Research Branch. Mini-Review 86-36E BILL C-22: COMPULSORY LICENSING OF PHARMACEUTICALS. Margaret Smith Law and Government Division.

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1 Mini-Review 86-36E BILL C-22: COMPULSORY LICENSING OF PHARMACEUTICALS Margaret Smith Law and Government Division 24 November 1986 Library of Parliament Bibliothèque du Parlement Research Branch

2 The Research Branch ~of the Ubrary of Parliament works exclusively for Parliament, conducting research and providing information for Comrntttees and Members of the Senate and the House of Commons. This service is extended without partisan bias in such forms as Reports, Background Papers and Issue Reviews. Research Officers in the Branch are also available for personal consultation in their respective fields of expertise CE DOCUMENT EST AUSSI PUBUE EN FRAN~AJS

3 ~!1 CANADA BIBLIOTHEQLJE DU PARLEMENT BILL C-.22: COMPULSORY LICENSING OF PHARMACEUTICALS ~ On 7 November 1986, Bill C-22, An Act to amend the Patent Act and to provide for certain matters in relation thereto was given first reading. The Bill would make several changes to Canada s patent laws to simplify patenting procedures, make technological information more readily available and bring Canadian law into conformity with current international practices. More importantly, the Bill would effect a major policy change respecting the pharmaceutical industry by restricting the compulsory licensing of pharmaceutical patents and granting periods of exclusive protection to patent holders. Because the Bill may have a significant impact on the cost of drugs in Canada, it has been highly contentious. This review will outline the provisions designed to implement the pharmaceutical patents policy. Compulsory licensing(1) for the purpose of manufacturing patented drugs has existed in Canada since In 1969 the Patent Act was amended to permit compulsory licences to import drugs. The 1969 amendment was based upon the results of a number of studies conducted in the 1960s which concluded that drug prices in Canada were too high. In 1963, the Restrictive Trade Practices Commission recommended that drug patents be abolished. Two years later the Royal Commission on Health Services proposed, among other things, that (1) A compulsory licence confers on the licensee (a person other than the patent holder) the right to use the patented invention. The patent holder receives compensation in the form of royalties for the licence, and cannot prevent the use of the invention by the licensee.

4 UBRARY OF PARLIAMENT 2 efficient mechanisms to grant compulsory licences to import, manufacture and sell drugs be established. In 1966, the House of Commons Special Committee on Drug Costs and Prices, recommended that the Patent Act be amended to allow for compulsory licences to import drugs. The ability to obtain a licence to import and sell copies of patented drugs led to the establishment of a number of so-called generic drug companies which could produce and sell lower-priced alternatives to the drugs produced by the patent holders. (Generic drug firms import active ingredients from chemical manufacturers, process them into final form, package and distribute the product). The growth of the generic drug industry was also encouraged by various provincial government programs which reimbursed the cost of drugs purchased by certain persons (senior citizens, social assistance recipients and others) and enabled or required pharmacists to fill certain types of prescriptions with the generic equivalent to the more expensive patented drug. Subsequent to the 1969 amendment, over 500 licences to import and sell drugs have been applied for; of these, over 300 have been granted. Royalty rates on such licences were set at 4% of the licensee s selling price of the drug. Pharmaceutical research and development in Canada has remained fairly stable, from , amounting to about 3.5% to 4% of domestic sales. The industry is less R & D intensive here than it is in the home countries of the patent-holding firms, e.g. U.S., U.K., West Germany, Switzerland etc. Although absolute research expenditures in Canada have grown significantly over this period, the federal government began to examine ways to increase the intensity of research and development here. In 1983, the then Minister of Consumer and Corporate Affairs called for changes to the Patent Act to rebalance the 1969 policy in order to generate growth in the pharmaceutical industry. Three approaches to changing the Act were set forth: (1) variable royalty rates where licences would be granted but rates set to reflect the level of research and development activity carried out in Canada by the patent holder, (2) market exclusivity where compulsory licences to import would be granted only after a specified number of years had elapsed; and (3) allowing

5 3 companies giving performance and price commitments to be exempt from having to grant compulsory licences. In 1984, a Commission of Inquiry on the Pharmaceutical Industry (the Eastman Commission) was established to examine the Canadian situation. In its report, the Commission recommended, among other things, that a patent holder be granted a short period of market exclusivity (four years), to begin when a new drug received a Notice of Compliance (NOC)(2) authorizing marketing. The Commission concluded that this period of exclusivity would allow such companies to set prices without competition, develop sales and recoup development and promotional costs. Respecting royalties to be paid by licensees under compulsory licences issued after the expiration of the four-year period of exclusivity, the Commission recommended that a special royalty fund be established and financed by such payments. The payments by generic firms would be determined in accordance with a formula which took into account the worldwide research and development expenditures of companies whose patents are subject to compulsory licensing in Canada, plus 4% of the licensee s sales. The distribution of funds would be based on the relative research intensity of patent-holding firms in Canada. The Canadian pharmaceutical industry, which is concen- trated in Ontario and Quebec, has two major components: generic companies, which manufacture drugs for which patents have expired, patented drugs under compulsory licences and drugs ineligible for patents; and subsidiaries of multinational patent-holding companies. These latter dominate the Canadian pharmaceutical market, accounting for approximately 90% of the total value of pharmaceutical sales. Generic firms account for under 10% of such sales. In 1983, generic companies generated 21% of the value of the sales of compulsorily licensed drugs while 79% of such sales went to brand name products manufactured by patent holding firms. Sales by generic firms tend to be concentrated in certain therapeutic drug categories (in 1983, (2) A Notice of Compliance is issued by Health Protection Branch of National Health and Welfare after the drug has met the requisite health, safety and efficacy requirements.

6 4 13% of sales of anti-infective agents and 6 to 9% of sales in five of the other 19 therapeutic classes). Lower price has been the main weapon used by generic firms to sell their licensed products. This has been particularly attractive to provincial governments and private health care plans which pay for certain pharmaceutical purchases. The Eastman Commission found that for the year 1983, prices of generic drugs were 51% of the prices of patent-holding firms for substitutable brands, producing a saving of $211 million to Canadian consumers and taxpayers. Those who support the continuation of unrestricted compulsory licensing argue that the prices of pharmaceuticals will increase dramatically if the current policy is abandoned in favour of a period of exclusive patent protection. The conclusions and recommendations of the Eastman Commission are certainly consistent with rising pharmaceutical prices. There are, however, two issues intertwined in this question. First, what prices of pharmaceuticals are considered to be appropriate from the point of view of market incentives? Second, what will the effect of regulatory changes be on the consumer, that is, on the ability of lower-income groups to pay for drugs? The first question is relevant to the R & D market price link. The second question is one of the purchasing power of the economically disadvantaged. The first question is discussed below. The - second question presents the familiar quandry facing the policy-maker. How do we help those in need through specific subsidies from government, - medical insurance, or the one currently in use, compulsory licensing to force market prices down? Even though the Canadian pharmaceutical industry has grown and remained profitable, some companies have been more adversely affected than others by compulsory licensing. The Eastman Commission reported that compulsory licensing had a major negative impact on some 10 to 12 patent-holding companies, particularly those which relied on a single product for the bulk of their sales and profits. It also noted that this negative impact had the potential generic products increased. to grow in the future, as sales of

7 5 Opponents of compulsory licensing contend that a period of patent protection (preferably 10 to 12 years) is necessary for a company to recoup its product research and development and promotional costs and to generate a positive cash flow. With generic products currently taking an average of six to seven years to come on the market,(3) (the Eastman Commission estimated the time to be 91 months for 29 major drugs introduced between 1969 and 1984) a period of 10 years of patent protection would give patent holding companies at least three additional years of market exclusivity. Both before and after the Eastman Commission report, the Government has undertaken discussions with the pharmaceutical industry, the provincial governments and with other groups in an effort to reach a consensus on new legislation. On 27 June 1986 the Government released information on the contents of the amending legislation which was introduced into the House of Commons on 7 November At the same time, the Minister of Consumer and Corporate Affairs announced that innovative pharmaceutical firms would increase levels of research and development in Canada to 10% of sales by 1995, spend $1.4 billion in additional research and development expenditures over the next 10 years and create 3,000 new scientific and research related jobs. BILL C-22 Bill C-22 would restrict compulsory licences to import patented drugs by providing varying periods of market exclusivity to patent holders. These periods are seven, eight and ten years, depending upon whether the patent holder has received an NOC for the drug and whether compulsory licences have been granted and the licensees have received their NOCs. Ten years of market exclusivity is granted to all drugs for which a patent holder receives an NOC after June 27, Generic drugs that have (3) The Globe and Mail, November 21, 1986, p. A3. Statement by the Chairman of the Canadian Drug Manufacturers Association.

8 6 been licensed and have received their NOCs as of June 27, 1986 are not affected by these limitations. Compulsory licences to manufacture drugs would also be restricted. Where a patent holder receives an NOC after June 27, 1986, it will be entitled to a period of seven years of patent protection against licences to manufacture. Patented medicines invented and developed in Canada would be granted an even greater period of protection. If the patentee manufactures the medicine in Canada within seven years from the date of receiving its NOC, then full patent protection (20 years, as provided in the Bill) will be granted. The Patent Act currently limits pharmaceutical patents to processes. The product is protected only when it is made by the patented process (product-by-process protection). Following the recommendation of the Eastman Commission, Bill C-22 would allow the product as well as the process to be patented. The Bill would establish a Patented Medicine Prices Review Board (the Board) to review drug prices. Where the Board finds that a patented medicine is being sold at an excessive price, it can revoke its patent protection or order that the price be reduced. The Board would be required to consider certain factors when assessing drug prices, such as prices in previous years, prices of other medicines, prices in other countries and the Consumer Price Index. Provincial governments would be entitled to appear and make representations to the Board. To alleviate any impact that restricting compulsory licensing might have on provincial drug purchasing plans, the Bill would provide for annual payments (based upon a formula contained in the Bill) by the federal government to the provinces over a four-year period March 31, The Bill would also give the Governor in Council, expi ration of four years, the power to reduce the number of years protection or to end the restrictions on compulsory licensing. expiration of nine years after the restrictions have been in parliamentary review of the amendments will be conducted. ending on after the of patent On the force, a