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extracted text: World Health Organization

WHO/EDM/PAR/2003.6

Cost-containment mechanisms for
essential medicines, including

antiretrovirals, in China
Mission report
Beijing, 11 to 13 December 2002
German Velasquez, Carlos Correa, Robert Weissman

Health Economics and Drugs
EDM Series No. 13

Essential Drugs and Medicines Policy

Cost-containment mechanisms for essential medicines, including antiretrovirals,
in China
WHO/EDM/P AR/2003.6

© World Health Organization 2003

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Acknowledgements

The authors wish to thank the following individuals for their comments and
constructive suggestions in revising this document: Henk BekeHam WHO, ChinaJorge Bermudez, WHO Collaborating Centre for Drug Policies, Rio de JaneiroAndrew Creese, WHO/EDM, Desmond Johns, Joint United Nations Programme on
HIV/AIDS; Joan-Ramon Laporte, WHO Collaborating Centre for Research and
Training in Pharmacoepidemiology, Barcelona;
Monique Mrazek, WHO
Collaborating Centre for Health Economics and Drug Policies, London; Jos Perriens
WHO/HIV; Jonathan D. Quick, WHO/EDM; Siripen Supakankunti, WHO
Collaborating Centre for Health Economics, Bangkok; Ellen't Hoen, MSF, Paris.

Contents
Terms of reference................................................................................................................ 3
Introduction........................................................................................................................... 5
Cost-effective medicine selection..................................................................................... 5
Price information................................................................................................................ 5

International open tendering............................................................................................ 6
Voluntary discount agreements....................................................................................... 7

Voluntary licensing............................................................................................................7
Compulsory licensing........................................................................................................8

Local state production...................................................................................................... 9

Government price controls.............................................................................................. 9
Reduction of import and other taxes for essential medicines, and rational
dispensing practices........................................................................................................ 10
Public investment in R & D for new medicines: A mid- to long-term strategy...... 10

Background and experiences with voluntary agreements.......................................... 13
Country rights to be protected in voluntary agreements
for reduction of prices of medicines...............................................................................15
Compulsory licensing - practical aspects and procedures.......................................... 19
Identify relevant patents................................................................................................ 19
Explore possible sources of supply based on local production................................. 19
Identify possible sources of importation of the required medicine.......................... 19

Marketing approval........................................................................................................ 19
Request for a compulsory licence.................................................................................. 20
Granting of the compulsory licence by the Patent Administration Department.... 20

Negotiation with patent holder about fee..................................................................... 21

Determination of fee by the Patent Administration Department.............................. 21

Appeal............................................................................................................................... 21
Other considerations....................................................................................................... 21

Concluding comments....................................................................................................... 23
List of persons contacted................................................................................................... 25
Further reading.................................................................................................................... 27

1

Terms of reference

Terms of reference
Following meetings between the Chinese Ministry of Health (MOH) and the World
Health Organization Representative in China, the MOH requested WHO to provide
technical assistance on cost-containment mechanisms for antiretrovirals (ARVs) and
other essential medicines in China.

The MOH requested information in the following areas:
1. The range of cost-containment options for ARVs and other essential medicines that
China might consider.

2. Lessons from other countries' experience in negotiating price discounts and
voluntary licensing arrangements for ARVs and other essential medicines.
3. China's World Trade Organization (WTO) Trade-Related Aspects of Intellectual
Property Agreement (TRIPS) compatible options to undertake compulsory licensing;
and the modalities of how a compulsory licence might be issued in China.

German Velasquez, Coordinator of the Drug Action Programme within WHO's
Department of Essential Drugs & Medicines Policy, headed a three-person delegation
that went to China, from 11 to 13 December 2002, for meetings with the MOH and
other Chinese agencies. Fie was accompanied by Professor Carlos Correa of the
University of Buenos Aires and Robert Weissman, an attorney practicing in
Washington, D.C., who served as expert consultants on licensing and intellectual
property issues.
This report contains a short summary of issues discussed during the mission in the
area of cost-containment mechanisms and policies for access to essential medicines.

3

Introduction

Introduction
Cost-containment mechanisms should be used for any essential medicine not
affordable to the people or the health insurance systems. Various measures can be
taken in China to increase value for money and to contain costs in the
pharmaceutical sector.

Cost-effective medicine selection
Selection of cost-effective medicines at the primary health care, hospital or national
level should be a major, and probably the first, component of cost-containment of
medicines in China. Selective medicines lists for public health systems or private
insurance include:

o
o

Positive lists (essential medicines) setting criteria for new medicines to qualify for
reimbursement;
Negative lists, as in some industrialized countries, which exclude medicines from
coverage under the health insurance system for therapeutic or financial reasons.

From a macro-economic perspective, access to HIV-related medicines should be seen
in the context of a consistent selection of medicines supplied to patients by the public
sector or by health insurance schemes (see also page 9, Government price controls).

Price information
As a mechanism for cost-containment of medicines, information on prices of
medicines is crucial. Transparent pricing information enables rational decision
making about medicines selection, from the national level to individual
prescriptions, and is a vital element in making use of other cost-containment
mechanisms. As indicated in the box hereafter, WHO offers numerous medicines
price information resources, as well as a methodology for sampling prices and
comparing local prices with international reference prices (draft manual and
worksheet currently being finalized).

5

Cost-containment mechanisms for essential medicines, including antiretrovirals, in China

WHO medicines price information sendees’

WHO works with several partners to make price information easily accessible to
governments, nongovernmental organizations, donor agencies and any institution
involved in medicines procurement. WHO medicines price information sendees are
accessible at : <http://www.who.int/medicines/organization/par/ipc/drugpriceinfo.shtml>.
Particular resources include: International Drug Price Indicator Guide: Details 252
active ingredients in 448 dosage forms. Indicative prices of generic products on the
international market and selected tender prices. Produced by Management Sciences
for Health and WHO.

Sources and Prices of Selected Drugs and Diagnostics for People Living With HIV/AIDS:
Details 73 active ingredients in 110 dosage forms. Issued by UNICEF, UNAIDS,
Medecins Sans Frontieres and WHO. Covers antiretroviral (ARV) medicines,
HIV/AIDS test kits for diagnosis and ongoing monitoring, and medicines for
treating opportunistic infections, for pain relief, for use in palliative care, for the
treatment of HIV/AIDS-related cancers, and for managing drug dependence.
Pharmaceutical Starting Materials/Essential Drugs Report: Details over 262 active
ingredients. Issued by WHO and the International Trade Centre, a joint WTOUNCTAD publication.
AFRO Essential Drugs Price Indicator: Nearly 300 essential medicines and dosage
forms listed - details provided by 24 Member States and 2 international low-cost
essential drugs suppliers. Published by the Regional Office for Africa and the WHO
Collaborating Centre for the Quality Assurance of Medicines, University of
Potchefstroom, South Africa.

Average Prices of a One Year Treatment with Antiretrovirals in Countries of Latin America
and the Caribbean: Survey by Pan American Health Organization of ARV therapy in
Latin American countries.
Antiretrovirals in Latin America and the Caribbean: Details prices and uses of ARV
treatments, and access policies for these medicines. Also covers prices by country
and by groups of countries.

International open tendering
Open tender is a formal procedure by which quotations are invited from any
manufacturer or manufacturer's representative on a local or worldwide basis, subject
to the terms and conditions specified in the tender invitation. In medicines
procurement, the use of competitive international tendering has indisputable
economic advantages and is one of the classic cost-containment mechanisms.

1 Annual Report 2001 - Essential Drugs and Medicines Policy: Extending the Evidence Base
(WHO/EDM/2002.1).

6

Introduction

According to the experiences of many countries, international tendering reduces
prices by 40 to 50 %2.

However, the economic advantages of this mechanism apply mainly to multi-source
products where competition exists and not for patented medicines. Open tendering
is not an option for medicines, such as the majority of ARVs, that are protected by
patents.

Voluntary discount agreements
Two categories can be distinguished of voluntary agreements between supplier firms
and developing country governments to supply differentially priced products:
a) initiatives where prices are negotiated at a central level, such as the Global
Alliance for Vaccines and Immunization (GAVI) and the Green Light Committee
(GLC);
b) initiatives where prices are negotiated at a disaggregated level, between suppliers
and countries3.

Voluntary agreements in tire second category include those between firms and
countries to supply discounted ARVs through tire Accelerating Access Initiative (a
collaboration between 5 UN agencies and 6 research-based pharmaceutical
companies); as well as agreements between countries and Indian, Brazilian or other
countries' public or private pharmaceutical manufacturers. These agreements need
to be assessed in terms of their price level, volume assured, duration of the deal and
any other conditions which may be requested by the manufacturer.

Voluntary licensing
Voluntary licensing arrangements between a patent holder and another party in a
country, or serving the country's market, may afford opportunities for significant
cost-containment. As with negotiated discounts, the benefits of voluntary licensing
arrangements depend crucially on the terms of the licence. For voluntary licences, the
capacity of the licensee is also critical.
Patent holders may at their discretion, license to other parties, on an exclusive or
nonexclusive basis, the right to manufacture, import, and/or distribute a
pharmaceutical product. Depending on the terms of the licence, the licensee may act
entirely or effectively as an agent of the patent holder; or the licensee may be free to
set the terms of sale and distribution within a prescribed market or markets,
contingent on payment of a royalty. Either option, or arrangements in between, may
allow for substantial price reductions. However, terms in a voluntary licence may set
price ranges, or include other terms, that maintain prices at or near the same level as
2 Quick et al. Managing Drug Supply. Kumarian Press, 1997.

3 Unpublished paper commissioned by WHO to Cheri Grace, 2002.

7

Cost-containment mechanisms for essenlial medicines, including antiretrovirals, in China

those offered by the patent holder. Or terms may limit how many patients or which
categories of patients are eligible to benefit from the lower prices provided by the
licensee. Again, such matters turn on the terms of the licence contract. Voluntary
licensing arrangements, at the discretion of the patent holder, are usually made for
strategic reasons (e.g. market entry) rather than as price gestures and they may not
entail any price reduction at all.

Compulsory licensing
When a product is patented, competitive bidding is not a viable option to reduce prices
because, unless a patent is made ineffective, there is no competition. Compulsory
licences may be an important cost-containment measure in that situation. The granting
of such licences creates competition by one or more compulsory licensees, which in turn
may force prices down. At tire same time, the patent holder (and/or any voluntary
licensees) can continue with commercial exploitation of the patent, and will receive a
compensation (generally in the form of a royalty) from the compulsory licensee/s.

Article 31 of the WTO TRIPS Agreement expressly allows the granting of compulsory
licences. The Agreement contains no limits on the grounds under which such licences
can be granted. Members' right to determine such grounds has been confirmed by the
Doha Declaration on the TRIPS Agreement and Public Health (November 2001). Article
31 makes particular, but not exhaustive, reference to cases of national emergency or
extreme urgency, dependency of patents, licences for governmental non-commercial
use, and licences to remedy anti-competitive practices. National laws can, however,
provide for the granting of such licences whenever the title holder refuses to grant a
voluntary licence "on reasonable commercial terms" (Article 31 (b)) and for other
reasons, such as public health orbroad public interest considerations. The Agreement
permits compulsory licences to authorize licensees to exercise any of the rights
conferred by a patent, including production or importation.
The Chinese Patent Law provides that compulsory licences may be issued in the case
of patent holder refusal to grant voluntary licences on reasonable commercial terms
(Article 48), or to address a national emergency, an extraordinary state of affairs or
public interest needs (Article 49).

China, like any other WTO Member corm try, may address the current problems of
access to antiretrovirals or other essential medicines by issuing one or more
compulsory licences. The granting of such licences — subject to the conditions set
forth by Article 31 of the TRIPS Agreement and Chinese Patent Law -- would
constitute a legitimate implementation of one of the safeguards allowed by the TRIPS
Agreement in order to protect public health.

Compulsory licences and government use provisions have been extensively used in
developed countries, such as Canada and the USA, to address various public
interests through the creation of competitive sources of supply4.
4 Correa C. Integrating Public Health Concerns into Patent Legislation in Developing Countries. Geneva,
South Centre, 2000, p. 93-94.

8

Introduction

Local state production
Two recent experiences have shown the importance of the existence of a state
medicines manufacturing capacity.

During the 1998 Asian financial crisis, the Indonesian Government was able to
supply hospitals, health centres and other health facilities with essential medicines
thanks to the existence of state-owned local pharmaceutical manufacturers.
Privately-owned local and foreign companies practically halted production for
several weeks as tire collapse of the local currency and uncertainty in foreign
exchange rates prevented them from importing necessary raw materials.
Another important example has been the success of the Brazilian policy to fight
AIDS, which has relied crucially on state pharmaceutical manufacturing capacity.
Brazil produces most of the ARVs required for the local market, at prices
significantly below those charged by brand-name companies. In addition, the
existence of a significant local capacity to manufacture medicines increased Brazil's
negotiating power in discussions with brand-name companies over price discounts.

The existence of a state pharmaceutical manufacturing capacity may also play an
important role regarding prices in the international market. If states act as
competitors in tire global market, that will reduce worldwide prices.

Government price controls
Price regulation and negotiations
A competitive marketplace is the best way to ensure low prices for medicines.
Proper organization of the market and application of anti-trust (monopoly) laws
should facilitate price competition. However, if pharmaceutical markets do not
become competitive, governments may choose to institute price controls.
Control or regulation of medicines prices may be based on:

a) actual costs (cost-plus pricing based on manufacturer's or
importer's cost plus a fixed mark-up),
b) controlling companies' profit margins, or
c) comparison with prices in other countries or prices of other
medicines in the same therapeutic category (yardstick, benchmark, or
reference pricing). Once initial prices are established, decisions must then
be made about price increases.

Reimbursement controls
A further means of controlling costs to the government is to establish different levels
of reimbursement and to increase the proportion of the cost paid by the consumer for
certain products (those not included in the national essential medicines list, for
example).
Economic evaluation
Medicines selection decisions and tire establishment of standard treatments involve
judgements about relative therapeutic value. The economic evaluation of medicines is a
systematic method to identify which of a series of alternative therapies will achieve

9

Cost-containment mechanisms for essential medicines, including antiretrovirals, in China

medical objectives most cost-effectively. It forms part of a newly-emerging discipline
called pharmacoeconomics.

Economic evaluation is being used in some industrialized countries to determine
whether the magnitude of the benefit of a new medicine justifies the cost and then to
subsidize those medicines that produce tire greatest output in improved health in return
for lire lowest cost.
Policy-makers are faced with a lack of unbiased and accurate information on the trade
offs between competing product options. Economic evaluation is useful because it
offers a logical framework for considering a new medicine for subsidy, for drug
formulary management, or for price-setting. Yet it is not a proven means of budgetary
control. It is a complex, time-consuming and resource-intensive process. Nev er tireless,
it would be a way to ensure that tire medicines budget represents value for money.
Frequent reassessment of decisions is necessary as more information becomes available.

Reduction of import and other taxes for essential medicines, and
rational dispensing practices
Reducing import and other taxes on pharmaceuticals may serve to lower final prices
to consumers. Where there is competition, such taxes will clearly add to the final
price of a product, an add-on to the wholesale price. Where patent protections are in
place, patent holders have much more pricing discretion, and may set wholesale
prices with an eye to the final retail price. Thus tax reductions may not translate into
reduced retail prices, or price reductions equivalent to the tax reduction. Whether
tax reductions thus benefit consumers will turn in significant part on tire
particularities of specific markets: whether products are patented, whether price
controls are in place, how patent holders choose to act and pricing discretion
available to pharmacies and dispensing agencies.
Pharmaceutical dispensaries may engage in significant price mark-ups, or
unscientific dispensing practices that favour use of brand-name and higher-cost
products at the expense of generics and lower-cost alternatives. As is the case in
many countries, China may consider regulations to require or prefer generic
substitution, where safe and effective generics exist. Many price-increasing and
unscientific dispensing practices relate to the percentage mark-up by dispensaries.
To realign dispensary incentives, China may consider regulations stipulating that
pharmacies charge a flat fee per sale, as opposed to a percentage of sales.

Public investment in R & D for new medicines: A mid- to long-term
strategy
An option that developing countries with a large scientific base, such as China,
should explore more systematically is the strengthening and expansion of the R & D
needed to address the diseases prevalent in those countries, including HIV/AIDS.
China may have significant cost advantages to undertake R & D in complex fields
(including genomics, proteomics and other new fields) and become an important
player in the discovery of new medicines and treatment. This could be done on the
basis of public investment at the national level, or through partnerships with other
countries, for the public good, that is, in order to make available new therapeutic

10

Introduction

options for non-profit purposes. Of course, several modalities may also be envisaged
to recoup investments in R & D as well as to establish partnerships with the private
sector.

11

Background and experiences with voluntary agreements

Background and experiences with voluntary
agreements
The most prominent of the formal arrangements to facilitate voluntary price
reductions for pharmaceutical products for developing countries is the Accelerating
Access Initiative (AAI).

The AAI was launched by UNAIDS in a partnership with several UN agencies and
five pharmaceutical companies (Boehringer Ingelheim, Bristol-Myers Squibb,
GlaxoSmithKline, Merck & Co and Hoffman-La Roche5). Responsibility for this
initiative was transferred to WHO at the end of 2001. The main AAI goal is to
provide developing countries with access to ARV medicines at reduced prices.

Hie launch in 1977 of the UNAIDS Drug Access Initiative, which antedated the AAI,
resulted in participating research-based firms dropping their prices for triple ARV
therapy from US$ 12 000/year to US$ 7 000/year. With the launch of the AAI in May
2000, the cost of triple drug combination regimens sourced from the participating
companies quickly fell to about US$ 1 200/year. After the Indian Generics industry
entered the scene, prices for first line regimens decreased further. Currently, four
Indian generic companies offer first line triple combination regimens at less than half
the price offered by the lowest priced companies participating in the AAI. A recent
check of offers found the following prices: Cipla at US$ 350, Hetero at USS 347,
Aurobindo at USS 289, and Ranbaxy at USS 2956. These prices (not only those of the
generic ARVs, but also those of the R & D industry) continue to drop and
increasingly the quality of generic ARVs is being documented: both CIPLA and
Ranbaxy obtained WHO prequalification of their first line ARVs7.

5

Abbott has now joined, so there are now 6 participating companies.

6 Untangling the WEB ofprice reductions - a Pricing Guide for the Purchase of ARVs for Developing Countries,
MSF, June 2002.

7 Pilot Procurement Quality and Sourcing Project: Access to Antimalarial, Anti-tuberculosis and
HIV/AIDS Drugs and HIV/AIDS Diagnostics of Acceptable Quality
(http: / / www.who.int/medicines/organization/qsm/activities/pilotproc/pilotprocmain.shtml).

13

Cost-containment mechanisms for essential medicines, including antiretrovirals, in China

recede, limited-term discount arrangements may only postpone tire day of
reckoning. For products such as ARVs, which must be taken for tire life of the
patient, limited-term solutions are particularly problematic. Of course, discoimts
need only be afforded during tire period of effective patent protection, if an
effective generics market is operational.
•

Static price discount. Tire negotiated discount is likely to provide a set price over
an extended period. By contrast, competition offers dynamic benefits and
ongoing price reductions as competitors improve manufacturing technique and
gain economies of scale. Tirus, as government officials negotiate a set price,
keeping in mind what price benefits they might obtain from compulsory
licensing or state production, they should also be mindful that tire cost savings
from these approaches would grow over time. A discount price should be
negotiated against a backdrop of awareness of the dynamic benefits of
competition and local production.

•

Secrecy. Patent holders may request that the terms of a final negotiation — price,
ancillary conditions, or both — remain confidential. Confidentiality does not
directly weaken tire government's negotiating hand; obviously, tire government
knows what it negotiated. But a practice of confidentiality among multiple
government beneficiaries of price reductions weakens them all. Each operating
individually, they deprive themselves through secrecy of the collective
knowledge of other discount deals, and the leverage afforded by knowledge of
what others were able to negotiate. Similarly, secrecy protects tire patent holder
from international public pressure in support of more generous terms.

•

Policy conditions. Patent holders may request that governments agree to certain
TRIPS-plus legal or regulatory changes in exchange for discount products. They
may also request that governments agree not to undertake compulsory licensing
of other products. Such agreements may severely limit the government's
flexibility, and have long-term impacts on tire overall national pharmaceutical
bill.

•

Restrictions on number of patient beneficiaries. Patent holders may agree to
provide discounted treatment only to a limited number of patients, leaving others
in need of medicines to purchase them at the market rate, or to go without.

•

Restrictions on type of patient beneficiaries. Patent holders may agree to provide
discounted treatment only to a certain category of patients. Price discoimts may
only be available to those classified as impoverished, for example, with others
required to purchase products at the market rate. The patent holder goal in this
circumstance would be to bifurcate the market, and maintain a viable market for
less poor consumers who may be able to afford to pay more. However, many of
those consumers denied discounts may be unable to afford any medicine at the
market rate.

•

Restrictions on type of distributing institution. Patent holders may provide
discounts only to public hospitals, thus restricting the number of people who
benefit from price reductions. Or they may provide discounts confined to certain
lower-income geographical areas. Again, the patent holder goal may be to
maintain a market for better-off consumers, even though many in this category
may not be able to pay, or their insurance providers may refuse to pay, the higher

16

Country rights to be protected in voluntary agreements for reduction of prices of medicines

rates. Patent holders may also require the dispensing institution to demonstrate
its capacity to properly handle patient treatment and care related to the discount
product. While governments must ensure the safe and efficacious provision of
medicines, demonstrations of such capacity may be onerous or administratively
complicated such that relatively few institutions are able to meet externally
imposed tests.

17

Compulsory licensing - practical aspects and procedures

Compulsory licensing - practical aspects and
procedures
The granting of a compulsory licence under China's existing legislation (and in
conformity with the TRIPS Agreement) would require a number of steps which are
described below.

Identify relevant patents
In most cases, pharmaceutical products are protected by a patent on the active
ingredient (the main patent) and by a number of patents on formulations,
manufacturing processes, new indications, etc. (secondary patents). All these patents
should be identified and be included in the compulsory licence, as necessary, to
allow freedom to operate with the needed product. Otherwise, the use of the
invention under the compulsory licence may be perturbed or blocked on the basis of
allegations of infringement of secondary patents (as illustrated by the welldocumented case of ddl in Thailand).

Explore possible sources of supply based on local production
The analysis to be undertaken should include:
o
o
o
•
•

the availability of technical resources for reverse engineering;
the cost and duration of developing manufacturing processes and formulations;
the need for technology transfer;
GMP and quality of final products made by local producers; and
estimates of the investment required and of the marginal cost of production.

Identify possible sources of importation of the required medicine
The analysis to be undertaken should include:
•
•
•

compliance with GMP and product quality assurance by potential suppliers;
prices of supply over time; and
the sustainability of the exporter's supply.

Marketing approval
Registration requirements may pose obstacles to the speedy distribution of needed
medicines. While considering the issuance of a compulsory licence, steps should be
taken to ensure that such obstacles do not exist or are overcome.

China has recently introduced an exclusivity period of protection for test data
(Article 35 of the Implementing regulations of the Drug Administration Law) which
would only apply to products containing new chemical entities.

19

Cost-containment mechanisms for essential medicines, including antiretrovirals, in China

Request for a compulsory licence
Compulsory licences can be granted in China on the basis of Article 48 or 49 of the
Chinese Patent Law. The applicable conditions will vary depending on the
alternative to be followed.
Article 48

A request to the patent holder on reasonable commercial terms should be made,
including:
•
•
•
•
•
•
•
•
•
•

information about the requesting party’;
the expected volume of production;
the royalty to be paid;
the form of payment;
the intended mode of use of the invention;
quality controls;
trademark to be used, if any;
the duration of tire licence;
the licensee's right to control sales for determination of royalties due;
the applicable law and jurisdiction in case of disputes.

The "reasonable period of time" for the patent holder to accept or reject the offer is
undefined in the Chinese Law and Regulations. One to three months may be a
reasonable period.

Article 49

Under Article 49, there is no need for prior negotiation (provided that Article 51 of
the Law is understood to apply to Article 48 only). "Public interest" is a legitimate
ground for issuance of a compulsory licence under Article 49.

Declaring a "national emergency" is not a pre-condition for granting a compulsory
licence under Article 49. If this option is followed, it should be borne in mind that an
"emergency" may be a long-lasting situation, as in the case of the HIV/AIDS
epidemic, not just a short-term problem.

An Article 49 compulsory licence is preferable to a licence grounded on Article 48,
because there is no requirement for prior negotiation, and because an Article 49
licence would make clear from the outset that public health reasons are the key
governmental consideration in granting a compulsory licence. This will make it
politically more difficult for patent holders, their business associations and respective
governments to challenge the compulsory licence.

Granting of the compulsory licence by the Patent Administration
Department
The competent department will have to define the scope of the licence and its duration.
It would be advisable for the scope to include all commercial and non-commercial
uses of the relevant invention, and for the licence to last until the patents' expiry.

20

Compulsory licensing - practical aspects and procedures

Negotiation with patent holder about fee
After the granting of the compulsory licence, bona fide negotiations should be
undertaken with the patent holder to establish the fee for the exploitation of the
patent. Generally, fees are determined as a percentage of the net sales price of the
product made under the licence (and not the patentee's own product), but other
modalities can be adopted, for instance, a fixed sum per unit sold.

The TRIPS Agreement requires that the compensation reflect the economic value of
the licence.

Commercial practice in voluntary licensing is to use royalties ranging between 2%
and 5%, though they may be higher in certain cases. There is some evidence
available on tire royalties determined by national authorities in Canada, the USA and
other countries for the granting of compulsory licences10.

Factors that may be considered to negotiate the fee include: launch date of the
product, possible substitutes, coverage and possible invalidity (total or partial) of the
patent/s, pending challenges to the patent/s, if any, accumulated sales and recovery
of R & D investment made by the patent holder, global and Chinese market for the
product (units and value), expected volume of production and price under the
compulsory licence, royalties agreed upon in voluntary licences on the same or
similar products.
Of course, gathering this information will require considerable preparation and work
by an inter-disciplinary team.

Determination of fee by the Patent Administration Department
If the fee negotiations fail, the fee will be determined by the Patent Administration
Department. For the purposes of transparency and consistency, it would be
advisable to make explicit the criteria used for the determination (such criteria are
not defined in Chinese legislation), and to establish guidelines that will apply to all
such fee determinations.

Appeal
Chinese law establishes that patent holders may appeal a decision to grant a
compulsory licence to a court, but that the appeal does not suspend the execution of
the compulsory licence.

Other considerations
Patent holders (or their governments) may attempt to use legal measures, such as
injunctions, to delay or prevent the execution of a compulsory licence. It would also
be useful to check the possible application of other instruments, such as bilateral
10 Niess, P. Technology evaluation and pricing. TECH MONITOR, November-December 1999, p. 16-17.

Concluding comments

Concluding comments
1. hi seeking to contain costs for ARVs and other essential medicines, China should
consider the full panopoly of available policy tools, and examine closely how the
various tools may complement one another.

2. In making policy choices related to cost-containment, including use of TRIPS
flexibilities and safeguards, China should prioritize public health considerations.
Affordability of essential medicines is a public health priority.
3. Voluntary negotiations can lead to substantial price reductions for on-patent
medicines in developing countries. China will be strongest in negotiating for
voluntary discounts if it has reviewed its options for compulsory licensing and
domestic production, arid can credibly present these approaches as an alternative to
deep discounts.

4. Voluntarily offered price reductions may be accompanied by limiting conditions.
These may limit the number or type of beneficiaries of the price reduction, impose
significant burdens on the government, or limit the government's ability to deploy
varying policy tools. The government may or may not decide that these limitations
are an acceptable trade-off for the benefits of price discounts; but it should be aware
both of the costs, and its options.
5. WHO supports measures which improve access to essential medicines, including
application of TRIPS safeguards.
6. By introducing competition, compulsory licensing may significantly reduce the
price of ARVs and other essential medicines.
7. Compulsory licensing is widely used in some industrialized countries, and is an
integral part of the intellectual property system. If China chooses to proceed with
the issuance of compulsory licences for some essential medicines, it will be showing
its commitment to the patent system. That is, rather than ignoring patents or
engaging in underground counterfeiting, the government would be addressing
access concerns from within the patent system. The government would be indicating
its respect for the patent system, even where crucial public health matters are at
stake.

23

List of persons contacted

List of persons contacted
Dr Henk Bekedam, WHO Representative, Beijing

Ms Sarah Invemizzi, Economic and Commercial Officer, Delegation of the European
Commission, Beijing
Ms Jiao Ya Hui, Programme Officer, Division of Medical Service Supervision &
Management, Department of Medical Administration, Ministry of Health

Dr Liu Mei, Programme Officer, United Nations World Food Programme, Beijing

Dr Qun Meng, Deputy Director General, Department of Health Legislation &
Inspection and Chief, Office of WTO Relative Affairs, Ministry of Health
Dr Song Li, Division of Maternal Health, Department of Primary Health Care &
Maternal and Child Health, Ministry of Health
Dr Xia Gang, Programme Officer, Division II of Epidemic Prevention, Department of
Diseases Control, Ministry of Health

Dr Xiaoyan Zhou, Deputy Director General, Department of Treaty & Law, Ministry
of Foreign Trade & Economic Cooperation
Dr Xing Jim, Deputy Director, Division of Multilateral Relations, Department of
International Cooperation, Ministry of Health
Mr Yang Hongwei, Programme Assistant, Office of the WHO Representative, Beijing

Dr Yu Fang, Department of Treaty & Law, Ministry of Foreign Trade & Economic
Cooperation
Dr Ytmyan Zheng, Office of WTO Relative Affairs, Ministry of Health
Dr Zhang de Ying, Director, Division of Child Health, Department of Primary Health
Care & Maternal and Child Health, Ministry of Health

Dr Zhang Yonghua, Legal Affairs Department, State Intellectual Property Office
Dr Zhao Flong, Division Director, Department of Treaty & Law, Ministry of Foreign
Trade & Economic Cooperation

25

Further reading

Further reading
•

Sources and prices of selected drugs and diagnostics for people living with HIV/AIDS,
joint UNICEF-UNAIDS Secretaria t-WHO-MSF Project, May 2002
(WHO/EDM/PAR/2002.2).

•

Globalization and Access to Drugs - Perspectives on the WTOfPRIPS Agreement
(Revised), Geneva, World Health Organization, 1999 (WHO/DAP/98.9) available in Chinese.

°

Globalization, TRIPS and Access to Pharmaceuticals, WHO Policy Perspectives on
Medicines N° 3, Geneva, World Health Organization, March 2001 - available in
Chinese.

27

Other documents in the EDM
Health Economics and Drugs Series

No. 1

Alternative drug pricing policies in the Americas

No. 2

The public and private circuits for the distribution of drugs
in the Chilean health system

No. 3

Global comparative pharmaceutical expenditures

No. 4

Financing drugs in South-East Asia. Report of the first meeting
of the WHO/SEARO Working Group on Drug Financing

No. 5

Public-private roles in the pharmaceutical sector.
Implications for equitable access and rational drug use

No. 6

Health reform and drug financing. Selected topics

No. 7

Globalization and access to drugs.
Perspectives on the WTO/TRIPS Agreement

No. 8

Financing drugs in South-East Asia. Report of the second meeting
of the WHO/SEARO Working Group on Drug Financing

No. 9

Globalization, patents and drugs (1st ed.).
An annotated bibliography

No. 10

Globalization, patents and drugs (2nd ed.).
An annotated bibliography

No. 11

Network for monitoring the impact of globalization
and TRIPS on access to medicines.
Report of a meeting, February 2001, Bangkok, Thailand

No. 12

Implications of the Doha Declaration on the TRIPS Agreement
and Public Health

Health Economics and Drugs
EDM Series No. 13

The WHO Department of Essential Drugs and Medicines Policy (EDM)
seeks to ensure that all people, wherever they may be, are able to
obtain the drugs they need at a price that they and their country
can afford; that these drugs are safe, effective and of good quality;
and that they are prescribed and used rationally. It provides opera
tional support to countries in the development and implementation
of national drug policies based on the concept of essential drugs and
it promotes the rational use of drugs at every level.

Health economics is of increasing relevance in the formulation and
development of national drug policies that promote equity and
rationalize the use of community and state resources. In many
countries the new economic context and the global increase in
pharmaceutical prices has highlighted the socio-economic aspects of
drug use and accessibility. In this process, national drug policies have
evolved from a primarily technical and pharmacological focus to
encompass social and economic dimensions.
The Health Economics Series provides an orientation and an analysis
of key issues. It aims to provide drug policy makers, planners and
managers with the information and practical tools needed for policy
development within this wider context.

Essential Drugs and Medicines Policy
World Health Organization, 1211 Geneva 27, Switzerland

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