As part of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), a signatory country can allow someone to produce a patented product or process without the patent owner’s consent. The grounds for justifying a grant of a compulsory patent license are up to the member country.

On March 9, 2012, in the case of Natco Pharma Ltd. v. Bayer Corp., the India Controller of Patents granted a compulsory license for the first time, permitting Natco to manufacture and sell Bayer’s patented drug sorafenib (Nexavar).

In doing so, the Indian patent office took into account (a) the high cost of the patented drug ($5,600 per month) relative to the public’s ability to pay, and (b) the failure of Bayer to “work” the invention in India. Even though Bayer owns numerous manufacturing facilities in India, it had manufactured sorafenib exclusively in Germany during the four years since the Indian patent had been granted.

Under its Patent Act, the Indian Patent Office may grant a compulsory license if “the reasonable requirements of the public have not been satisfied… by reason of the refusal of the patentee to grant a license… on reasonable terms [and]… the demand for the patented articles has not been met to an adequate extent or on reasonable terms.”

The parties disagreed as to what constituted reasonable terms. Bayer argued that reasonable terms must recognize the need of the pharmaceutical innovator to fund its research and development costs. The Controller of Patents disagreed, saying that “reasonable terms” primarily concerned the ability of the Indian public to afford the drug. It likely did not help Bayer’s case that worldwide sales of the drug had exceeded $1.2 billion, thereby presumably offsetting—or surpassing–Bayer’s research and development costs.

A second basis for Natco’s victory was a provision authorizing a compulsory license if “the patented invention is not worked in the territory of India.” According to the Patent Controller’s opinion, this statute requires the patentee “to contribute towards the transfer and dissemination of technology… so as to balance the rights with the obligations…. [W]orked in the territory of India implies manufactured in India…”

The Controller of Patents noted that Bayer owned manufacturing facilities in India but had not used them to make sorafenib during the four years when it owned the Indian patent rights. This lack of local manufacturing was thus a second basis for the grant of a compulsory license.

The patent office granted Natco a non-exclusive compulsory license, and awarded Bayer a royalty of 6% of net sales. In its petition, Natco said that its generic version of the drug will be available for $176 per month, a far cry from Bayer’s $5,600.

This ruling will not only have sweeping implications in India, but may also affect the role of compulsory patent licenses in other developing countries. As a result, pharmaceutical companies need to be mindful of the patient’s ability to pay for the drug when pricing their products, and give careful consideration to the implications of having manufacturing facilities in the country.

Interestingly, the Natco case may be read to suggest that if a pharmaceutical company has to choose between patenting a drug in India or building an Indian manufacturing facility, it should elect the former. Lack of a plant in India could provide the pharmaceutical company an excuse for maintaining high prices (because the drug is imported) and for the lack of distribution into less affluent areas.

Here, because Bayer actually had manufacturing facilities in India, no such excuse was available and it now must submit to the court-imposed compulsory license or appeal the decision.