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Countries’ Use of Life Sciences Localization Policies Continues to Metastasize

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The global economy—across a range of industries from information and communication technologies (ICTs), to advanced manufacturing, to life sciences—has seen a substantial increase in countries’ use of forced localization policies, particularly since the beginning of the Great Recession in 2008. These so-called localization barriers to trade represent policies that seek to explicitly pressure foreign enterprises to localize economic activity in order to compete in a country’s markets.

The life sciences sector confronts a number of different types of localization policies, though they can be generally grouped into three categories: 1) local production as a condition of market participation (including in government procurement); 2) forced intellectual property or technology transfer as a condition of market access; and 3) the use (or threat of use) of compulsory licenses. Unfortunately, the roll call of countries employing these pernicious policies continues to grow.

For example, Indonesia’s Decree 1010 requires foreign pharmaceutical companies to manufacture locally or entrust manufacturing to a company already registered as a manufacturer in Indonesia (a company that could be a potential competitor) in order to obtain drug approvals. Further, Decree 1010 requires local manufacturing in Indonesia of all pharmaceutical products that are five years past patent expiration and contains other technology transfer requirements for pharmaceutical products.

Likewise, Russia’s Pharma 2020 agenda makes forced localization of pharmaceutical production a central component of its strategy. Russia wants to force foreign pharmaceutical companies to localize production or compel collaboration with domestic firms. Accordingly, Russia has introduced subsidies, price preferences, and procurement restrictions as part of an explicit import substitution industrialization approach seeking to make local production account for at least 50 percent of total domestic pharmaceutical sales by 2020. Russia has also introduced a 15 percent price preference in state and municipal government procurement for locally made medicines and stated that imported medicines will not be allowed to participate in public procurement if there are offers from at least two domestic-producing suppliers.

An increasing number of countries have issued compulsory licenses on a range of pharmaceutical products that compel pharmaceutical manufacturers to disclose the intellectual property underlying the pharmaceutical drug, often so that it can be locally manufactured by a generic competitor. In some cases, countries are doing this on the grounds that the pharmaceutical drug is not being adequately worked (e.g., manufactured) in a country, despite the fact that this is not a valid reason for compulsory license issuance under the World Trade Organization Trade-Related Aspects of Intellectual Property (TRIPS) Agreement.

For example, when the Indian Patent Controller General issued a compulsory license to Natco for Bayer’s patented anti-cancer drug Nexavar in 2012, the Controller ruled against Bayer on three counts, including one contending that the patent was not “worked” (i.e., exercised) to the fullest practical extent in India because it was not manufactured there. Moreover, India’s Patent Controller has been empowered to require patent holders and any licensees to provide details on how the invention will be worked in India, including by requiring completion of a Statement of Working, suggesting that India intends to impose working requirements on users of its patent system (and not just in the life sciences sector).

Perhaps more disconcertingly, Indian delegates on the TRIPS Council continue to regularly question the utility of intellectual property regimes. For example, at a recent TRIPS Council meeting, an India representative contended that there is “no evidence to prove that strong IP could deliver on development or innovation.” In the same forum, an Indian delegate also insisted on several occasions that “there is not [a] direct linkage between IP and innovation.” Such sentiment belies the reality that robust intellectual property rights have, in contrast, been instrumental to a vast panoply of life-saving or life-improving medicines.

Elsewhere, in 2010, Ecuador established a compulsory license regime for pharmaceutical and agrochemical products. Ecuador has issued at least nine compulsory licenses since then, including five in 2014, for anti-cancer drugs such as Sutent as well as for drugs treating non-fatal illnesses. Likewise, Thailand has issued a compulsory license on a patent protecting an AIDS drug sold by Abbott under the name Kaletra as well as one for a heart disease drug sold under the trade name “Plavix.”

In May 2016, Colombia’s health minister announced that Colombia will override Novartis’s patent on an anti-leukemia cancer medication (Glivec, or Imatinib) and open it up to generic manufacturers unless the Swiss pharmaceutical maker accepts a price cut. This despite the fact that the drug has been sold in Colombia since 2003 and is currently used by over 2,000 patients. Specifically, Resolution 2475, promulgated by Colombia’s Ministry of Health, creates a mechanism by which a patent may become an object of potential [compulsory] license requests, opening the door for the pressure on Glivec (and potentially also on other pharmaceutical drugs). Unfortunately, this policy does not concord with the other commendable and laudable steps Colombia has recently taken—such as joining the Information Technology Agreement, participating in negotiations toward completing a Trade in Services Agreement (TiSA), and taking steps to join the Organization for Economic Cooperation and Development—toward transforming itself into a fast-growing, knowledge- and innovation-based economy.

Unfortunately, here, Colombia is not alone. South Africa’s draft National Policy on Intellectual Property (still under review) suggests that “compulsory licensing may be used as a bargaining tool in price negotiations with producers of patented medicines.”

Finally, while it is not an explicit localization policy, Canada’s increasing practice of invalidating even already-issued patents on grounds of “inutility” under the auspices of the so-called promise doctrine has a similar effect. For, in many cases, such as with Pfizer’s anti-glaucoma drug Latanoprost, Canada’s generic competitors are taking the very intellectual property underlying the invalidated patent and using it to create a similar drug, de facto localizing the production of the drug in Canada at the expense of the foreign competitor.

But while such policies seem like they can pay immediate dividends for countries, when nations enact forced localization policies they inflict significant damage on both the global innovation system and global health. For as enterprises are forced to open redundant, and thus economically inefficient, production facilities in other countries, the global community is deprived of the opportunity for those resources to be invested in novel biomedical discovery, and so the world is left with less biomedical innovation than would otherwise be the case. Moreover, when countries enact such policies, to the extent they succeed, they inflict significant reputational harm, compelling enterprises to invest the bare minimum they are mandated to do so, and no more.

In conclusion, whether in ICTs, advanced manufacturing, or the life sciences, forced localization policies represent a destructive force in the global innovation economy that should be eschewed by domestic policymakers and pushed back upon by the rest of the global economic community wherever encountered.

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About the author

Stephen Ezell is vice president, global innovation policy, at ITIF. He focuses on innovation policy as well as international competitiveness and trade policy issues. He is coauthor of Innovating in a Service-Driven Economy: Insights, Application, and Practice (Palgrave MacMillan, 2015) and Innovation Economics: The Race for Global Advantage (Yale, 2012). Ezell holds a B.S. from the School of Foreign Service at Georgetown University.