The BRICS Wall of Protection: What South Africa’s Patent Policy Means for the Future of National Health

BY ALEXANDER WARD.

In 2001, the Doha Declaration guaranteed flexibility of public health initiatives within the WTO’s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).  Included in the new legislation is the right for countries to issue compulsory licenses (CLs) for life-saving drugs, outline country-specific terms for the acquisition of these licenses, and adopt stricter patentability standards.   Although these new regulations have the ability to lower healthcare costs and increase government revenues if implemented in concert, South Africa’s intellectual property (IP) policy has failed to adjust accordingly.

-IP Policy in South Africa-

Lenient patent standards, bureaucratic roadblocks to compulsory licenses, and the lack of a patent examination and opposition system characterize South African IP policy.  Currently, patent applications need only meet the soft requirements of a regulatory bureau.  South Africa does not provide channels for third party opposition or oversight, allowing applications to escape public scrutiny during the filing process.  As a result, patents are granted on the assumption of validity, not subject to public discourse until after approval—at which point revocation of the patent is more difficult. Additionally, patents are often granted for the “ever-greening” of drugs, a pharmaceutical company’s attempt to extend the life of a patent through small adjustments to the drug, namely new forms, uses, or formulations that have only a marginal impact on efficacy and delay the entrance of generic alternatives.  Because South Africa does not explicitly prohibit these strategies patents extend long past their initial 20-year lifespan. Consequently, Drugs are delayed from entering the generic market, where competition can drive prices down.

While patents undergo little inspection upon submission, CLs are difficult to obtain. CL applications face opposition by large pharmaceutical companies and fierce litigation battles, costing generic drug companies time and money that deter the production of generics.  South Africa has yet to grant a CL for any type of drug and relies instead on generics for which the patent has expired.  While these drugs have undoubtedly improved the public health landscape in South Africa, new diseases and mutations, especially HIV, necessitate the procurement of generics for drugs currently under patent.

IP policy in South Africa discourages South African innovation and facilitates patent acquisition by foreign companies.  In 2008, 1,988 of the 2,442 patents granted in South Africa came from American or European countries, while just 16 were identifiable from South African companies.  Public health concerns aside, it is clear that current IP policy largely serves the interests of multinational companies (MNC) seeking to capitalize on lenient patentability standards.  While it is likely that South Africa hopes to procure foreign direct investment (FDI) by extending patents to MNCs, the tradeoff has been the stifling of domestic innovation.

South Africa has resultantly been unable to contain the lifespan of foreign pharmaceutical patents, thus failing to cultivate a generic drug industry that would enhance access to affordable drugs. On another note, the Companies and Intellectual Properties Commission (CIPC) derives little benefit from the current system, generating much lower revenues than those seen in the IP offices of comparable nations, who charge higher patent filing and retention fees. In other BRICS countries, proactive adjustments to IP policy have facilitated generic drug manufacturing, lowering the cost of life-saving medicines, generating remarkable government revenues, and spurring economic growth.

-IP Policy in the BRICS-

There exist marked differences between IP policy in South Africa and the other BRICS countries.  Brazil, Russia, India, and China employ both an examination system to evaluate the validity of a patent and pre- and post-grant opposition measures allowing for third party intervention.  Electronic patent databases allow for quick searches and access to patents filed in other countries, creating a more comprehensive portrait of the patent landscape.  As a result, it is easier for these countries to reject patents on evidence of ever-greening, including lack of an inventive step and minimal contribution to the public good.  To put the effects of these policy differences into perspective, Brazil granted 273 pharmaceutical patents between 2003 and 2008 while South Africa granted 2,442 in 2008 alone. Each country features different policy nuances that allow them to derive benefit from IP policy.

A map of the BRICS Countries. Image by João Felipe.

The first case study is India, who—through its development of a patent application process, increase of patent filing fees, and commitment to fostering a robust domestic drug industry—has used TRIPS flexibilities to further healthcare and development goals.  Patents filed in India undergo a rigorous examination process, including publication in a patent journal that examiners then inspect for true innovation.  Third party pre- and post-grant opposition opportunities also allow the public to analyze both the patent filing and the examiners’ work, effectively creating a system of checks and balances that ensures patents granted are legitimate.

Economically, the new policies have led India’s IP department to increase its contribution to government revenue. The patent office generated R 417,339,975 in revenue in 2010-2011, nearly double the amount accrued in 2009-10, when profits totaled R 195,000,000. Revenue growth has been disproportionately positive in comparison to growth in the number of patent filings.  Over the 20-year lifespan of a patent, patent retention costs an average of R 1,786 per year, with initial filing and examination fees amounting to R 887.  The sum of South Africa’s average annual retention fee (R 143) and its initial filing fee (R 730) amounts to less than 10% of India’s equivalent figure.

Furthermore, since 2005, when CLs were first required to override patents in the country, India has become a standard bearer for affordable healthcare through generic drug manufacturing and compulsory licensing. Granting a CL to Natco Pharma for Bayer’s kidney and liver cancer drug, Nexavar, in 2012, the Indian government successfully brought down drug price from Bayer’s $5,600 per month to $175 per month, less than 4% of the original price.  Through capitalization on TRIPS flexibilities, India has constructed an IP policy that rewards genuine innovation, drives government revenue, and benefits a robust generic drug industry.

In Brazil, too, IP policy changes have been used to bring its citizens access to more affordable healthcare, through the facilitated development of an enormous domestic pharmaceutical industry. Policy initiatives, such as the 1996 amendment providing for CLs, have allowed the generics industry to expand, with sales growing by eight times between 2002 and 2009 and over 2,700 new products being registered. Article 68 of Brazil’s IP even Law requires patent owners to manufacture their products in Brazil or accept compulsory licensing of those products. Just one month after defending its position in a meeting with the WTO, Brazil gained access to two HIV drugs from Merck, at discounts of 59% and 65%. Generic drugs now produce sales of $5.5 billion per year, comprising 20% of the pharmaceutical industry.

Brazil has issued CLs on drugs currently under patent and has leveraged their IP policy against the interests of the international pharmaceutical industry to procure significant price reductions for life-saving drugs.  In 2005, Brazil announced that it would issue CLs for ARVs, which had assumed 85% of their total AIDS program budget.  In 2007, after a series of unsuccessful meetings with Merck Sharp and Dohme, they acted on their previous assertion by issuing a CL for Efavirenz, a drug used to treat HIV, causing the prices to decrease dramatically.  But beyond demonstrating the importance of CL issuances, Brazil is a testimony  to how the threat itself of CL issuance has also been critical to lowering healthcare costs.  In 2001, Roche agreed to sell Viracept in Brazil at a 40% discount to avoid a compulsory license.  Later in 2005, the same fear of CLs allowed Brazil to obtain Kaletra, another HIV drug, at a 46% discount, as well as a technology transfer upon patent expiration.  By using their IP policy as a counterbalance to the interests of pharmaceutical companies, the Brazilian government facilitates access to more affordable healthcare for its citizens.

Like Brazil and India, China has established a rigorous patent examination system that relies on criteria such as novelty, inventiveness, and utility.  In evaluating this last parameter, China assesses empirical evidence of drug efficacy, based on results from clinical trials. While providing for pre- and post-grant opposition, China also allows for the reexamination of a rejected patent, should the patent filer believe their application to be misevaluated. In this way, the patent office displays a commitment to both public and private interests.

In 2008, China explicitly allowed for more developed countries to export generic drugs to countries without their own manufacturing capabilities, with the approval of the “August 30 decision,” a piece of WTO legislation designed to promote CLs.  Also known as the “early working” exception, the Bolar exception was also established to enable generics companies to prepare for the manufacture of a drug still under patent. Third parties can thus be ready to distribute the generic version of a drug immediately upon patent expiry, ensuring continued and increased drug access.

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The development of an IP policy implementing TRIPS flexibilities would move South Africa closer to controlling its AIDS epidemic.  Adjustments to the current policy would encourage genuine innovation and ensure that public health issues take precedent over the interests of private companies.  In doing so, South Africa could improve public health while also driving economic growth and government revenue.

-Learning from the BRICS-

The IP policies of the other BRICS countries provide valuable references for developing South Africa’s own IP policy.  Features like patent examination systems, pre- and post grant opposition, and increased filing fees would both legitimize South African IP policy and bolster the strength of the patent office.  It would first ensure that patents granted in South Africa represent genuine innovation and are neither ever-greening technologies nor useless inventions.  In a related vein, the number of patents filed would be reduced, allowing the patent office to concentrate on conducting more comprehensive examinations of the higher-quality pool of filings.  Furthermore, through pre- and post-grant opposition rights, the public would gain the chance to serve as a patent regulatory authority and greater voice in IP developments in South Africa.

As it is, drug companies and their lobbyists enjoy a disproportionate influence in IP policy.  Bringing South African patent filing and retention fees in line with those of the countries previously examined would grant patents greater legitimacy and offer patent holders increased incentive to market their products.  Adjusting patent fees, incorporating an examination system, and facilitating pre- and post-grant opposition should be the foundation of a revamped South African IP policy.

In the implementation of a new IP policy for South Africa, a cost-effective strategy could be developed from the successes of other BRICS patent offices. To accommodate the expenses of building a vertically structured patent examination system and database—which would ensure confidentiality of patent filings and give the South African government complete control over domestic IP, patent-filing fees should be raised.  An alternative would be to use aspects of other BRICS patent offices’ examination systems and patent databases.  India and Brazil, for example, have shown competency and rigor in patent procedures and could absorb at least a portion of South African patent filings.  Access to an established examination system would both serve to legitimize South African patents and ensure that South African patents could be marketed across the world, a factor essential to establishing South Africa in the global economy.  The disadvantage to using foreign patent offices would the increased risk of IP theft and greater difficulty in process regulation.

Leaders of the BRICS Nations in 2012. From left to right, Dilma Rousseff, president of Brazil, Vladimir Putin, president of Russia, Manmohan Singh, prime minster of India, Li Keqiang, premier of the People’s Republic of China, and Jacob Zuma, president of South Africa. Photograph by Panalto.

In this author’s opinion, it would be best to create a combination of these two approaches.  South Africa should establish a viable examination system within the context of a reworked patent filing protocol while utilizing foreign patent databases to perform the search process.  South Africa would retain control over its patent filings yet exploit the valuable resources of other countries.

Economic Effects of IP Policy and Compulsory Licensing

Opponents of stringent IP policies and CLs often form arguments based on the measures’ perceived effects on economic growth, specifically Foreign Direct Investment (FDI). Critics assert that MNCs are less likely to invest in countries where patents are more difficult to obtain and where there is potential for a patent’s override by a CL. China is often cited as an examples of this principle—FDI has increased rapidly, in face of a government reluctant to issue CLs for the production of pharmaceuticals.
However, no empirical evidence exists to support the link between increased FDI and lenient patentability standards, or a lack of CLs.  In fact, South Africa’s own FDI has decreased nearly 50% from 2008-2012, falling from $9 billion to $4.6 billion, which represents a decline in percentage of GDP from 3.3% to 1.2%. South Africa has also fallen behind its peers in high-technology exports over the past two decades. The country’s share of global high-technology exports stagnated at 0.07% from 1992-2005, while Brazil—a country featuring strict patentability standards—saw a share that grew from 0.29% to 0.49% during the same period, as their generic drug industry gained momentum. FDI and IP policy do not have a strong direct correlation, and FDI in South Africa has suffered under the current legislation.

Lack of robust economic growth and FDI under South Africa’s current IP policy supports the need for a change in patent laws and for the issuance of CLs, which could allow South Africa to take advantage of escalating drug demand in Africa.  With African pharmaceutical spending expected to reach $30 billion by 2016, facilitating generic drug production through the issuance of CLs would give South Africa an opportunity to compete in a growing market. South African generics companies would enjoy competitive advantages in transport costs and local political relationships, making them attractive for contracts with sub-Saharan countries.

Though generic producers are currently constrained by high prices for Active Pharmaceutical Ingredients (API), which are currently monopolized by China, it is likely that generics companies in Africa could negotiate better rates and thus become more attractive to the market.  This option should be explored and would allow African companies, and specifically those in South Africa that enjoy a more developed infrastructure, to make the continent more pharmaceutically self-sufficient.

South Africa cannot hope to enjoy the benefits of new IP policy or CLs without the political will of government.  To give TRIPS flexibilities, the Doha Declaration, and WTO legislation meaning, the South African government must take initiative to use this legislation for the good of the people.  In Brazil, the government’s use of legislation to counter the interests of Big Pharma allowed the country to bring down drug prices and, in some cases, issue CLs. Through the strength of their political will, they were able to stand up to the interests of the pharmaceutical researchers and manufacturers of America (PhARMA) and have since garnered more affordable healthcare and massive economic benefits. South Africa can mirror Brazil’s success in pharmaceutical lobbyists.

-Conclusion-

IP policy will play an increasingly important role in shaping South Africa’s response to the HIV/AIDS epidemic. In a country struggling to meet its public health goals on account of artificially high drug prices influenced by foreign pharmaceutical companies, the acquisition of cheaper drugs through CLs and the institution of a patent examination system to ensure high standards for innovation would allow the country to treat more people suffering from HIV/AIDS. The resulting support of bona fide inventions with cutting edge technology would also drive South Africa forward.  South Africa can learn from the IP policies of the BRICS and should collaborate with these countries for the exchange of resources and ideas. With a combination of political will and thoughtful policy making, South Africa can better combat HIV incidence.