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Compulsory Licensing in Emerging Markets

As populations in emerging markets grow and their economies improve, so will the demand for quality, affordable health care. In general, to curb the high costs of medication and improve access, governments in emerging markets may impose price controls or regulations that require drugs to be “manufactured in country.” Depending on the governing body, “manufactured in country” could mean repackaging or the complete manufacture of product; either of these will undoubtedly increase costs for companies with branded product unless they have infrastructure in place to support in-country operations.

With this in mind, pharmaceutical companies essentially have three options: to enter the market directly, grant a voluntary license to a local manufacturer, or refuse to enter. Based on the company’s decision, the national government can then choose whether to grant the company a compulsory license or not.

A voluntary license is an agreement between an intellectual property holder (e.g., patent holder) and a manufacturer, allowing the manufacturer to produce, market, sell, and in some cases export, the drug for a set licensing fee. This route is pursued at the discretion of the patent holder, who can choose to negotiate with a local generic manufacturer, and then grant them a voluntary license. In this case, pharma companies often choose to increase their involvement in the manufacturing process to ensure a consistent, quality product.

Contrarily, compulsory licensing legally forces a company to license their product to a local company – effectively circumventing resident intellectual property laws. This practice has caused tension within the pharmaceutical industry, particularly since it seems an overt violation of intellectual property regulations. With compulsory licensing, pharmaceutical companies are not only required to take the fees dictated by the government, but they also lose bargaining power and may suffer from reduced product quality – which can bring additional (more costly) ramifications. Responses to compulsory licensing have traditionally been filled with costly and time-consuming litigation, which are often grossly unsatisfying for all parties involved.

However, if a compulsory license is not granted, and the company does not pursue other avenues for entry, the national government can choose to import generics instead of the branded product, which will result in additional lost opportunity cost.

When considering entry into any emerging market, pharmaceutical companies obviously have a range of criteria to assess. While their entry strategy may differ based on government pricing structure, intellectual property safeguards, or the national healthcare system, pharmaceutical companies have to be proactive in engaging government and industry stakeholders. Many governments are actively assessing generic options, so branded pharma will need to support and initiate opportunities that will improve global access to medications while ensuring profitability for all of the companies involved.