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Home PageNews & PublicationsThai Government Pay Hike Undermines Rationale for Compulsory License Policy

Thai Government Pay Hike Undermines Rationale for Compulsory License Policy

According to the World Health Organization, Thailand is a middle-income country with impressive achievements in both economic and social development. The Kingdom has a long and successful history of health development, achieving universal health care for Thai citizens in 2002, vibrant primary health care and innovative health system development and health promotion. The Thai government holds Thailand out as an aspiring Asian medical hub.

Notwithstanding dramatic improvement in Thailand’s export-led economy over the past three years, Thailand maintains that it is necessary to continue its compulsory license (“CL”) policy stripping pharmaceutical companies of private property rights to patents covering several medicines. The rationale for the CL policy is stated to be a general lack of available funding to pay for quality innovative medicines produced by R&D based pharmaceutical companies.

On December 14, the Thai cabinet approved an across the board pay raise for all state workers and political office appointees of 5%, while parliamentarians received hikes of 14.3-14.9%. This 13 billion baht raise for state officials and senators is presumably part of the roughly 2.07-trillion-baht ($64.7-billion) budget for the current fiscal year, which began on October 1. The budget bill passed by Parliament represents an approximate 22% increase from last year.

Thailand’s healthcare expenditure between 2007-2010 has been in a range of between 280 billion baht and nearly 300 billion baht (projection). While healthcare spending has remained fairly stable, spending on other national priorities, such as defence (approximately 8% of the overall budget) has increased significantly since late 2006, when the coup d’etat occurred (and also when the CL policy was first rolled out). One may question how pay hikes for government and military officials are possible when some of the same recipients of government largesse contend that there is not enough funding to buy medicine for Thai people.

The CL policy was invoked by the Health Ministry based on the so-called “government use” exception of the Thai Patent Act, which permits a patent to be broken for purposes of “public non-commercial use” of the patented invention. Although legally restricted to non-commercial use, the primary beneficiary of the CL policy has been the state-owned Government Pharmaceutical Organization (“GPO”), which paradoxically is a for profit concern with the leading market share in Thailand. Business has been booming for the GPO since the CL policy went into effect. According to its annual report, GPO has generated net profit averaging more than 1.1 Billion Baht since 2007, a substantially improved performance from 2004-2006 before CL was invoked.

That GPO invokes CL to buy generic products of questionable quality from India and sell those products for its own account has led to concern over the legitimacy of the CL policy. A CL based on the Patent Act must only be implemented in compliance with the international treaty on IP rights called TRIPS. TRIP generally allows CL in exceptional circumstances and as a last resort after exhaustion of all other options.

In the extraordinary case where a CL may be justified, TRIPS Article 31 requires (a) that the public use must be non-commercial; (b) that a royalty must be paid to the patent owner as adequate remuneration, taking into account the economic value of the authorization; and (c) that the legal validity of any CL be subject to judicial review or other independent review in the Courts.  In Thailand’s case, GPO arguably uses the CL in a commercial manner for its own account. GPO has not paid any royalty to affected patent owners and has not even agreed on the rate to be offered much less paid (at least in the cases with which the author is personally familiar). Finally, none of the patent owners have been afforded any right to challenge the legality of the CL in the Courts. Indeed, Thailand’s position is that a patent owner may only challenge the rate of royalty imposed and cannot test the merits of the CL itself.

TRIPS also requires that, even if the CL were justified because of exigent circumstances at the time it was invoked, the CL should be discontinued when those circumstances no longer exist.  Thailand is flush with cash- the currency and stock market are at long-time highs. Exports continue to impress. Foreign reserves are at unprecedented levels. Whatever funding crunch may have justified the CL in 2006 after the coup has long since disappeared. Moreover, in some cases, non-infringing substitute generic products are available in the market. Certainly, if the medicine is not covered by any patent, no CL is necessary to gain access to the medicine.

These facts lead many to question whether the CL policy has been implemented by the Thai government in a manner consistent with a TRIPS-compliant interpretation of the Thai Patent Act. Unfortunately, a reasoned debate whether the imposition of CL was an unsound exercise of executive authority is difficult, because a misinformed public is often polarized by the rhetoric of radicals and activists.

From the policy standpoint of Thai national competitiveness, is there any merit to continuing to impose CL? The continuation of CL only serves to highlight concerns about intellectual property risk for foreign investors, making Thailand on balance a less attractive destination for high tech investment.

Credible estimates of actual savings enjoyed by the Thai government arising from its procurement of generic products from India under CL are hard to come by, but in no event exceed a couple hundred million baht, a mere drop in the bucket in relation to overall spending on medicines. Do such meager savings justify wrecking Thailand’s image as a safe destination for R&D companies to do business?

There is also the question of whether the cheap drugs imported by GPO meet the high quality standards set by the manufacturers of the patented medicines. Batches of medicines shipped to Thailand from Indian suppliers have reportedly faced increased scrutiny by GPO because of quality concerns.

Substituting supply of medicines from India certainly improves competitiveness for India, in terms of increased stature, more employment, and more tax revenue for the Indian economy. What needs to be examined is whether there is any comparable advantage to the Kingdom of Thailand. A multi-national company operating here, if stripped of its patent rights, sells less medicine. Lost sales mean less income, less income tax, less VAT, less training of employees, less training of physicians, and potential layoffs, all unintended negative consequence for Thailand. India’s gain comes at a price to Thailand, a price likely exceeding the small amount of savings from purchase of cheaper drugs under CL.

Three years on, the time may have come for a calm, clear-eyed and rational reconsideration of the wisdom of the Thai government’s policy on compulsory licensing.

The author is an international intellectual property attorney with Siam Premier International in Bangkok and has represented manufacturers of both generic and innovative medicines in Thailand.

By Edward J Kelly © December 2010