Compulsory Licence: The Cure to America’s High Drug Prices

Parth Nikumbh

Intro

Even with revolutionary advances in biomedical innovation, the therapeutic gains of life-saving medications are all too often out of reach for millions of Americans. The sky-high prices and complex financing arrangements make the utilization of life-saving medicines all but unaffordable. A new analysis projects that over 1.1 million Medicare patients could die by 2030 due to their inability to pay for the medications they require.¹ With the nation confronting widening health inequities and growing chronic disease burdens, comprehensive drug policy reform is required.

The Status Quo of the US Drug Prices

The U.S. pharmaceutical market is uniquely expensive. Although the U.S. comprises less than 5% of the world's population, it accounts for nearly 50% of the world's pharmaceutical revenues.² The reason for this disparity lies in a highly fragmented and opaque funding system where neither pharmacy benefit managers (PBMs), insurers, nor manufacturers have much price transparency.³ The result is an intricate web of markups, rebates, and misaligned incentives that inflate prices and obscure the actual cost of care.⁴ Even insured patients generally face high out-of-pocket expenses, particularly for brand-name and specialty drugs.

In addition, the U.S. patent and exclusivity system exacerbates the access issue, as "evergreening" of patents and the strategic use of market exclusivity extensions delay competition, enabling drug companies to keep prices high years after the original innovation.³ This system undermines the balance between rewarding innovation and ensuring affordability. These dynamics have deadly consequences. According to West Health and the University of Chicago, if current price trends continue, being unable to afford medications could kill more Medicare patients by 2030 than diabetes, pneumonia, and kidney disease combined.⁴

To counter such concerns, major policy changes must be established in current patent laws. One such mechanism is compulsory licensing, where governments provide authorization to produce generic versions of patented medicine for the sake of public interest.⁵ Many countries, such as India, have established comparable mechanisms which have allowed them to make essential life-saving medication at affordable prices.

Understanding India's Compulsory Licensing System

Compulsory licensing is a provision that allows a government to authorize the production of a patented product without the consent of the patent holder according to specific circumstances. Compulsory licensing is institutionalized in India under the Patents Act of 1970 and is aligned with the flexibilities provided under the World Trade Organization's Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. According to Section 84 of the Indian Patents Act, any interested person may apply for a compulsory license after three years from the grant of a patent if any of the following circumstances are met:⁶

• The reasonable needs of the public in relation to the patented invention have not been met.
• The patented invention has not been made available to the public at a reasonably affordable price.
• The patented invention is not worked in the territory of India

This mechanism ensures that patents do not become barriers to access life-saving medicines, particularly in cases where public health is at stake.

Benefits of India's Compulsory Licensing

India's utilization of compulsory licensing has led to many benefits, particularly in expanding access to life-saving medicines. A landmark example of this is the 2012 compulsory license granted to Natco Pharma to produce a generic version of Bayer's patented cancer drug, Nexavar. Prior to the license, Nexavar was priced at approximately $5,000 monthly, out of reach for the vast majority of Indian patients. The compulsory license enabled Natco to sell the generic version at approximately $160 monthly, dramatically improving affordability and accessibility.⁸ This example demonstrates the application of compulsory licensing to combat monopolistic prices and provide life-saving medications to those in need.

Furthermore, the possibility or deployment of compulsory licensing can also be employed as a threat to get the patent holders to voluntarily license their patents on more favorable terms, bringing about a more competitive market. The result can be reduced prices and increased access to medications, to the benefit of public health outcomes.

Potential Implications of Using Compulsory Licensing within the United States

The United States faces a pressing issue of high prescription drug costs, which can limit access to necessary treatment and worsen adverse health outcomes. Implementing a compulsory licensing system like that of India's would offer a viable solution to this dilemma. By allowing the government to authorize the production of generic versions of patented drugs when their costs are unaffordable, compulsory licensing would introduce competition, which would incentivize lower prices and increased accessibility.⁷

Further, the introduction of compulsory licensing in the U.S. would also serve as a bargaining tool during negotiations with pharmaceutical companies regarding prices. The mere threat of the government invoking a compulsory license could compel patent holders to be more modest in their pricing, limit evergreening practices, or agree to voluntary licenses, for the benefit of consumers.

Major Concerns

A major concern surrounding compulsory licensing is its potential impact on pharmaceutical innovation. Critics argue that weakening patent protections could disincentivize investment in costly and time-consuming drug research and development. However, this concern, while valid, may be overstated—particularly in the context of limited, targeted use of compulsory licensing. The threat to innovation is mitigated when compulsory licenses are issued only under strict criteria, such as public health emergencies or when a drug is priced far beyond affordability. Historical data from countries that have employed such licenses, including India and Brazil, show no clear evidence of a significant decline in pharmaceutical innovation as a result. In fact, companies often respond to the possibility of compulsory licensing by voluntarily reducing prices or negotiating licensing agreements, preserving both access and innovation.

Moreover, the U.S. government already plays a major role in subsidizing drug development through public institutions such as the NIH. Taxpayer-funded research often lays the groundwork for pharmaceutical discoveries decreasing out of pocket costs for companies allowing them to innovate regardless of current profit margins.

Conclusion

India’s experience with compulsory licensing demonstrates that it is possible to utilize compulsory licensing effectively as a tool for enhancing access to life-saving medications and combating astronomically high drug prices. Applying the same tactic in the United States can provide a solution to the increasing cost of prescription drugs, improve public health, and reduce health care expenditure. A balance between the need for affordable medicines and the need to preserve pharmaceutical innovation will be critical in creating a compulsory licensing regime that serves the public interest while encouraging continued medical innovations. Through this approach, the US government could ensure that prices are kept low, either by companies themselves or by mandating a compulsory license, finally allowing low-income Americans access to life saving medications. It is time that the US finally made revolutionary advances in drug affordability to accompany its revolutionary drug innovation.

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