Calculation of Royalties in Compulsory Licensing of Pharmaceutical Patents in Europe – How Much is Justified?

Abstract

Rent-seeking companies are not aiming at increasing the quantity of capital services that their asset yields in certain period of time, but rather at investing in intangibles with the objective of gaining high returns in the future. In such cases the quantity is not really contributing to production or the economy. This causes such a company to posses so called monopoly rents, which are gold to the company itself as well as to the stock market, but unfortunately the benefits do not necessarily extend to the national economy.1 Pharmaceutical companies are of such sort. They seek to invest in research and development (R&D) to gain high prices with possible future patented products during the patented lifecycle of their medicine. This causes controversy in the aspect of social welfare. Pharmaceutical companies are often seen as inhumane in their quest for high rents at the price of human lives and health. In the battle against monopoly rents, legislation on compulsory licensing has been devised. Compulsory licensing may be used by states to disrupt abuse of a monopoly position, to prevent or stop other anti-competitive actions or to simply provide easier access to medication. Such compulsory licenses oblige the patent owner to license its patented medicine to another pharmaceutical company, often a producer of generic drugs. The issuing court may decide on a certain price for the license, i.e. a royalty payable to the patent owner, or it may condemn the patent to be licensed for free. The objective of this study is to answer the following sub-problems: - How is the value of pharmaceutical patents calculated? - What is the value of research and development for pharmaceutical companies? - How is society affected by a compulsory license? Through these sub-problems I seek to resolve what all the factors to be taken into consideration in order to calculate a justifiable amount of royalties paid for compulsory licenses in Europe, are. The research is geographically restricted to Europe in order to limit the study merely to developed countries, hence bypassing the biggest ethical problem of patents that is present in least developed countries (LDC). Also, the United States is set aside, because of their heavy emphasis on the exclusive ownership of patents, and lack of case law concerning compulsory licensing of medical patents. Moreover, the EU countries reflect relatively homogenous legislation and economies.