Thailand is pushing ahead with its decision to break the patents on cancer drugs.

Thailand's new health minister had considered reversing the country's stance, saying that the policy was a politically, though not legally, correct decision. Now he's decided to recommend leaving the policy in place.

Thailand issued compulsory licenses in January for several expensive cancer drugs. Under the compulsory licensing scheme, Thailand's former military government temporarily suspended patent protections for the drugs and allowed the production of cheaper generic versions.

The drugs in question -- Novartis' (NYSE: NVS) Femara, Sanofi-Aventis' (NYSE: SNY) Taxotere, and OSI Pharmaceuticals' (Nasdaq: OSIP) Tarceva, marketed overseas by Roche -- are all cancer treatments.

Patent compulsory licenses are allowed under world trade agreements in cases of health-care emergencies. Unfortunately, the laws are ambiguous with respect to the ability of breaking patents simply to reduce costs.

It's not hard to find the reason for the about-face. Public Health Minister Chiya Sasomsub's policy epiphany came after consumer and health activists collected more than 20,000 signatures -- the number needed to impeach a minister in Thailand.

The health minister justified the action by stating that Thai patients must have access to affordable drugs, but the real issue here is money. Chiya said the compulsory licenses would save Thailand more than $100 million a year just on these three drugs.

While the brand-name drug company will receive a reasonable royalty, determining the reasonableness is difficult, since it depends on your perspective. Thailand spent just 3.3 percent of GDP on health care, less than its poorer neighbors Cambodia and Vietnam, which spent 6.7 percent and 5.4 percent of GDP, respectively, in 2004.

Earlier, the Thai government issued compulsory licenses for Abbott Laboratories' (NYSE: ABT) Kaletra and Merck's (NYSE: MRK) Efavirenz, both HIV drugs, as well as Sanofi's Plavix, a medication for patients with heart disease. In retaliation, Abbott said it would not seek licenses for seven new products in Thailand.

Brazil has repeatedly managed to win price reductions in recent years from big pharmaceutical companies by threatening to break patents. Last year, the government broke the patent on Efavirenz, saving the government more than $30 million this year alone.

It is difficult to evaluate the total impact of these licenses. Many companies say that compulsory licenses will discourage companies from investing in new treatments for disease in poor nations. Merck does not report sales for the AIDS drug in Thailand, but the licenses are likely to have an insignificant impact on its $24.2 billion in worldwide sales for 2007.

This current trampling of patent rights, however, raises several big concerns for drug companies going forward:

  • Patent-breaking might spread to other nations across Asia, Africa, and South America. As yet, compulsory licensing has been limited to a few countries. Many countries are reluctant to play this card, for fear of economic retaliation by governments in more developed countries. Unfortunately, the more this continues, the more it will appear acceptable. Upholding patents is critical to drug companies that have pegged future growth on expanding their markets in developing countries.
  • There is a risk that developing countries will try to expand the compulsory licensing programs to include drugs beyond AIDS and cancer treatments. The Thai government has indicated it has about 20 more various patented therapeutics that could be candidates for compulsory licenses, including drugs for treating hypertension, diabetes, and hyperlipidemia -- excessive fats in the blood. This could be only saber-rattling to get a better price on drugs, but it indicates a willingness to keep pushing the limits.
  • The increased availability of ultra-low priced drugs in the world provides more opportunity for trafficking into more developed nations, thereby undercutting drug profits in yet more regions. Drug companies make the bulk of their profits in just a handful of wealthy countries. If low-cost generics are moved across borders, then the profit loss will be even greater.

Clearly, the issue of compulsory licensing requires further debate. We can hope for more equitable solutions, but in the meantime, I recommend drug-company investors keep an eye on how this plays out to see if a trend develops.

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Fool contributor Stephen Albainy-Jenei is a patent attorney at Frost Brown Todd LLC and serves chat at PatentBaristas.com. Feel free to write him with comments or questions. Stephen doesn't own shares of any company mentioned in this article. The Fool's disclosure policy loves sticky rice cakes with red bean filling.