The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) is an international agreement administered by the World Trade Organization (WTO) which sets down minimum standards for many forms of intellectual property (IP) regulation. It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994. Before the advent of WTO, the members of the GATT were allowed to choose among a number of Agreements as per their interest, but WTO bring all the agreements together under one umbrella and TRIPS are the part of those agreements which means that all the member countries of WTO have to follow the TRIPS rules and regulations. As per definition, Intellectual property rights (IPR) are a legally enforceable but limited monopoly, granted by the state to an innovator. They specify a time period during which others may not copy the innovator's idea, allowing him or her to commercialize it, and recoup any investment on research and development (Rakesh Basant, 2007).
As per this essay, I am taking the influence of TRIPS on Pharmaceutical Industry in Developing country. There is a world wide debate that whether there should be provision of patent protection for pharmaceuticals in developing countries as this will result in substantial increase in price which in turn will affect the health of the citizens of their country especially the poor people. On the contrary, according to research based global pharmaceutical companies, patent protection is unlikely to increase the prices as most of the patented products have their therapeutic substitutes. Moreover, Companies are losing billions of dollars because of patent infringement by third world countries and if there will be no patent protection then there is no incentive left to invest heavily in Research & Development and finding out new NCEs (New Chemical Entities) for new therapeutic segments. According to them, this will help the developing countries in turn by stimulating innovation and transfer of technology in their countries by MNCs; therefore this debate has no end as both the parties stick to their points.
In this essay, I am taking the case study of Indian Pharmaceutical Industry as it was non-patent recognizing low income developing country which now has to recognize the patent provisions due to its membership with WTO. Earlier, India was one of the strongest contenders among developing countries who were opposing the implementation of TRIPS in developing countries but in the fourth round India had to agree with the rules and regulations of WTO. India’s growth is tremendous after 1970 which showed that how the support of central government policies can bring 360 degree change in the industry. Hence, a sector which was almost negligible in India before 1970 became as one of the largest suppliers in generics in world market (Chaudhuri, S., Goldberg, P.K. & Jia, P., 2003).
The objective of this essay is to ascertain that how TRIPS will affect the Indian pharma industry after 2005 and what measures Indian companies can adopt to survive in new Product-patent regime. What are the new business models present for the industry to give stiff competition to MNCs.
Indian Patent Act 1970 played an important role in round over change of Indian Pharmaceutical industry. An industry which was almost non-existing till 1970 ranks 4th in terms of volume and 13th in terms of value globally now. The domestic pharmaceutical output has increased at the compound growth rate (CAGR) of 13.7% p.a. (FICCI, 2005). The Indian pharmaceutical companies have gained the desired competence in their manufacturing capabilities and also started fulfilling the current good manufacturing practices (cGMP) compliance requirements stipulated by international regulatory agencies like United States Food and Drug Administration (USFDA) and Medicine Control Council (MCC). Presently, it is only Indian pharma industry which has more USFDA approved manufacturing plants after US reflecting the growth of Indian pharma industry worldwide.
The various Indian Patent Acts played an important role in growth of Pharma industry. As per the background of patent regime in India, The Indian Patent System owed its origin to British rule in India and the important patent related enactments includes: (i) Act VI of 1856 on Protection of Inventions based on British Patent Law of 1852 which provided exclusive privileges to inventors for 14 years; (ii) The Patent & Designs Protection Act, 1872; (iii) The Protection of Inventions Act, 1883; (iv) The Inventions & Designs Act, 1888; (v) The Indian & Designs Act, 1911; (vi) The Patents Act, 1970; (vii) The Patents (Amendment) Act, 1999; (viii) The Patents (Amendment) Act, 2002 effective from May 20, 2002 and (ix) The Patents (Amendment) Act, 2005. Among them, Indian Patent Act 1970 played the pivotal role in transforming Indian pharma industry through making it more beneficial for domestic producers by abolishing product patents for pharmaceuticals being implemented during Indian Patent act 1911 and reduced the patent years from the date of sealing, whichever was earlier. It allowed only process patents in the areas of food, pharmaceuticals and agricultural chemicals. It also made provisions for invoking compulsory licenses after three years if a price was deemed ‘unreasonable’ (Alka Chadha, 2005). This act also putted restrictions on the import of finished formulation, high tariff rates, ratio requirements and equity ceilings on foreign participation which ultimately encouraged domestic production (Jean O. Lanjouw, 1997).
The drug manufacturing basically consist of two parts, namely, Bulk Drug manufacturing which involves the production of Active Pharmaceutical Ingredient (API) and second is Formulations which include the conversion of API into finished dosage forms such as tablets, capsules, ointments, etc. Before the introduction of Indian Patent Act 1970, the Indian pharma industry was basically ruled by MNCs with a market share of 85%. All the supply of bulk drugs and formulations was controlled by MNCs which impeded the growth of local manufacturers and the total investment in pharmaceutical sector was around Rs. 24 crore in 1952 which rose to Rs. 200 crore in 1972 after the introduction of Indian Patent Act 1970 and recently the investment was around Rs. 5,253 crore in 2003-04 (Ravinder Jha, 2007). After 1970 Act, Indian companies started the reverse engineering process in which they imitate the branded products of MNCs and started exporting them in third world countries. Thus, in a matter of 6 to 7 years the Indian industry developed the capability to manufacture any new molecule introduced in the world market and many of them from the very basic stages. That efficiency of Indian entrepreneurs brought down the prices of a large number of widely used drugs and formulations in the country and posed threat to most of the MNCs operating in the country. Then came the first Drug Policy in1978 and a comprehensive price control in 1979 in which the price control measures affected the profitability of almost the entire pharmaceutical industry but some of its policy directions had openly supported the domestic industry and discouraged the existence of MNCs. An important thrust of the policy was the self sufficiency in bulk drug production in the country, an area where MNCs were unwilling to enter into for several years. These two policy initiatives from the government had transformed the Indian pharmaceutical industry into a leading manufacturer and exporter of APIs and for almost a decade India remained as the quality supplier of APIs at competitive prices in the international market and became truly internationalized (P.A. Francis, 2006).
Indian Pharmaceutical industry now ranks second among industries in India (after IT) in terms of internationalization as measured by exports as well as foreign direct investment by constituent firms. In an analysis of about 120 firms for ten years between 1996 and 2005, it has been found that average export intensity of an incumbent Indian firm growing from about 15% to over 24%, with foreign sales growing at a remarkable annual rate of over 21%. The noteworthy feature of internationalization of the Indian pharma firms is the presence of a large number of international firms in the industry rather than a few large ones. Out of the 120 odd firms in the industry, over 50% (53 firms) had more than 25% of their sales composed of foreign sales for the year 2005 and about one-third (32 firms) had more than 50% of their sales contributed by overseas markets. Another important feature of internationalization is in terms of target geographies as India's pharmaceutical exports are not dominated by a focus on other developing economy markets, but are spread over developed as well as developing economies. As of 2000–01, the US constituted the largest market for Indian exports (10%), followed by Russia (6%), Hong Kong (5%), Germany (4%) and others. The share of US has been on the rise, increasing to 17% in 2003–04 from 10% in 1999–2000 (Chittoor, R. & Ray, S., 2007).
Therefore, Indian manufacturers have established themselves as the low cost generic quality suppliers and build competitive advantage in bulk drugs and generics formulation. As there is a saying that time never remains same forever and history repeats, similarly it happened with Indian Pharma industry. After the gap of 34 years with the amendments in Indian Patents Act 1970, Indian pharma industry again transformed to Product patent recognition with the introduction of Indian Patents (Amendments) Act 2005 which aimed at protecting the intellectual property rights of patent holders. The act was in fulfilment of India’s commitment to WTO on matters relating to agreement on TRIPS (Shashi Sharma, 2007). Now Indian manufacturers cannot imitate the branded patented product as they were doing earlier and they will face stiff competition again from MNCs but this time Indian manufacturers are prepared for this environment. After Independence, we did not have much resource to rejuvenate ourselves and MNCs benefited from this by supplying medicines at higher rates. But, this time Indian firms are well prepared to work under new product patent regime as they established themselves as low cost generics suppliers in world market and proved their competitive advantage in production of Bulk Drugs & Formulations.
Indian pharma industry may not be affected much in new product patent as there are lots of flexibilities for developing countries under TRIPS agreement. Firstly, it provides exemptions from grant of patents in certain areas like patent should be granted only to new NCEs for new therapeutic advancement. Any change in process or in combinations will not be considered an invention and patent will not be granted in that case. Secondly, it provides exceptions to product patents rights in certain areas like Early Working also known as bolar provision which mean that generic companies can start work on clinical trials before the patent get expired for the patented product so that product can be immediately launch in the market after patent gets expired for that; other area is Parallel Imports under which a country can import the same patented product from others countries also after the first sell off by the innovator company as companies have different prices in different countries. So a country can import the product from anywhere without any prior knowledge of the innovator company and the last area is Research & Experimental use which means that patented product can be used by other local companies for experimental purposes to develop new processes and new combinations for commercial purpose. It will help in transfer of technology and stimulates innovation. Lastly, Compulsory Licensing which is an effective way to stop the inflation of prices. Under this, Innovator Company gives the license to produce patented product to the domestic company in return of royalty. This creates the immense competition among the domestic companies to get the license from the company and the innovator company is expecting the high royalty fees in return which they can invest again in R&D. It was first adopted in UK under the Patents Act 1883 and from their, it became an important features of patent laws worldwide (Sudip Chaudhuri, 2005).
Indian companies can adopt various business models in new Patent regime. One of them is Contract Research; it means that now Indian companies are shifting their vision from reverse engineering and process improvisation to New Drug Discovery, Clinical Trials and R&D which was seen rarely in Indian companies. Companies started In-house R&D and some companies have tied agreements with research institutes for new drug discovery and developing new NCEs for advancement in therapeutic categories. In 2002, the industry for clinical trials in India was $70 million. This market is growing at a rate of 20% per annum. According to experts, it will be an industry worth anywhere between $500 million to $1.5 billion by 2010. The global R&D spend is to the tune of $60 billion, of which the non-clinical segment accounts for $21bn and the clinical segment accounts for $39bn. In terms of Indian prices, this translates into $7bn (at 1/3rd of US/EU costs) and $7.8bn (at 1/5th of US/EU costs) respectively. This constitutes a total potential of $14.8bn for the Indian pharma companies. Another model is Contract manufacturing; at present many global pharmaceutical companies are outsourcing Bulk drugs as well as formulations from Indian companies as it cost them very cheap as compare to their western counterparts. It is because many Indian companies have made their plants cGMP compliant and India is also having the largest number of USFDA-approved plants outside USA. Indian companies are proving to be better at developing APIs than their competitors from target markets and that too with non-infringing processes. Therefore, Indian drugs are either entering in to strategic alliances with large generic companies in the world of off-patent molecules or entering into contract manufacturing agreements with innovator companies for supplying complex under-patent molecules. Indian companies started undertaking contract manufacturing of APIs as part of their additional revenue stream. Top MNCs like Pfizer, Merck, GSK, Sanofi Aventis, Novartis, Teva etc. are largely depending on Indian companies for many of their APIs and intermediates. The Boston Consulting Group estimated that the contract manufacturing market for global companies in India would touch $900 million by 2010. Industry estimates suggest that the Indian companies bagged manufacturing contracts worth $75 million in 2004. Another model can be Co-marketing Alliance; it means Indian companies will do marketing for products which will be manufactured by MNCs. It can be very effective for those MNCs which are not known with the network distribution system of the industry but want to enter this market. Therefore, tie up with Indian companies can be the best solution for them and Indian companies can be benefitted as later on they may get the compulsory license for the same product they are marketing from that company (FICCI, 2005).
Government should also take necessary measures to boost the competitiveness of Indian pharma industry. The measures can be; firstly, government can provide an extension on deduction of 150% on R&D expenses so that companies will be encouraged to invest more in R&D. Secondly, academic-industrial relationships can be developed where universities will play an important role in research process and industry will try to commercialize that discoveries. India should follow the footsteps of developed countries like USA, UK, Europe, etc. where universities played an important role in innovation process. Thirdly, income tax exemption should be given on clinical trials and contract research done outside the company and abroad because India is seen as emerging as a major centre for outsourcing of clinical trials for the pharmaceutical MNCs. Fourthly, to rationalize the Drug Price Control Order because the product patent regime will make it necessary for the Indian companies to invest in R&D but the stringent DPCO regulations restrict the companies to invest heavily in research process but this is an important process in product patent regime as to compete MNCs. Therefore, we need more liberalize DPCO policies. Lastly, government should encourage setting up of more USFDA approved plant by giving tax holidays for a specified period like given in Baddi (HP), Roorkee (UK), Ponta Sahib (HP), Vizag (AP) etc. (FICCI, 2005).
Overall, a co-ordination between government and industry is required where government policies should align with the industry which in turn may help the domestic manufacturers to compete against the MNCs and retain their market value in the global context which they attained before the introduction of TRIPS.
To sum up, Indian domestic manufacturers situation was worse after independence as Indian government were following the patent acts being implemented by British government which was supportive to MNCs and there was no domestic pharmaceutical manufacturing. Therefore, it was like an exploitation of Indian people by the monopoly being created by MNCs in Indian pharmaceutical industry. But then Indian government took some major steps and started their own 14 manufacturing plants around 1960’s like HAL (Hindustan Antibiotics Limited), IDPL (Indian Drug Pharmaceutical Limited), etc to boost the growth of domestic pharma industry and ultimately changed the product patent laws to process patent laws in 1970. That was the starting point for the domestic industry and downward trend for MNCs. The domestic manufacturers then started reverse engineering process by imitating the branded patented products of MNCs and this led the beginning of internalization of Indian pharma industry. The growth continues and India became one of the largest suppliers of generics drugs in world pharma market with the production of more than 450 bulk drugs.
TRIPS will not affect the position of Indian pharma market as such because there is not patent for secondary products like making new combinations and new drug delivery systems and Indian companies are now investing hugely on R&D to find new ways and substitutes for the patented therapeutic categories. Moreover, Indian companies can continue with the manufacturing of those products which got patent before 1995 and they can still manufacture those products also which are in the cue of getting patent but not get yet. Moreover, it has been seen that from past some years, the innovation is basically restricted to niche therapeutic segment which is not very useful for commercialization purpose.
Compulsory licensing will play an important role in new product patent regime as it will help in transfer of technology and stimulates innovation in the market. We can see that companies are getting involved in to the contract research with various research institutes and cooperating with each other in R&D. companies have shifted their vision from reverse engineering process to finding out new molecules and NCEs. India is also getting affiliation in bulk drug industry as well and this is the reason that many big MNCs are signing contract with Indian companies for supply of specialized bulk drug.
TRIPS though may give stiff competition to small and medium enterprises as they have not involved themselves much into the R&D process. Their R&D is limited up to finding of new non-infringing routes for a particular product. Therefore, it will be very difficult for them to cope up if a MNCs enters the market with new patented product as then they cannot manufacture that by any route. Therefore, it is very important for them to invest in R&D either individually or jointly by cooperating with each other. Therefore, I may conclude that TRIPS may not have an adverse effect on Indian pharma industry until the MNCs enters the market with new patented product which has new therapeutic category with no substitutes but market can control the inflation of price by compulsory licensing route. Investment in R&D is the biggest area which Indian companies have to look after and cost competitiveness, rice biodiversity and strong marketing & distribution network are their biggest strength. Every action has a reaction and TRIPS will have a positive reaction on industry as it will lead Indian pharma industry to head towards globalization from internationalization process.
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