Industrial Policy, Globalization and India

1
Industrial Policy, Globalization and Indias
Pharmaceutical Industry

• Sudip Chaudhuri
• Indian Institute of Management Calcutta
• Conference on 'Post Liberalisation Constraints on
  Macroeconomic Policies', organised by IDEAS and
  UNDP, Muttukadu, Chennai, 27-29 January, 2006

2
Indias Industrial policy success in
pharmaceuticals is well known

• Product patents in drugs abolished in 1972
• Remarkable growth of pharmaceutical industry
  since then
• India and Japan only two countries where western
  MNCs do not dominate
• India net exporter and self sufficient in drugs
• Drug prices among the lowest in the world
• Source of good quality cheap drugs for the rest
  of the world.

3
Status of Indias Pharmaceutical Industry

• Size of Indias pharmaceutical market is 4.9
  billion (2003). This constitutes about 1 of the
  global pharmaceutical sales and about 10 of
  total generic market in the world.
• In value terms, India is the 14th largest market
  in the world. In volume terms, Indias share is
  around 8 and is the 4th largest after USA, Japan
  and China
• India is among the top five bulk drugs
  manufacturers of the world. India has the largest
  number of US FDA approved manufacturing
  facilities outside USA.
• India exported drugs worth 3.2 billion to more
  than 65 countries. India is the 14th largest
  exporter of drugs in the world

4
To Comply with TRIPS, India has amended Patents
Act, 1970

• Patents (Amendment) Act, 1999
• Patents (Amendment) Act, 2002
• Patents (Amendment) Act, 2005

5
The Patents (Amendment) Act, 2005

• Has introduced product patent protection for
  pharmaceuticals from 1 January, 2005
• Hence unless otherwise authorized, Indian generic
  companies cannot produce new drugs developed
  abroad

6
It is widely believed that the Global product
patenting of medicines will

• Enhance the monopoly power of the MNCs and
• Result in higher prices and lesser access of
  medicines

7
But those in favour of TRIPS argue

• Countries such as India with developed generic
  companies can gain economically

8
How are Indian generic companies responding
and what are the economic implications?
9
Options for Indian companies in post 2005

• Develop new drugs
• Collaborate with MNCs as manufacturing and/or
  marketing partners for the new drugs developed by
  the MNCs
• Produce off-patent drugs
• In the domestic market
• For exports

10
We concentrate here on

• Generic exports

11
It is often argued that

• Product patent protection will not have any
  negative consequences.
• In fact it will have some beneficial effects

12
Remarkable growth of pharmaceutical exports is
the result of the confidence built up in our
industry due to our progressive adherence to our
IP commitments.Some 60 billion dollars worth
of drugs are going off patent in the next few
years. Indian industry can grab a lions share of
this provided we are a bona fide member of the
international trading community. (Press
Statement by the Minister on December 27, 2004)
13
Growth of Indias pharmaceutical exports

• Not the result of progressive adherence to our
  IP commitments
• As the chart shows, it was only after the
  abolition of product patent protection in 1972
  that the export market developed

14
Growth of Exports
Source Sudip Chaudhuri, The WTO and Indias
Pharmaceuticals Industry Patent Protection TRIPS
and Developing Countries, New Delhi, Oxford
University Press, 2005.
15
Patents Act, 1970

• Provided the Indian companies the opportunities
  to gain the necessary experience and
  earn/mobilize resources to enter and grow in the
  export markets

16
India developed as the home country for us and
provided the financial base and skill sets to
expand internationally.

• (Letter of the CEO Managing Director Of Ranbaxy
  to Shareholders in Annual Report, 2001, p. 10).

17
Growth sequence

• Production for the domestic market
• Exports to un-regulated markets
• Exports to regulated markets other than USA
• Exports to USA
• Motivation at each stage larger market and
  higher price realizations

18
Acceleration of pharmaceutical exports since
mid-1990s

• Not the result of TRIPS but a response to it
• Anticipating shrinkage in opportunities of
  reverse engineering of new drugs for production
  in domestic market in the post-TRIPS regime
• Larger Indian companies have been aggressively
  focusing on generic exports since the mid-1990s,
  particularly to regulated markets such as USA

19
Export Intensity of selected Indian companies,
2002-03
Company Exports as of total sales
Ranbaxy 65.6
Dr Reddys 60.1
Cipla 39.4
Aurobindo 50.6
Orchid 82.5
Lupin 39.0
Ipca 60.0
Shasun 69.9
20
Indian Generic Companies

• Are also increasingly targeting the export
  markets for patent expired drugs particularly in
  developed countries.

21
In Developed Countries

• Even when patents for the new chemical entity in
  the drugs expire
• Secondary patents prevent delay generic entry

22
Types of Patents

• New Chemical Entities (NCEs)
• New formulations, i.e., new dosage forms or
  routes of administration
• New combinations of existing NCEs
• New salts or esters of existing NCEs, i.e., new
  chemical derivatives of existing NCEs
• New uses of existing NCEs
• New processes of manufacturing

23
The Case of Omeprazole

• AstraZeneca obtained the patent for the
  anti-ulcer drug, omeprazole, the active
  ingredient in Prilosec on April 5, 1979.
• (In India Omez (Dr Reddys price Rs 25/- for 10
  tablets 10 mg, i.e., less than a . In USA, the
  price has been several times more)
• Patent supposed to expire in 1999
• Two formulations patents of AstraZeneca, which
  were filed in 1987, i.e., 8 years after the
  patent on the active ingredient was taken and
  hence expires later (in 2007).
• The formulations patents relate to the coating of
  the pill, which prevents drug from being degraded
  by stomach acids.
• Dr Reddys was prevented from entering into USA
  even after 1999 because the MNC argued that Dr
  Reddy vilated its formulation patent on the
  coating (another generic company proved that its
  formulation patent is independent and hence got
  the approval to enter.

24
Indian generic cos actually contributing to
affordability in USA

• A number of Indian companies are involved in
  patent challenges to hasten entry of generics
• Tremendous competition among Indian companies

25
Indian generic companies

• Are increasingly fighting patent cases on these
  secondary patents
• Resulting in earlier generic entry
• And hence contributing to affordability of drugs
  in developed countries

26
Patent challenges in USA by Indian cos

• Fluoxetine (Dr Reddys against Eli Lilly)
• Cefuroxamine axetil (Ranbaxy against GSK)
• Amoldipine maleate (Dr Reddys against Pfizer)
• Loratidine (Morepan/Geneva against Schering
  plough)

27
Competition among Indian bulk drugs exporters to
USA, 30/9/2003
No of Indian cos with DMFs Bulk drugs
10 Cefuroxamine
9 Ranitidine
8 Fluconazole
6 Ciprofloxacin, Metformin etc
5 Ibuprofen, Clarithromycin etc
4 Trimethoprim, Omeprazole etc
3 Cephalexin, Famotidine etc
28
60 billion off-patent market is exaggerated

• As generics enter, prices fall sharply. Assuming
  realistically that the prices would fall by about
  90 per cent, a 60 billion market effectively
  becomes 6 billion
• Bulk drugs account for about 15 per cent of the
  price. Hence the total bulk drugs market, where
  primarily the Indian exporters are involved would
  be around 0.9 billion during the five year
  period, or 0.18 billion per year. (Indias
  current exports about 3 billion).
• Then there is competition among the Indian
  exporters and also from other countries such as
  Italy, Switzerland, Taiwan province of China,
  Brazil, Argentina and particularly China.
• Hence the beneficiaries would actually be the
  consumers in USA and other developed countries

29
Another factor

• Remarkable export growth of the larger Indian
  companies in recent years has been accompanied by
  equally remarkable domestic growth
• The top 15 Indian companies, for example have
  been growing at about 20 per annum in the
  domestic market in recent years

30
Annual compound rate of growth of domestic retail
sales, 1996-2004 ()

• Cipla 18.7
• Ranbaxy 16.6
• Nicholas Piramal 26.1
• Sun Pharma 32.2
• Dr Reddy's 31.6
• Zydus-Cadila 18.1
• Aristo Pharma 20.2
• Alkem Labs 21.9
• Lupin 13.3
• Source ORG-MARG

31
Under TRIPS

• When Indian companies are prevented from
  producing the new drugs, their domestic growth
  will be adversely affected
• A steady and stable home market is of fundamental
  importance for success abroad
• It will be very difficult for Indian companies to
  sustain the export dynamism in the absence of a
  growing domestic market.

32
Thus

• Domestic space of operations is important
• In a product patent regime, this can be provided
  by an easy to use compulsory licensing system
• In such a licensing system, not only will the
  growth of the generic companies be faster both in
  the domestic and export markets
• Competition will drive down the prices of new
  drugs and make these more accessible

33
But Has India Used the Flexibility Under
TRIPS to Introduce a Proper Compulsory Licensing
Regime?
34
Article 31 of the TRIPS agreement dealing with CL

• Does not place any restriction on the grounds
  under which a CL can be given.
• In case there were any doubt, the Doha
  Declaration has made it clear that
• Each member has the right to grant compulsory
  licence and the freedom to determine the grounds
  upon which such licences are granted.

35
Conditions listed in Article 31

• that authorization of such use will have to be
  considered on its individual merits
• that before permitting such use (except in such
  cases as situations of national emergencies,
  extreme urgency, public non-commercial use), the
  proposed user will have to make efforts over a
  reasonable period of time to get a voluntary
  licence on reasonable commercial terms
• that the legal validity of the CL decision and
  the remuneration will be subject to judicial or
  other independent review

36
Not difficult to tackle these problems

• the grounds and the procedure can be so specified
  as to make these conditions less onerous than
  what these appear to be
• Guidelines can be issued for reasonable terms
• The maximum time period can also be stipulated
• The review can be a simple administrative process

37
Amended Patents Act has elaborate provisions on CL

• General provisions
• Also special provisions on notification by the
  central government

38
The Amended Act provides details of

• General principles applicable to working of
  patented inventions
• Grounds for grant of CL
• Matters to be taken into account by the
  Controller of patents while considering
  applications for CL
• The procedure for dealing with CL applications
• General purposes for granting CL
• Terms and conditions of CL.

39
The text of General principles includes
excerpts from

• Article 7 of TRIPS on Objectives
• Article 8 of TRIPS on Principles and
• Para 4 of the Doha Declaration

40
General principles

• that patents are granted to encourage inventions
  and to secure that the invention are worked in
  India ..
• that they are not granted merely to enable
  patentees to enjoy a monopoly for the importation
  of the patented article
• that the protection and enforcement of patent
  contribute to the promotion of technological
  innovation and to the transfer and dissemination
  of technology, to the mutual advantage of
  producers and users of technological knowledge
  and in a manner conducive to social and economic
  welfare, and to a balance of rights and
  obligations
• that patents granted do not impede protection of
  public health and nutrition and should act as an
  instrument to promote public interest specially
  in sectors of vital importance for socio-economic
  and technological development of India
• That the patents granted do not in any way
  prohibit the Central Government in taking
  measures to protect public health

41
But

• These have not been operationalised to have a
  simple and easy to administer CL system
• Article 1 of TRIPS - member countries are not
  obliged to implement in their laws more extensive
  protection than is required by this Agreement
  ....
• But the government has preferred to adopt a
  stricter CL regime than what is required under
  TRIPS.

42
Difficulties

• the procedure specified is cumbrous. The
  procedure is open-ended without any time limit
  imposed for the grant of CL
• the copy of the CL application will have to be
  advertised in the official gazette, though this
  is not required under TRIPS
• the patentee or any other person may oppose the
  application and will have to be given adequate
  time for doing so
• the Controller will decide only after giving both
  the parties an opportunity to be heard.
• A CL granted by the Controller can be opposed.
  Such appeals will be considered by an Appellate
  Board before a CL is ultimately permitted.

43
Difficulties

• the grounds of reasonable requirements of the
  public or reasonably affordable price can
  easily be challenged by the patentees.
• then arguments and counter-arguments will follow.
  After all these are heard by the Controller and
  then by the Appellate Board, in case of an
  appeal, it may be years before a CL is granted,
  if at all.
• The entire process is excessively legalistic and
  provides the patentees the opportunity to
  manipulate by litigation. The huge expenses
  involved in fighting the large pharmaceutical
  companies holding the patents may dissuade the
  non-patentees from applying for licences in the
  first place.

44
Not mere theoretical possibilities

• The current CL procedure has been inherited from
  the British Act of 1911
• Till 1972 when the Act of 1911 was in force,
  there were only five CL cases
• Granted in only two cases
• Refused in two cases
• Ultimately, application withdrawn in one case

45
Special CL provisions

• Any time after the sealing of the patent, an
  application for a CL can also be made under
  Section 92 for a patent notified by the Central
  Government.
• Such a notification can be made in circumstances
  of national emergency, extreme urgency, or public
  non-commercial use
• The procedure mentioned need not be followed if
  the emergency, or extreme urgency or public
  non-commercial use is due to public health crises
  related to AIDS, tuberculosis, malaria or other
  epidemics.

46
Section 92 is a potentially important
provision.But no simple and easy to use
procedure has been elaborated in the Rules
47
A National CL Policy

• Rather than adopting a case by case approach, the
  Central Government may notify the list of
  medicines eligible for CL in public health crises
• The inclusion of any drug in the list cannot be a
  ground for opposition and appeal. Guidelines may
  be issued for the royalty to be paid to the
  patent holders in case of CL.
• For any drug in the public health list, the
  Controller may immediately after receiving an
  application, grant the CL, fixing a royalty rate
  using the royalty guidelines

48

• Any opposition or appeal against the grant of a
  CL in this case can only relate to the royalty
  rate fixed.
• The opposition to the rate fixed should not hold
  up the use of CL. While this is being
  adjudicated, the non-patentee could begin to use
  the patent on the basis of an undertaking that
  the royalty rate finally decided will be paid in
  full
• The case by case consideration of the royalty
  rates payable and the opportunity to oppose and
  appeal against the royalty rate fixed will
  satisfy the Article 31 clauses (a), (i) and (j)
  relating to consideration of individual merits
  and review of the CL decision.