Industrial Policy, Globalization and India’s Pharmaceutical

Industry

Sudip ChaudhuriIndian Institute of Management Calcutta

Conference on 'Post Liberalisation Constraints on Macroeconomic Policies', organised by IDEAS and UNDP, Muttukadu,

Chennai, 27-29 January, 2006

India’s 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.

Status of India’s Pharmaceutical Industry

• Size of India’s 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, India’s 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

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

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

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

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

But those in favour of TRIPS argue

Countries such as India with developed generic companies can gain economically

How are Indian generic companies responding and what are the economic implications?

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

We concentrate here on …

Generic exports

It is often argued that …

•Product patent protection will not have any negative consequences.

•In fact it will have some beneficial effects

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 lion’s share of this – provided we are a bona fide member of the

international trading community.”

(Press Statement by the Minister on December 27, 2004)

Growth of India’s 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

Growth of Exports

0

500

1000

1500

2000

2500

3000

3500

1973-7

4

1975-7

6

1977-7

8

1979-8

0

1981-8

2

1983-8

4

1985-8

6

1987-8

8

1989-9

0

1991-9

2

1993-9

4

1995-9

6

1997-9

8

1999-2

000

2001-0

2

2003-0

4

$ m

illi

on

Source: Sudip Chaudhuri, The WTO and India’s Pharmaceuticals Industry: Patent Protection TRIPS and Developing Countries, New Delhi, Oxford University Press, 2005.

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

“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).

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

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

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

Indian Generic Companies

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

In Developed Countries

• Even when patents for the new chemical entity in the drugs expire

• Secondary patents prevent delay generic entry

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

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 Reddy’s 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.

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

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

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)

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

$ 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. (India’s 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

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

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

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.

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

But Has India Used the Flexibility Under TRIPS to

Introduce a Proper Compulsory Licensing Regime?

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”.

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

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

Amended Patents Act has elaborate provisions on CL

• General provisions

• Also special provisions on notification by the central government

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.

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

“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”

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.

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.

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.

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

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.

Section 92 is a potentially important provision.

But no simple and easy to use procedure has been elaborated in the Rules

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

• 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.