Drug Patents - A Necessity

The establishment of Trade-Related Intellectual Property Rights (TRIPS) regime establishes new disciplines for many countries in copyright, trademarks, industrial designs and patents.

Two groups of issues dominate the debate on intellectual property in India - patents for pharmaceuticals and agricultural chemicals; and the implications of the WTO agreement on products based on local species.

In India, there is one big paradox. The Indian drug industry has been protected from foreign competition for two decades. And yet it is one of the most competitive in the world. Indian drug exports grew by 35% annually over the past decade to reach $1.5 billion in 2001.

In December 1997, the Appellate Body which handles appeals in disputes between WTO members, upheld a panel ruling that India was violating its obligations on pharmaceutical and agricultural chemicals patents.

Broadly speaking, the issue was a technicality concerning the transition to full patent protection, although it does have serious implications. But behind it lies an intense debate within India, not least within the Indian drug industry itself.

Patent protection for pharmaceuticals raises the following distinct issues:

With full implementation still a couple of years away, concrete evidence to support either side is not yet available. But there is already plenty to think about.

While the government has implemented the agreement though it has faced resistance from local drug manufacturers and consumers.

The Indian Drug Manufacturers Association (IDMA) protested in 1994 that prices of drugs shall go up by 5 to 20 times as a consequence of accepting the TRIPS [Trade-Related Aspects of Intellectual Property Rights] proposals. However, the government claimed that once the crutches of weak patent law are removed, we can successfully negotiate with research-based international companies to boost export earnings, create more employment and benefit from the transfer of technology".

The government had some reservations about the TRIPS Agreement. But it signed the deal, taking the view that the package of agreements in all areas of trade — the result of the 1986-94 Uruguay round of negotiations — was on balance in India’s interests.

The crux of the matter is that when the world is moving in one direction, it makes no sense for India to move in the opposite direction. At best, India can seek amelioration, which it has done successfully. This is not happening overnight. As a developing country, India has a 10-year transitional period (until 2005) for giving full patent protection for pharmaceutical and agro-chemical products. These provisions are designed to allow India and other developing countries time to adjust.

In the post-independence era, over 90% of the Indian pharmaceutical industry’s market share and ownership was dominated by foreign companies. This made the country increasingly dependent on imports for bulk drugs and formulations. As a result, drug prices were amongst the highest in the world.

In 1970, the government took two important steps to break the multinational domination and foster a self-reliant indigenous industry. It introduced a Drug Price Control Order (DPCO) to protect consumers against high prices. Ceilings were set on the retail prices of essential drugs and those required to treat common diseases. In an attempt to stimulate domestic industry, new drugs manufactured through indigenous technology were exempt from price controls for five years.

A far more significant reform was the Indian Patent Act of 1970, which recognised process patents (patenting the process used to make a particular drug formulation), but not product patents (patenting the product itself). These reforms made new drugs available cheaply and promoted import substitution by encouraging local firms to make copies of the drugs by developing their own processes, followed by bulk drug production. The Patent Act effectively served to legalise "copying" of drugs that were patentable in developed countries as newly invented products, but were unprotected in India. Exempt from paying for licences and royalties, Indian companies could now access the newest molecules from all over the world and reformulate them for sale in the domestic market. The limited patent protection for product processes was valid for seven years, which meant by the time an application for patent protection was processed, the duration of protection was almost over.

Moreover, high tariffs at 80% encouraged Indian firms to develop a manufacturing base from the basic stages and produce cost efficient bulk drugs (raw materials) and formulations (finished product). As a result, the Indian market accounts for US$4.3bn annually, shared among 16,000 licensed drug companies.

The pendulum has swung towards domestic production that meets 70% of the bulk drug requirements and 90% of its formulations. Today in mid 2003, Indian companies enjoy market shares of 70% for domestic formulations and 85% for bulk drugs. The reversal of fortunes in the pharmaceutical industry has created a dominant position for local firms. Many of the foreign multinationals have slowly opted out of the Indian market, as a result of the disadvantages they face, compared to their local rivals. Other restrictions such as price controls served as a further disincentive to invest in the Indian market.

Indians fear that costs of medicines will rise as a result of royalty payments and increased prices for products manufactured under license. Local companies could face foreign competition. After India ratified the WTO agreements, the press accused the government of selling out to rapacious multinationals and making Indian patients pay for the sell out"

However, recent evidence suggests that these gloomy predictions are largely unfounded. India has been granted breathing space in the form of a 10-year transitional period before it is obliged to enforce patent protection for drugs. However, developing countries that do not provide patent protection for pharmaceuticals and agricultural chemicals still have to do two things. They have to set up a mechanism (known informally as a "mailbox") that allows inventions to be notified to the patent authorities — this is a way of establishing that the invention is "new", an important criterion for granting a patent once the system for patent protection is eventually set up. And if the country allows the new drug to be marketed, the right has to be given exclusively for a period to the company that invented it. India has already implemented this in its Patents Act by an amendment in 2002.

One recent estimate suggests that only 15% of the Indian drug market will be covered by patents after 2005 and be subjected to price premiums as a result. The remaining 85% of the market will continue to be exposed to "the full impact of generic [i.e. non-brand name drugs] competition, to which patented products will themselves ultimately contribute when their patents expire". Moreover, as the TRIPS Agreement does not allow for backdating, drugs already in the market will be exempt from patenting.

Will drug prices rise dramatically? On the one hand, there are several checks and balances within the Indian drug market that could prevent this from happening, such as India’s low purchasing power, the government’s price control mechanism and competition in the drug market itself.

Whilst India comprises 16% of the world’s population, it accounts for a mere 1% of global healthcare spending. Its per capita consumption of drugs amounts to less than US $ 6 per annum, compared to US $ 414 in the US. India’s domestic healthcare system only covers 3.7% of its population of over 980m. Therefore 75% of expenditure on medicines is borne privately by patients. Given these circumstances and the low per capita incomes, prices have to be maintained at an affordable level. If they exceed the threshold of affordability, the government price control mechanism will keep prices in check. In other words the self-paying Indian pharmaceutical market will in effect be self-regulating in terms of drug pricing, without the need for government intervention.

Moreover, competition amongst multiple producers of the same drug has resulted in lowering the price of drugs in India, to the extent that they are now amongst the cheapest in the world. Drugs outside the price control mechanism have experienced a particularly dramatic fall in prices, owing to competition. Industrialists also predict that competition between firms will continue to act as a safeguard against price escalations resulting from patent protection.

On the other hand, there are other pressures that could indeed cause prices to rise. One, ironically, is the government’s new drug pricing policy. In a bid to attract foreign investment, the government has ended laws that used to discriminate against multinationals, including some price controls. It is argued that the decontrolling will in itself lead to a hike in drug prices, irrespective of whether a new intellectual property regime is introduced.

This has created a major dilemma for the government. Deregulation and patent protection are considered necessary encouragements for research and development because they allow companies to recover the costs. But their immediate impact could be social upheaval, resulting from an increase in the price of essential drugs; and it is the lifting of price controls that could have a more serious impact on drug consumers.

For Indian companies, the new policies offer three options: to try to compete with the multinationals by producing their own inventions; to produce patented drugs under licence; or to make drugs that are free from patents, in particular the generics — drugs identified by chemical formulation (such as aspirin) and not by brand name. The prospects for generics in particular look good.

According to a recent study by the Indian Drug Manufacturers Association, within the next 10 years, patents of most of the world’s top 10 drugs will expire. The market for generic drugs will correspondingly increase. The global market for generic drugs is estimated around US$20bn currently and is forecast to rise to US$30bn by 2000. With well-established capabilities in the manufacture of bulk drugs, India can meet the challenge from the ‘hard’ patent regime, by invading Western markets with generic drugs.

In a recent World Bank study, 81% of US research-based pharmaceutical companies complained intellectual property protection is too weak in India to permit licensing of their newest or most effective technology and zero percent would invest in R&D [research and development]. Therefore, strengthened patent protection is expected to encourage foreign direct investment in India. An environment hospitable to foreign innovative technology sets in motion a range of other dynamics such as licensing, co-marketing and joint ventures, generating multiplier effects that benefit local drug manufacturers.

In Malaysia for instance, the level of foreign direct investment increased significantly as a consequence of enforcing the TRIPS Agreement and is currently 11 times the amount India has managed to attract. Patent protection could therefore, improve the quality of medical care in India, as the country progresses from a copying culture, to one that induces local innovation. However, the extent that a new intellectual property regime will have a direct impact in stimulating research and development in India remains open to debate.

The case of Japan provides an insight into ways in which India’s research and development industry can profit from TRIPS. In 1970, Japan was in a similar situation as India today. As a result of introducing patent protection, research and development expenditure amongst top Japanese drug firms rose from 6% of sales in 1975, to 18.8% in 1999. During the same period, their net profit margins rose from 3.6% of sales to 8.7%. In the 20 years preceding the new patent legislation, Japanese companies introduced 4 new major global drugs. By contrast, during the 10 years following the introduction of patent protection, Japanese drug companies introduced 25 new major global drugs into the market. Foreign investment in Japan also rose dramatically during the new patent regime.

The Japanese case suggests that product patents are a prerequisite to achieving a successful transformation from a copying and parasitic culture, to one of indigenous design and innovation. But the question is does India have the capital and level of technology that Japan had to invest in research and development?

Perhaps India’s ongoing liberalization programme has stimulated the process by encouraging further foreign direct investment and capital accumulation in the burgeoning private sector which can be channelled into research and development projects.