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INDIAN PHARMACEUTICAL INDUSTRY: STRATEGIC OPTIONS AFTER 2005

A Project Report Submitted in Partial Fulfillment of award of MBA Degree

TABLE OF CONTENT
1. 2. 3. Executive summary History of Pharmaceutical Industry Pharmaceutical Industry in India Major players Domestic trade The EXIM scenario a. Imports b. Exports Pricing R&D Patent & R & D 4. Global pharmaceutical industry Europe and generics market 5. IPR Misconception and facts Myths of high priced medicine after change in patent law Myth of Damage to local industry 6. Patents and its impact on pharmaceutical industry in India and on its consumers 7. Product patent Definition of patent Types of patents What does patents do ? Criteria for patentability General procedures to obtain a patent 8. IPR in GATT 9. The proposed patent regime 10.Patent in India 11.TRIPs & Pharmaceutical : Implication for India 12.Look at TRIPS agreement 13.TRIPS pharmaceutical & India Consequence of TRIPS : Myths & reality Impact of TRIPS on global business Impact of TRIPS on Indian firms

14.TRIPS : Availability & Prices of Drugs 15.Conclusion 16.Recommendations 17.Porter five force model 18.Porter diamond model 19.PEST Analysis

EXECUTIVE SUMMARY
The Pharmaceutical Industry in India is the largest in the developing world. India produces nearly 8.5% of the worlds drug requirements in terms of volume and 1.5 % in terms of value, and ranks amongst the top 15 drug manufacturing countries in the world. The pharmaceutical industry in India meets around 70% of the countrys demand fo r bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectables. The pharma industry in India is highly fragmented both in terms of number of manufacturers, with over 23,000 licensed units as well as the variety of products. Over 350 units in the organized sector and many more in the unorganized sector. Bulk drug units concentrated around three areas: Bombay Ankleshwar, Hyderabad Chennai, Chandigarh. Further, about 32% of the total exports are to 12 developed countries namely USA, Canada, Mexico, Germany, UK, Italy, Netherlands, France, Japan Australia, Brazil and Argentina. Indian exports are destined to more than 200 countries around the globe including highly regulated markets of US, Europe, Japan and Australia. Domestic players account for over 70% market share and the rest is accounted for by MNCs. The leading domestic companies are Dr. Reddy's Laboratories (DRL), Ranbaxy Laboratories (RLL), Sun Pharmaceuticals, Cipla, Lupin Laboratories, Orchid Chemicals and Wockhardt while the leading MNCs are Glaxosmithkline, Pfizer, Aventis Pharma and Merck India. If one considers the entire healthcare scenario, allopath accounts for 50% of the overall Indian market, ayurveda accounts for 30% and sidha, unani, homeo and other systems share the rest. This is the reason why India has low per capita expenditure i.e. only 3 US$, compared to 412 US$ of Japan. The traditional Indian system is based on process driven. This leads to process development of bulk drugs.

We have tried to analyze the Indian Pharma Industry by applying the strategic models like PEST, Porter five forces and Porter Diamond. The major findings of the application of models are that there is a great amount of potential available in Pharma Industry in domestic as well as export market. In order to achieve such a high growth there is a need to take initiatives by government as well as company to overcome its weaknesses and concentrate on strengths to trap upcoming opportunities. After 2005, patent act will be implemented. So, patented bulk drugs will not be allowed to produce. The Indian companies are good at process development but, due to product patent, they will not be able to produce some of bulk drugs. Major challenges in the Pharma Industry are low price realization, fragmented small players, dumping from some of countries, lack of brand building exercise, low product development focus, etc. India has already realized the problems in the Pharma Industry and had taken the action in its EXIM Policy by focusing more on export of bulk drugs by developing Export Oriented Units (EOU) in selected area near by International airports. In the end, we have given some suggestions to improve the current situation of Pharma Industry. One of the issues is consolidation of small firms so that they can compete to the world level. To take advantage of cheap labor, Indian firms should emphasize on contract manufacturing. Government should develop the policy, which boosts the new product development. As R&D is crucial in upcoming future due to patent act, the role of government will be very important. Lastly, we have covered some of the current issues related to the bulk drug industry. Patents play an important role in encouraging Research and Development. The new WTO rules imply that India will have to switch to a product patent regime post 2005 from its current process patent regime. This would alter the scenario in the Indian market over the next 10-15 years. Government policies will play an important role in defining the future of the Pharmaceutical industry. The product patent regime coming into effect from January 2005 will lead to long-term growth for the future.

RESEARCH METHODOLOGY
A.) Study Objectives: The study of Indian Pharmaceutical Industry The study the impact of product patent regime on Indian Pharmaceutical Industry To find out the strategic option after 2005 related to Indian Patent Act B.) Methods of Data Collection: Secondary data was collected from various sources such as journals, magazines, websites, books Primary data was collected personally through structured questionnaire. C.) Limitations : The data is collected through secondary source so it may happen that it does not match the actual data. The data collected from the concerned person in the company is only as provided by them.

HISTORY OF PHARMACEUTICAL INDUSTRY


Until about 1800, there were few drug companies. Pharmacists themselves made almost all the drugs they sold. Then two revolutions, one in drugs and the other in industrial development, gave birth to the modern drug industry. The discovery of more and more drugs that required special training and equipment to produce made it increasingly difficult for a pharmacist to prepare drugs. At the same time, the Industrial Revolution in Europe led to the development of manufacturing methods that could be used to mass-produce drugs. As a result, many drug companies were established in Europe, and European companies dominated the world drug market for many years. The beginning of the United States drug industry can be traced back to the Revolutionary War in America (1775-1783). The chief pharmacist of the American army, Andrew Craigie, set up a laboratory in Carlisle,

Pennsylvania, to supply drugs to the military. After the war, Craigie opened his own laboratory and began a wholesale drug business. Soon other pharmacists set up drug companies. These companies grew as they adopted the mass-production techniques developed in Europe. The American Civil War (1861-1865)--like the American Revolution-created a great demand for drugs and so furthered the growth of the U.S. pharmaceutical industry. But European companies continued to dominate the world drug market until World War I (1914-1918). Before the war, the United States imported most of its drugs from Germany. But such imports stopped when the United States joined the war against Germany in 1917. The American pharmaceutical industry then expanded rapidly to meet the country's drug needs. The United States soon began to export drugs and became one of the world's leading producers. Today, the United States leads all countries in drug production. Drugs today benefit us tremendously. They also present us with some of our worst problems and greatest challenges. Drugs help prevent or control many diseases. They also relieve pain and tension and help the body function properly. But misuse of alcohol, narcotics, and other drugs has led to addiction for millions of people. In addition, widespread illegal use of drugs has become a major problem. The challenges that drugs offer lie in the discovery of better medicines for treating cancer, cardiovascular diseases, AIDS, and other crippling and deadly disorders. In the 1980's and 1990's, pharmaceutical researchers increased efforts to find such drugs. Someday, scientists may develop drugs that lengthen life by slowing the aging process. The pharmaceutical industry, which is centred around Vadodara (Baroda), Ahmedabad, and Atul (Valsad), produces one-third of the national total.

PHARMACEUTICAL INDUSTRY IN INDIA


The Indian Pharmaceutical sector has come a long way, being almost non-existent before 1970 to a prominent provider of healthcare products, meeting almost 95% of the country's Pharmaceuticals needs. The Indian Pharmaceutical Industry today is in the front rank of Indias science -based industries with wide ranging capabilities in the complex field of drug manufacture and technology. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicines is now made in India. The domestic Pharmaceutical sales have increased from Rs4bn in 1970-71 to Rs214bn in 2002, at a CAGR of 13.7% per annum. The total Indian production constitutes about 1.3% of the world market in value terms and, 8% in volume terms. The per capita consumption of drugs in India, stands at

US$3, is amongst the lowest in the world, as compared to Japan- US$412, Germany- US$222 and USA- US$191. During 1970, the Indian Patents Act (IPA) and the Drug Price Control Order (DPCO) were passed. Although, the DPCO acted as a buffer against Pharmaceutical companies by making free pricing illegal, it fulfilled the goal of providing quality drugs to the public at reasonable rates. The introduction of the IPA which did not recognize product patent but only process patent provided a major thrust to the Indian Pharmaceuticals industry and the Indian companies, who through the process of reverseengineering, began to produce bulk drugs and formulations at lower costs. This led to high fragmentation in the Indian Pharmaceutical industry due to the emergence of a number of small Indian firms. Thus, there are about 24,000 companies big, medium and small fighting for a more than $ US 5 Billion market. The Indian Pharmaceutical market is ranked about 12th worldwide. About 300 firms in this industry are in the organized sector, around 15,000 being in the small-scale sector and the remaining being very small without any economies of scale. India manufactures over 400 bulk drugs and around 60,000 formulations being distributed by 5, 00,000 chemists all over the country. The Pharmaceutical Industry is passing through a wave of consolidation in India. The objective is to strengthen their brand equity and distribution reaching the Indian market, which is essentially a branded-generics market. The organized sector of the Pharmaceutical Industry has played a key role in promoting and sustaining development in this vital field. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past fifty-three years and helped to put India on the Pharmaceutical map of the world. The Pharmaceutical Industry in India provides excellent facilities. It has quality producers and many units are approved by regulatory authorities in USA and UK. It has a pool of personnel with high managerial and technical competence as also skilled workforce. Its track record of development, particularly in the area of improved cost-beneficial chemical synthesis for various drug molecules is excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk drugs. In the present scenario, the growth of a domestic Pharmaceutical company is critically dependent on its therapeutic presence. The old and mature categories like anti-infectives, vitamins, analgesics are de-growing while; new lifestyle categories like

Cardiovascular, Central Nervous System (CNS), Anti Diabetic are expanding at double-digit growth rates. The Indian market has some unique advantages. India has a 53 year old democracy. It has an educated work force and English is commonly used. It has a solid legal framework and strong financial markets. Professional services are easily available. There is already an established international industry and business community. It has a good network of world-class educational institutions and established strengths in Information Technology. The country is now committed to a free market economy and globalization. Outsourcing in the fields of R&D and manufacturing is the next best event in the Pharmaceutical industry. Spiraling cost, expiring patents, low R&D cost and market dynamics are driving the MNCs to outsource both manufacturing and research activities. India with its apt chemistry skills and low cost advantages, both in research and manufacturing coupled with skilled manpower will attract a lot of business in the days to come. For the first time in many years the international Pharmaceutical industry is finding great opportunities in India. The process of consolidation, which has become a generalized phenomenon in the world Pharmaceutical industry, has started taking place in India. The Pharmaceutical Industry, with its rich scientific talents and research capabilities, supported by Intellectual Property Protection regime, is well set to mark its place as a Sunrise Industry. MAJOR PLAYERS: The top five companies in the industry -Ranbaxy, Glaxo, Lupin, Hoechst and Cipla account for only 19 percent of the industry's turnover, and the top ten control around 31 percent of the market. The major multinational players in the organized sector of the industry are E Merck (India), Parke- Davis (India) ,Pfizer ,Rhone-Poulenc (India), GlaxoWellcome, Novartis, and Smithkline Beecham Pharmaceuticals. The main Indian bulk drugs and formulations manufacturers in the organized sector are Dr. Reddy's Laboratories, Ipca laboratories, J B Chemicals & Pharmaceuticals, Nicholas Piramal India, Ranbaxy, Cipla, Sun Pharmaceuticals, and Wockhardt. The unorganized sector accounts for 30 percent of the total industry sales. Most of the players in the unorganized

sector are involved in formulations manufacturing, since this is not technology intensive. These players mainly cater to local demand and compete on price. The Indian pharmaceuticals industry is essentially a process research driven industry. The industry is highly fragmented. Some of the diseases for which new drugs are continuously researched globally include AIDS, Alzheimers disease, arthritis (rheumatism), cancer, depression, diabetes, heart disease, osteoporosis and stroke. India is presently one of the top 15 drug producers worldwide. Indian pharmaceutical companies have progressed by leaps and bounds in recent times. This is evident from the fact that while the MNCs market share in the Indian pharmaceutical market has plummeted from 75% in 1971 to approximately 35% at present, the market share of the Indian companies has increased to 65%. Domestic players account for over 70% market share and the rest is accounted for by MNCs. The leading domestic companies are Dr. Reddy's Laboratories (DRL), Ranbaxy Laboratories (RLL), Sun Pharmaceuticals, Cipla, Lupin Laboratories, Orchid Chemicals and Wockhardt while the leading MNCs are Glaxosmithkline, Pfizer, Aventis Pharma and Merck India. If one considers the entire healthcare scenario, allopath accounts for 50% of the overall Indian market, ayurveda accounts for 30% and sidha, unani, homeo and other systems share the rest. Bulk drugs: About three-fifths of Indias bulk drugs output is sold overseas. However, most of the Indian pharmaceutical companies as well as their MNC counterparts import bulk drugs from abroad as domestic companies that export formulations are eligible for duty free imports of bulk drugs. Under patent drugs are primarily exported to developing countries while the generics are exported to developed nations. Formulations: About 85% of the domestic production is consumed locally. With the exception of certain life saving, new generation underpatent formulations, India is relatively self sufficient in formulations. The current Indian formulations market is worth about Rs.90 billion and has a

growth rate of about 15-16% pa. The main markets for Indian formulations include developing countries such as China, South Africa, and CIS. India has also bagged a 10-year transition period to introduce Trade Related Intellectual Property Rights (TRIPS). During this time-frame, new molecules patented for the first time in the world after January 1, 1995, when the TRIPS agreement came into force will be granted recognition, for which an application needs to be made in India. The developer would be entitled to exclusive marketing rights for five years during the transition period. Some of the main advantages which the Indian pharmaceutical companies have over their MNC counterparts include:

Restriction to parent companys portfolio and lack of freedom to reverse engineer any other MNCs products. More DPCO (Drugs Price Control Order) coverage owing to a more mature product range. Lack of initiative on part of parent company to introduce new products due to absence of patent protection and threat of process piracy and compulsion to price the product lower in India compared to other countries. Hardly any export opportunities due to parents global presence. Expensive manufacturing cost due to parent companys insistence on stricter compliance of GMP (Good Manufacturing Practices).

DOMESTIC TRADE: More than 85% of the formulations produced in the country is sold in the domestic market. India is largely self-sufficient in case of formulations. Some life saving, new generation under-patent formulations continue to be imported, especially by MNCs, which then market them in India. Overall, the size of the domestic formulations market is around Rs160bn and it is growing at 10% p.a. GROWTH INDICATOR

THE EXIM SCENARIO: Nearly 95 % of India's bulk drug needs are met through indigenous production. However, inspite of having a well-developed pharmaceutical industry, it continues to import not only intermediates and chemicals required by the bulk drug industry, but also some of the bulk drugs and specialty formulations. One positive factor, however, is that over the last decade or so, the overall exports by the pharmaceutical industry have been more than its imports. In fact, the bulk of the growth of the pharma sector has come through exports.

Imports: Indias pharmaceuticals imports (including bulk drugs, formulations, intermediatiates, chemicals, solvents etc) were to the tune of Rs31.3bn. Imports have registered a CAGR of nearly 23% in the past 5 years. Imports of formulations have increased significantly in the past 5 years registering CAGR of 32.9% in the past 5 years. In FY99 import of formulations grew by 25.5% yoy. Import of bulk drugs have slowed down

in the past 2-3 years mainly due to two reasons firstly there is over capacity in the domestic market and secondly the quality of bulk drugs manufactured by the local manufacturers have improved significantly and they act as import substitute for MNCs requirements.

Exports: Over 60% of Indias bulk drug produ ction is exported. The balance is sold locally to other formulators. Indias Pharmaceutical exports are to the tune of Rs87bn, of which formulations contribute nearly 55% and the rest 45% comes from bulk drugs. In financial year 2000, exports grew by 21%. Indias Pharmaceuticals imports were to the tune of Rs20.3bn in FY2001. Imports have registered a CAGR of only 2% in the past 5 years. Import of bulk drugs have slowed down in the recent years. The exports of Pharmaceuticals during the year 1998-97 were Rs 49780 million. From a meager Rs 46 crores worth of Pharmaceuticals, Drugs and Fine Chemicals exports in 1980-81, Pharmaceutical exports has risen to approximately Rs 6152 Crores (Prov.1998-99), a rise of 11.91% against the last year exports. Amongst the total exports of India, the percentage share of Drugs, Pharmaceuticals and Fine Chemicals during April-October (2000-2001) was 4.1%, an increase of 7%.

PRICING
Drugs and formulations are under price control for more than three decades now. The economic reforms initiated by the Government of India in July 1991, trickled down to the Pharmaceutical Industry only in 1994 and that too partially. Price control in a large number of industries has already been abolished. The Pharmaceutical industry in India is the only industry being subjected to a three-tier control, viz. 1. Item-by-item control on the prices of bulk drugs,

2. Product-wise control on the prices of formulations and an overall control on the profitability of formulations. 3. Administrative and rigid price control has certainly retarded the development of this essential industry. In todays liberalized economic environment, determining costs of 74 bulk drugs and hundreds of their formulations and fixing ceiling prices is outdated. The cost plus formula of fixing prices leads to inefficiency lower the efficiency, higher the cost and more the mark-up. Independent professional studies have revealed that at the Industry level, after Drugs (Prices Control) Order, (DPCO) 1995, overall price increase during the period 1995-98 on year over year basis, is modest and much below the average rate of inflation. Competition has kept prices under control even in the case of decontrolled formulations. The fear that prices will rise steeply if the industry is deregulated is disproved by these independent studies over a period of time. Market competition is the best regulator of prices. Medicines bear a heavy burden of taxes. Today almost every Pharmaceutical product is taxed to the extent of 30-35 percent through customs duty, excise, sales tax, octroi and other taxes. This burden on the consumer keeps rising year by year. In a way, the tax on medicine is tax on sickness. Ideally, there should be no tax on medicines. Alternatively, the tax should be reduced substantially.

In the emerging business scenario, a market-oriented approach should be adopted. There should be a shift from the present system of control to management and monitoring drug prices. The industry should be encouraged to foster self-regulation and concentrate on development issues rather than being subjected to detailed and administrative control. The traditional approaches and conservative ideas of control, regulations and administration will have to give way to free enterprise, flexibility, transparency and speedy implementation of public policies.

RESEARCH AND DEVELOPMENT


Research & Development is the key to the future of Pharmaceutical industry. The Pharmaceutical advances for considerable improvement in life expectancy and health all over the world are the result of a steadily increasing investment in research. R & D in the Pharmaceutical industry in India is critical to find answers for some of the diseases peculiar to a tropical country like India and also for finding solutions for unmet medical needs. The R & D expenditure by the Indian Pharmaceutical industry is around 1.9% of the industrys turnover. This obviously is very low when

compared to the investment on R & D by foreign research based Pharma companies. They spend 10 16% of the turnover on R & D. However, now that India is entering into the Patent protection area, many companies are spending relatively more on R & D. There is considerable scope for collaborative R & D in India. India can offer several strengths to the international R & D community. These strengths relate to availability of excellent scientific talents who can develop combinatorial chemistry, new synthetic molecules and plant derived candidate drugs. Industrial R & D groups can also carry out limited primary screening to identify lead molecules or even candidate drugs for further in vivo screening, pre-clinical Pharmacology, toxicology, animal and human Pharmacokinetics and metabolic studies before taking them up for human trials. In such collaborations, harmonized standards of screening can be assured following established good laboratory practices. When it comes to clinical evaluation at the time of multi-centre trials, India would provide a strong base considering the real availability of clinical materials in diverse therapeutic areas. Such active collaboration will be mutually beneficial to both partners. According to a survey by the Pharmaceutical Outsourcing Management Association and Bio/Pharmaceutical Outsourcing Report, Pharmaceutical companies are utilizing substantially the services of Contract Research Organizations (CROs). Indian Pharmaceutical Industry, with its rich scientific talents, provides cost-effective clinical trial research. It has an excellent record of development of improved, cost-beneficial chemical syntheses for various drug molecules. Some MNCs are already sourcing these services from their Indian affiliates. The Pharmaceutical and Biotechnology Industry is eligible for weight deduction for R&D expense upto 150%. These R&D companies will also enjoy tax holiday for 10 years. A promotional research and development fund of Rs.150 crores is set up by the Government. The Indian Pharmaceutical industry is highly regulated. The Government controls prices of a large number of bulk drugs and formulations. Profit margins of players vary widely in both domestic and export sales due to many factors.

PATENT AND R & D


The Pharmaceutical industry is a knowledge driven industry and is heavily dependent on Research and Development for new products and growth. However, basic research (discovering new molecules) is a time consuming and expensive process and is thus, dominated by large global multinationals. Indian companies have recently entered the area and initial results have been encouraging. Patents play an important role in encouraging Research and Development. The new WTO rules imply that India will have to switch to a product patent regime post 2005 from its current process patent regime. This would alter the scenario in the Indian market over the next 10-15 years. Government policies will play an important role in defining the future of the Pharmaceutical industry. The product patent regime coming into effect from January 2005 will lead to long-term growth for the future. In the global Pharmaceutical market, western markets are the largest and fastest growing due to introduction of newer molecules at high prices. A well-established reimbursement and insurance system implies that per capita drug expenditure is abnormally high in Western Countries as compared to the developing nations. The Indian Pharmaceutical industry is highly fragmented, but has grown rapidly due to the friendly patent regime and low cost manufacturing structure. Intense competition, high volumes and low prices characterize the Indian domestic market. Exports have been rising at around 30% CAGR over last five years. There is a shift in export profile towards value added formulations from low value bulk drugs. The Drug Pricing Control Order (DPCO) has been the millstone around the neck of Indian industry as it has severely restricted profitability and hence innovation. However, the government has been relaxing controls in a slow but progressive manner. The span of control of DPCO has come down from 90% in 1980s to 50% in 1995 and is likely to be further reduced as per the latest proposed changes. Indian companies are putting their act together to tap the generic drugs markets in the regulated high margin markets of the developed countries. The US market will remain the most lucrative market for the Indian companies led by its market size and the intensity of blockbuster drugs going off patent. An estimated US$45bn of drugs expected to go off patent by 2007 in US alone.

In the domestic market, old and mature categories like anti- infectives, vitamins, analgesics are degrowing or stagnating while new lifestyle categories like cardiovascular, CNS, anti diabetic are growing at doubledigit rates. The growth of a company in the domestic market is thus critically dependent on its therapeutic presence.

GLOBAL PHARMACEUTICAL INDUSTRY


Some of the world's largest Pharmaceutical companies took a hit on fourth-quarter profits last year as a result of patent expirations and manufacturing problems. Eli Lilly & Co., for example, saw its annual sales plummet dramatically after it lost patent protection on its antidepressant Prozac in August.

However, the Pharmaceutical industry is poised for a 10 percent sales growth in 2002, according to 2002 Industrial Outlook, a report by Industrial Information Resources, Houston. The U.S. Pharmaceutical industry will invest in capital and maintenance expenditures for manufacturing capacity expansions, as well as for research and development (R&D) laboratories. Increasing manufacturing capacity and expanding R&D are keys to continued industry success, says the report. "New products are the lifeblood of the Pharmaceutical industry," says Carl Bergsten, vice president, Pharmaceuticals and biotechnology for Lockwood Greene, Spartanburg, S.C.

Pharmaceutical chemicals: The overall Pharmaceutical industry is managing to stay ahead of the Pharmaceutical chemicals market. The world Pharmaceutical chemicals market will increase 6.3 percent annually to $83.5 billion in 2005, states a new report from The Freedonia Group, Cleveland. World Pharmaceutical Chemicals cites generic competition, downward profit pressures and tighter price controls as drivers that will prompt U.S., Japanese and Western European drug makers to pursue greater production efficiencies. As a result, Pharmaceutical chemical costs will fall under greater scrutiny and decrease as a percentage of total drug shipments. An increased emphasis on prevention, says the Freedonia Group report, will broaden opportunities for several cardiovascular agents, especially new second-generation tissue plasminogen activators for preventing strokes and heart attacks. Other new Pharmaceutical chemicals projected to enjoy strong growth include leukotriene blockers for asthma; monoclonal antibodies for transplant rejection, and serotonin 5HT3 antagonists for irritable bowel syndrome and vaccines for influenza.

"The Pharmaceutical chemical segment is seeing somewhat less intense research because of the boom in biologically produced products," says Lockwood Greene's Bergsten. "The interest in the Human Genome Project and in developing products coming out of this effort has diverted some of the resources traditionally applied to products derived by chemical synthesis." European and generics mark: The European Pharmaceutical industry is expected to grow 8.1 percent from 1999 sales to reach $150 million by 2005, says European Pharmaceutical Industry, a report from Norwalk, Conn.-based Business Communications Co. Inc. The rising cost of R&D has increased the cost of innovative drugs and imposed added pressure on the ability of drug manufacturers to market in the European Union. Unlike the U.S. Pharmaceutical sector, European national governments are the main purchasers of Pharmaceutical products; therefore, they dictate restrictions or cost containment measures on drug producers. "The role of generic companies also is having an impact on the industry," says Jennifer Casazza, global marketing manager for POLYOX Water Soluble Resins at the Dow Water Soluble Polymers Pharmaceutical Group, "and will continue to do so given the number of large brands that are coming off patent [worldwide].

In fact, analgesics, aminopenicillins, cephalosporins-generation antihistimines, acid reducers, herbal and related extracts and calcium and iron minerals are among the Pharmaceutical chemicals expected to fare well on the open market, the Freedonia Group report affirms. "Also, generics are concentrating on not just developing 'me too' versions of the branded products," continues Casazza, "but developing unique delivery systems for differentiation and/or higher performance this adds more complexity to the traditional competitive environment.

Top 20 Pharmaceutical Companies based on 2000 Pharmaceutical revenues 1. GlaxoSmithKline $23.5 billion 2. Pfizer $22.6 billion 3. Merck $18.6 billion 4. AstraZeneca $15.7 billion 5. Aventis $15.2 billion 6. Bristol-Myers Squibb $14.4 billion 7. Johnson & Johnson $12.0 billion 8. Novartis $10.9 billion 9. Pharmacia $10.8 billion 10. American Home $10.8 Products billion 11. Eli Lilly & Co. $10.2 billion 12. F. Hoffman-La $8.6 Roche billion 13. Schering-Plough $8.3 billion 14. Bayer AG $5.8 billion 15. Takeda Chemical $5.2 Industries billion 16. Sanofi Synthlabo $5.0 billion 17. Boehringer $4.5 Ingelheim billion 18. Abbott Laboratories $4.0 billion 19. Sankyo Co. Ltd. $3.8 billion 20. Shionogi & Co. $2.8 billion

2000 R&D Expenditures

1. Pfizer

$4.4 billion

2. GlaxoSmithKline $3.8 billion 3. Aventis 4. Johnson & Johnson 5. Novartis 6. AstraZeneca 7. F. Hoffman-La Roche 8. Merck 9. Bayer AG 10. Eli Lilly & Co 11. Pharmacia 12. Bristol-Myers Squibb 13. American Home Products 14. Abbott Laboratories 15. Schering-Plough 16. Takeda Chemical Industries 17. Sanofi Synthlabo 18. Boehringer Ingelheim 19. Sankyo Co. Ltd. 20. Shionogi & Co. $3.1 billion $2.9 billion $2.9 billion $2.6 billion $2.5 billion $2.3 billion $2.3 billion $2.0 billion $2.0 billion $1.9 billion $1.7 billion $1.3 billion $1.3 billion $712 million $890 million $884 million

$584 million $230 million

INTELLECTUAL PROPERTY RIGHT (IPR)


The driving force which will change the character and shape of the Pharmaceutical industry will be the impending Product Patent regime. At present, under the Indian Patents Act, 1970, there is no Product Patent protection for Pharmaceuticals. There is only Process Patent protection. The duration of process patent protection in India is seven years from the date of filing or five years from the date of sealing of the patent, whichever is shorter, for Pharmaceuticals, food products and agrochemicals as against fourteen years for all other items. India signed the General Agreement on Tariffs and Trade (GATT) on April 15, 1994 along with 124 Nations. After Indias membership of World Trade Organisation (WTO), it is obligatory for India to comply with the requirements of GATT including Trade Related Aspects of Intellectual Property Rights (TRIPs). This should be done without any further delay. India has an excellent pool of scientific talents. Early adoption of world class IPR will motivate some of the distinguished Indian Scientists working abroad to return to India and engage themselves in research. Once a strong IPR regime is established India can avail of the vast scope of evolving collaborative research arrangements.

MISCONCEPTIONS AND FACTS

The anti-Patent lobby has propounded several myths. Most of these are based on conjecture and are unsupportable on facts. The two most frequently employed are "High Prices" and "Impact on Local Industry". Both of these are addressed below: Myth of High Priced Medicines after Change in Patent Laws : A myth is propagated that after introduction of Patent Act, in compliance with TRIPs provisions, the prices of medicines will accelerate and medicines will become unaffordable for people. This fear is due to a lack of understanding of how the transition to a Patent Regime works and how Pharmaceutical prices are determined. Patents can never be awarded retrospectively. Patents can only apply to new discoveries. The transition provisions of TRIPs ensure that patents in India will only be granted for totally new discoveries, post 1 st January 1995. Only items for which no patent has ever been granted in any other WTO country before 1st January, 1995 or for which no application was pending for a patent in any other WTO country as on 1 st January 1995 will ever be patentable in India. This means that any medicinal product already available in the Indian market on the date of coming into force of the new law, cannot, and will not, ever be patented in India. It should be noted that it takes anywhere between 8-12 years for a new drug to be granted registration by Drug Authorities of any country after which marketing permission is given. This registration period comes out of the overall patent life of the medicines, which is now almost universally 20 years from the date of application. A discoverer thus enjoys at best only 812 years of Exclusive Marketing for recovering the cost of research. The number of new drugs registered worldwide each year is between 25-35.

What this essentially means is:

A. Within the transition period (1995-2004) allowed for India, not more than a handful of new drugs will actually qualify for any form of exclusivity. B. Even after India commences granting patents, by the time patented products become a significant proportion of those already available locally; it will be another 10-15 years i.e. 2015-2020. C. It is not correct to believe that Multinational Corporations (MNCs) have only one price for a product everywhere in the world and as such the price charged in India will be exorbitant. There are several examples to show that even when the product is unique, it is introduced in India at a price significantly lower than in Western countries. Most international manufacturers will base their pricing strategy for countries, like India, on "affordability criteria". There is empirical evidence (Study by the National Economic Research Associates NERA, Washington January 1998 and Study by Dr. Heinz Redwood entitled New Horizons in India - 1994) to show that prices do not rise after IPR. Myth of Damage to Local Industry : As has been stated earlier, the effective period of exclusivity enjoyed by a patent holder is, at best, 8-12 years. Once patent life ends, other manufacturers are free to market generic versions of the same products. Worldwide, generic markets are growing at a rate faster than that of patented products. There will therefore always be a large generic market in India and this will continue to be dominated by Indian companies.

PATENTS AND ITS IMPACT ON PHARMACEUTICAL INDUSTRY IN INDIA AND ON CONSUMERS


PRODUCT PATENT: The sweep of intellectual property rights is very vast as it embraces many sectors of global economy and technology such as, pharmaceutical, food, mechanical, chemical, bio-technical, environmental, energy, agriculture, textile, etc. Here the discussion is limited to the pharmaceutical patents. The advent of protection of innovative work for a limited period under the Intellectual Property System (IPS) permits the full disclosure of work, instead of keeping it secret. Such an environment facilitates sharing of the innovative work with others and at the same time ensuring certain amount of reward to the innovator. In recent times, due to advancement of communication facilities, the flow of knowledge has also increased tremendously and the system of Intellectual Property (IP) permits sharing and commercial transaction of the new knowledge gained. One of the important factors in the tremendous growth of pharmaceutical industry worldwide has been the protection afforded by the patents. Patents have given the inventor the necessary incentive to develop new processes or molecules, which are now widely used in therapy. The nations with strongest patent system have introduced the largest number of new drugs into the world market. DEFINITION OF PATENT: The patent is granted by the government, which confers on the applicant a guarantee for a limited period of time, the exclusive privilege of making, selling, distributing and using the invention for which the patent has been granted and also of authorizing others to do so. The grant of patents for inventions in India is governed by the Patent Act 1970 and the Patent Rule 1972. The patents granted under the Act are operative in whole of India.

TYPES OF PATENTS: Three kinds of patents are granted under the provisions of the Act, viz., An ordinary patent A patent of addition for improvement in or modification of an invention for which a patent has already been applied for or granted A patent granted in respect of convention application, which is based on an application, made in a convention country in respect of some invention The convention application has to be made within one year from the date of the first application made in a convention country in respect of that invention.

WHAT DOES PATENTS DO? : The patent gives the owner the right to take legal action to prevent others from exploiting a patented invention without the proprietors consent. This right can be used to prevent competition whilst the proprietor develops a business based on the invention. Moreover another person or company may be allowed to exploit the invention and pay royalties under a licensing agreement. CRITERIA FOR PATENTABILITY: Any invention, which satisfies the definition of the invention given in the act, may be patented. For securing a patent under the Act, the invention must be Novelty: novelty of an invention is judged taking into account the knowledge available anywhere in the world in the relevant field at that time of filing the application for patent. The invention should not be publicly known anywhere in the world prior to the date of filling the application for the patent.

Inventive step: An invention is considered to have an inventive step or is non obvious if when compared to what is already known, the invention would not be obvious to one with reasonable knowledge and experience of the subject. Industrial application: Invention must have utility and must take practical form such as an apparatus, device a product such as new material, compound or an industrial process producing said product or any improvement of the above.

GENERAL PROCEDURE TO OBTAIN A PATENT : The following are the successive stages of procedure for obtaining a patent. o Filling an application for a patent accompanied by provisional or complete specification. o Filling the complete specification if a provisional specification accompanied with the application. o Examination of Applicant. o Acceptance of application and advertisement of such acceptance in official gazette. o Overcoming opposition, if any, to the grant of a patent. o Sealing of the patent. o Amendment of application and specification if needed. o Filling application for the patent outside India THE PROPOSED PATENT REGIME : Following the signing of GATT in 1994, India has to comply with the TRIPS accord, which calls for replacement of Process Patents with stricter Product Patents within a certain time frame. April 1999 : As per TRIPS Article 70.8 and 70.9 India had to # Introduce a Mail box system accepting filling for Product Patent s from 1 January 1995

# Provide for EMR in respect of Patents covered by such fillings, on satisfaction of certain conditions. In the recent decision, the WTO made it mandatory for India to provide for mail box and EMR provisions by mid April, 99. December 1999: As per TRIPS Article 65, India has until December 31, 1999 to bring Patent Legislation in conformity with TRIPS. January 2005: As per trips Article 65 the actual implementation of product patent provisions can be delayed until January 1, 2005.

INTELLECTUAL PROPERTY RIGHTS (IPR) IN GATT


India is one of the founder members of General Agreement on Tariffs and Trade (GATT). GATT lays down a set of multilaterally agreed rules to govern international trade. Trade Related Intellectual Property Rights (TRIPS) agreement under the GATT provides for universal protection of IPR of the firms and individuals. It binds the countries to modify their laws to comply with the provisions of the TRIPS agreement. India being signatory of WTO, the provision of WTO stand enacted from 1 st January 1995. Under the agreement, India has been given a change over period of 10 years from process patenting system to product patenting system. Therefore, from 1st January 2005 product patent regime will be enforced in India. In addition, Exclusive Marketing Rights (EMR) will have to be granted for a period of 5 years for pharmaceuticals and agricultural chemical products in favor of foreign patent holders who have applied for and obtained product patent and market approval of such products in other members countries of the WTO. This will apply to newly patented products coming in the market during the transition period of the 10 years i.e. up to 1 st January 2005.

INDIAN PATENT ACT, 1970:

Pharmaceutical Industry in India The Indian Patent Act, 1970 was the instrument that made it possible for the domestic Pharmaceutical industry to expand rapidly. Because, the Act legalized reverse engineering of drugs that are patentable as products throughout the industrialised world but unprotectable in India. Reverse engineering' is a method of evaluation of a product in order to understand its functional aspects and underlying ideas. This technique may be used to develop a similar (or even identical) product. Well equipped with technological expertise, Indian scientists and businesses seized the opportunity to do reverse engineering on therapeutically innovative drugs discovered elsewhere, and launched them on the domestic market as well exporting them to other countries with similar gaps in their patent cover. For example, the Indian Institute for Chemical Technology developed AZT, the AIDS drug through this process without replicating the patentholder Burroughs-Wellcomes process. The technology was passed on to CIPLA, the fourth largest Pharmaceutical manufacturer in India. It was also sold to a Brazilian manufacturer. The cost of the crucial medicine through this route has come down to less than a third of the Burrough-Wellcome's price. Another factor is that of strategic abdication of many transnational corporations who refused to compete without the patent cover. For example, the Sterling-Winthrop Company wound up their business in India in 1970s and sold their shares to the Indian partner Deys Medical Company. Furthermore, under the Indian Patent Act, 1970, the following points are pertinent:

No product patents are allowed in Pharmaceutical, agro-chemical and food processing sectors, where only process patents are admissible; The Indian patent term of 14 years from the date of filing for Pharmaceutical processes, is curtailed to 7 years from the date of filing or 5 years from the date of sealing a patent, whichever is shorter; and

Pharmaceutical process patents are automatically deemed to be endorsed License of Right for 3 years from the date of sealing a Pharmaceutical patent. With the coming of TRIPs Agreement, disputes arise with regard to the protection of Pharmaceutical patents. The main provisions of TRIPs Agreement with respect to Pharmaceutical products are as follows: The minimum patent term will be 20 years from filing; Patent protection is to be extended to Pharmaceutical products; Importation must be accepted as a working patent; Compulsory licensing is relegated to special circumstances; In infringement suits over process patents the burden of proof is reversed. Provide transitional arrangementsdeferment of the acceptance of Pharmaceutical product patents by developing countries for ten years; and Limited exclusivity is granted to developing countries for Pharmaceutical products whose patent applications are filed after the enforcement of the TRIPs Agreement.

TRIPS (TRADE RELATED INTELLECTUAL PROPERTY RIGHTS) AND PHARMACEUTICALS: IMPLICATIONS FOR INDIA
A LOOK AT THE TRIPS AGREEMENT Contrary to popular belief, intellectual property legislations not only cover patents but also the acquisition and use of a range of rights covering different types of creations including that of an aesthetic character (e.g. artistic works and industrial designs) and information and signs of a purely commercial value (e.g. trademarks) among others. Intellectual property rights (IPRs) include the following categories (see Box 1. Also see Annexure 1 for details about the categories of intellectual property rights):

Copyright and related rights, Trademarks, Geographical indications, Industrial designs, Patents, Layout designs of integrated circuits, Trade secrets, Breeders' rights, and Utility models.

However, the GATT Agreement on Trade Related Aspects on Intellectual Property Rights (TRIPs) covers the first seven categories only. Perhaps the industrialized nations (and their business lobbies that actively promoted the TRIPs negotiations) had little interest in the excluded categories. As mentioned in Box 1, patent is that type of intellectual property right a major application of which occurs in the Pharmaceutical sector. According to the United Nations definition, a patent is a legally enforceable right granted by a country's government to an inventor.

In simple words, the content of intellectual property is information, and this is exercised with respect to the products that carry the protected information. A patent excludes other persons from manufacturing, using or selling a patented product or from utilizing a patented method or process. And, because of this intellectual property rights may have a direct and substantial impact on industry and trade. Before the conduct of the TRIPs negotiations within the GATT there exist a number of international organizations and conventions regarding the protection of intellectual property. The World Intellectual Property Organisation (WIPO--a United Nations specialized agency) has been particularly active in the development of new forms of protection (layout designs of integrated circuits) as well in the application of new technologies of patents (e.g. biotechnological applications) and copyright (e.g. computer programmes). However, the following are the reasons for which the industrialized nations pressed for the TRIPs negotiations, chose the organization setting rules for world trade (World Trade Organisation--a forum without any tradition of work in the field of intellectual property rights) as the forum for implementation of the TRIPs Agreement:

The developed countries, through patents and other protective instruments, are provided with the possibility of exporting products incorporating innovations under exclusive or monopolistic rights, i.e. technology-holders can exclude competition from domestic producers in importing countries or other foreign firms (see Smith, Pamela, Intellectual Property Protection and United States Exports: Evidence in the Data, Paper presented at the Conference on International Relations on Intellectual Property: Challenges at the Turn of the Century, The American University, Washington D. C., 1995. The study indicates significant increase in the US exports to countries where intellectual property protection has been enforced); and An Agreement within the GATT/WTO facilitates recourse to crossretaliation for non-fulfilment of specific obligations. In simple words, countries failing to comply with TRIPs could be subject to trade retaliation if the WTO dispute settlement mechanism determined the existence of a case of non-compliance with the TRIPs Agreement.

Box 1: Subject Matter and Main Fields of Application of Intellectual Property Rights Types of Intellectual Property Rights

Subject Matter

Main Fields

Chemicals, drugs, plastics, engines, New, non-obvious, industrially Patents turbines, electronics, applicable industrial control and scientific equipment Signs or symbols to identify goods Trademarks All industries and services Printing, entertainment (audio, video, motion Copyright Original works of authorship pictures), software, broadcasting Integrated Micro-electronics Original layout designs circuits industry Breeders' New, stable, homogeneous, Agriculture and food rights distinguishable varieties industry Trade secrets Secret business information All industries Industrial Clothing, automobiles, Ornamental designs designs electronics, etc. Geographical Geographical origin of goods and Wines, spirits, cheese indications services and other food products Utility models Functional models/designs Mechanical industry Source: The TRIPs Agreement: A Guide for the South, South Centre, Geneva, 1997

TRIPS, PHARMACEUTICALS AND INDIA Except in three sectors: food processing, Pharmaceutical and agrochemicals the Indian patent law allows product patents. In these sectors only process patents are allowed. As on today, India has a process patent regime regarding Pharmaceutical products. Therefore, the Indian Patent Act, 1970 has to be changed to bring it in line with the international laws on patenting of Pharmaceutical (and agro-chemical) products. Being a developing nation, India has a grace period of five years to change its patent laws under the Agreement on TRIPs. In other words, the Indian Patent Act, 1970 will have to be amended suitably by 31st December 1999. At the same time, developing countries like India are given a grace period of ten years for technologies previously unprotected in its market. During this interim period of ten years, all patent applications will be put in a black box. However, Pharmaceutical corporations can apply for an exclusive marketing right (EMR) for their products for five years only even before the country in question has fully phased into the new patent protection system. The proviso is that the product must have been registered for a patent and has recieved marketing rights in any of the WTO Member countries. Thus it is a backdoor method for granting the monopoly rights. Furthermore there is a grey area here too. If marketing rights are granted only for five years, what will be its position for the remaining five years until the country in question actually amends its patent laws. As for example, there is light at the end of the tunnel for India's patent' muddle, and particularly the Pharmaceutical patent. The idea is to amend the existing patent law with a provision which will allow its drug industry to copy world class prescription' medicines for research purposes even before a patent expires. In lieu of this provision, India can offer incentives to world drug manufacturers, e.g. the extension of exclusive marketing rights for an extra year. A careful perusal of provisions of the TRIPs Agreement reveals that such a move will not violate the TRIPs Agreement under the aegis of the WTO.

Such a decision would come under Article 30 of the Agreement which deals with the exceptions to rights conferred: "Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties." Transnational corporations (MNCs) control 90 percent of all registered patents in the world. Effectively, given such monopoly power over patents and the EMR clause, India or for that matter any developing country does not have any transition period. This is true for protected technology, and if one interprets that from the patent/product-originating country angle. This is the haziest part of the TRIPs Agreement with respect to the Pharmaceutical and also the agro-chemical sectors. An instance of haziness is that the Agreement is silent on the content and scope of the EMR clause. Furthermore, it makes no reference to actions which third parties would be permited to take (for instance, with respect to products already marketed or to products manufactured by a process different from the patented process). Third parties may interpret the EMR clause as not including a ius prohibendi, i.e. not including the right to exclude others from using the invention, as in the case of patents. Apart from the haziness mentioned above, for the developing country like India, the following are clear concerns of the TRIPs Agreement vis-vis the Pharmaceutical sector:

The introduction of product patents may imply significant social costs due to the higher prices charged for medicaments; The access to local firms of protected technology will become more difficult because of the enforcement of the patent-holder's bargaining position through investments in R&D; and There is the possibility that the most dynamic segments of the Pharmaceutical market, where the prospects of growth are highest, will be excluded from domestic firms. This is likely to be true for drugs based on biotechnology where inventing around (i.e developing drugs with similar compositions) is relatively more difficult.

However, given the present day political economy set up, it is futile for a developing country like India to adopt a reactive stance with respect to Pharmaceutical patents. In other words, the rational policy would be to cope with the situation pro-actively. Furthermore, in reality the fears expressed above may not come true (see page 4--Consequences of TRIPs: Myths and Reality). Even if the fears have come true there are possible ways out if one approache the issue pro-actively. An example of the pro-active approach is to go for compulsory licences (Article 8 of the TRIPs Agreement) on grounds of competition, health and public interest (see Box 4). Article 8 of the TRIPs Agreement states the right of parties to "adopt measures necessary to protect public health and nutrition, and to promote public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of this Agreement" (emphasis added). For example, in 1991 a German Court granted a compulsory licence in favour of a German firm with respect to a patent (relating to interferon) held by a US firm on grounds of public interest. The purpose of the licence was to allow the marketing of a therapeutical application of interferon that had been developed by the German firm. Another (pro-active) way out is there in Article 30 of the Agreement (exceptions to rights conferred--see Box 2). The following are the exceptions which may be deemed legitimate under Article 30:

Importation of a protected product that has been legitimately put on the market elsewhere; Acts carried out privately and on a non-commercial scale or for a non-commercial purpose; Use of an invention for research and experimentation and for teaching purposes; Preparation of medicines for individual cases according to a prescription; Compulsory licensing; and

Use of the invention by a third party who started, or took serious precautionary action, before the application for the patent (or of its publication).

The third way out is within Article 27 of the Agreement which deals with patentable subject matter. Article 27.1 states: "Subject to the provisions of paragraphs 2 and 3, patents shall be available for any inventions, whether products or processes in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application..." Here, inventive step and capable of industrial application may be deemed by a Member to be synonymous with the terms non-obvious and useful, respectively (see Annexure 1). Article 27.2 states: "Members may exclude from patentability inventions, the prevention within their territory of the commercial exploitation of which is necessary to protect order public or morality, including to protect human, animal or plant life or health..." (Emphasis original). Furthermore, Article 27.3 (a) states: "Members may also exclude from patentability: diagnostic, therapeutical and surgical methods for the treatment of humans or animals." CONSEQUENCES OF TRIPS: MYTHS AND REALITY TRIPs does not provide for the retrospective patenting in India of drugs that are already on the market or covered by existing patent applications elsewhere. Taking into account the transitional period, there will be less impact on prices of new-patented drugs on the Indian market during the 1990s and only a minimal effect until 2005. Thereafter it will build up gradually from a pool of new drugs. Global progress in research and development is replenishing this pool at a steady but moderate pace as older drug patents expire (see Box 3).

Pharma-quake as Patents Expire About 40 US drugs with $16bn sales in 1996 are set to loose patent protection by the year 2002. This will throw the gate open for competition from generic drugs. Cheaper drug price and bonanza for generic drugs will alter the research and business of Pharmaceutical majors. To fill the patent gap, drug majors are turning more to biotechnology development and other partners. The pressing needs for new drugs have led to the earlier adoption of new technologies.

To avoid the Tagamat Crisis (loss of patents), the companies are increasingly investing in riskier, cutting-edge technologies. SmithklineBeecham is one of the first such companies to leap into new technologies for gene-hunting. Again, Glaxo, after realizing the futility of blockbuster dependency, is contemplating to develop broader portfolio of drugs. The rationale is to minimize risks associated with the development of new drugs. Here, one has to consider the moderate pace of Pharmaceutical innovation and of obstacles for market penetration by new drugs in India. Such consideration leads to the conclusion that in value terms not more than 15 percent of the Indian market will be covered by patents some time after 2005. The remaining 85 percent of the market will continue to be exposed to the impact of generic competition (see Redwood, Heinz, and New Horizons in India: The Consequences of Pharmaceutical Patent Protection, Oldwick Press, 1994). The time scale of the introduction of Pharmaceutical patents in India under TRIPs makes it certain that, if Indian drug prices rise during the remainder of the 1990s, it will not be for reasons of patenting . The earliest start of premium pricing for patented drugs will be in the early years of the next decade. No significant effect can be anticipated until after 2005, because the weight age of patented drugs on the Indian market will be too small for economic impact. More important than the time scale of patent protection will be fundamental checks and balances which will put a brake on the impact of premium pricing on Indian drug expenditure (see Box 4). Such balances are as follows:

The low purchasing power of Indian consumers; Government price controls under permanent or reserve powers; and Therapeutic competition from cheaper unpatented drugs.

Of these the second is the most immediate, whereas the first and the third are the most durable safeguards against a price explosion. Compulsory Licensing of Commercial Medicines Possible According to the Co-ordinator of the Forum of Parliamentarians on Intellectual Property, India, B K Keyala, compulsory licensing of

Pharmaceutical products for commercial purposes is possible within the ambit of the TRIPs Agreement: India should draw strength from Articles 7 and 8 of TRIPs and insist on compulsory licensing of Pharmaceutical products for commercial purposes. The current understanding, under Article 31 of the agreement, is that TRIPs provisions only allow compulsory licensing for non-commercial use. However, Article 7, which outlines the objectives of the intellectual property agreement, states that implementation of the agreement should inter alia contribute to the transfer and dissemin ation of technology. Furthermore, Article 8 gives Member countries the right to adopt measures to protect public health and nutrition and promote public interest. India should interpret these articles in the national interest since the constitutional guarantee of the right to life encompasses the right to health, which requires availability of medicines at affordable prices, asserts Keyala. Source: Press Trust of India, 26.12.1996 Here, it will be interesting to note that Canada established the Patented Medicine Prices Review Board in 1987 under reforms to extend patent protection on brand-name Pharmaceuticals. Until recently, the Board reached over 100 settlements with the Pharma industry, which it claims has saved consumers about C$110mn. In a recent case, it ordered a US company ICN Pharmaceuticals' local subsidiary to cut the price of its drug: Virazole by almost 90 percent and pay a penalty of C$1.2mn. Thus, there are precedents for such price regulations. There is nevertheless a widespread belief by Indian companies that even if the remaining preconditions for R&D in India were met, they cannot afford the cost of minimum scale operations, and that only MNCs will be in a position to benefit. Evidently MNCs have far greater financial resources, but they also have more diverse calls on those resources and are themselves obliged to make difficult choices when it comes to new R&D projects. IMPACT OF TRIPS ON GLOBAL BUSINESS As expected, the proposed changes in the intellectual property regime are welcomed by the global business and their subsidiaries operating in

India. Big MNCs like Hoechst, Novartis etc. have already set up 100 percent Indian subsidiaries. However, most of them are interested in playing a waiting game regarding their involvement in the Indian Pharmaceuticals market. They are likely to introduce their new-patented drugs once the system of product patent becomes fully operational. Even in that case, most of the new drugs will either be imported as formulations or be formulated in India by using imported bulk drugs. In short, India is unlikely to be a site for R&D and production of bulk drugs. According to Glaxo-Wellcome, it is holding back on investments in India because of concerns on intellectual property rights. However, it has plans to build up volumes in certain therapeutic segments by allowing their Indian subsidiary to negotiate a cheaper price for imports from the parent company. Under the TRIPs Agreement, India has to accept the applications for the grant of product patents from 1st January 1995. According to one estimate, up to July 1996, 264 applications were received by the patent office. Another area of concern is the pricing of drugs under the new patent regime. Though it is a fact that the prices of Indian drugs are lower than those prevailing in developed countries, the future price differential is unlikely to be large. The reason is to avoid any action against dumping of bulk drugs.

IMPACT OF TRIPS ON INDIAN FIRMS Axiomatically, the introduction of product patenting will affect the Indian Pharmaceutical firms to a large extent. Certainly, they will be prevented from taking a circuitous route to growth through the adoption of process patents. At the same time, some of them are seriously concerned with the expansion of their business.

To achieve their aim, they are increasingly exploring the following options: a. Development of New Drugs b. Production of Off-Patent Drugs c. Production of Patented Drugs under License d. Marketing of Imported Drugs

a. Development of New Drugs For this, a necessary condition is to increase the expenditure on R&D activities. Drug discovery and development have to be included in the R&D strategy. In other words, the focus of R&D will have to be changed from the innovation of new processes to that of invention of new products. For example, Dr. Reddys Laboratory (a leading Indian manufacturer) has focused its R&D expenditure on the development of new drugs for cancer, bacterial infections and diabetes. They have set up a research facility at the cost of Rs 8 crore (approximately $2.3mn). However, a couple of structural weaknesses have to be taken into account. First, given the small size of Indian firms, even a sharp increase in R&D activities will not generate sufficient funds for the development of new drugs. Secondly, Indian firms lack manpower and other institutional mechanisms to launch new drugs successfully in the foreign market.

Given such limitations, the focus of R&D should be on:

The development of in-house drugs which have the same therapeutic value of those existing in the market; and Production of indigenous drugs catering to the needs of India and other tropical countries where MNCs have little or no interest in introducing drugs according to their needs.

b. Production of Off-Patent Drugs A realistic assumption is that in near future, off-patent drugs will emerge as one of the important manufacturing activities of Indian Pharmaceutical firms. Furthermore, off-patent (generic) drugs made by Indian firms are going to meet most of the domestic demand. At the same time, it is incorrect to say that their therapeutic value will be less than the new, on-patent drugs. With increasing concentration of Indian firms in generic drugs, its export prospect is very high. Currently, the world market for generic drugs is $20bn, and expected to grow to $40bn by 2005. In order to take this opportunity, leading Indian firms (like Ranbaxy, SOL, East India Pharmaceuticals) are building their capacities to produce generic drugs. For example, SOL (Hyderabad) has set up a separate division for the production of generics. Further, it expects to generate more than 33 percent of its annual turnover from generics. Exports of generics will get further boost from foreign investment in this area. The US Pharma giant Merck has set up a 100 percent subsidiary to produce and export generics. However, Indian firms are going to face strong competition from other developing countries, and even some developed countries. Therefore, the long-term success of Indian firms depends on improved efficiency and exploration of new markets through South-North and South-South cooperation, both at the producers and consumers level.

c. Production of Patented Drugs under License Global drug development and production are undergoing structural changes in recent times. The reasons for such changes are: a) Exponential increase in the cost of drug development,

b) Shortening of product life, and c) Stiff competition from generic drugs. In order to gain maximum revenue within a short period, Indian firms are trying to get licenses from global Pharma business to produce and market on-patent drugs. However, two discernible facts are worth mentioning:

1. Global Pharma companies not having much stake in Indian market will not hesitate to give licence to Indian firms; and 2. Companies with large subsidiaries in India (like Glaxo, Pfizer) are likely to introduce licensed drugs through their subsidiaries only.

d. Marketing of Imported Drugs The fourth option for Indian Pharma firms is marketing of imported drugs. Many Indian firms are interested in entering into long-term arrangements with global business. For example, Ranbaxy has entered into an alliance with Eli Lilly. The new and liberalized drug policy has removed import restriction from all but eight categories of drugs. The removal of import restrictions and proposed changes in the IPR regime will lead to an increase in drugs import.

TRIPS: AVAILABILITY AND PRICES OF DRUGS


The aforementioned discussion on off-patent drugs reveals the fact that they will meet most of the demands. Therefore, even under the new patent regime (compatible with the TRIPs Agreement), the availability and prices of generic drugs will largely be unaffected.

However, the situation is different with respect to new (on-patent) drugs. There is no doubt that these drugs will be available in the Indian market (either through production or under licence). But, the effect on prices is ambiguous. Under the customary theory of demand-supply, the price level should come down in future. The reason is increased supply and not-so much change in demand. Albeit, this ideal situation may not be true in practice because of the following factors:

The oligopolistic nature of global Pharma business; The practice of transfer pricing by the global business, where monitoring and regulation of prices by the Government will be difficult; and The price situation also depends on the proportion of patented drugs being sold in the Indian market. At the same time, the global Pharma business has a large number of patented drugs which comes from their own R&D (see Table 4).

Furthermore, in the long run, medical bio-technology is going to be the area of research and development. Biotechnology base and research of Indian firms (except the Government-owned Central Drug Research Institute) is poor, and they are unlikely to be able to produce much of these drugs (see Box 5). Why India Needs R&D in Medical Biotechnology? In March, 1995, the US Patent and Trade Mark Office (USPTO) granted the patenting of healing property of haldi (turmeric). A dispute arose pertaining to the issue of patenting of traditional knowledge. Under the Agreement on TRIPs, patenting of traditional knowledge is barred. Under the WTO procedures, any Member country can seek resolution of a dispute with another Member by formally asking for consultations. If such consultations fail, WTO can be asked to set up a disp ute settlement panel to adjudicate the issue. In August 1996, Indias Council for Scientific and Industrial Research (CSIR) approached attorneys in the US to challenge the American patent on turmeric. After protracted techno-legal arguments, on August 13, 1997, the USPTO unequivocally rejected the patent application. India won the Battle of Haldighatipoliticians (and experts!) from all hues (left, right or centre) rejoiced at the great victory(!).

However, the real issue is not that of India won, US lost. It lies in Indias lack of research facilities in exploring in and inventing with ethno medicines. Medical biotechnology can play a crucial role here not in near future, but now. Given the decentralized origin and nature of ethno medicines, both the civil society and public sector research institutions have a larger role in this regardwhat is required is public action. Source: SAWTEE Newsletter No.8, Aug-Dec., 1996 , The Economic Times, 24.08.1997, The Times of India, 31.08.1997 On the other hand, MNCs have a large base for research in medical biotechnology (see Box 6). Given such a dominant position, prices of onpatent drugs are likely to go beyond the reach of the consumers at large in the long run. Therefore, the real issue is not availability of new drugs in the Indian market, but peoples access to them. Hoechst Patents Ayurvedic Herb Hoechst, Germany patented the Indian medicinal plant Coleus Forskohlii, which is being used for ayurvedic (Indian traditional medical system) medicine. Traditional uses of this herb include treatment for cardiovascular disease, abdominal colic, respiratory disorders, painful urination, insomnia and convulsions. In 1974, a large scale screening of medicinal plants by Central Drug Research Institute of India revealed the blood pressure lowering and anti-spasmodic effects of extracts from C Forskohlii. One of Hoechsts patents covers a specific formula of the plant extract and its use in treating cardiovascular disease and intraocular pressure. According to a report of the Rural Advancement Foundation International, Canada, in 1997, Hoechst will begin worldwide marketing of its C Forskohlii based drug. Source: Press Trust of India, 20.02.1997

PORTER FIVE-FORCE MODEL:


ENTRY BARRIERS: The pharmaceutical industry has high barriers to entry for small firms. Substantial economic, regulatory, legal, and even personnel obstacles block new competitors.

Economies of scale: In the formulations segment the economies of scale have been mitigated for the SSI through exemptions from DPCO. Capital Investment: The initial capital investment is a deterrent to the entry of new players on the industry, since the bulk drug industry requires huge amount of investment in capital to exploit the inherent advantages of economies of scale in its operations. Heavy investment is required in R&D facilities such as research laboratories new products. Government policy: DPCO: It does not allow independent pricing for drugs having an annual turnover of more than of Rs.4 Crores. This leads to very low margins on drugs and makes it unattractive for large number of players to operate thus raising the entry barriers. Foreign investment: Entry barriers for MNCs are high due to a cap on foreign investment to 74%. Indian Patents Act: Since the Act recognizes only process patents, it allows large number of players to manufacture the same drug having the effect of lowering the entry barriers. Technology (Production, R&D): The technology for manufacturing bulk drugs and formulations can also act as an entry barrier. But the Indian firms have good process skills and this effectively lowers the entry barriers. R&D will play an important role in the post-GATT era. Those companies which have the necessary skills and the financial muscle to carry on the research will survive. Heavy

expenditures on research and development are required for the arduous processes of drug discovery, development, manufacturing, and approval through the Federal Drug Administration. Development of a new drug can take 10 to 15 years and cost over 500 million dollars. Distribution channels: Adequate distribution channel is another significant entry barrier. The retailers are important influencers in the buying process as they sometimes recommend substitute products that are out of stock and often fail to adhere to the prescriptions even if the prescribed product is in stock. It is therefore critical for the pharma companies to service both the doctors and retailers. This requires the pharma companies to have large sales force to meet this challenge while the MNCs have lagged behind in this aspect.

RIVALRY AMONG COM PETITORS: Currently there are about 24,000 players in the industry. The small scale of operations has reduced profits for most players. In the bulk drugs segment the competition is essentially on price, as there is low level of product or service differentiation. This industry segment is driven mainly by technology and cost control. Companies such as Orchid and Morepen have achieved international leadership in this segment. In the formulation business however the most important dimensions are brands, distribution strength and new product introduction capabilities. Companies are effecting mergers with other companies having complimentary product portfolios to gain access to each others brands. Large companies entering into brand building by providing scientific information and support of clinical research to doctors across the country.

BARGAINING POWER OF BUYERS:

For bulk drugs the other formulation making pharmaceutical companies are the buyers. Since there are large numbers of formulation makers they do not have strong bargaining power. For the formulations, the buyers are the retail chemists, the consumers and institutions like hospitals. The pharmaceutical products are unique in the sense that person who is consuming the product does not have much discerning power. It is the doctors and to some extent the chemist Doctors: Though doctors account for only 11 percent of the total sales, they are the single most important influencers in the purchase decisions of the final consumers, as they dont know the products that are available in the market. Thus the pharmaceutical companies have to maintain large sales force to service the doctors and the retailers with new product information, samples etc. Retail chemists: The chief influence in the purchase of OTC drugs is the retail chemists and distributors. The customer relies on the information provided by the above in his buying decision. Institutional buyers: Institutions buy drugs in large volumes and prefer to buy unbranded products. The margins on these products are lower than on those that are sold to the trade directly. Besides these there are reservations for the small scale sector in the purchases of the government programs such as the National Malaria and National Cholera Programs. Hospital, institutional and managed care customers usually pay well below list price because of heavy discounting and negotiating. They can achieve higher quantity discounts because of their superior purchasing power. Demand has a tendency to be very elastic with these market segments. In contrast, drugs sold to wholesale distributors and pharmacy

chains for individual physicians and patient markets are priced at the higher end of the price scale. BARGAINING POWER OF SUPPLIERS: The main suppliers for the pharmaceutical industry are the bulk drug manufacturers and other basic chemicals necessary for production of bulk drugs. The basic drugs are available without any constraints. There are a large number of bulk drugs manufacturers and this dilutes their bargaining power. The threat of backward integration by the formulations manufacturers is another reason for their less bargaining power. With the impeding product regime, the bulk drug manufacturers will not be able to reverse engineer molecules and must obtain product patents. This is bound to bring exclusivity to the bulk drug manufacturers and increase their bargaining power. THREAT OF SUBSTITUTES: People are turning to alternative medicine systems that could affect the pharmaceutical industry in a significant manner. India has a rich history of traditional medicine systems that are slowly staging a comeback. The drug industrys competitors are traditional systems such as Ayurvedic, Unani, Homeopathy, Nature care systems and new age medicine such as Reiki etc. But most of these medicine systems do not have adequate cure for all the major known disease, therefore they remain limited substitutes for the allopathic medicine system.

PEST of Indian Pharma Industry:


POLITICAL FACTORS: Government factors:

1. Regulatory role- prohibitive in past, but it now gradually towards encouraging in nature, with respect to free trade. 2. No. of drugs under DPCO has been reduced significantly from 370 in 1989 to 76 in 1995. 3. Government and municipal bodies are spending 33% of total expenditure on health care in India. ECONOMIC FACTORS: Investment: In 1973, Rs. 225 crore In 1999, Rs. 2500 crore Year (Rs. Crores) 1973 225 1977 450 1979 500 1982 600 1985 650 1988 800 1993 1,060 1994 1,200 1995 1,380 1996 1,600 1997 1,840 1998 2,150 1999 2,500 Employment: Direct: 4.60 lakhs Indirect: 24 lakhs SOCIAL FACTORS:

Health indicators:

1960-61 Life expectancy (Years) Infant morality (Per 1000 live births) Death rate (Per 1000) Birth rate (Per 1000) Health infrastructure: 1955-56 Doctors 65,000 Nurses 18,500 Hospitals 4,000 Hospital Beds 1,25,00 0 Primary Health 725 Centers sub-centers 17,521 No. of Medical 42 Colleges 41.2 146

199899 62.9 69

22.8 41.7

8.9 26.4

1998-99 4,98,689 5,65,696 15,097 8,70,161 22,291 1,36,818 162

TECHNOLOGICAL FACTORS: Production: The process skills are excellent and are comparable to the best in the world. This has made India one of the lowest cost producers in the world. With the impeding product patent regime and a large number of blockbuster drugs going off patent in the International market especially

USA, the Indian bulk manufacturers are upgrading their production facilities to meet US FDA standards. The Indian companies are putting emphasis on in hi-tech QA/QC instrumentation and on Online Visual Inspection machines. Research & Development: An expertise in reverse engineering Scientific pool of pharma base Contract manufacturing: MNCs give contract manufacturing which is advantageous for Indian companies as it is less rigorous than formulation.

RECOMMENDATIONS:
To Government:

Take a pro-active stance with respect to the Agreement on TRIPs Build capacity for research and development on indigenous drugs of decentralized origin

Help researchers to obtain patents on their products by adopting a single-window approach Adopt a holistic and need-based drug policy Adopt a rational competition Pharmaceutical sector policy with respect to the

To Business:

Give more focus to preventive aspects of disease control while developing new drugs Develop South-South cooperation while developing and producing need-based drugs

To Consumers:

Make rational use of drugsmore is better is a falacious concept in this respect

To NGOs:

Arouse public action, and convince (through networking and advocacy) the polity of the necessity of a need-based drug policy Reaching up to the international fora and advocate on the various issues/implications of TRIPs on Pharma sector Reaching down to the civil society at large, and make them aware of their traditional knowledge of indegenous systems of medicine

CONCLUSIONS
In conclusion, India should adopt a strong world class patent law without further delay for the following reasons:

(i) Development of Science and Technology (ii) Attracting Foreign Investments in Technology and Research (iii) Reversing Brain Drain (iv) Creation of Wealth (i) Development of Science and Technology: In the research world today, where collaboration and alliances are the order of the day, ability to network within the world community of scientists will be strengthened only if we have strong IPR. (ii) Attracting Foreign Investments in Technology and Research: World class and TRIPs compliant law will bring to India the benefits of investments, funding of R&D and technological development. Funding of R&D is a major hurdle today. India can attract funds from abroad if it gives the right signals. Out of total Foreign Direct Investment (FDI) Approvals during the period August 1991 to December 1998, the Pharmaceutical Industry accounted for a meagre 0.44% of the total. (iii) Reversing Brain Drain: IPR will provide challenging opportunities to retain scientific talent in India and attract our scientists and researchers from abroad back into the national mainstream. (iv) Creation of Wealth: Intellectual Property creates the wealth of nations. Recognition of IPR will change our scientific culture from copying to creativity. For all this to happen, India should have a Patent Law, which is clear and unambiguous and comparable to the best statutes available to IPR. A welldrafted legislation will minimize litigation and disputes. Given such a hazy scenario it is difficult to predict the future of the Indian Pharmaceutical industry under the new regime of intellectual property rights and its relationship with international trade. However, certain broad trends can be pasteurized.

First is that the Indian Pharma companies are going to face stiff competition from the global business. This despite the fact that at least in India, the Pharma market is not oligopolistic. At the same time, trends in research and development can make it so in the long run. Therefore, Indian companies can go either for collaboration or concentrate on producing and marketing generic drugs. This futuristic conclusion is based on the realistic assumption regarding poor research and market penetration strategies by the Indian companies. On the other hand, global Pharma majors are unlikely to consider India as one of their bases for exploring new drugs through re search. At most, India can be an assembly point of some drugs. The trickiest part is what position should the Indian government take. The issue is a political- economic one, and has to be (pro-actively) approached from both angleseconomics and politics. Broadly, the Government of India has two options:

Introduce an effective regulatory mechanism for checks and balances on the availability, access and price of essential drugs; and Develop research facilities for the introduction of new drugs catering to the needs of the country.

Given its traditional medicinal plant base, India can take a leading position in developing, producing and exporting tropical drugs. Compatibility between the above mentioned two options serves as a base for rational and need-based drug policy.

ANNEXURE
Annexure 1: Categories of Intellectual Property Rights Copyright and related rights: unlike a patent, copyright protects the expression of an idea, not the idea itself. This means that, in principle, protection is only extended to the form in which an idea is expressed (e.g. the particular writing of instructions in a computer programme), but not to the concepts, methods and ideas that are expressed. Copyright protection is provided to the authors of original works of authorship, including literary,

artistic and scientific works. Copyright has also been extended to protect computer software and databases. "Neighbouring rights", that is, rights which are related to copyright, are accorded to phonogram producers, performers and broadcasting organisations. The owners of copyright can generally prevent the unauthorised reproduction, distribution (including rental), sale and adaptation of an original work. Protection generally lasts for the life of the author plus fifty years or for fifty years or more in the case of works belonging to corporate bodies. Trademarks: trademarks are signs or symbols (including logos and names) registered by a manufacturer or merchant to identify goods and service. A valid trademark allows the owner to exclude from commerce imitations likely to mislead the public. Protection is usually granted for ten years, and is renewable as long as the trademark continues to be used. Geographical indications: these are signs or expressions used to indicate that a product or service originates in a particular country, region or place. There are different types of geographical indications. They are called appellations of origin if the characteristics of the products or services can be attributed exclusively or essentially to natural and human factors of the place in which the products or services originate. Industrial designs: an industrial design normally protects the ornamental or aesthetic aspect of an industrial article. Industrial designs are characterised by their appeal to the eye. There is a wide variety of requirements and modalities of protection pertaining to industrial designs. In some countries, protection is based on novelty, while in others on originality. Further, in some countries specific protection for an industrial design co-exists with or can be accumulated to copyright or trademark protection for the same design. The term of protection generally ranges between five and 15 years (including renewal). Patents: patents are granted by a government authority conferring the exclusive right to make, use or sell an invention generally for a period of 20 years (counted from the date on which the application for the patent was filed). In order to be patentable, an invention usually needs to meet the requirements of absolute novelty (previously unknown to the public), nonobviousness (containing sufficient innovativeness to merit protection) and industrial applicability (or usefulness). Patents may be granted for all types of processes and products, including those related to the primary sector of production, namely agriculture, fishing or mining etc. Patent-like protection

is conferred for functional models and other minor innovations under utility models (see definition below). Layout designs of integrated circuits: the protection of the layout (or topography) of integrated circuits is conferred in most industrialised countries. It is a sui generis form of protection introduced for the first time in the USA in 1984 -- limited, like copyright, to the design as such -- that allows the owner of the design to prevent the unauthorised reproduction and distribution of such designs. Reverse engineering is generally allowed, in accordance with the industry's practice. The duration of protection is shorter than under copyright (typically ten years). Trade secrets: confidential business information, such as lists of clients or recipes, can be an enterprise's most valued asset. Civil and criminal actions are provided for in most legislation against the unauthorised disclosure or use of confidential information (of a technical or commercial nature). In this case, there is no exclusive right, but an indirect type of protection based on a factual characteristic of the information (its secret nature) and its business value. Unlike patents, trade secrets are protected as long as the information is kept secret. Breeders' rights: this is a sui generis form of protection conferred on plant varieties that are new, stable, homogeneous and distinguishable. Exclusive rights, as a minimum, include the sale and distribution of the propagating materials for around 20 years. Unlike patents, breeders' rights permit the use by other breeders of a protected variety as a basis for the development of a new variety (the breeders' exemption) and for the re-use by farmers of seeds obtained from their own harvests (the farmer's privilege). Utility models: protection is given to the functional aspect of models and designs, generally in the mechanical field. Though novelty and inventiveness are generally required, the criteria for conferring protection are less strict than for patents. The term of protection also is shorter (typically up to 10 years). Utility models - which are concerned with the way in which a particular configuration of an article works -- are distinct from industrial designs, which are only concerned with the aesthetic character of an article. Source: As in Box 1

GLOSSARY
EMR This forms part of trips agreement. It says that governments which avail of the ten years transition period for switching over to product patents are bound to give the right of exclusively selling a particular drug in their country to a particular company which fulfills certain conditions. It means that no other manufacturer can sell a particular drug except the company,

which has the EMR. This actually implies a monopoly-like situation for that company.

MAIL BOX This is the box in which all the applications for the Pharmaceutical and Agricultural products patent are kept. It will be opened in 2005. Till that time no examination of Applications would be possible.

EMR VS PRODUCT PATENT EMR will cease to exist once product patent comes. Further, products which were selling under EMR may or may not be granted patent. On the other hand, any product can be granted a patent irrespective of whether it was under EMR or not.

Source: Wall Street Journal, 13.08.1997