Impact of Product Patent on FDI in Indian Pharmaceutical Industry

An Ordinance on Patents (Third) Amendment wasproduct has actually been used in the disputed
promulgated by the Government on December 26,product) lies with the accused rather than with the
2004 to make the Indian patents law WTO compliantpatent holder (in the 1970 Act, the responsibility is with
and to fulfill India's commitment under TRIPS tothe patent holder). This is the broad framework, which
introduce product patent protection for Drugs, Foodwill guide the pharmaceutical industry of India in the
and Chemicals with effect from January 1, 2005.WTO regime ( i.e. post 2005 period).
An overview of Indian pharmaceutical industryIn order to increase the global prospects of the
The Indian pharmaceutical industry, with US$4 billion inpharmaceutical industry in the post 2005 period, the
domestic sales and over US$3billion in exports, isCentral Government has fixed the deadline of
showing satisfactory progress in terms ofDecember 2003, to comply with the Good
infrastructure development, technology base andManufacturing Practices set by World Health
product use. The industry now produces bulk drugsOrganisation. Since this is mandatory for all the units, it
belonging to all major therapeutic groups requiringmeans incurring expenditures that could range from
complicated manufacturing processes and has alsoRs. 15 lakhs to 1 crore per unit. In some cases, it would
developed excellent 'good manufacturing practices'involve shifting to new premises altogether. A few
(GMP) compliant facilities for the production of differentunits might exit from business because of this. As
dosage forms. The strength of the industry is incontract manufacturers it is essential that both the
developing cost-effective technologies in the shortestparent unit and the loan licensee meet these
possible time for drug intermediates and bulk activesrequirements in cases where the production is meant
without compromising on quality. This is realizedfor exports. While these standards improve the quality
through the country's strengths in organic synthesison par with international standards, it will also act as
and process engineering.potential entry barriers for new firms to enter.
The focus under the R&D effort is to encourageThe strength of the Indian pharmaceutical industry is in
development of new molecules. A provision of Rs. 150reverse engineering. Such units by utilising the
crore has been made under the Pharmaceuticalprovisions under compulsory licensing, exceptions to
Research & Development Support Fund. A Drugexclusive rights and the Bolar exception should aim at
Development Promotion Board under the Departmentproducing the generic version of the patented product
of Science & Technology has also been set upand those that are nearing patent expiry. Such firms
for the utilisation of this fund. Feasibility of setting up ashould also be engaged in research leading to new
Mega Chemical Industrial Estate in the country withdrug delivery mechanisms and in identifying new uses
world class infrastructure facilities is also being studied.of existing drugs. In this context, it is also essential to
For the first time in many years, the internationalprotect the innovations that have been introduced by
pharmaceutical industry is finding great opportunities inthe technology spillovers. It is suggested that in order to
India. The process of consolidation, which has becomedevelop domestic innovations, developing countries
a generalised phenomenon in the world pharmaceuticalrequire utility models or petty patents. These petty
industry, has started taking place in India.patents can be available for a shorter period of time
The pharmaceutical industry, with its rich scientific talentfor process innovations made over an existing product.
and research capabilities, supported by IntellectualThe TRIPS agreement leaves members to introduce
Property Protection regime, is well set to take a greatsuch legislation, as there are no specific rules on this
leap forward. As regards product patents fordrugs, ansubject. Such patents will encourage the small firms.
amendment to the Indian Patents Act has been carriedOne of the concerns regarding product patents is the
out through the Patent (Amendments) Ordinance, 2004access to patented products. Some of the provisions
on December 26, 2004. The Ordinance amends thewithin the TRIPS agreement clearly indicate that price
Indian Patents Act, 1970 for the third time with a viewcontrols could be imposed on the patented products.
to introducing product patents for drugs, food andHowever, exemptions from price controls has been
chemicals. Apart from manufacture of drugs, thesuggested by the government for the products that
product patent regime will help the pharmaceuticalare produced domestically using the domestic
industry to tap outsourcing of clinical research. ByR&D and resources and are patented in India.
participating in the international system of IPRSuch exemptions will keep the prices high and make
protection, India, with its vast pool of scientific andaccess to the drugs difficult. It appears that `who
technical personnel, and well-established expertise inpatents the product' matters more for the government
medical treatment and health care, has unlocked vastthan what is patented. In the recently concluded Doha
opportunities in both exports and outsourcing and hasmeeting, a separate declaration on the TRIPS
the potential to become a global hub in the area ofagreement has clarified that members have the right
R&D based clinical research. The Patentto grant compulsory licence in the area of
Ordinance also provides adequate safeguards topharmaceuticals and that they have the freedom to
protect the interest of the domestic industry, and thedetermine the ground upon which such licenses are
citizen from any increase in prices of drugs.granted, which can have a considerable impact on the
Impact of product patent on Indian Pharma industryavailability as well as on their prices. However, the
With a regulatory system focused only on processamendments made by the Government of India, make
patents, helped to establish the foundation of a strongthe procedures very cumbersome which needs to be
and highly competitive domestic pharmaceuticalrevised in the third amendment to the Patents Act.
industry which in the grip of a rigid price controlWhile parallel trade in pharmaceutical may facilitate
framework transformed into a world supplier of bulkaccess to medicine, yet compulsory licence will be the
drugs and medicines at affordable prices to commononly course of option to facilitate flow of technology
man in India and the developing world. Introduction ofand R&D. Scherer and Watal (2001) suggest that
product patents will, however, mark the end of atax concessions should be provided to the
golden age for IPI (Indian Pharmaceutical Industry). Thepharmaceutical manufacturers to encourage them to
new regulations will reshape the landscape of IPIdonate the high technology drugs to the less
forcing significant changes and divide within thedeveloped and developing countries which is a viable
industry.option.
A look into organization of pharmaceutical producersA majority of the population does not have access to
of India (OPPI) directory shows only 300 units out ofthe essential medicines (most of which are off patent)
10,000 registered companies are in the organizedeither in the government or private health care
sector. While process patent helped to flourish IPI into asystems because they are not within their capacity to
world-class generics industry, product patent regimereach. Now that the percentage of drugs under price
will filter the best from the pack and would becontrol has been reduced drastically it is essential to
favorable to players with built-in scientific and technicalkeep the prices of the essential drugs under check,
resources. The impact of the new regulations will notespecially those concerning the common diseases.
deter the Indian pharma majors as they are alreadyCurrently only a handful of pharmaceutical firms in India
doing roaring business in the very countries whereinvest in R&D which needs to be improved. The
these patent laws are strictly in force.Pharmaceutical Research and Development
Export markets increasingly drive IPI: in a turnover ofCommittee (1999) has suggested that a mandatory
US$5 billion, exports constitute $3.2 billion and thecollection and contribution of 1 per cent of MRP of all
industry is poised to grow to $25 billion by 2010. Theformulations sold within the country to a fund called
share of IPI in world pharmaceutical market is 1.0%pharmaceutical R&D support fund for attracting
(ranks 13th) in value and 8% (ranks 4th) in volumeR&D towards high cost-low-return areas and be
terms. The global market for generic drugs isadministered by the Drug Development Promotion
estimated at $27 billion (2001) and the expiry ofFoundation. The domestic universities and other
patents on drugs will be worth $80 billion (2005) offersacademic institutions can play the role of research
a huge opportunity to IPI. India today has the largestboutiques or contract research organisations (CRO),
number of US Food & Drug Administration (FDA)which can supply the technical know-how and
approved drug manufacturing facilities outside the US.manpower. Units that already have such facilities can
In addition, Drug Master Files (DMFs) filed by Indianalso function as a CRO for other firms.
companies with the FDA is 126 higher than Spain, Italy,In the post TRIPS era, the government will have to
China and Israel put together. DMF has to be approvedprobe in to factors that contribute to the widening gap
by FDA for a drug to enter the US market.between the proposed FDI and the actual FDI and
Research & Development (R&D) is a key torectify these bottlenecks. Similarly the difference
the strength of pharmaceutical industry especially in thebetween the number of patents filed and the patents
product patent period. The global pharmaceuticalgranted calls for a detailed analysis to figure out where
industry spent $30.4 billion (2001) on R&D. Thethe Indian firms are lacking.
R&D expenditure (as a percentage of turnover)Governments at various levels should take active part
by the IPI is low (1.9%) when compared global giantsin disseminating knowledge about the IPRs and the
(1016%). With transition into the new regime manypossible strategies that can be adopted by the
Indian companies are mobilizing their resources warindustry. This will remove some of the impediments.
chest with an increase in their R&D budget.Lessons should be drawn from the Chinese
Government of India (GOI) encouraged the R&Dexperiences where systematic efforts were taken to
in pharmaceutical companies by extending 10 year taxeducate the bureaucrats, policy makers and the
holiday to this sector. Besides, planning commission hasindustry about the WTO and product patents in the
earmarked $34 million towards drug industry R&Dpharmaceutical industry. India will have to strengthen
promotion fund for the tenth plan.the patent examination process and speed up the
FDI in India was low in prior Product Patent era. Why?processing procedures. This will help in checking the
Bringing a new drug into the market costs a companyproducts that may enter the country utilising the import
an average of about $800 to $900 million. Somemonopoly route provided by the EMR. Besides a
estimates show that patient recruitment and medicalstrong institutional and judicial framework will have to
personnel account for nearly 70 per cent of the clinicalbe set up for monitoring the prices, to prevent
costs that are required to bring a drug to market. Theinfringement and trade dress cases of patented
less expensive means to raise research productivity isproducts respectively.
outsourcing research to low cost havens such as IndiaAs far as India's pharmaceutical industry is concerned,
and China. The global pharmaceutical outsourcingvarious options are possible in the WTO regime.
market stands at $10 billion (2004). PharmaThese are to: (a) manufacture off patented generic
multinationals have maintained a low-key presence indrugs, (b) produce patented drugs under compulsory
Indian market due to absence of product patents andlicensing or cross licensing, (c) invest in R&D to
rigid price controls. Pharmaceutical industry did notengage in new product development, (d) produce
receive significant foreign direct investment (FDI). Frompatented and other drugs on contract basis, (e)
August 1991 to December 1998 this industry accountedexplore the possibilities of new drug delivery
for a meager 0.44% of the total FDI. Introduction ofmechanisms and alternative use of existing drugs, and
product patents will see multinationals strengthening(f) collaborate with multinationals to engage in
their presence in the country. The second largestR&D, clinical trials, product development or
population in the world, a growing economy and risingmarketing the patented product on a contract basis
income levels makes Indian market difficult to ignore.and so on. Besides these strategies, India's strength lies
Global companies would be reluctant to invest in ain process development skills. This expertise utilised
country where there is no IPR protection. Eli Lillywithin the WTO framework with emphasis on quality
(world's 7th Largest Pharma Firm) has its clinicalstandards will provide India a competitive advantage
research focus in the country and had spentover other Asian countries.
considerable amounts over the last 2-3 years. But weTo conclude we can anticipate more FDI nature of
would be only maintaining the quantum and will notinvestment in India in the field of Pharma Sector?
expand even though there is huge potential. GlobalIt's a question which requires more time to be
companies face the same frustration.answered, but we can draw inferences from the facts
So the main activity of the company in the country& data discussed above. As from the above
would be to introduce products from the parentdiscussion it is obvious that Pharma industry is high
pipeline.mIn the domestic market, the share of Indianinvestment seeking industry, & the other most
companies has steadily increased from around 20 perimportant fact about it is that it require enormous
cent in 1970 to 70 percent now. Ranbaxy LaboratoriesR&D. The new Patent regime brings both
is the market leader in terms of revenues followed byopportunities and challenges to the domestic pharma
Cipla and Dr Reddys Laboratories. Glaxo is the onlyindustry. Even larger Indian companies lack the financial
multinational to figure among the top ten pharmamuscle to be major international player in basic
companies in India. In India, 97 per cent of drugs are offR&D, that involves discovery of new chemical
patent and are manufactured by a vast number ofentities (NCEs). They would be helped by the
companies. The key therapeutic segments includegovernment's decision not to restrict patenting to
anti-infectives, cardio vascular and central nervousNCEs. The Patent Ordinance issued recently defines
system drugs. Anti-infective comprise the largestthe term patentability as per the TRIPS guidelines but
therapeutic segment in India, accounting for about 26does not exclude patenting of incremental inventions
per cent of the market.like new drug delivery systems, polymorphs etc,
Globally, pharmaceutical industry grew at abrightening the chances of Indian companies to benefit
compounded annual growth rate of 9.1 per cent in thefrom the patent regime, but it may act as a
last 23 years to $491 billion propelled by a string ofdisincentive for the international Pharma firms to invest
innovative blockbusters. Multinationals were reshapedin India.
by mergers and acquisitions as a way of fatteningAgain if we look at the patent amendment act there
their research pipelines. This at best represents aare certain provisions of this Act which are
short-term solution. With a slew of brand name drugsdiscouraging the FDI in Pharma sector like
losing patent protection in the next few years and the1. Deletion of the provisions relating to Exclusive
pressure building for pharmaceuticals to cut price,Marketing Rights (EMRs) (which would now become
these giants find themselves under immense strain toredundant), and introduction of a transitional provision
find new drugs and reduce price.for safeguarding EMRs already granted.
So, from the above discussion it's very evident that2. a) Conditional grant of patent (Section 47) :
before any proper IPR regime specially in the absenceEmpowers the Government to import, make or use
of "Product patent" in India it was not a judiciousany patent for its own purpose. For drugs, it also
decision for the international Pharma companies toempowers import for public health distribution.
invest here in India. FDI cap was raised from 74% to3. Revocation of patent in public interest (Section 66):
100% in 2001 only but we didn't find any change in theEmpowers the Government to revoke a patent
pattern of FDI in Pharma Sector.where it is found to be mischievous to the State or
Impact after 2005?prejudicial to the public.
India a signatory to the WTO resolution on TRIPS4. Grant of compulsory licence (Sections 82 to 94):
Agreement India was thus committed to recognisingChapter XVI deals with the general principles and
product patents by amending The Indian Patents Actcircumstances for grant of compulsory licences in
1970. As per the minimum standards mentioned in theorder to protect public interest particularly public health
TRIPS agreement, patent shall be granted for anyand nutrition. These provisions check the abuse of
inventions, whether products or processes, in all fieldspatent rights. They can be invoked if the reasonable
of technology provided they are new, involve anrequirements of the public with respect to patented
inventive step and are capable of industrial applicationinventions have not been satisfied, and the patented
without any discrimination to the place of invention orinvention is not available for public at a reasonably
to the fact that products are locally produced oraffordable price, and if the patented invention is not
imported. Accordingly, now patents will have to beworked in the territory of India. Section 92 of this law
granted in all areas including pharmaceuticals and theprovides for action in case of national emergency,
effective period of protection is for twenty years fromextreme urgency and public non-commercial use, and
the date of filing the application. With thecan be invoked without the grace period of 3 years
implementation of TRIPS agreement by most of thefrom grant of patent.
developing countries by 2005, a stronger patent5. Use of invention for the purpose of Government
regime or product patents will be uniformly applicable[Sections 100 & 101]: Compliments Section 47.
on the pharmaceutical innovations among the member6. Acquisition of invention and patent for public purpose
countries of the World Trade Organisation.[Section 102]: Empowers the Government to acquire a
The implications of TRIPS for the pharmaceuticalpatent to meet national requirements.
sector are that: patents will be granted both for7. Bolar provision [Section 107 (A) (a)]: Facilitates
products and processes for all the inventions in allproduction and marketing of patented products
fields of technology; the patent term will be twentyimmediately after expiry of the term of patent
years from the date of the application (compared toprotection by permitting preparatory action by non
the seven years under the 1970 Act), which ispatentees during the life of the patent.
applicable to all the member countries and thus rules8. Parallel import [Section 107 (A) (b)]: Provides for
out all the differences in the protection terms prevailedimport so that patented product can become available
in different countries; patents will be grantedat the lowest international price.
irrespective of the fact whether the drugs wereThese provisions are basically public interest provisions
produced locally or imported from another country;but these are anti FDI in nature because in a sector of
though the grant of the patent excludes unauthorizedhigh investment & high uncertainty every investing
use, sale or manufacture of the patented item, yetfirm need complete protection & patronage but
there are clauses which provide manufacturing orhere it is not guaranteed.
other such rights of the patented item to a personSo we can anticipate that product patent is going to
other than the patent holder. In the case of a disputehave a very little impact on the FDI scenario in a
on infringement the responsibility (to prove that acountry like India.
process other than the one used in the patented