Impact of TRIPS Agreement on Competition in Pharmaceutical Sector in India Competition Commission of India Government of India Maitreyi Das 2 nd Year, MA in Economics Centre for Economic Studies & Planning JNU, New Delhi July 2013 Under the Guidance of: Dr. Bidyadhar Majhi Joint Director (Economics), CCI 1
Table of Contents Acknowledgement ---------------------------------------------------------- 3 Disclaimer ------------------------------------------------------------------- 4 Section I Introduction --------------------------------------------------------------------- 5 Section II Genesis of Patent System in India and TRIPS Agreement --------------- 8 History of Product Patent and Process Patent in India --------------- 8 TRIPS Agreement ------------------------------------------------------------ 10 Section III The Necessity of Patent --------------------------------------------------- 11 Section IV Impact after Implementation of TRIPS Agreement ------------------------- 13 a. Geographical Distribution of Pharmaceutical Companies ------ 14 b. Impact on Prices of Drugs ------------------------------------------ 14 c. Impact on Research and Development Expenditure ---------------- 16 d. Import Export Scenario ------------------------------------------ 18 e. FDI Situation ------------------------------------------------------------- 19 Section V Anti Competitiveness and Abuse of Patent Rights ------------------------ 20 Section VI Conclusion ----------------------------------------------------------------------- 24 Selected Reference -------------------------------------------------------------- 28 2
Acknowledgement This research project entitled Impact of TRIPS Agreement on Competition in Pharmaceutical Sector in India has been a part of my Internship Programme in the Competition Commission of India (CCI). On the completion of this report, I would like to acknowledge the invaluable support that I have received from different personnel of CCI. In particular, I would like to thank my guide Dr. Bidyadhar Majhi, Joint Director (Economics), CCI for his immense support, thoughtful guidance and constant help during the project. I would also like to thank Mr. Sachin Goyal, Deputy Director (Financial Advisor) for his guidance in the initial stage. I am also grateful to the support staffs of CCI for other technical help. I specially want to thank my co-intern Vaibhav Rathi for holding such informed discussion with me and helping me at various stage of the project. Maitreyi Das Date: July 29, 2013 3
DISCLAIMER This paper entitled Impact of TRIPS Agreement on Competition in Pharmaceutical Sector in India has been prepared by the author as an intern under the Internship Programme at Competition Commission of India. This report is an intellectual property of the Competition Commission and hence the whole report or a part of the report cannot be used without the permission of the Commission in writing. Moreover this report has been prepared solely on the basis of academic purpose and views expressed are personal and are not necessarily the view of the Competition Commission of India. Maitreyi Das Date: July 29, 2013 4
SECTION I Introduction Competition is central to the operation of any market or sector. For the economic development of any nation, a country should ensure fair and healthy competition to attain inclusive growth. The main idea behind any competition policy is to preserve and promote competition, so as to enable efficient allocation of resources in the economy. It is expected that competition would result in lower prices, better quality products and would encourage invention and innovation all of which maximizes social welfare. The Competition Act, 2002 was formulated for the purpose of economic development and it was enacted on January 13, 2003. The Competition Commission of India (CCI) was established on October 14, 2003 and it became functional from May 2009. The establishment of the commission is to prevent anti competitive practices having adverse effect on competition, to promote and sustain competition in market, to protect the interest of the consumers and to ensure freedom of trade carried out by other participants in the Indian market, and for matters connected therewith. CCI is primarily concerned with fostering competition and protects Indian market against anti-competitive practices by enterprises. The Competition Act prohibits anti-competitive agreements, abuse of dominant position by enterprise, and regulates combination whenever such agreements cause or is likely to cause appreciable adverse effect on competition. According to the Act, anti-competitive agreement includes any arrangement, understanding or concerted action entered by two or more parties that include, but are not limited to, agreement to limit production or supply, agreement to allocate markets, agreement to fix prices, bid rigging or collusive bidding. Abuse of dominant position refers to the position of strength of an enterprise who can independently distort market forces that affect consumer welfare. Abuse of dominant position includes imposing unfair condition on price, predatory pricing, creating entry barrier, applying dissimilar conditions for similar transactions, denying market access, using dominant position in one market to gain advantages in another market etc. Combination mainly includes acquisition of controls, shares, voting rights or assets. 5
Health sector is one of the most important sectors in the world and healthcare industry is the world s largest industry valuing $ 2.8 trillion. Drugs and pharmaceutical sector, an important part of health sector, have a vital role to play in the process of economic development of a nation. Pharmaceutical sector is one of the most dynamic, research intensive industry and falls under the priority sector as is concerned with the welfare of individuals. Global pharmaceutical sector accounts to $ 643 billion in 2006 and it is expected to become $ 1300 billion in 2020. The pharmaceutical market generated total revenue of $ 10838.7 million in 2009, representing a compound annual growth rate of 11.3 percent for the period spanning 2005-09. Sustained research and development is very important for this sector in order to obtain improved, quality medicine at low prices. This sector is influenced by sets of rules and regulations so as to promote better research and development, to keep in view the necessity and welfare of the consumers, to control public and private expenditure etc. This hightechnology and knowledge intensive sector has a two tier structure: The larger firms which account for majority of the investment in research and development and hold maximum number of patents. The smaller firms which mainly produce off-patent products or are under license to a patent holder. Moreover, the global pharmaceutical industry can be divided into two broad structures: Bulk drugs: This part consists of 20 percent of the pharmaceutical sector. It basically consists of the active pharmaceutical ingredient or the chemical molecule that is responsible for the therapeutic effect. This segment has grown at an annual growth rate of 20 percent in the past decade. The Indian pharmaceutical industry is the Formulations: This division consists of the rest 80 percent and has grown at a rate of 15 percent annually. Firms which are into production of formulations are further classified into innovating firms and non-innovating firms. A particular firm can produce both bulk drugs as well as formulations. The main types or regulations in the pharmaceutical sector are preserving the incentive for innovation and research, controlling the quality and quantity of drugs produced and ensuring safety of drugs consumed by public. 6
In India, the pharmaceutical sector has grown drastically in the past three decades. The annual turnover of the Indian Pharmaceutical industry is estimated to be little more than T 1 lakh crores during the year 2010-11. It is the third largest manufacturer of pharmaceutical products in terms of volume and ranks 14 th in terms of value world-wide. The net worth of the industry is 8 billion US$ with a growth rate of around 8-9 percent per annum. Past records show that India s export of generic drugs to both developed and developing countries have increased steadily from the 1990s. The Indian industry has emerged as a world leader in production of drugs like Ciprofloxacin, Dextropropoxyphene, Ibuprofen, Ethambutol, Norfloxacin etc. The patent law of 1970 which allowed only process patent and not product patent in this sector resulted in development of reverse engineering industries which gave India a better position in the world market in terms of competitiveness. At present India exports drugs to 212 countries and is a net exporter of drugs and has earned an international reputation in the world market. According to 2009 data, India tops the world in exporting generic medicines worth $ 11 billion. It is known that competition in any sector is desirable and pharmaceutical sector is no exception. The question of intellectual property right comes as it is costly to produce any new knowledge or product. Copying of an already existing knowledge is easy, costless and it is basically a public good with the property of non excludability and non rivalries. Hence the concept of Intellectual Property Right (IPR), which gives the inventor monopoly power for a limited time period to avoid the free rider problem. Thus there is a trade off between competition which is supposed to be welfare maximizing and the grant of intellectual property right which retards competition for a short period of time resulting in a dichotomy between the two. Some people criticize IPRs as monopoly power that would affect the growth and expansion of the health sector. However, the monopoly power in the short run would encourage more innovation and greater enthusiasm in research and development which would be beneficial in the long run. Patent is one of the IPRs which gives the inventor sole right to produce his property or license it to other producers. But misuse of this right is not desirable and it is not expected that patent holders would get into anti competitive ways such as ever-greening of patents, patent pooling etc. India being one of the members of the World Trade Organization (WTO) has to comply with the clauses of Trade Related Aspects of Intellectual Property Rights (TRIPS) from 2005 onwards. It is possible that TRIPS agreement would have some impact over India s economy on all sectors including pharmaceutical sector. The impact of TRIPS on pharmaceutical 7
sector could be immense due to the introduction of product patent which was earlier not there in India. In this paper, I would like to take a close look on the impact of TRIPS agreement in the pharmaceutical sector in India with some emphasis on the anti-competitive attitude of the intellectual property holders and its negative impact on society. SECTION II Genesis of Patent System in India and TRIPS Agreement Product Patent and Process Patent and its History: The first legislation relating to patents in India was the Act VI of 1856. The main motive of this legislation is to promote invention of new and useful products and to give incentive to the inventor to disclose the technology by conferring them limited monopoly right for a period of fourteen years. Subsequently this act was modified in 1857, 1859 and 1872 according to changes in the laws made in the United Kingdom. But all these previous Acts were replaced by the Indian Patent and Design Act, 1911 which brought patent administration under the management of Controller of Patents for the first time. For securing priority this act was further amended in 1920 in order to have reciprocal arrangements with United Kingdom and other nations also. Further amendment of this act was done in 1930 and 1945. However, after independence, there was a strong need to review the patent law to suit the new political and economic environment of the country. Hence, Government of India constituted a committee under the chairmanship of Dr. Bakshi Tek Chand in 1949. Based on the recommendation of the committee, the 1911 Act was amended in 1950 in relation to compulsory license, prevention of abuse of patent right, to make sure that food, medicine and other surgical and curative devices are available cheap to the common people. In 1957, Government of India appointed another committee, headed by N. Rajagopala Ayyangar. This committee also dealt with anti-competitiveness in the patent system. These committees found that more than 90 percent of Indian patents were held by foreigners and more than 90 percent of them were based on work done outside India. Thereby foreigners were exercising monopolistic rights over Indians at that time. In order to reform this act, further changes were made in patent law which formulated the Patent Act of 1970, effective from April, 1972. Under this act, patents 8
are mainly granted to encourage inventions and to secure inventions in India so that it can result in high scale commercialization and profit in the long run. The Patent Act of 1970 was of real importance. The main features of this act were: There were no product patent system for pharmaceuticals, food and chemical-based products. These sectors were only covered by process patent (Section 5). The term of the process patent was seven years from the date of application or five years from the date of sealing patent, whichever period was less (Section 53). In order to ensure effective role of domestic enterprises, there was a system of licensing of right which prevailed for the sectors covering process patents (Section 87 & 88). There were no restrictions on export of pharmaceutical products or other products (Section 90(a) (iii)). The patent holder was under obligation to work with the patent in the country itself. Non working of patent might lead to withdrawal of monopoly power of patent. (Section 83). This was mainly done to encourage in development of new Indian industries and sustain better employment opportunities in India. The royalty ceiling was stipulated at four percent of sale price in bulk of the patented product for licenses of right (Section 88(5)). The fundamental principle of India s patent law is that patents are granted only for those innovations which are new and useful and which would have some utility to human kind. The mere improvement or combination of two or more things is not patentable. According to Section 48 of Indian Patent Act 1970, the patentee has exclusive right to the product or process and no third party can exercise the patentee s right without his/her permission. For a product patent, the rights consists of making of the product, using or selling it. For a process patent the right consists of using that particular process in making the product or selling the process mechanism. Via this act, the Government had the right to use a patented invention in necessary circumstances. Moreover clauses like compulsory licensing, licenses or right and revocation of patents were put in so as make a healthy working of patents in India. The average number of Patent applications before Paris Convention in India is around 3000 among which 1000 are from Indians. 9
The 1970 Patent Act basically gave an upper hand to Indian pharmaceutical manufacturers. Moreover, the high tariff rates for drugs ultimately made Indian companies cost efficient with time resulting in an advantage over their foreign counterparts. In the nineties it the capital cost for establishing an Indian firm was one third that of a foreign firm and thus Indian pharmaceutical sectors enjoyed a sufficient amount of cost advantage. TRIPS Agreement: It was in April 15, 1994 that the Final Act embodying the results of the Uruguay round of Multilateral Trade Negotiations was authenticated by 117 nations including India. This Final Act came into force on January 1, 1995. India was one of the countries to implement the requirements of the treaty within a period of ten years. This grace period ends on December 31, 2004. The Government temporarily implemented the treaty for the period January 1 to March 31, 1995 without any legislative approval. During the transition period India was supposed to accept applications for product patent in the pharmaceutical sector and these applications were called the black box application. Products which come under black box application had Exclusive Marketing Rights (EMRs), wherein the applicant had the right to sell and distribute the product for a time period of maximum five years. EMRs can only be obtained for a particular pharmaceutical product when that product has been granted a patent and has obtained marketing approval in another signatory country. After this only the product can get marketing approval in India. Only very few patent applications qualify for EMRs as it applies to patent applications only after January 1, 1995. In January 1997, the US requested WTO to set a dispute panel against India to investigate India s failure to pass implementing legislation to enable the acceptance of black box production patents in the pharmaceutical sector during the transition period. It was by December 31, 1991 that India brought laws and regulations in conformity with WTO. By December 31, 2004 India started granting product patents for pharmaceutical sector products also. Since India is a member of World Trade Organization (WTO), it has to comply with all rules of the TRIPS Agreement. According to Article 3 of TRIPS, all members have to treat their own nationals as well as foreign nationals in the same way and apply the same principles on both. Article 4 talks about Most Favoured Nation Treatment, where with regard to protection of intellectual property, any advantage, privilege, favour or immunity granted by a member to the nationals of any other country shall be accorded immediately and unconditionally to the nationals of all other members. Article 27 in TRIPS talks about patentable subject matter. 10
Patents shall be available for any inventions, whether products or process, in all fields of technology, provided they are new, involve an inventive step and are capable of industrial application. Members exclude from patentability the diagnostic, therapeutic and surgical methods for the treatment of humans or animals and secondly, plants and animals other than micro organisms. However, members shall provide for the protection of plant varieties either by patents or by a sui generis system. According to Article 28, a patent shall confer on its owner exclusive rights: Where the subject matter of patent is a product, to prevent third parties to either make, use, offer for sale, or import without the owner s consent. Where the subject matter of a patent is a process, third parties are not allowed to use the process, or offer the process for sale without the owner s consent. Article 33 discusses the terms of protection which states that the protection will expire in twenty years from the date of filling the application. Also under TRIPS, the provision of compulsory licensing and parallel imports can be implemented only under emergency situations. Unlike in the Indian Patent Act 1970, Government had very limited scope to use patented innovation. SECTION III The necessity of patent Inventions precede innovations. Discovering a drug is not only considered as one of the premier intellectual pursuit of human endeavour, but also a hugely cost-intensive and highrisk process. Such a knowledge industry can bring out a useful medicine only on sustained efforts along the lines of understanding a disease process and its possible intervention strategy. Provision for protecting such intellectual property rights seems a prerequisite for drug discovery. Notwithstanding the fact that healthcare sector is the largest sector in terms of value, drug discovery is certainly a high-risk challenge that encompasses drug-target discovery, lead molecule discovery, lead optimization and toxicity evaluation. The input cost in bringing out a candidate drug is in the tune of 50 million US $ and 10-15 years of intense innovation. Hence the provision of intellectual property right in the form of patent seems justified. However, copying the drug molecule for manufacturing, either by the same process or via other routes is easy for anyone conversant with such art of knowledge. Thus the 11
necessity of product patent instead of the process patent alone was warranted. Innovations therefore need to be recognised and rewarded economically. So protection of rights for a certain time period is the pre condition for further development incentive so that no one can copy the product with ease. Further, no private companies would have any incentives to invest in R & D without this exclusive monopoly reward. Now the social cost of granting patent would obviously entail in monopoly. As a result, there will be a rise in price, accompanied by lower supply of quantity. So in the short run, it is true that consumer welfare will fall. Hence short run costs will have an adverse impact on society. But in the long run, intellectual property rights will result in more inventions, greater efficiency in production, better and useful allocation of scarce resources, and in turn the right spirit for competition towards invention and innovation. Be it a process patent or a product patent, it would help in efficient mechanism of production along with optimal utilization of scarce resources in the longer run. Now the crux of the problem is that under TRIPS agreement, the time period of product patent has been increased to twenty years from seven years as per Indian Patent Act, 1970. So the question is whether such a long period of monopoly right is necessary or not. If we consider the fact that pharmaceutical industry is the world s largest industry ($ 13 billion economy with a CAGR of 11 percent), and is one of the priority sectors, it is better to promote world-wide inventions in this sector by every country rather than thinking about the fact that only developed countries which already have established R & D units in this sector, will enjoy the monopoly benefits. Granting a patent does not necessarily mean that the economy will lose its competitiveness. It becomes more competitive in the sense that patent right gives proper incentives and rewards for development of better and varied products. Moreover, this reward in the form of monopoly right would generate supernormal profit, which would trigger investment in R & D and hence inventions. But it should definitely be taken care that no patent holders should abuse their dominant position or perform any act which would result in abuse of patent rights or huge welfare loss to the society. 12
SECTION IV Impact after Implementation of TRIPS Agreement The growth Indian Pharmaceutical industry has been characterized by extensive Governmental control and absence of strong patent protection before 2005. Grant of product patent became one of the necessary conditions in order to become a member of World Trade Organization. There were almost fifty developing countries which did not exercise product patent in the pharmaceutical sector during the Uruguay round of GATT and actually resisted introduction of product patent in this sector for the fear of increase in drug prices. India s advantage remained in formation of generic drugs and it remained competitive in the world pharmaceutical market in terms of price mainly through reverse engineering and advantage of process patents. It was the developed countries that feared their monopoly rights and profit margins might get affected from low price drugs supplied by countries like India. Thus these developed countries were keen in implementation of product patent for all WTO members. In the TRIPS agreement, more than 100 countries have agreed not to free-ride on invention efforts of others. TRIPS may be the result of the world resurgence of capitalism and hence cannot be a cause of strengthening the world patent system. Introduction of product patent is expected to impact Indian pharmaceutical market. It is true that there would be huge pressure on copiers and firms which work mainly based on the process of reverse engineering and reformulation of the latest drugs. But it is expected that Indian companies would work on Research and Development for innovation of newer drugs, at least for the diseases which concerns developing countries. R & D for drugs meant for diseases like malaria, typhoid, cholera etc. are generally not carried out by developed countries and these diseases tend to possess serious threat to health sectors of many developing countries. So introduction of product patent might enhance R & D in these concerned issues which would result in improved health scenario and in effect sustained economic growth. I would like to see the impact of TRIPS Agreement in terms of prices, export-import situation and on foreign direct investment, investment by multi-national corporations and investment by domestic companies in the research and development of this sector. 13
a. Geographical Distribution of Pharmaceutical Companies: In 2007, data shows that there were 8174 bulk drug manufacturing units and 2398 formulation units spread across India. Table 1: Geographical distribution of pharmaceutical units in India in 2007 State Number of manufacturing units Formulation Bulk drug Total Percentage share Maharashtra 1928 1211 3139 29.7 Gujarat 1129 397 1526 14.4 West Bengal 694 62 756 7.2 Andhra Pradesh 528 199 727 6.9 Tamil Nadu 472 98 570 5.4 Others 3423 422 3845 36.4 Total 8174 2398 10,563 100 Source: Competition Law and Indian Pharmaceutical Industry, Centre for trade and Development, 2010. These firms were mainly concentrated in the states of Maharashtra and Gujarat. Table 1 shows the state-wise number of manufacturers of pharmaceutical units in India in 2007. b. Impact on prices of drugs: It is true that under any kind of intellectual property right, the price of that particular commodity will be high. This is due to the reason that monopoly price is always higher than perfect competition prices. Though producer surplus increases under monopoly, consumer surplus is less under compared to perfect competition and there is a net deadweight loss in the former case. Moreover, we are usually more concerned about increase in consumer surplus than producer surplus as it is assumed that consumer surplus indicates better welfare situations. This is illustrated in Figure 1. In the diagram, it is seen that under perfectly competitive market structure, price charged will be less in comparison to monopoly and quantity supplied will be more. P c and P m represent respectively competitive market price and monopoly price, while Q m and Q c represent the monopolistic quantity and perfectly competitive quantity respectively. Now under a patent right there will be monopoly for a limited time period. Monopoly would result in a fall in 14
Price P m A C B D H MC P c E F G AR Q m Q c MR Quantity Fig. 1: Comparison of perfect competition and monopoly market structure in terms of consumer surplus and deadweight loss. Abbreviations: MR Marginal revenue, AR Average revenue, MC Marginal cost consumer surplus as compared to perfect competition and a net deadweight loss. Consumer surplus would decrease from the area covered by (A+B+C+D+H) to (A+B) and the net deadweight loss is (H+G) under monopoly. So introduction of product patents is going to make a rise in price for obvious reasons, at least in short run. But benefits are expected to follow in the long run when after discovery, diffusion of knowledge occurs. The process of diffusion would include adapting the product to local conditions, obtaining market approval, introducing it to physicians and other distribution chains. Another important factor regarding pharmaceutical sector is that this sector is characterised by information asymmetry. The consumers do not have the perfect information and knowledge, and the information is mainly in the hand of producers and doctors. The law of one price is basically not at all a law in this sector and often users go by brand name and use high priced products even though generic versions which are low priced are available. So in this kind of sector it is very difficult to attain a market structure near to perfect competition and only can be done by sets of regulations like drug price ceiling. Another factor which affects price depends on the elasticity of the demand curve. Higher the own price elasticity, higher will be the percentage change in demand for an unit percentage change in price. The price is also affected by the cross price elasticity of demand, which 15
depends on the availability of substitutes. It has usually been observed that the rural demand curve for pharmaceuticals is much more elastic than the urban demand curve. This is perhaps due to the fact that rural income is less than urban income. Producers use this fact to determine their marketing strategy and manipulate price accordingly. These aspects should be regulated by the Government, so as to ensure uniform supply geographically. Introduction of product patent and hence increase in price of drugs may not affect much of Indian population. A large part of the Indian population falls below the poverty line (37%) and is never in the capacity of affording any drugs. Moreover, in India less than 4 percent people have medical insurance which indicate that most people have their health expenditure from their own money. Consumers in India are much more price sensitive because of low income and less provision of health insurance. So the majority of the population will have a preference for generic drugs, though information asymmetry plays a huge distortion in this market. India can have regulations mandating doctors prescribe for both patented drugs and generic drugs, similar to practices in many European countries. c. Impact on Research and Development Expenditure: Table 2 shows that there has been a steady increase in R & D expenditure by domestic companies over the past 15 years. In India, R & D expenditure done by Indian companies is 1.5 to 4 times more than that of foreign companies based in India. It is worth noting here that domestic pharmaceutical companies over time are putting in higher percentage of sale proceeds in R & D expenditure compared to foreign companies. This shows that Indian companies are trying their best to catch up with the developed countries in a globalized world where intellectual property rights are highly rewarded. The reason why foreign pharmaceutical companies are putting in less investment may be attributed to either of the two reasons. Firstly, they are not much confident regarding the returns from India in terms of rewards and profits even after implementation of TRIPS strategy in India after 2005. Secondly, they have no incentive for development of Indian R & D and train Indian people with the high tech knowledge or are basically pretentious about their R & D activities based in India. The growth rate is quite fluctuating and nothing can be concluded, apart from the fact that it showed a positive growth rate for 15 years. The foreign companies also showed an absolute increase in R & D expenditure, except in 1999 and 2007. The R & D expenditure as a percentage of sales is comparatively much lower compared to 16
total expenditure both for foreign companies as well as domestic companies, with the ratio being more skewed for foreign companies. After 2007, leaving out 2009, the growth rate in R & D expenditure for domestic companies as a percentage of sales has tended to remain negative. For foreign companies even though growth rate has declined, but growth rate was still positive. So the question is: Can this kind of trend be a reason for the introduction of product patent in India? Indian companies who initially had an advantage in the production of generic drugs mainly through the process of reverse engineering might find it difficult for the discovery of new products and perform well in the pharmaceutical sector. Table 2: Research and Development expenditure scenario Growth in R & D expenditure R & D expenditure as % of sale Year Domestic company * Growth % Foreign company * Growth % Domestic company * Growth % Foreign company * Growth % 1995 80.61-64.13-1.34-0.77-1996 142.50 76.78 83.37 30.00 1.71 27.61 0.91 18.18 1997 148.12 3.94 89.41 7.24 1.55-9.36 0.95 4.40 1998 154.15 4.07 90.65 1.39 1.43-7.74 0.88-7.37 1999 218.66 41.85 79.78-11.99 1.56 9.09 0.70-20.45 2000 256.80 17.44 90.17 13.02 1.56 0.00 0.66-5.71 2001 435.07 69.42 109.81 21.78 2.30 47.44 0.72 9.09 2002 597.91 37.43 110.04 0.21 2.64 14.78 0.65-9.72 2003 686.74 14.86 232.73 111.50 2.93 10.98 0.71 9.23 2004 1084.26 57.89 346.69 48.97 3.81 30.03 1.10 54.93 2005 1527.24 40.86 510.50 47.25 4.98 30.71 1.63 48.18 2006 1850.97 21.20 816.02 59.85 5.35 7.43 2.39 46.63 2007 2371.79 28.14 695.62-14.75 5.01-6.36 2.67 11.72 2008 2772.63 16.90 700.18 0.66 4.78-4.59 2.86 7.12 2009 3316.14 19.60 846.05 20.83 4.89 2.30 3.84 34.27 2010 3342.32 0.79 934.40 10.44 4.50-7.98 4.01 4.43 Source: Ministry of Chemicals and Fertilizers, Department of Pharmaceuticals Annual Report 2011-12 * T in crores 17
d. Import Export Scenario: One of the most important motives for development is to promote export of pharmaceuticals. India is a well known world market player for drugs and has performed quite well. Table 3: Import and export scenario Import Export Year Trade Medical and Growth Medical and Growth balance * pharmaceuticals * % pharmaceuticals * % 2002-03 2,865-12,826-9,961 2003-04 2,956 3.18 15,213 18.61 12,257 2004-05 3,139 6.19 17,228 13.25 14,089 2005-06 4,515 43.84 21,230 23.23 16,715 2006-07 5,866 29.92 25,666 20.89 19,800 2007-08 6,734 14.79 29,354 14.37 22,620 2008-09 8,649 28.43 39,821 35.66 31,172 2009-10 9,959 15.15 42,456 6.62 32,497 2010-11 10,973 9.82 47,551 12.00 36,578 Source: Ministry of Chemicals and Fertilizers, Department of Pharmaceuticals Annual Report 2011-12 *T in crores For the past decade it is seen that India has a remarkably positive trade balance. India is one of the best players in the world market due to its strength in production of low priced drugs through reverse engineering. This development of skills in reverse engineering perhaps might be accounted for the sustained development in educational infrastructure in India over time. If we look in terms of absolute values, then both exports and imports have increased over the years, exports increasing more. Growth rate of imports shows that there has been a decline after 2009-10. As such India is almost self sufficient in the production of majority of formulations and other pharmaceuticals. Manufacturers of drugs and pharmaceuticals are free to produce any drugs approved by the drug control authorities. Pharmaceutical sector accounted for 4.5 percent share in total exports in 2006-07 and 2007-08. This share increased to 4.7 percent and 5.0 percent in 2008-09 and 2009-10 respectively and again dropped to 4.2 percent in 2010-11. On the other hand share in total imports in this sector constitutes only 0.6-0.7 percent over the same time period. 18
e. FDI situation: With the introduction of product patent in India, it is expected that more foreign companies will apply for patent of their products and there will be a boost in R & D investment. The FDI statistics is represented in Table 4. Table 4: Foreign Direct Investment equity flow Period April 2000 April 2010 April 2000 April 2011 April 2000 April 2012 April 2000 April 2013 Drugs & Pharmaceuticals sector Total inflow (T in crores) Percent share of total inflow Total inflow (T in crores) Source: DIPP, Ministry of Commerce and Industry Chemicals Percent share of total inflow 7,586.01 1.51 11,389.53 2.27 10,796.92 1.83 13,234.17 2.20 44,727.09 5.55 47,944.76 5.72 54,245 5.78 40,771.85 4.57 Table 4 shows that there is a drastic increase in share of FDI in 2012 and thereafter. More manufacturers would make greater effort to broaden their geographical boundaries as potential for greater profits are globally available. R & D is an important part of the pharmaceutical sector without which the sector cannot thrive and develop. It is expected that after implementation of TRIPS Agreement, investment by multi-national corporations (MNCs) would rise in India. But the actual scenario is quite different. If we compare the top ten pharmaceutical companies in the world market and their expenditure on research and development with that of MNCs operating in India in this sector, it is seen that R & D expenditure on average for the former is Rs 162.94 crores while that of the latter is only Rs 60.15 crores. Moreover, when we look for the data of R & D expenditure as a percentage of sales the average for world top ten companies is around 8.53 percent while that for MNCs operating in India is only 3.54 percent. This shows that much new development in this sector in India is not possible. This kind of attitude for MNCs worldwide have developed due to the apathy developed among them as India did not allow product patent in this sector before 2005. R & D intensity of Indian companies when compared with 19
global major players is minuscule. So with such low R & D expenditure it is quite difficult to attain competition and ensure development. Ranbaxy Ltd. is the largest Indian MNC in terms of R & D expenditure and accounts for Rs 460.51 crores, an amount much larger than the top ten companies in the world. Introduction of product patent might result in a number of static costs and dynamic gains. The sudden introduction of a twenty year intellectual property right from a free market scheme is bound to have economic impacts. The static cost constitutes of monopoly pricing and the dynamic gains consist of innovation. Now if the world consists of one single country, then net gain and loss would not matter much. But in a multi nation scenario, we would be keen in examining what gains are accruing to India out of the product patent rights. In a single country world the identity of the inventor is not of much concern. The transfer of consumer surplus from the consumers to profits which accrue to the producer will basically change the distribution of income and the overall welfare of the country will not be affected much. But in a multi country world, the static cost consists of not only the deadweight loss accruing to the economy, but also will have a strong bearing who is the patent holder. If the newly available patent rights are assigned entirely to individuals or groups outside India, then the consumer surplus will be a net loss without any gain in profits. All the monopoly profits will go to foreign firms in terms of royalty payments. Moreover, if the production of the drugs is not made in India, but is imported from somewhere else, i.e., if local production is replaced by imports, then there might occur a loss in skilled employment as well. As a result of this, there will be a loss in balance of payment and loss of self-sufficiency. Now it is expected that introduction of patents will help in knowledge diffusion which would help in increasing the efficiency of production of drugs and efficiency in research and development for the innovation of newer drugs. But to obtain the new knowledge, one of the important factors is location. Intellectual property laws matter to location decisions too. SECTION V Anti Competitiveness and Abuse of Patent Rights Patent right is basically given to the discoverer to reap benefits of his invention. The main function of CCI is to enquire into any of the anti-competitiveness going on in the economy and impose proper penalties for that. Many patent holders try to abuse the patent right in 20
various forms. Abuse of dominance basically concerns itself to the unilateral act of dominant firms as it might infringe competition laws. One of the major forms of abuse of patent right is ever-greening of patents. Ever-greening of patents basically give the patent holder the chance to retain monopoly over its product after the patent period has expired by bringing about small changes and then claiming a patent right for another twenty years. The patent holder in order to retain its royalty payments sometimes buys out competitors or frustrates competitors out of the market for a longer period of time. Also, the patent holder fears the competition which comes from generic drugs that may result in a decline of the drug price resulting in lower profit margin. Generic drugs sometimes can reduce price even to the extent of 90 percent. The patent holder in order to have monopoly right usually claim large number of complex and often highly speculative patents, thus ever-greening the intellectual right. When the generic drug manufacturers intend to copy the drug at the time of the expiry of patent right, the patent holder intends to threaten away the generic drug manufacturers for breaching of their ever-greened patents and try to get a court order so as to stop the marketing of the generic drugs. Many of the multinationals have slowed down their research and development in new invention of novel drugs and try to make their way out by changing the mere composition of already existing drugs, in order to get access to easy price competition. Ever-greening of patent is the most common way of anti-competitiveness in the pharmaceutical industry. The ultimate consequence is borne by the patients who have to live on with not only poor quality of drugs, but also have to pay a higher price for it. In order to avert ever-greening of patents, it must be ensured that no patents should be granted on the basis of insignificant or trivial modifications. There is no reason why anyone should support this infinite monopoly for a particular drug and tolerate artificially held high priced medicines. The Indian patent law has the provision which prohibits the patent of a new form of a known substance, unless it significantly improves the medical efficacy of the drug. This fact is elaborately stated in Section 3(d) of the Indian Patent Act. This particular clause considers salts, esters, ethers, polymorphs, metabolized, pure forms, particle size, isomers, complexes, combination and other derivatives of known substances as the same substance, unless they differ a lot with respect to efficacy. 21
One of the examples of ever-greening of patents is the Novartis case of the drug Glivec, a drug used for the treatment of acute Myeloid Leukaemia. Novartis, a Swiss pharmaceutical drug maker company wanted the patent of the Gleevec (name used in US) drug in the name of Glivec in India. Recently, in April 2013, Supreme Court denied the case of Novartis after the six year legal battle saying that the small changes and improvement in the drug Glivec did not amount to innovation which deserves a patent. When this company was first given exclusive marketing rights for Glivec in November 2003, the price increased from $230 to $2740. The key motive of the manufacturer is to gain a patent so as to extend control over the product. This is nothing but a way of cheating on the implicit bargaining of patents. Therefore, such kind of regulation would definitely help a developing country like India to work on generic versions which would be affordable by the poor population of India and should be set as an example for all other developing countries wherein it is impossible to afford patented drugs. Another form of anti competitiveness with regard to patent right is patent pooling and cross licensing. Patent pooling is a consortium of at least two companies agreeing to cross license patents and other intellectual property rights relating to a particular technology. This is done mainly to save time and money of a patentee or licensee. The competition law would come to use in this case when a large consortium is usually formed as they might set market and control market prices which is unwanted. Patent pooling is mainly seen in the areas of electronics and communication industries. The sewing machine combination formed the first example of patent pooling consisting of sewing machine patents in 1856. In 1917, there was another famous example of patent pooling between two aircraft companies namely Wright and Curtiss which literally blocked any new entrant into the market. This kind of anti competitiveness in the pharmaceutical sector can affect the economy in a deeper way, as this particular sector is a top priority sector. Manipulating this sector by a few dominant players can result in acute problems in the health sector, which would in turn affect the economy in every possible respect. Hence, regulations are absolutely necessary in this sector. Another case was that of the German company Bayer and Indian company Nacto Pharma. Bayer was producing cancer drug Naxevar and was charging a price of T 2.8 lakhs for a month s dosage which would be unaffordable for majority of the people of developing countries. In this acute situation, Government of India allowed Nacto Pharma to produce the generic version of this drug under the provision of compulsory licensing which was selling 22
the product for T8800 for a month s dosage. Government of India did not accept Bayer s case against Nacto Pharma. Here we should take into account the necessity of the drug and the extent to which monopoly right is exercised. Accordingly, the decision by the Government was right. The fact is that patent right should not result in such kind of market distortions and herein comes the role of competition commission. Patent troll is another kind of anti competitiveness observed in the economy. It is a derogatory term used for a person or company that enforces its patents against one or more alleged infringers in a manner considered unduly aggressive or opportunistic, often with no intention to manufacture or market the product. A related, less derogatory concept is Non- Practicing Entity (NPE) which describes a patent owner who does not manufacture or use the patented invention. Basically a patent troll uses patents as legal weapons, instead of actually creating any new products or coming up with new ideas. Trolls are in the business of litigation (or even just threatening litigation). They often buy up patents cheaply from companies down on their luck who are looking to monetize whatever resources they have left, such as patents. Unfortunately, patents are being issues for ideas that are neither new nor revolutionary, with these patents covering a broad ground as their territory, including many things that should never have been patented in the first place. Armed with these overbroad and vague patents, the troll then sends out threatening letters to those they deem infringe their patent(s). These letters threaten legal action unless the alleged infringer agrees to pay a licensing fee, which can often range to the tens of thousands or even hundreds of thousands of dollars. Many recipients of these threatening letters actually chose to submit to the threat, and pay, since the alternative is a much more expensive and enduring legal endeavour. Faced with the dire scenarios, fight against patent abuses has been picking up momentum with efforts ranging from celebrated judgment against patent trolls to formulation of full blown piece of legislatures to curb such practices. Latest attempt by a Texas Senator is Patent Abuse Reduction Act, 2013 (PAR). The Patent Abuse Reduction Act beams necessary sunlight onto these all-too-frequent proceedings and is a major step toward fixing the problem of patent abuse. Few of the features of PAR are: Section 285 institutes a loser pays rule for unreasonable litigation. This is the ultimate tool for balancing litigation, freeing businesses and individuals from having to shoulder the massive financial burden of fighting a frivolous patent infringement claim. 23
One of the most expensive parts of a patent lawsuit is something called discovery where companies are forced to organize and hand over huge number of internal documentation to the patent trolls so that they can introduce evidence of patent infringement. Trolls use discovery to drive up the cost of the lawsuit, making it cheaper to settle, and to fish for more ways in which they can apply their claims. Section 300 of the PAR Act adds fairness to the discovery process by limiting discovery until after the meaning of the patent has occurred, and shifting much of the cost of unreasonable discovery back to the patent troll. Patent trolls usually hide their actual owners behind shell companies. These patent trolls do not want publicity because they don t want to be known for who and what they are. Section 281A of the bill removes the anonymity of patent trolls and forces them out of hiding, by requiring them to identify not only themselves, but any other businesses or individuals who are co-owners, assignees, licensees or have a legal right to enforce the patents in question, along with exposing any person or business with a financial interest in the patent infringement case. Patent trolls are notorious for hiding their claims behind weak lawsuit pleadings. The current standards for making an accusation of patent infringement do not require plaintiffs to explain what they allege to be infringing or how the defendant infringes. This lack of clarity forces anyone accused of patent infringement into an endless (and expensive) guessing game. Section 281A of the Patent Abuse Reduction Act forces patent assertion entities (PAEs) to spell out their claims and be specific about their complaints. These specifics include how the patent is being abused; the names, model numbers and other information of the products or services alleged to infringe the claim and where the infringement occurs; and a host of other factors most patent trolls can currently omit from their suits. This Act is yet to be passed and is in the stage of formation. SECTION VI Conclusion Introduction of TRIPS Agreement, which mainly concerns product patent in all sectors and increased the length of patent to twenty years is bound to affect India s pharmaceutical 24