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India In Pharmaceutical Patents Regime

Written by: Abhay Kumar (Law Student)
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TRIPs, the intellectual property component of the Uruguay round of the GATT Treaty, has given rise to an acrimonious debate between the developed countries and less developed countries (LDCs). Business interests in the developed world claimed large losses from the imitation and use of their innovations in LDCs. They also asserted that IPRs would benefit the developing countries by encouraging foreign investment, by enabling transfer of technology and greater domestic research and development (R&D). On the other side, LDC governments were worried about the higher prices that stronger IPRs would entail and about the harm that their introduction might cause to infant high tech industries. India was very actively involved in opposing the TRIPs component of the GATT agreement, especially the proposal for product patents on pharmaceutical innovations. Indira Gandhi succinctly summed up the national sentiment at the World Health Assembly in 1982: "The idea of a better-ordered world is one in which medical discoveries will be free of patents and there will be no profiteering from life and death." Now that India has signed the treaty, though most unwillingly, it is committed to introducing pharmaceutical product patents 2004, a value analysis i.e. cost-benefit analysis of this move is essential for India. First some history.

The Indian Patents Act 1970

This legislation implemented in 1972 made pharmaceutical product innovations, as well as those for food and agrochemicals, unpatentable in India thus greatly weakening IPR protection. It allowed innovations patented elsewhere to befreely copied and marketed in India. Therefore foreign firms did not find patenting in India worthwhile. This act further restricted import of finished formulations, imposed high tariff rates and introduced strict price control regulation with the 1970 Drugs Price Control Order. This gave a boost to the Indian pharmaceutical industry.

India beyond 2004
In granting patents, there is a trade-off between the costs incurred by the country granting the patent due to monopoly pricing and the gains accruing to it due to encouragement to innovative efforts.

With the introduction of patents, the inventor will try to maximise his profits and therefore price his drug higher than if there were no patents. Correspondingly the consumption of the drug will be lower. This represents an indirect welfare loss to Indian consumers because of higher prices associated with introducing product patents. In addition to this are the direct costs of administering the patent system and enforcing patentee rights through the courts in case there are infringement disputes.

The inventor is able to earn higher profits and therefore would likely invest more in R&D and drug discovery and testing, in turn increasing consumer welfare. Also, patent laws require specifications to be disclosed to all and therefore information about new technologies becomes more quickly available to others as an input into their own R&D. Moreover the innovating firm is able to reveal its innovation without losing control and hence can sub-contract parts of the development work at lower cost to countries like India.

The blurring line between costs and benefits

The benefit in the form of increased consumer welfare from patent rights in India might turn out to be a cost if all profits accrue to foreigners and funds are transferred out of India. Foreign patentees earn income from patents in two ways:
1. In the form of royalties if production remains under license in India
2. In the form of export profits if the drugs are imported.

In the case of imports India faces further costs in terms loss of employment, forex outflow and loss of self-sufficiency i.e. if strategies shift from imitative R&D to directly purchasing technology. On the other hand, if these two strategies are not substitutes to each other, this could turn out to be beneficial for India if such technology purchase spurs domestic research efforts. These concerns, however, do not arise in the case of patents granted to Indians.

The patentee receives profits on his innovation until the patent expires, after which there will be a generic entry which will bid down the prices. In India, lack of protection for pharmaceutical products means that Indians can manufacture and sell on-patent drugs in India and then access the world markets faster than foreign firms when the patent expires. Thus, patent protection in India will confer on the patentee an additional benefit (over and above profits from sales in India), that is, a decrease in the rate of erosion of his profits from sales in the world markets after patent expiry. The cost to India would be to those Indian firms who hitherto enjoyed the first mover advantage in accessing the world markets. All this depends on how India is viewed as a destination for R&D investment. If profits from such newly created markets are viewed to be only marginally incremental, then India might face higher consumer drug prices and a loss of industry profit and employment, for little gain in new pharmaceuticals.

Estimating the magnitudes
The magnitude of costs due to introduction of patents will depend on how much more can the patentee charge for his patented drug and how much is the loss in consumer welfare. In India, general income levels are low and consumers directly pay for the drugs (due to lack of penetration of medical insurance). Therefore consumers will be sensitive to prices. Also, there are less effective but cheaper substitutes available in almost all the cases. This limits the extent to which higher prices can be charged and acts as a downward pressure on prices. One consideration that would push the price upwards is the fact that global reference pricing is very common in developing markets, that is, price for newly introduced drugs is usually linked to its price elsewhere, either explicitly or through regulations. Patentees seek to maximize global profits and therefore if prices are increased in developed countries, it will have a direct fallout on prices in developing countries. But the price control regime in India would play a very significant role in limiting prices, more so because there is nothing in the GATT treaty which prevents such price regulating actions. Some drugs might be entirely exempt from the price control allowing the patentee to charge his own prices. But keeping in view the price elasticity of demand, especially in countries like India, this will not be of much significance in terms of loss in consumer welfare.
Generics the other profit rectangle.

Once the patent on a drug expires, it is termed a "generic". Till now Indian firms enjoyed tremendous advantage in the generics market, which might be somewhat eroded post- 2004. However India enjoys the advantage of lower manufacturing costs and capital costs. Moreover it is a significant player in the bulk drugs business and Indian firms are leveraging this fact to become important players in the formulations market, regardless of whether they will continue to enjoy the first mover advantage.

Effect on pharmaceutical production in India

Once patent protection is available, patent-owning firms may choose either to export their patented drugs to India, thereby replacing domestic production, or they may chose to produce in India through a subsidiary or under license to Indian firms. Concerns about global price differentials makes local, low cost, production attractive as a way to justify Indian prices which are lower than those charged in developed country markets. Even the Drug Price Control Order may not act as a hindrance. Ceiling prices are determined as a mark-up on input costs.

This means that there is a 'transfer-price loophole'. An MNC may export the patented active ingredient to its Indian subsidiary at an artificially high transfer price and thereby attain a higher controlled price for its formulations. This would give patent-owning MNCs an incentive to produce bulk drug inputs elsewhere and then import them into India. While the availability of strong intellectual property protection is necessary, other considerations, like tax advantages, are also important in choosing a manufacturing location for on-patent drugs. Further, unlike generic drugs, manufacturing costs are a small component of the price of patented drugs and therefore India's advantages as a low-cost manufacturer would not be particularly useful in attracting investment in local production facilities. So, while the largest part of pharmaceutical production should be unaffected, only some part of the local production of on-patent drugs will be replaced by imports.

Concluding Comments

The following facts are noteworthy to gauge the impact of the introduction of pharmaceutical patents in India:

1. Consistent growth rate of the Indian economy
2. Rising income levels
3. Increasing penetration of insurance on all fronts, especially after allowing entry of private players.
4. For the 60% of the "poor" in India, who currently do not have access to pharmaceuticals, price rise and demand sensitivity due to patent introduction is irrelevant. Thus only a small part of the market will be affected by the new regime.
5. India is governed by a government which relies more on populist politics for survival and this would ensure that the best interests of the population is kept in mind without buckling too much under international pressures. All in all, India stands to gain more in the new patent regime with the inherent costs being marginalized by several factors.

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Patent & Its Effect In India
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