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Sudipta Sarkar - Legal Associate Gagrats, Mumbai

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I

(I) Introduction
On May 8, 1981, Prime Minister, Late Mrs. Indira Gandhi, addressing the World Health Assembly in Geneva, said:
Affluent societies are spending vast sums of money understandably on the search for new products and processes to alleviate suffering and to prolong life. In the process, drug manufactures have become a powerful industry. My idea of a better- ordered world is one in which medical discoveries would be free of patents and there would be no profiteering from life or death.- Quoted in B.K.Keayla, Conquest by Patents, 1998

The national sentiment on the issue of product patents is well captured in the above oft -quoted statement. But the Indian Patent Act of 1970 was amended on March 22, 2005, to fulfill its obligation under the TRIPS agreement, thus marking the end of a protected era and signaling a new phase in the integration of India into the global pharmaceutical market. It is indeed ironical, as the people who claim to represent her legacy foist a very different world on the people of this country, with the passing of the Patents (Amendment) Act, 2005(the Act).

India, without a doubt, recognizes that there is perhaps no industry that relies as heavily on patents as the pharmaceutical industry. And now that the Patents (Amendment) Act, 2005 provides for the Trade Related Aspects of Intellectual Property Rights (TRIPS) regime, it is indeed very important to understand the impact it will have on the $4.5 billion Indian Pharmaceutical Industry representing 1.6% of the global market , and, also considering the fact that “patent” is a critical issue that impinges upon the life of every common man.

(II) The Pharmaceutical Industry and the Indian Patent System
The first Indian Patent Act was enacted in 1856 which was replaced by a more comprehensive Patents and Design Act in 1911. The Act of 1911 allowed for product-patents for drugs and medicines. The consequences of having strong intellectual property laws in place were that the foreign companies or the MNCs enjoyed a complete monopoly and charged exorbitant prices, and thus dominated the Indian drug market. They were engaged mainly in the import of drugs from their country of origin. During that time the MNCs who were controlling 80% of the market did not come forward with financial investment and technological help to establish drug production centres in India. An American Senate Committee headed by Senator Kefauver stated in 1959 in its report that
in drugs, generally, India ranks amongst the highest priced nations of the world.

The Indian Patents Act, 1970 was a response to the Patents Act, 1911, as according to one commentator, the 1970 Indian Patent Act stemmed from a 1959 Ayyangar Committee report that examined the reasons for the high cost of drugs in post - independence India and concluded that the high prices resulted from the monopoly control foreign based pharmaceutical companies exercised over the production of drugs. Thanks to the prevailing patent regime. To remedy this issue the Act of 1970 not only excluded drugs from the product claims category but also redefined the working of the patent as its commercial exploitation within India, and excluded any importation from abroad. It also introduced safeguards like the Automatic Right to License in the case of life-saving drugs. These safeguards along with the Drug Price Control Order, 1970, which put a cap on the maximum price that could be charged, ensured that life-saving drugs are available at reasonable prices.

The Act of 1970 was hailed by many developing countries and UNCTAD (United Nations Conference on Trade and Development) as one of the most progressive statutes which safeguards the interest of both the inventor and the consumer in a balanced manner. This Act was a product of deep consideration and long deliberation to synchronize with the Directive Principles of State Policy contained in the Constitution which provides in Article 39 that:

":39. The State shall, in particular, direct its policy towards securing
(a) .
(b) That the ownership and control of the material sources of the community are so distributed as best to sub serve the common good; and
(c) That the operation of the economic system does not result in the concentration of wealth and means of production of the common detriment.
"

With a regulatory system focused on process patents which encouraged local firms to come up with cheaper processes through reverse engineering, thus cutting the cost of production, helped to establish the foundation of a strong and highly competitive domestic pharmaceutical industry, and being in the grip of a rigid price control framework transformed into a world supplier of bulk drugs and medicines at affordable prices to common man in India and the developing world.
The evolution of the domestic pharmaceutical industry constitutes one of success stories of the Indian economy. From being an import dependent industry in the 1950s, the Indian pharmaceutical sector has today achieved global recognition as a low-cost producer of high-quality pharmaceutical products and its annual exports turnover is in excess of $1.5 billion. This could be possible only because there was no product patent system for drugs and pharmaceuticals.
But under the Patents (Amendment) Act, 2005 patents will be granted both for products and processes for all the inventions in all fields of technology. The other implications for the pharmaceutical sector under this new patent system are:

(a) Term of the Patent: The patent term will be twenty years from the date of the application under Article 33 of the TRIPS agreement (compared to the seven years under the 1970 Act), which is applicable to all the member countries and thus rules out all the differences in the protection terms prevailed in different countries;

(b) Authorization for use of Patented Product: Patents will be granted irrespective of the fact whether the drugs were produced locally or imported from another country; though the grant of the patent excludes unauthorized use, sale or manufacture of the patented item, yet there are clauses which provide manufacturing or other such rights of the patented item to a person other than the patent holder under Article 31.

(c) Reversal of Burden of Proof: Under Article 34 the onus of proving on the legal complaint that process used by another enterprise is totally different than the patented process would lie with the defendant and he will have to prove that he is not guilty of infringement. (in the 1970 Act, the responsibility was with the patent holder).
This is the broad framework, which will guide the pharmaceutical industry of India in the WTO regime.

(III) Impact on the Pharmaceutical Sector on the Introduction of Product Patents
This amendment to the Act of 1970 making the Indian Patent Act TRIPS compliant has accompanied intense debate and the striking feature of the continuing discussions about pharmaceutical product patents is the divergence between the strength of the claims made by both sides and the weakness of the empirical foundations for those claims.

(a)
Product Patents and Prices of Medicines
Much of the debate on the impact of product patents on the pharmaceutical industry in India has centred on the issues of price of the patented product and their accessibility.

The AIDS epidemic has made evident the fact that the cost of health care and drugs is becoming prohibitive in the entire world as a result of implementing the product patent system. The debilitating immune disorder currently afflicts some 40 million people worldwide. The more telling fact in the data shown is that, while most new AIDS drugs are developed in North America more than 70 percent of AIDS patients live in sub-Saharan Africa, where few can afford the drugs they desperately need to survive . Effective antiretroviral (ARV) treatment to combat the disease can cost up to US$15,000 annually ; even the cheapest current costs is US$350 per year which exceeds the annual per capita incomes of many of the most severely affected areas. In poor countries, drug prices are closely connected to exclusive marketing rights (EMRs) and product patents, and patents preventing generic drug production, or cheap imports put drugs beyond the reach of the common people. For example, Flucanazole, an ARV, was not patented in Thailand. Pfizer was selling the drug for US $6.2 while the Thai manufacturer priced the drug for US$ 0.3, 207 times cheaper than Pfizer. In South Africa, the same drug was priced at US$ 21.4 because no generics were available.

The prices of drugs in India are in fact much lower than the prices in other countries like Pakistan, U.K. and U.S.A., where product patents are in force. Ranitidine is sold by Glaxo in India at Rs. 7.20. The same product is sold by the same company in Pakistan at Rs. 65 and in the U.S.A. at Rs. 545. Similarly, the anti-viral drug Aciclovir costs Rs. 33.75 in India while the same drug is sold in Pakistan at Rs. 363.

Irrespective of the competition, because of the socio-welfare implication of the pharmaceutical prices, all over the world other than in the US, the prices of medicines are subject to government regulations. In France and Italy, the manufacturer’s price must be approved for a product to be reimbursed by the social insurance programme. In the absence of such health security schemes and with the very low purchasing power of the people in India, the Government of India has brought certain essential drugs under the price control. The price control along with the amendment of patent laws in early ‘70s resulted in a declining impact on prices. Based on India’s own experience and on a selective comparison of prices of a few drugs in countries where product patents is in force, intellectuals forewarn that the stronger protection would result in increase in the prices of the drugs and thus medicines will be inaccessible to common people.

One of the major advantages of the universal system is that, it would facilitate access to new medical products. While the welfare loss due to the possible price increase in the post WTO regime is highlighted in most of the studies, the welfare loss due to the non-introduction of new-patented drugs in India due to the weak protection regime is not discussed adequately. In this context, one of the advantages of the product patents is that the stronger patents will provide access to the latest inventions in drugs, which the developed world will not shy away from introducing in India. It is observed that, though Pakistan also has process patent regime, some of the new drugs that were introduced in Pakistan by the MNCs were not introduced in India at all even though these MNCs were present in the country. This is because the MNCs feared about the competition from the counterfeit products in India, whereas in Pakistan MNCs are stronger than the domestic firms.

But it also argued that since the new patent regime would either raise the prices of new drugs to the international level or make the Indian population wait until the patent expires and drugs become cheaper, they in any case will be consuming
old drugs, and the purpose of getting quicker access to new drugs will be defeated. So actually prices would increase without much welfare gains in terms of access to new drugs.

It is also possible that higher prices charged by the MNCs may not really affect the consumers because; the research activities undertaken by the MNCs are totally different and not pertain to the Least Developed Country (LDC) market. Only 13 of 1373 new molecules developed during the last 30 years target diseases of tropical countries like India. Hence it can be said that the percentage of population affected by the price rise would be very less.

A related issue is the wider use of cost effective generic drugs. In the US and some parts of Europe, the pharmacists are authorised to dispense generic drugs in the place of a prescription drugs, which will cost less than the prescription drug. Thus, the consumers have the option to choose between the generic and the branded drug. However, if the doctor writes it as `dispense as written’ then the pharmacist cannot change the drug. Unlike the other consumer items, in the case of drugs, the consumer goes by what has been prescribed by the physician. Hence, in the post WTO regime, the physicians will play a crucial role in choosing between a patented drug and a generic drug, in cases where alternatives are available and help the consumers from being exploited by the market forces.

There is nothing in the GATT treaty, which prevents India from continuing to use price regulation to protect the consumers against exploitation through high prices. The drug price control mechanisms prevalent in India are applicable on the patented drugs too.

(b) Product Patents and Research and Development
One of the advantages of the universal patent regime is that private venture capital firms become willing to invest in technology based start up companies; technical knowledge flows more readily from university laboratories to the market place and local firms become willing to devote substantial resources to internal research. Available evidence shows that patents are important for chemicals and particularly for pharmaceuticals basically because of the huge R&D costs incurred by the firms . Also, the purpose of the patent is to provide a form of protection for the technological advances and thereby reward the innovator not only for the innovation but also for the development of an invention up to the point at which it is technologically feasible and marketable.

The higher cost of the R&D proves to be an effective entry barrier for new firms and hence only firms with large flow of funds become responsible for industrial inventive activity . In developing countries, only a few firms have sophisticated R&D facilities and others benefit mainly from the spillovers of the resultant R&D. But, in order to move on to the higher echelon, firms need to invest in R&D. More often small firms shy away from investing in R&D because; financial risk is too high as there are more possibilities of failure than success. For instance, cost of developing one new drug in the US increased from $54 million in 1970 to $231 million in 1990. Recent studies indicate that 1 out of 5000 compounds synthesized during applied research eventually reaches the market. Other estimates indicate that of 100 drugs that enter the clinical testing phase I, about 70 complete phase I, 33 complete phase II, and 25-30 clear phase III. Only two-thirds of the drugs that enter phase III is ultimately marketed.

According to a US FDA report 84 per cent of new drugs placed on the market by large US firms during the period 1981-88 had little or no potential therapeutic gain over existing drug therapies. Similarly in a study of 775 New Chemical Entities introduced in to the world during the period 1975-89, only 95 were rated to be truly innovative.

Because of these reasons and due to the protected policy regime, the R&D investment in India has been very low and started picking up only in the early ‘90s .Of the Rs.1, 800 crores spent on R&D in 1998, 35 per cent belongs to the public and joint sector and that of the private sector is about 65 per cent. In spite of the growing investment in R&D, R&D as percentage of sales ratio stagnates around 2 per cent. Further of the 1261 Department of Science and Technology recognised R&D units, 256 have spent more than Rs. 1 crore every year. 350 have spent between Rs.25 lakhs and Rs. 1 crore and the remaining below Rs. 25 lakhs . This indicates that most of the R&D investment was perhaps directed towards process improvements and adapting the technology to local conditions thus resulting in technology spillovers rather than in new product developments. For instance, the UK multinational Glaxo was faced with several local competitors on the first day when its subsidiary marketed its proprietary drug Ranitidine in India , because the competitors enabled by the weaker patent regime were ready with the indigenous version of Ranitidine.

The more recent case of adapting the technology developed elsewhere to local conditions enabled by the process patent regime is the case of Viagra introduced by Pfizer. A patent for this drug was granted by the US patent office to Pfizer in 1993. The company spent about 13 years and several millions of dollars to develop the drug. Apparently what took Pfizer 13 years and millions of dollars in R&D to perfect, the Indian firms have managed to do in weeks, for a fraction of costs. Of the 30 raw materials used in this drug, 26 are available locally. Utilising the information that was available on the Internet, US patent records and industry literature some of the Indian firms started their work on the indigenous version of Viagra, which was available in the market within weeks of Pfizer formally launching the product. Absence of stronger protection in the chemical and pharmaceutical sector in developing countries like India is cited as one of the reasons that holds back foreign investment especially from countries like the US, Japan and Germany . However, with the change in scenario, domestic companies, which had invested in biotechnology, were finding the lack of protection as a problem to commercialise their innovations , because in DNA recombinant technologies, novelty is the product. The process of discovery is complicated, but once the product is obtained, its propagation can be achieved in many ways.

There has been an apprehension that in the wake of globalisation the focus of research in the LDCs could change and the major R&D firms may be more involved in drug discovery that addresses the global diseases and neglect the research that is more relevant for the LDCs. In this context Amit Sen Gupta, of the National Working Group on Patent Laws, adds: “I think for me it’s frightening that ten or twelve people today are deciding what are the kind of drugs that need to be researched because clearly those drugs are being researched not because of the health needs but based on how much profits they can bring in. That’s why you have research money going into drugs for baldness or Viagra but the last drug for tuberculosis was 30 years back. When you deny people cars or washing machines they don’t die, when you deny people drugs they die and they die in millions.

With transition into the new regime many Indian companies are mobilizing their resources war chest with an increase in their R&D budget. Government of India (GOI) encouraged the R&D in pharmaceutical companies by extending 10 year tax holiday to this sector. Besides, planning commission earmarked $34 million towards drug industry R&D promotion fund for the tenth plan.

(c) Product Patents and Foreign Direct Investment
One of the expected outcomes of strengthening the IPR is the increase in foreign direct investment (FDI) in R&D, direct manufacturing or joint ventures. However, the impact of stronger patents on FDI remains inconclusive from the available evidence since IPR is only one of the factors in attracting FDI. FDI flows depend on skills availability, technology status, R&D capacity, enterprise level competence and institutional and other supporting technological infrastructure . Highlighting the FDI flows to countries with allegedly low levels of IPR protection, Correa observes that the perceived inadequacies of intellectual property protection did not hinder FDI inflows in global terms. Thus FDI increased substantially in Brazil since 1970 until the debt crisis exploded in 1985, while in Thailand FDI boomed during the eighties. In contrast developing countries that had adopted stronger protection have not received significant FDI inflows. He further observes that FDI in the pharmaceutical industry outpaced FDI in most other sectors in Brazil after patent protection for medicines was abolished in that country. In Italy after the introduction of process patent protection in 1978, FDI increased. Myriam Orlenna, Executive Director of the Chilean National Industry Association declared, “The trade benefits and investments which were promised in exchange for the implementation of a US style patent law have never materialized.” Hence, it appears that patent production does not have significant impact on FDI.

(d) Product Patents and Technology Transfer
To qualify for the patent, an invention should be novel, non-obvious and capable of industrial application. As per this, the applicant reveals the content of the patent in the patent application, which is in the public domain. However, such disclosure could undermine the competitive advantage of the invention encouraging the innovator to protect the invention as a trade secret rather than with a patent. For as detailed earlier in the case of Viagra, it is possible to get access to patent information from the patent office of any of the countries and develop a new product based on the information obtained in the patent application form thanks to the rapid development of information technology. A sizeable level of technology currently available is due to `spill overs’ or developing an alternative process that is very close to the existing one. This is the reason why the actual technology in a patent is often kept as a trade secret and which leads to entering in to a separate licensing agreement with the innovator for the transfer of that technology.

The high cost of development and rapid obsolescence may prevent the transfer of technology and the patent holder may prefer direct exploitation or import of products than transferring the technology or know-how. Fear of competition also dissuades the transfer of technology or demands a high royalty for the transfer, but huge royalties may have a negative impact on the expenditure on R&D. In the case of India, though in the pre’70s era, the technology transfer by the big TNCs did not support the indigenous technological abilities, yet in the post ‘70s, a large number of small and medium size firms have also been transferring their drug technologies to India, thus encouraging an atmosphere of competition in technology transfer . But India has encountered difficulties in getting access to technology for a component known as HFC 134 A, which is considered the best available replacement for certain chlorofluorocarbons. Patents and trade secrets cover this technology, and the companies that possess them are unwilling to transfer it without majority control over the ownership of the Indian company.

(IV) Conclusion
The strength of the Indian pharmaceutical industry is in reverse engineering. Such units by utilising the provisions under compulsory licensing and exceptions to exclusive rights under the TRIPS agreement should aim at producing the generic version of the patented product and those that are nearing patent expiry. Such firms should also be engaged in research leading to new drug delivery mechanisms and in identifying new uses of existing drugs. In this context, it is also essential to protect the innovations that have been introduced by the technology spillovers. In order to develop domestic innovations, developing countries require utility models or petty patents. These petty patents can be available for a shorter period of time for process innovations made over an existing product. The TRIPS agreement leaves members to introduce such legislation, as there are no specific rules on this subject. Such patents will encourage the small firms.

It is true that the impending WTO regime has stimulated the R&D investment in India. Some of the big units have started strengthening their R&D and have also filed number of applications for patents. There is some evidence available regarding the mergers and amalgamations to pool the human and financial resources to strengthen the R&D in new product development. These firms will definitely benefit by the stronger protection. Some of the R&D and manufacturing facilities set up in these firms meet the international standards, and they have already been approached by multinationals for conducting research and undertaking manufacturing on their behalf. Besides the R&D investment in traditional chemical based screening, some of the R&D firms are looking for breakthroughs in biotechnology research.

One of the concerns regarding product patents is the access to patented products. Some of the provisions within the TRIPS agreement mentioned in the above paragraphs clearly indicate that price controls could be imposed on the patented products. However, exemptions from price controls has been suggested by the government for the products that are produced domestically using the domestic R&D and resources and are patented in India. Such exemptions will keep the prices high and make access to the drugs difficult.

A majority of the population does not have access to the essential medicines (most of which are off patent) either in the government or private health care systems because they are not within their capacity to reach. Now that the percentage of drugs under price control has been reduced drastically it is essential to keep the prices of the essential drugs under check, especially those concerning the common diseases.

Also the government should probe in to factors that contribute to the widening gap between the proposed FDI and the actual FDI and rectify these bottlenecks. Similarly the difference between the number of patents filed and the patents granted calls for a detailed analysis to figure out where the Indian firms are lacking.

The real impact will be seen only over the next 2-3 years in the field of innovative drug discoveries: estimated to be only 3 per cent of the global formulations market. Foreign brokerage Refco Global Research commenting on the new product patent regime says, "The average developing time for such drugs is 10-12 years, so the earliest drugs are not likely to come through until 2006-07." Thus firm conclusions of the impact of the new IPR regime must await further implementation of the Act.

As far as India’s pharmaceutical industry is concerned, various options are possible in the WTO regime. But ultimately, the path currently being followed by international standards for patent protection moves inevitably toward a clash between public health and intellectual property. Despite the Doha Declaration’s affirmation of public health as the paramount concern, it is not clear how such an objective would be achieved, because generic substitution is so instrumental in the effort to improve drug accessibility. Stringent intellectual property protection for pharmaceuticals would only retard public health initiatives in the coming years. Given the rapid evolution of the AIDS crisis throughout the world, with more than 35 million cases alone in India , a twenty-year term of market exclusivity for new treatments is not reasonable if we expect to make real progress in containing the disease. It might well be appropriate for a governing body to clearly define a list of essential  medicines, such as antiretroviral (ARV) agents, that would be subject to somewhat more relaxed patent protection compared to other drugs.

The critical point is that the pharmaceutical industry and trade negotiators alike should not forget the true goal of drug innovation: saving lives. Profit should always be a means to this end, not vice versa. Only by keeping this principle in mind and achieving a better understanding of the modern world health situation can we hope to effectively ensure the safety and well-being of the people of India and the world’s population as a whole in the twenty-first century and beyond.

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The  author can be reached at :
suudipta@legalserviceindia.com

 

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