August 1997, Number 8

A Look at the TRIPs Agreement 
TRIPs, Pharmaceuticals and India 
Pharmaceutical Industry in India 
Consequences of TRIPs: Myths and Reality 
Impact of TRIPs on Global Business 
Impact of TRIPs on Indian Firms 
TRIPs: Availability and Prices of Drugs 
Conclusions 
Recommendations 
Annexure 1

A Look at the TRIPs Agreement 

Contrary to popular belief, intellectual property legislations not only cover patents but also the acquisition and use of a range of rights covering different types of creations including that of an aesthetic character (e.g. artistic works and industrial designs) and information and signs of a purely commercial value (e.g. trademarks) among others. 
 Intellectual property rights (IPRs) include the following categories (see Box 1. Also see Annexure 1 for details about the categories of intellectual property rights): 

• copyright and related rights,
• trademarks,
• geographical indications,
• industrial designs,
• patents,
• layout designs of integrated circuits,
• trade secrets,
• breeders' rights, and
• utility models.

As mentioned in Box 1, patent is that type of intellectual property right a major application of which occurs in the pharmaceutical sector. According to the United Nations definition, a patent is a legally enforceable right granted by a country's government to an inventor. 

In simple words, the content of intellectual property is information, and this is exercised with respect to the products that carry the protected information. A patent excludes other persons from manufacturing, using or selling a patented product or from utilising a patented method or process. And, because of this intellectual property rights may have a direct and substantial impact on indusry and trade. 

Before the conduct of the TRIPs negotiations within the GATT there exist a number of international organisations and conventions regarding the protection of intellectual property. The World Intellectual Property Organisation (WIPO--a United Nations specialised agency) has been particularly active in the development of new forms of protection (layout designs of integrated circuits) as well in the application of new technologies of patents (e.g. biotechnological applications) and copyright (e.g. computer programmes). 

However, the following are the reasons for which the industrialised nations pressed for the TRIPs negotiations, chose the organisation setting rules for world trade (World Trade Organisation--a forum without any tradition of work in the field of intellectual property rights) as the forum for implementation of the TRIPs Agreement: 

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

TRIPs, Pharmaceuticals and India 

Except in three sectors: food processing, pharmaceutical and agro-chemicals the Indian patent law allows product patents. In these sectors only process patents are allowed. 

As on today, India has a process patent regime regarding pharmaceutical products. Therefore, the Indian Patent Act, 1970 has to be changed to bring it in line with the international laws on patenting of pharmaceutical (and agro-chemical) products. 

Being a developing nation, India has a grace period of five years to change its patent laws under the Agreement on TRIPs. In other words, the Indian Patent Act, 1970 will have to be amended suitably by 31st December, 1999. 

At the same time, developing countries like India are given a grace period of ten years for technologies previously unprotected in its market. During this interim period of ten years, all patent applications will be put in a ‘black box’. However, pharmaceutical corporations can apply for an exclusive marketing right (EMR) for their products for five years only even before the country in question has fully phased into the new patent protection system. 

The proviso is that the product must have been registered for a patent and has recieved marketing rights in any of the WTO Member  countries. Thus it is a backdoor method for granting the monopoly rights. Furthermore there is a grey area here too. If marketing rights are granted only for five years, what will be its position for the remaining five years until the country in question actually amends its patent laws. 
 
 

Transnational corporations (TNCs) control 90 percent of all registered patents in the world. Effectively, given such monopoly power over patents and the EMR clause, India or for that matter any developing country does not have any transition period. This is true for protected technology,  and if one interprets that  from the patent/product-originating country angle. This is the haziest part of the TRIPs Agreement with respect to the pharmaceutical and also the agro-chemical sectors. 

An instance of haziness is that the Agreement is silent on the content and scope of the EMR clause. Furthermore, it makes no reference to actions which third parties would be permited to take (for instance, with respect to products already marketed or to products manufactured by a process different from the patented process). Third parties may interpret the EMR clause as not including a ius prohibendi, i.e. not including the right to exclude others from using the invention, as in the case of patents. 

Apart from the haziness mentioned above, for the developing country like India, the following are clear concerns of the TRIPs Agreement vis-a-vis the pharmaceutical sector: 

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

Even if the fears have come true there are possible ways out if one approache the issue pro-actively. An example of the pro-active approach is to go for compulsory licences (Article 8 of the TRIPs Agreement) on grounds of competition, health and public interest (see Box 4). Article 8 of the TRIPs Agreement states the right of parties to "adopt measures necessary to protect public health and nutrition, and to promote public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of this Agreement" (emphasis added). 

For example, in 1991 a German Court granted a compulsory licence in favour of a German firm with respect to a patent (relating to interferon) held by a US firm on grounds of public interest. The purpose of the licence was to allow the marketing of a therapeutical application of interferon that had been developed by the German firm. 

Another (pro-active) way out is there in Article 30 of the Agreement (exceptions to rights conferred--see Box 2). The following are the exceptions which may be deemed legitimate under Article 30: 

• importation of a protected product that has been legitimately put on the market elsewhere;
• acts carried out privately and on a non-commercial scale or for a non-commercial purpose;
• use of an invention for research and experimentation and for teaching purposes;
• preparation of medicines for individual cases according to a prescription;
• compulsory licensing; and
• use of the invention by a third party who started, or took serious precautionary action, before the application for the patent (or of its publiation).

Pharmaceutical Industry in India 

The existence of process patents under the Indian Patent Act, 1970 resulted in a robust growth of domestic pharmaceutical industry in India. At the same time, history also shows a decline in the business of foreign pharmaceutical companies in India (see Table 1 for Trends and Table 2 for Cross-Sectional Data). 

Why such a paradox when the global business is expanding at a rapid pace_ To answer such a seemingly incongruous fact, one has to take the following into account. 

The Indian Patent Act, 1970 was the instrument that  made it possible for the domestic pharmaceutical industry to expand rapidly. Because, the Act legalised  ‘reverse engineering’ of drugs that are patentable as products throughout the industrialised world but unprotectable in India. ‘Reverse engineering' is a method of evaluation of a product in order to understand its functional htmlects and underlying ideas. This technique may be used to develop a similar (or even identical) product. 

Well equipped with technological expertise, Indian scientists and businesses seized the opportunity to do ‘reverse engineering’ on therapeutically innovative drugs discovered elsewere, and launched them on the domestic market as well exporting them to other countries with similar gaps in their patent cover. 

For example, the Indian Institute for Chemical Technology developed AZT, the AIDS drug through this process without replicating the patent-holder Burroughs-Wellcome’s process. The technology was passed on to CIPLA, the fourth largest pharmacetical manufacturer in India. It was also sold to a Brazilian manufacturer. The cost of the crucial medicine through this route has come down to less than a third of the Burrough-Wellcome's price. 

Another factor is that of strategic abdication of many transnational corporations who refused to compete without the patent cover. For example, the Sterling-Winthrop Company wound up their business in India in 1970s and sold their shares to the Indian partner Dey’s Medical Company. 

Furthermore, under the Indian Patent Act, 1970, the following points are pertinent: 

• no product patents are allowed in pharmaceutical, agro-chemical and food processing sectors, where only process patents are admissible;
• the Indian patent term of 14 years from the date of filing for pharmaceutical processes, is curtailed to 7 years from the date of filing or 5 years from the date of sealing a patent, whichever is shorter; and
• pharmaceutical process patents are automatically deemed to be endorsed License of Right for 3 years from the date of sealing a pharmaceutical patent.
• With the coming of TRIPs Agreement, disputes arise with regard to the protection of pharmaceutical patents. The main provisions of TRIPs Agreement with respect to pharmaceutical products are as follows:
• the minimum patent term will be 20 years from filing;
• patent protection is to be extended to pharmaceutical products;
• importation must be accepted as a working patent;
• compulsory licensing is relegated to special circumstances;
• in infringement suits over process patents the ‘burden of proof’ is reversed.
• provide transitional arrangements—deferment of the acceptance of pharmaceutical product patents by developing countries for ten years; and
• limited exclusivity is granted to developing countries for pharmaceutical products whose patent applications are filed after the enforcement of the TRIPs Agreement.

Consequences of TRIPs: Myths and Reality 

TRIPs does not provide for the retrospective patenting in India of drugs that are already on the market or covered by existing patent applications elsewhere. Taking into account the transitional period, there will be less impact on prices of new patented drugs on the Indian market during the 1990s and only a minimal effect until 2005. Thereafter it will build up gradually from a pool of new drugs. Global progress  in research and development is replenishing this pool at a steady but moderate pace as older drug patents expire (see Box 3). 
 
 

The time scale of the introduction of pharmaceutical patents in India under TRIPs makes it certain that, if Indian drug prices rise during the remainder of the 1990s, it will not be for reasons of patenting. The earliest start of premium pricing for patented drugs will be in the early years of the next decade. No significant effect can be anticipated until after 2005, because the weightage of patented drugs on the Indian market will be too small for economic impact. 

More important than the time scale of patent protection will be fundamental ‘checks and balances’ which will put a brake on the impact of premium pricing on Indian drug expenditure (see Box 4). Such balances are as follows: 

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

There is nevertheless a widespread belief by Indian companies that even if the remaining preconditions for R&D in India were met, they cannot afford the cost of minimum scale operations, and that only TNCs will be in a position to benefit. 

Evidently TNCs have far greater financial resources, but they also have more diverse calls on those resources and are themselves obliged to make difficult choices when it comes to new R&D projects and facilities (see Table 3). 

For them their acid test in India is whether the Indian authorities will pursue their declared objective of attracting global investment and R&D to India by meeting the essential pre-conditions. 

Impact of TRIPs on Global Business 

As expected, the proposed changes in the intellectual property regime are welcomed by the global business and their subsidiaries operating in India. Big TNCs like Hoechst, Novartis etc. have already set up 100 percent Indian subsidiaries. However, most of them are interested in playing a waiting game regarding their involvement in the Indian pharmceuticals market. 

They are likely to introduce their new patented drugs once the system of product patent becomes fully operational. Even in that case, most of the new drugs will either be imported as formulations or be formulated in India by using imported bulk drugs. In short, India is unlikely to be a site for R&D and production of bulk drugs. 

According to Glaxo-Wellcome, it is holding back on investments in India because of concerns on intellectual property rights. However, it has plans to build up volumes in certain therapeutic segments by allowing their Indian subsidiary to negotiate a cheaper price for imports from the parent company. 

Under the TRIPs Agreement, India has to accept the applications for the grant of product patents from 1st January 1995. According to one estimate, up to July 1996, 264 applications were received by the patent office. 

Another area of concern is the pricing of drugs under the new patent regime. Though it is a fact that the prices of Indian drugs are lower than those prevailing in developed countries, the future price differential is unlikely to be large. The reason is to avoid any action against dumping of bulk drugs. 

Impact of TRIPs on Indian Firms 

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

To achieve their aim, they are increasingly exploring the following options: 

Development of New Drugs 

For this, a necessary condition is to increase the expenditure on R&D activities. Drug discovery and development have to be included in the R&D strategy. In other words, the focus of R&D will have to be changed from the innovation of new processes to that of invention of new products. 

For example, Dr. Reddy’s Laboratory (a leading Indian manufacturer) has focused its R&D expenditure on the development of new drugs for cancer, bacterial infections and diabetes. They have set up a research facility at the cost of Rs 8 crore (approximately $2.3mn). 

However, a couple of structural weaknesses have to be taken into account. First, given the small size of Indian firms, even a sharp increase in R&D activities will not generate sufficient funds for the development of new drugs. Secondly, Indian firms lack manpower and other institutional mechanisms to launch new drugs successfully in the foreign market. 

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

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

A realistic assumption is that in near future, off-patent drugs will emerge as one of the important manufacturing activities of Indian pharmaceutical firms. 

Furthermore, off-patent (generic) drugs made by  Indian firms are going to meet most of the domestic demand. At the same time, it is incorrect to say that their therapeutic value will be less than the new, on-patent  drugs. 

With increasing concentration of Indian firms in generic drugs, its export prospect is very high.    Currently, the world market for generic drugs is $20bn, and expected to grow to $40bn by 2005. In order to take this opportunity, leading Indian firms (like Ranbaxy, SOL, East India Pharmaceuticals) are building their capacities to produce generic drugs. 

For example, SOL (Hyderabad) has set up a seperate division for the production of generics. Further, it  expects to generate more than 33 percent of its annual turnover from generics. Exports of generics will get further boost from foreign investment in this area. The US pharma giant Merck has set up a 100 percent subsidiary to produce and export generics. 

However, Indian firms are going to face strong competition from other developing countries, and even some developed countries. Therefore, the long term success of Indian firms depends on improved efficiency and exploration of new markets through South-North and South-South co-operation, both at the producers’ and consumers’ level. 

Production of Patented Drugs Under Licence 

Global drug development and production are undergoing  structural changes in recent times. The reasons for such changes are: a) exponential increase in the cost of drug development, b) shortening of product life, and c) stiff competition from generic drugs. 

In order to gain maximum revenue within a short period, Indian firms are trying to get licences from global pharma business to produce and market on-patent drugs. 

However, two discernible fact are worth mentioning: 

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

The fourth option for Indian pharma firms is marketing of imported drugs. Many Indian firms are interested in entering into long-term arrangements with global business. For example, Ranbaxy has entered into an alliance with Eli Lilly. 

The new and liberalised drug policy has removed import restriction from all but eight category of drugs. The removal of import restrictions and proposed changes in the IPR regime will lead to an increase in drugs import. 

TRIPs: Availability and Prices of Drugs 

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

However, the situation is different with respect to new (on-patent) drugs. There is no doubt that these drugs will be available in the Indian market (either through production or under licence). But, the effect on prices is ambiguous. 

Under the customary theory of demand-supply, the price level should come down in future. The reason is increased supply and not-so much change in demand. Albeit, this ideal situation may not be true in practice because of the following factors: 

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

On the other hand, TNCs have a large base for research in medical biotechnology (see Box 6). Given such a dominant position, prices of on-patent drugs is likely to go beyond the reach of the consumers at large in the long run. Therefore, the real issue is not availability of new drugs in the Indian market, but peoples’ access to them. 
 
 

Conclusions 

Given such a hazy scenario it is difficult to predict the future of the Indian pharmaceutical industry under the ‘new’ regime of intellectual property rights and its relationship with international trade. However, certain broad trends can be picturised. 

First is that the Indian pharma companies are going to face stiff competition from the global business. This despite the fact that at least in India, the pharma market is not oligopolistic. At the same time, trends in  research and development can make it so in the long run. 

Therefore, Indian companies can go either for collaboration or concentrate on producing and marketing generic drugs. This futuristic conclusion is based on the realistic assumption regarding poor research and market penetration strategies by the Indian companies. 

On the other hand, global pharma majors are unlikely to consider India as one of their bases for exploring ‘new’ drugs through research. At most, India can be an ‘assembly’ point of some drugs. 
 The trickiest part is what position should the Indian government take. The issue is a political- economic one, and has to be (pro-actively) approached from both angles—economics and politics. 

Broadly, the Government of India has two options: 

• introduce an effective regulatory mechanism for ‘checks and balances’ on the availability, access and price of essential drugs; and
• develop research facilities for the introduction of ‘new’ drugs catering to the needs of the country.

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