Sudip Chaudhuri, INDIAN INSTITUTE OF MANAGEMENT

Lead Author: Sudip Chaudhuri
Organization: Indian Institute of Management
Country: India

Abstract

In line with the conventional wisdom that developing countries are entitled to limit product patent protection in essential products such as medicines and in the light of the post-TRIPS experience, I am suggesting a change in the compulsory provisions of TRIPS. What I am suggesting is licence of right in developing countries for patented medicines. Any non-patentee in these countries will be eligible to manufacture and sell any patented medicine provided they pay a prescribed royalty. This will eliminate the product monopoly in patented medicines. The resultant competition will drive down prices. And the royalty paid to innovators would continue to provide funds and incentives for R&D.

This suggestion is based on the post-TRIPS experience in India. India is an important case study since India is a major player in the generic pharmaceutical industry as a supplier of medicines to both developed and developing countries.

If the proposal of licence of right is implemented, whatever positive have happened after TRIPS are unlikely to turn negative. But whatever negative have happened are likely to turn positive. Licence of right of patented medicines in developing countries and increased generic competition will reduce the prises of patented medicines. Hence access to medicines will be strengthened. But it is unlikely that the impact on innovation will be negative. With product patent protection continuing in developed countries, R&D for new drug development neither by the MNCs nor by the Indian companies are likely to be adversely affected. Foreign direct investment in developing countries may go down. But as India's experience suggests MNCs are more keen on importing and marketing activities rather than manufacturing and undertaking productive investments. Developing countries in fact are likely to gain due to the larger space of operations of generic companies.

Submission

There is an inherent contradiction between the rights of inventors and the access to fruits of invention. The conventional wisdom has been that developing countries may not recognise product patent protection particularly in vital sectors such as medicines because prices may be higher due to product patent monopoly but the technological and other benefits may not follow unless these countries are more developed economically and technologically. The study by Challu (1991) in fact shows that pharmaceutical product patenting followed economic development rather than being a prerequisite for it. Most developed countries adopted pharmaceutical product patent protection after they had reached a high degree of economic development, for example the United Kingdom (UK) in 1949, Germany in 1968, Japan in 1976, and Switzerland in 1977. Even the United States of America (US) which recognized product patents all through, blocked German drug patents at a critical juncture during the First World War (Challu 1991, Table 9 and p. 75).

But in accordance with TRIPS, product patent protection has been made mandatory in all WTO member countries. And the reason it was done was that developing countries too will benefit. But my argument, which I will factually substantiate below is that developing countries have not benefited. I take India as a case study. And it is an important case study since India is a major player in the generic pharmaceutical industry as a supplier of medicines to both developed and developing countries. In the light of the post-TRIPS experience, it is legitimate to question the propriety of TRIPS. But rather than doing that at this stage, I am suggesting a change in the compulsory licensing provisions of TRIPS to address the problem of misalignment between the rights of inventors and access to medicines. What I am suggesting is licence of right in developing countries for all patented medicines. Any non-patentee in these countries will automatically be eligible to manufacture and sell any patented medicines provided they pay the prescribed royalty, the details of which can be decided later. This will eliminate product monopoly in developing countries. The resultant competition will drive down prices and hence strengthen access. And the royalty paid to innovators would continue to provide funds and incentives for R&D. As we will see below the developing country pharmaceutical market is now much larger than before and hence such royalty earnings will not be insignificant.

This is not a new idea. What is noteworthy so far as this submission is concerned is that it is based on the post-TRIPS experience. And this is a simple proposal - it does not require any financial commitment.

For each of the aspects relevant for the debate relating to innovation and access, I will first provide facts and then discuss what is likely to happen if the proposal of licence of right is implemented. I will argue that whatever positive have happened after TRIPS are unlikely to turn negative. But whatever negative have happened are likely to turn positive. And hence I will hope that the United Nations Secretary-General’s High-Level Panel on Access to Medicines will give this proposal a patient hearing.

Prices and TRIPS flexibilities:

In the 1960s a Senate Committee of the US (Kefauver Committee) found India to be among the highest priced nations in the world. But after the abolition of product patent protection in pharmaceuticals in India in 1972 and with the rise and growth of the generic pharmaceutical industry in India, the prices of patented medicines in India became one of the lowest (Chaudhuri 2005, chapter 2). After the re-introduction of product patent protection in pharmaceuticals in India in 2005, the days of monopoly markets and high prices are back. Table 5 of Chaudhuri 2014 provides information on prices charged by multinational corporations (MNCs) for selected patented medicines in 2013. Some of these prices are: Rs 71175/- for a single 45 mg injection of ixabepilone (anti-cancer) (BMS' brand name Ixempra); Rs 28320/- for a 10.8 mg injection of goserlin (hormones) (AstraZeneca's brand Zoladex); Rs 19516/- for 5 mg infusion of 100ml (pain/analgesics) (Novartis' brand name Aclasta ) etc.

Two important flexibilities which TRIPS permits to tackle the negative consequences of product patent protection are: (i) Exemptions from grant of patents in certain cases and (ii) Compulsory licensing (CL). India has used the former quite successfully by inserting Section 3(d) in her patent law and denying some patents as in the case of Novartis' anti-cancer drug imatinib mesylate (Gleevec). Important as it is, Section 3(d) prevents at best secondary patents. For new drugs which are currently under patents and those which will be patented in future, what is more important is CL. But in India despite hundreds of product patents granted and despite very high prices, only three CL applications have been made of which only one, the CL application of Natco Pharma for the anti-cancer drug, sorafenib has been successful. India's Patent office granted this CL in March 2012. The patentee however aggressively opposed the CL first at the Intellectual Property Appellate Board (IPAB), then at the Bombay High Court and ultimately at the Supreme Court which dismissed Bayer's petition in December 2014 (www.lawyerscollective.org). MNCs have the financial resources to indulge in such legal battles and have high stakes. But for generic companies it is too uncertain and costly a battle and hence it is no wonder why so few CL applications have been made. While MNCs fight aggressively for their patent rights and oppose CL, some of them offer voluntary licences (VL). Surely with the social objective of enhancing access to medicines in mind if the MNCs give VL liberally the resultant competition can keep prices low. But what the HIV/AID crisis and the pricing history of ARVs for example shows is that prices are much lower and are sustained when there is genuine generic competition without any legal or other barriers to entry. Typically VLs are offered for selected products and are associated with restrictions with respect to technology transfer, sources of APIs, geographical coverage and target beneficiaries. VLs also divert attention from the need to check high prices through CL (see, for example, Amin 2007).

Thus if exorbitant prices is the issue and that indeed is the issue then what is required is licence of right. Anyone should be able to enter the market on payment of royalty without any other restrictions and without the need for country specific, company specific or product specific negotiations. This will lead to genuine generic competition resulting in lower prices. HENCE THE IMPACT WILL BE POSITIVE.

Foreign direct investment and technology transfer

It is true that FDI has gone up significantly in the pharmaceutical industry in India in recent years. During 2000-2012, the pharmaceutical sector was in fact the largest recipient of FDI among manufacturing industries with a share of 17.16% (Chalapati Rao et al 2014, pp. 8-9). But this has been used primarily for acquiring existing Indian companies (for example Shantha Biotechs by Sanofi, Piramal Healthcare by Abbott) and for hiking their equity stake in existing companies in India (for example by Pfizer from 40% foreign equity in 2001 to 70.75% by 2010) rather than for productive investments. Whereas plant and machinery investments by Indian companies have expanded rapidly in the post-TRIPS period, that by the MNCs have essentially stagnated (Chaudhuri 2012). Rather than manufacturing the patented products in the country for technological diffusion and further progress, they are importing the products. Formulations imports in India have been increasing very rapidly. Compared to USD 275 million in 2005 it was USD 907 million in 2014. About 84% of these imports came from high income OCED countries - 17.7% from Germany, 15.4% from the US, 10.6% from Switzerland (calculated from the UNCOMTRADE database). Under Section 146 of the Patents Act, 1970, patentees are required to furnish data about whether the patented invention has been worked on a commercial scale in India. Out of the 1115 patented products for which information were available for 16 MNCs, only 140 were commercially worked, i.e., were marketed in India (12.6%). Again out of the 140 patented products worked in India, information about whether these were manufactured in India or not were available for only 92 products. Only 4 of these were manufactured in India including one which involves packaging of bulk imports. The remaining 88 patented products were being imported and marketed in India (Chaudhuri 2014).

If our proposal of licence of right is implemented, then obviously the environment will turn worse for the MNCs and FDI may do down. But IT WILL NOT BE WORSE FOR THE COUNTRY since FDI has hardly contributed to productive investments and technological progress. IN FACT THE OUTCOME WILL BE POSITIVE since as a result of the licence of right, more manufacturing will take place in the country by generic companies and high priced imports will go down.

Research and Development by MNCs

In the early 1990s before TRIPS came into effect, the top MNCs in India - Glaxosmithkline, Pfizer, Sanofi, Abbott, Novartis Wyeth, Merck and AstraZeneca - spent on R&D only about 1% of sales. Since then rather than going up, R&D expenditure as a percentage of sales has actually declined to about 0.3% in 2014-15. In absolute terms too R&D expenditure has started falling recently. Compared to Rs 570.2 million in 2009-10, these MNCs spent Rs 246.7 million in 2011-12 and Rs 369.7 million in 2014-15) (Table 2 of Chaudhuri 2014 updated). Two MNCs - Novartis and AstraZeneca - did not spend any amount on R&D in India during 2013-14 and 2014-15 (respective Annual Reports).

So far as India is concerned, the MNCs disprove the hypothesis that strong intellectual property rights are important for their investments in R&D. MNCs locate their R&D laboratories primarily in developed countries. But before TRIPS, three MNCs - Ciba Geigy (now part of Novartis), Hoechst (now part of Sanofi India) and Boots set up facilities for new drug development in India. In fact Giba-Geigy obtained 42 patents from India in the US and Hoechst 35 patents before TRIPS. Later both Ciba Geigy and Boots discontinued their new drug research in India. The Hoechst outfit was sold off to an Indian company Piramal. After TRIPS, except AstraZeneca none of the MNCs has been involved in any R&D for new drugs. AstraZeneca set up a research facility in 2003 in Bangalore to develop novel compounds for TB but decided to close it down in 2014 (Chaudhuri 2014). The foreign companies who are now more active in patenting activities in the US from India are the generic companies such as Teva and Mylan rather than the MNCs such Novartis or Sanofi or AstraZeneca. ((http://www.uspto.gov/web/offices/ac/ido/oeip/taf/stcasga/inx_stcorg.htm).

Hence if our proposal of licence of right is implemented the situation in India IS UNLIKELY TO BE ANY WORSE IN TERMS OF R&D IN INDIA AND PATENTING FROM INDIA. Globally of course the MNCs spend much more. But so far as innovation in India is concerned what is important is what they do in India. If they are doing R&D outside India and as we saw above importing in India the new patented drugs resulting from such R&D, India does not gain technologically but suffers from the high prices. But if the proposal of licence of right is implemented and if the generic companies start manufacturing and selling patented drugs, then what about the revenue loss of the MNCs from sales of patented drugs in India and other developing countries and hence what about the possible negative impact on their new drug R&D programmes? About 85% of the patented drugs market is located in developed countries (calculated from Espicom 2015, pp 11-12; the high income OCED countries as per World Bank's definition are considered as developed countries). And they will get royalties from the sales of the patented products in developing countries. Hence THE INCENTIVES FOR R&D ARE UNLIKELY TO BE AFFECTED.

R&D by Indian companies

In sharp contrast, R&D by Indian companies has increased rapidly in recent years specially by the larger companies. Like the MNCs in India, the Indian companies too traditionally did not invest much in R&D. But since the mid-1900s, particularly since the early 2000s, there has been a remarkable improvement in a segment of the industry. In 2013-14, Hetero Drugs, which is a mid-sized Indian pharmaceutical company alone spent Rs 362.4 million which is more than what the 8 MNCs together spent in the same year (Rs 359.3 million). There are 32 other Indian companies each of which spent more than the 8 MNCs put together in that year. The larger Indian companies spend much more. Lupin, for example spent Rs 9929.2 million (11.1%), Dr Reddys Rs 10706 million (10.9%), Cipla Rs 5175.1 million (5.4%), Cadila Healthcare Rs 4451 million (12.1%) etc in 2013-14 (calculated from the CMIE Prowess database).

Indian pharmaceutical industry is highly export oriented. A large number of companies earn more than 50% of their revenue from exports including the larger ones, for example Dr Reddys Laboratories (75.5%), Sun Pharmaceuticals 75.8%), Lupin (63.7%), Aurobindo Pharma (73.3%), Cipla (51.8%) etc in 2014-15 (CMIE Prowess database). Not only overall exports. Exports to developed countries have been increasingly very fast. Compared to 35.8% in 1995, the high income OECD countries accounted for 48% of total pharmaceutical exports from India in 2014. The US alone accounted for 30.8% of the exports in 2014 (calculated from the UNCOMTRADE database). The larger Indian companies in particular have been targeting the regulated markets in the US and in Europe. In 2013-14, 60% of the sales of Sun Pharmaceuticals came from the US compared to 23% from India. The US market contributed to 47.8% of sales for Dr Reddys in 2014-15 and 12% in Europe compared to only 13.4% in India. For Wockhardt in 2014-15, whereas India contributed to 27.6% of their sales, the US and Europe contributed 35.1% and 30.4% respectively. Other companies where the US market is more important than India, include Cadila Healthcare and Lupin (respective Annual Reports).

Developed countries have tough quality and regulatory requirements for marketing of drugs. The main objective of R&D conducted by Indian companies has been to develop processes and products to satisfy these requirements including for patent expired drugs in the regulated markets in developed countries. But a new development which has taken place in the pharmaceutical industry in India is that the Indian private sector has started investing in R&D for new chemical entities. This began around the time TRIPS came into effect in the mid-1990s. R&D investments were initiated by Dr Reddy’s Laboratories followed by Ranbaxy Laboratories. Since then several other companies such as Sun, Cadila Healthcare, Lupin, Torrent, Wockhardt, Glenmark, Biocon, Seven Lifesciences have also joined in.

None of these companies is engaged in the entire process of drug development for the simple reason that these companies lack the skills and the funds necessary to develop a drug and put it to the market on their own. Hence the model that these companies have adopted is to focus on the early stages of the R&D process and then out licensing it to larger companies in developed countries or to co-develop with them. The journey so far has not really been very smooth. The initial enthusiasm has waned. The prospect of huge licensing revenue through milestone and other payments is yet to materialize. Glenmark is the only Indian company which can claim some success in generating R&D revenue with milestone income of more than USD 200 million (Axis Capital 2014, p. 88). Several agreements between the Indian companies and MNCs have been called off and further development stopped (Chaudhuri 2010, pp 48 to 53; BMI Research 2015, p. 65; Wilson and Rao 2012, p. 51).

One of the major problems of the structure of the pharmaceutical industry dominated by the MNCs is that R&D is primarily directed towards developing new drugs for the large developed country markets. During the TRIPS negotiations, it was argued that developing countries too would benefit from stronger patent protection because it will prompt local companies to do more R&D for the development of new drugs which are more suited to their needs but are neglected by the MNCs.

But going by the progress as reported in their websites and Annual Reports, the Indian companies are not focussing on neglected diseases. The only exception is the new anti-malarial drug, arterolane maleate developed by Ranbaxy (now part of Sun Pharma). Lupin has discontinued the development of the much publicised anti-TB compound. What they are focussing on are "global diseases" such as cancer, heart diseases, diabetes, asthma, obesity, spasticity, pain and inflammation, CNS disorders etc. Apart from the anti-malarial drug developed by Ranbaxy, the only other successful NCE developed by an Indian company (Cadila Healthcare) is an anti-diabetic drug.

Indian pharmaceutical companies are very active in getting their inventions patented in the US, the largest pharmaceutical market. It started with Ranbaxy obtaining two patents in 1990. By 1995 the Indian companies obtained 8 patents and by 2000, 65 patents. But as the Indian companies increasingly focussed on R&D, the number accelerated since then. Between 2001 and 2010 they obtained 495 patents and between 2011 and 2014, 527 patents (http://www.uspto.gov/web/offices/ac/ido/oeip/taf/stcasga/inx_stcorg.htm).

If the licence of right for patented drugs is implemented in developing countries, R&D BY INDIAN COMPANIES ARE UNLIKELY TO BE ADVERSELY AFFECTED, the primary motivation for R&D being generic exports. The licence of right provision will be applicable also for new drugs that may be developed by Indian companies. This may limit their earnings in developing countries. But they are EXPECTED TO CONTINUE NEW DRUG R&D IN INDIA because they are targeting the large global diseases markets in developed countries and licence of right in developing countries will not stop the product patenting activities in developed countries. In fact due to expansion of their activities due to licence of right, THEIR REVENUE MAY GO UP AND HENCE THEIR R&D ACTIVITIES.

Bibliography and Refernces

Amin, Tahir, (2007), "Voluntary licensing practices in the pharmaceutical sector: An acceptable solution to improving access to affordable medicines?", a study prepared on behalf of Oxfam GB.

Axis Capital (2014), "Indian Pharma: Ready for the Next Leap", Pharma Sector Report.

BMI Research (2015), India Pharmaceuticals and Healthcare Report, Q3 2015.

Chalapati Rao, K S et al (2014): "FDI into India’s Manufacturing Sector via M&As: Trends and Composition", New Delhi: Institute for Studies in Industrial Development, Working Paper No 161.

Challu, Pablo (1991), “The Consequences of Pharmaceutical Product Patenting”, in World Competition: Law and Economics Review, Vol 15, Number 2, December.

Chaudhuri, Sudip (2005), The WTO and India’s Pharmaceuticals Industry: Patent Protection TRIPS and Developing Countries, New Delhi: Oxford University Press.

Chaudhuri, Sudip (2010), "The Industry Response", Chapter 1 in Chaudhuri, Park and Gopakumar 2010.

Chaudhuri, Sudip, Chan Park and K M Gopakumar (2010): Five Years into the Product Patent Regime: India’s Response, New York: United Nations Development Programme.

Chaudhuri, Sudip (2012), “Multinationals and Monopolies: Pharmaceutical industry in India after TRIPS”, Economic and Political Weekly, March 24.

Chaudhuri, Sudip (2014), "Intellectual Property Rights and Innovation: MNCs in Pharmaceutical Industry in India after TRIPS", New Delhi: Institute for Studies in Industrial Development, Working Paper No 170.

Espicom (2015), World Pharmaceuticals Factbook 2015, BMI Research.

Wilson Paul and Aarthi Rao (2012), India’s Role in Global Health R&D, Washington DC: Results for Development Institute.