The TRIPs Agreement and Its Effect on India Pharmaceutical Industry

8/10/2019 The TRIPs Agreement and Its Effect on India Pharmaceutical Industry

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The TRIPs Agreement and its effect on

Indian Pharmaceutical Industry

Ishaan Punj

Roll no.15

MBA-IB


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Contents

1. Introduction 1

2. Research Objective 6

3.Need of the Study 6

4.

Review of Literature 6

5. Findings

a. Genesis of patent system in India 9

b. Trips Exclusivity 10

c. Impact on drugs 13

d.

Impact on research 14

e. Productivity 15

f. Import scenario 18

6. Conclusion 25

7. References 27


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1. 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, andfor matters connected therewith.

Health sector is one of the most important sectors in the world and healthcare

industry is the worlds 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 in2020. 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


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development, to keep in view the necessity and welfare of the consumers, to

control public and private expenditure etc.

This high-technology 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 ofthe 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.Today, the whole world

acknowledges the supremacy of Indian pharmaceutical capabilities in chemistry,

manufacturing and adhering to stringent guidelines of most advanced nations. In

addition to generating revenues and securing appropriate medicines for its citizens,

the pharmaceutical industry propels the country to emerge as a knowledge

economy. Intricate science, technology, legal aspects and regulations involved inpharmaceuticals industry creates a great scientific and business tempo that propels

the nation. The diffusion impact of such knowledge economy will help various

sectors to think of global dominance following the example of pharmaceutical

industry and would provide means and drive in such achievement. Due to excellent

regulatory and fiscal climate, we have travelled a significant distance. India needs


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to protect what it has achieved, and draw key milestones, road maps and measure

our success with conscious effort to emerge as an alternate power in the global

health sector.

It is known that competition in any sector is desirable and pharmaceutical sector isno 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 tradeoff 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 ofIntellectual Property Rights (TRIPS) from 2005 onwards. It is possible that TRIPS

agreement would have some impact over Indias economy on all sectors including

pharmaceutical sector. The impact of TRIPS on pharmaceutical 8 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.


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2. Research Objective

To study the effect of Trips agreement on Indian pharmaceutical industry

3. Need for study

Although a lot many research have been conducted on this issue with respect to the

Asian pharmaceutical industry but an in-depth study in Indian context has been

missing. While there is no dearth of research and trend analysis of the productionand trade of pharmaceuticals from India, there is a lack of structured analysis of the

trade of pharma industry in particular which is emerging as a credible foreign

exchange earner for the economy. This research aims to fill that gap by providing

an analysis of the same

4. REVIEW OF LITERATURE

Ramani, (2002),according to the research paper ,The Indian pharma industry has

developed enough capabilities and patents to make ourselves self sufficient in

health care needs and also improve our export ability thereby making it a strategic

trade sector in the Indian economy.The Indian pharmaceutical industry exports

generic drugs to Commonwealth of Independent States countries, Africa, and to the

highly regulated markets of US and Europe. The Indian pharma industry is

characterized by low degree of concentration; & a large number of firms with

almost similar market shares, a low level of Research & Development intensity

ratios with a high level of brand proliferation.

The ease of imitation in reverseengineering further resulted in intense competition amongst the Indian firms for

market share, hampering the development of various networks of research

institutes, academia and industry


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(Wendt, 2000), according to the research ,during the last three decades the large

private Indian pharmaceutical firms have focused their efforts on reverse

engineering the various process of R&D, and the activity was limited to applying

the known knowledge, or to making small adjustments in the contents. The 1972

Patent Act therefore changed the pattern of competition towards volume / price ledcompetition rather than traditional pharmaceutical competition based on the

development of new medical treatments.

(Clark, 1990)showed that in order to adapt and change as a response to such

challenges of technological capabilities, firms must learn not only new components

of knowledge but also the new linkages between the components and so requires

the reconfiguration of existing system of managing and creating knowledge in new

way. In case of pharmaceutical R&D, the biotechnological change required new

competencies in both research and process development, and subsequently it

altered the relationship between different components of knowledge involved in

pharmaceutical R&D. Therefore as a response to biotechnological change, large

pharmaceutical firms not only developed new competencies through discontinuous

learning but also reconfigured existing system of managing and creating

knowledge in new way.

(Cheri,2004),carried out a research on the introduction of product patents in India

and China and its subsequent impact.

This study reveals that enhanced IPprotection in China and the approaching introduction of product patent law in India

are already having an effect on the product and market strategies of Indian firms.

The introduction of product patents means that Indian firms will have reduced

revenue options for the sale of drugs domestically, since generic copies of newer

drugs will become illegal. To compensate for this revenue loss, Indian firms have

increased their emphasis on exporting to the more profitable regulated markets, as

evidenced by the large concentration of FDA approved manufacturing.MNCs have

been interested in working with Indian firms for some time, attracted by the lower

cost structureestimated to be one-eighth (in R&D) to one-fifth (in

manufacturing) compared to Western firms; advanced chemistry and process

engineering skills; and large market size. In conclusion, the prospects are

extremely positive for the future of the Indian industry, in contrast to what many

would predict.


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(Spender, 1996),according to his research the realization that the new patent

regime will restrict, not end reverse engineering means that only a handful of

pharmaceutical firms in India has started moving towards innovative activity, asthe others do not yet perceive a need for innovative R&D in the immediate future.

This has restricted the number and nature of firms chosen for the study. A number

of firms(10 to12) have invested in innovative R&D and have products in advanced

stages, but for the purposes of analysis only those firms have been selected for the

study which has filed patents in USA and India for new drug delivery systems or

new chemical entities. Some of them have out licensed their molecule to the

multinational pharmaceutical firms thereby demonstrating the capability in

innovative research.

Genesis of patent System in India and Trips Arrangement

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 ofController 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,


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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, Governmentof 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 are mainly granted to encourage inventions and to secure inventions inIndia 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 saleprice in bulk of the

patentedproduct for licenses of right (Section 88(5)).


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The fundamental principle of Indias 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 thepatentees right without his/her permission. For a product patent, the rights consist

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.


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TRIPS Agreement and data exclusivity

Another controversial TRIPS compliance issue in India is data exclusivity. In the

case of pharmaceuticals, data exclusivity provides protection to the clinical data

generated by innovator companies to prove the safety and efficacy of theirproducts. Innovator companies are required to submit clinical test data relating to

safety and efficacy to national regulatory authorities to obtain market approval for

new drugs. Generic companies are not required to conduct their own clinical

testing and submit their own test data to gain market approval. If a country does

not grant data exclusivity rights, generic companies can refer to or use the data

submitted by innovator companies when they apply for approval of their products.

Article 39(3) of the TRIPS Agreement requires WTO members to protect

confidential information (undisclosed data) against unfair commercial use. Strictly

speaking, the TRIPS Agreement does not refer to data exclusivity, nor does it refer

to any period of data protection. The introduction of data exclusivity depends on

the interpretation of Article 39(3) of the TRIPS Agreement because data protection

regimes vary considerably among WTO members. The most difficult issue is

whether government use of data submitted by innovator companies to determine

bioequivalence of generic drugs is a commercial use or not.

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. Indias 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


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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 isexpected 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 patentmight enhance R & D in these concerned issues which would result in improved

health scenario and in effect sustained economic growth.


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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 increasesunder 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.


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Impact on Research and Development Expenditure

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 is1.5 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 profitseven 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.


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Productivity in the Indian Pharmaceutical IndustrySato and Kamiike estimate the production function and total factor productivity

(TFP) of the pharmaceutical industry in India in order to understand the drug

policy and the industrial development described above. It employs the growth

accounting approach and the production function approach to estimate TFP growth

and clarifies the characteristics of the Indian pharmaceutical industry. TFP is

defined as a residual of economic growth that cannot be measured by an increase

in factor inputs such as capital and labour. In other words, the residual of economic

growth not explained by input growth can be interpreted as pure technologicalprogress under certain conditions. The growth accounting approach measures TFP

growth as a residual by subtracting the overall contribution of factor inputs from

the growth rate of real value added. The production function approach clarifies the

technical relationship between output and production factors. It can examine

economies of scale, technological level, and substitutability between capital and

labour. By using the production function approach, not only TFP but also other

structural features of production like scale economies and non-neutral

technological progress can be understood.Sato and Kamiike use the Annual

Survey of Industries (ASI), which is collected by the Central Statistical

Organization of India, as the main data set. Empirical analysis is based on national-

and state-level data for the period 1973 to 1997 in the case of the growth

accounting approach and for the period 1984 to 1997 in the case of the production

function approach. The primary unit of enumeration in the survey is a factory in


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the case of manufacturing industries, and data are based on returns provided by

factories. The ASI factory frame is classified into two sectors: the sample sector

and the census sector. The sample sector consists of small plants employing 20 to

99 workers if not using electricity and 10 to 99 workers if using electricity. The

census sector comprises relatively large plants. It covers all units having 100 ormore workers and also some significant units that although having fewer than 100

workers, contribute significantly to the value of the manufacturing sectors output.

While units in the census sector are approached for data collection on a complete

enumeration basis every year, sample sector units are covered on the basis of well-

designed sampling. The sector covered by the ASI is called the registered or

organized sector. According to the National Account Statistics of India, the

registered sector covers 65 percent of the total value added in the manufacturing

sector in 1997.

According to Figure 5-1, TFP fell from 1973 to 1979 and then increased slowly but

steadily from the 1980s. It means that productivity improvement has been the

driving force of the sustainable growth of the Indian pharmaceutical industry since1980. In addition, the production function approach finds that firstly, there are

economies of scale, secondly, the average annual growth rate of TFP is reaching

about 7 to 10 percent, and thirdly, there is labour-saving technical progress.


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Based on the estimation results, Sato and Kamiike summarize the development

history of the pharmaceutical industry as follows:

(1) While Indian companies were protected and foreign companies were regulated

by drug price controls, regulations on foreign share holdings, and anti-patentpolicy, TFP itself fell in the 1970s. This is because the growth of foreign

companies, which were more efficient, had been suppressed by strengthening

regulation and the growth of Indian companies was insufficient to recover the drop.

At the same time, the oil crisis probably influenced the fall in TFP.

(2) Indian companies raising the share of the domestic market and improving the

level of technology have been increasingly export-oriented since the early 1980s

when economic liberalisation started. As the export markets and the domestic

market expanded with a learning effect and an economies of scale effect, theinternational competitiveness of the Indian pharmaceutical industry improved.

(3) In addition, the Drug Policy of 1986 saw the enforcement of stricter regulations

for foreign companies again and the deregulation of Indian companies. Then,

economic reforms in 1991 significantly relaxed the regulations on foreign

investment. During this period, the Indian pharmaceutical industry with

international competitiveness in the field of generic drugs, which were easily

imitated, competed with foreign companies. The Indian pharmaceutical industry,

gradually accumulating R&D capabilities, achieved trade surplus all over the world

in the late 1990s.

(4) Two important institutional developments can be emphasized. Firstly, the Drug

Price Control Order (DPCO), which was introduced in 1970 with the aim of

supplying drugs at affordable prices to the poor, gave the Indian pharmaceutical

industry the incentive to export rather than sell to the domestic market because

drugs could be sold at higher prices in overseas markets than in the domestic

market. Secondly, good manufacturing practice (GMP) increased the reliability of

Indian drugs in the world market. India decided to introduce GMP in the Drug

Policy of 1986. GMP was laid down in Schedule M of the Rules and came into

force in 1987. The introduction of GMP has contributed to the enhancement of

trust in Indian products in the global market. In addition, complying with the GMP

standards of US and Europe has increased exports to Western countries and has


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expanded opportunities for contract manufacturing. Generally speaking, the DPCO

provides incentives towards export orientation and GMP gives an institutional

basis for supporting the export orientation of the Indian pharmaceutical industry.

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.

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 ineducational 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


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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 percentover the same time period.

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.

R & D is an important part of the pharmaceutical sector without which the sectorcannot 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


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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 ofattitude for MNCs world-wide 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 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 suddenintroduction 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,


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one of the important factors is location. Intellectual property laws matter to

location decisions too.

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 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 inorder 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.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,


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isomers, complexes, combination and other derivatives of known substances as the

same substance, unless they differ a lot with respect to efficacy.

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, aSwiss 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.

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. Arelated, 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


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threat, and pay, since the alternative is a much more expensive and enduring legal

endeavor. 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.

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 dont 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


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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.

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 Indias

pharmaceutical sector. Under Indian Patent Act, 1970, product patent was not

allowed for pharmaceutical products, agricultural products, food products and any

kind of chemical products. It seems from the preceding sections that grant of

intellectual property right for an invention is absolutely necessary in the domain of

pharmaceutical sector. Though it creates a short term monopoly and loss in social

welfare, but the long term benefits are enormous. Secondly, the idea of making

India compliant with TRIPS policy thereby attracting more foreign directinvestment or multi-national corporations in this sector, needs to be looked into

carefully. Majority of the foreign pharmaceutical companies based in India spend

much less than half of what an Indian company spend on R & D of the sector. On

the other hand, if we compare the R & D expenditures of the companies working in

India and top ten pharmaceutical companies in the world, we would see that

companies based in India spend at least 2.5 times less than the latter. Thus, it is

quite obvious that it is very difficult for India to reap the benefit from IPRs.

Thirdly, India is a net exporter of pharmaceutical products, mainly generic versionswith an export growth rate of around 4.5-5 percent and import growth rate of

around 0.7 percent. So this sector needs proper regulation so that it can improve

Indias balance ofpayment situation. Lastly, pharmaceutical sector needs to be a

highly regulated sector not only in terms of price and quantity, but also in the way

it functions. India being a 1.2 billion population country with a large chunk of


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people living below the poverty line, the Government should look into the abuse

of patent rights and monopoly rights in this sector, because this sector is a vital

priority sector. Another factor which can hinder growth is that small companies

which were mainly benefited from the protective regime before 2005 may

eventually close up or may be forced to become contracting units. The mainfunction of CCI is to check all possible anti-competitive practices going on in this

sector like ever-greening of patents, patent pooling, not letting in manufacturers of

generic drugs for marketing, right to licenses, patent infringement etc. The main

motive is basically to boost competitiveness in the economy. Few suggestions that

might boost up competitiveness are discussed as follows:

To provide subsidies for investment in R & D so that it might boost up inventions

under the new patent regime in this sector.

To rationalize Drug Price Control Order: It is extremelyimportant to have

liberalized price control regime. Price control is mainly done to ensure availability

and quality medicines at affordable prices. But price control should not be to such

an extent that it makes firms unprofitable to invest in R & D. Moreover, under

WTO regime, without this investment, the nation can never come to the forefront

and become a global leader.

An academic cum industrial relationship can further be explored. The R & D can

be encouraged in different universities or academic institutions, while industries

can take up the commercialization part. In this case the IPR will be owned by the

academic institutions and they can share only a part of the total profit. This will not

only improve academic excellence in India, but help in better inventions.

Exemptions in tax: Income tax exemptions should be given for clinical trials in

order to boost up profits and encourage research.

The procedure for procurement of licenses should be made more stringent,

including extensive disclosure of exhaustive personal, financial and businessinformation and a detailed background check. This would tackle the problem of

spurious drugs. Moreover, most of the cases relating to spurious drugs remain

undecided for years and there is strong need for mechanisms which would result in

faster trials. Intellectual property right in the pharmaceutical sector is an important

issue. Given that India is still a developing country, and hence is vulnerable to


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global shocks, regulation policies in this sector should be seriously taken into

account. Given the bright future of Indias pharma sector, India needs to give

special attention to exim policies, so as to get the maximum return out of it. Also, it

needs to look into the issues of R & D investment which will boost up this

sector. India should adopt a balanced approach in making regulations and policies

for this sector. Policies should be made taking into consideration Indiasstrength.

One of the strengths of India from long has been its know-how in herbal

medicines. India exports about five percent medicinal plants and herbal medicines

and comes after China (exports about 30 percent). The Indian herbal market is

expected to double from $1.5 billion in 2010 to $3.0 billion in 2015. Intellectual

property right in these traditional medicines is very important. There is a renewed

interest in the modern world to shift from the modern medicines to traditional

medicines. India is working hard to retrieve its past knowledge in an organized

fashion by the formation of Traditional Knowledge Digital Library (TKDL). Since

these herbal medicines does not come under the purview of TRIPS Agreement and

research in new chemical products involve huge investment expenditure, Indian

companies should work in herbal medicines. Moreover, the Government should

help in the set up laboratories for research and development in herbal medicines.

Hence India should encourage healthy competitive practices. In the long run, due

to the introduction of patents researchers in India and abroad, there will be

renewed opportunities in India and the consumers will be benefited. Without thisopportunity, India will face nothing but brain-drain


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References

1. Competition Law and Indian Pharmaceutical Industry, Centre for Trade and

Development, New Delhi, 2010.

2. Lanjouw, JO. The Introduction of Pharmaceutical product Patents in India:

Heartless Exploitation of the Poor and Suffering?, National Bureau of

Economic Research, Working Paper 6366,1998.

http://www.nber.org/papers/w6366

3. Adelman, MJ and Sonia, B. Prospects and Limits of the Patent Provision in the

TRIPS Agreement: The Case of India, Vanderbilt Journal of Transnational Law.

4. FDI Statistics, Department of Industrial Policy and Promotion, Ministry of

Commerce and Industry.http://dipp.nic.in/English/Publications/FDI_Statistics/FDI_Statistics.aspx

5. TRIPS Agreement, http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm

6. TRIPS Agreement,

http://www.worldtradelaw.net/uragreements/tripsagreement.pdf

7. Indian Patent Act, 1970,

http://www.ipindia.nic.in/ipr/patent/patent_Act_1970_28012013_book.pdf

8. The Competition Act, 2002, Competition Commission of India.

9. http://www.rackspace.com/blog/how-the-new-patent-abuse-reduction-act-levels-

the-playing-field/
http://www.nber.org/papers/w6366http://www.nber.org/papers/w6366http://www.nber.org/papers/w6366

Documents

The TRIPs Agreement and Its Effect on India Pharmaceutical Industry