WTO Impact - Sinhgad COP (Nov 18 2003)

Indian Pharmaceutical Industry Issues and Strategies in the Post-GATT/WTO Era

by Asaf Shamsi

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ENHANCING

GLOBAL REACH OF THE

INDIAN PHARMACEUTICAL

INDUSTRY

ASAF SHAMSI Director, International Operations

Unit 10, Fifth Floor, Picasso Plaza, Plot No. 45 & 46 NIBM Junction, Kondhwa Road

Pune 411 048, India Tel: 91(20) 683-7084 Fax: 91(20) 683-7094

e-mail: [email protected]

Internet: http://pharmalliance.com

Address at

A Foundation Course In Basic Biotechnology And Bioinformatics For The Pharmacy Teachers

Sinhgad College of Pharmacy

November 18, 2003


by Asaf Shamsi

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Enhancing the Global Reach of the Indian Pharmaceutical Industry

Issues and Strategies in the Post-GATT/WTO Era

By

Asaf Shamsi, B. Pharm., MBA

PRESIDENT, SYNERGY INTERLINK INC. (NEPEAN, CANADA)

DIRECTOR, INERNATIONAL OPERATIONS, PHARMALLIANCE (AHMEDABAD, INDIA)

Address at

A Foundation Course In Basic Biotechnology And Bioinformatics For The Pharmacy Teachers

Sinhgad College of Pharmacy

November 18, 2003

I am going to try and give you an insight into the development of the present-day world scenario in the pharmaceutical industry, and issues facing Indian companies in wake of India’s joining the WTO and the commitments made to it by the Indian Government. Since this audience is generally well-informed on Indian industry, government policies, legislation and market mechanisms, I am not going to focus on detailed information or data pertaining to the Indian health care sector. The focus is on issues facing Indian companies in relation to the industry, policies, legislation and market mechanisms in the global environment, However, I will use relevant facts and figures that highlight issues of strategic importance to the Indian health care industry in relation to the prevailing global environment.

THE GLOBAL SCENARIO The pharmaceutical industry today remains the most regulated in the world, and subject to vociferous pressures from national as well as international interest groups. However, it still remains an industry with the highest stakes in terms of profitability, and perhaps therefore, one of the most important influencers of national governments in


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terms of shaping economic and trade policies, regulations, tariffs and non-tariff barriers in the developed, as well as developing nations. The “balance of influence” is overwhelmingly in favour of major transnational corporations (TNCs) that have emerged as the most dominant players on the world stage since World War II.

Inequality in health care between the North and the South has been expressed as a serious concern for over 25 years, and much of the debate stems from the fact that most drug development activity took place in developed countries through the present century.

European and North American based TNCs accounted for a majority of new drug developments, and enjoyed competition-free markets for their products under stringent patent laws. TNC/Medical/ Regulatory Nexus of the North During the earlier half of this century, a period of prolific drug development in the developed countries, most of the developing nations of today were colonized by the nations of the North. Over the past 55 years, while the colonies gained political independence, they were almost completely dependent on the North for their requirements of drugs since they had virtually no indigenous capabilities for local manufacture.

The problem faced by developing nations was of scarce funds, which they had to utilize to address immediate pressing problems of health care through import of drugs, rather than being able to invest these funds in setting up of indigenous research and development infrastructure and a local industrial base to cater to their needs. The developing nations were therefore obligated to spend scarce foreign exchange for imports of drugs at unfavourable prices from companies that, at least partially as a result of this inflow, were able to retain almost complete control over drug research and development worldwide. Subsequently through various trade policies, patent legislation, setting up of controlled subsidiaries, and acquisitions in the third world, these companies emerged as the dominant TNCs of today. The annual global pharmaceutical market today is estimated at US $ 320 billion. The worldwide sales of the top 50 TNCs in 1995 were US$273 billion, well over two-thirds. The total worldwide sales of the top 10 companies were $130 billion or 40 per cent of the global production. These firms are exceptionally large; annual sales of individual companies are in the region of several billions. How did this happen? The emergence of the dominant TNCs has been attributed to perhaps one single event, 118 years ago.


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The Paris Convention, 1883

This was the first multilateral treaty signed in 1883, basically to protect the interest of the industrially advanced nations. Over its 117-year history, it has only been revised six times - in 1900, 1911, 1925, 1934, 1958, and 1967. Each revision has further strengthened the rights of patent holders by introducing stiffer provisions.

Based on this single treaty, the developed countries evolved a regime which granted exclusivity to the so-called “innovator” firms for 17 years, and subsequently allowed them to extend it to well over 20 years. In addition, the developed countries, particularly the USA, also put in place elaborate regulatory and non-tariff barriers, as well as a number of retaliatory measures to deter competition from foreign firms

During the earlier half of this century, a period of prolific drug development in the developed countries, most of the developing nations of today were colonized by the nations of the North. Over the past 55 years, while the colonies gained political independence, they were almost completely dependent on the North for their requirements of drugs since they had virtually no indigenous capabilities for local manufacture. The South Response However, a completely different scenario began to emerge in the developing nations. Substantial momentum was given to an effort by developing nations, led by India and Brazil, to counter the inequalities in health care during the 1970s.

A large number of developing countries, particularly the larger ones, including India, enacted legislations to abolish product patents, thus preventing import monopolies.

The Indian Patents Act, (initially enacted in 1859, amended in 1911) was amended subsequently in 1970, and did away with product patents for pharmaceuticals, and granted limited process patents for seven years.

In addition, India also enacted the controversial Drugs (Prices) Control Order, limiting the maximum prices which pharmaceutical companies could charge for their products.

This was corroborated by the late Mrs. Indira Gandhi while speaking at the historic session of the 34th World Health Assembly in Geneva on May 6, 1981. In her words:

"Affluent societies are spending vast sums of money understandably on the search for new products and processes to alleviate suffering and to prolong life. In the process, drug manufacturers have become a powerful industry. My idea of a better ordered world is one in which medical discoveries would be free of patents and there would be no profiteering from life or death."


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As a result of these initiatives and various other measures, including pooled procurement, preferential licenses to local manufacturers, and restrictions on outflow of foreign exchange, developing nations, particularly China, India, Hungary, Argentina, Brazil, Chile, and Mexico were able to foster the development of strong local pharmaceutical industries. Many of these local companies have lately begun to make inroads into markets beyond their own national borders.

TNC Counter-Measures and Consolidation Thus, TNCs, faced with the increasing erosion of market shares began to adopt counter-measures against these initiatives by the developing nations, by combining market and non-market actions. Over the short term, they have managed to avert erosion of their market shares by a combination of tactics - ranging from effective lobbying and forcing passage of favourable, patent as well as regulatory legislation, and various trade barriers. However, over the long term, they have been faced with increasing competition from generic producers as patents have expired. Investments in research and development are yielding diminishing returns. The rate at which new and more efficacious drugs are being introduced into the marketplace has dropped drastically, while patents on large dollar-value drug products have expired, or are due to expire shortly. The so-called “innovator” firms are no longer able to bank on a product portfolio of patent-protected drugs ensuring guaranteed profits free from competition into the future. Although TNCs hold approximately 85% of all current drug patents, approximately 90% of all drugs used in the therapeutic armamentarium have ceased to enjoy patent protection and represent about 85% of world sales (approximately US $270 billion). In recent years, local industries in developing nations, helped by liberal patent legislation, as well as expiry of patents for most active ingredients used in drug manufacture today, have successfully managed to integrate vertically and produce their own active ingredients, and are emerging as significant players on the world stage.

In addition, developed countries of the North are faced with their own problems in the health care area - primarily spiraling costs - brought about as a result of their own economic and political environments - coupled with increasing public pressure on deficit-ridden governments to contain costs without compromising on services.

TNCs have so far managed to avert a substantial erosion of their respective market shares by a combination of tactics - ranging from effective lobbying and forcing passage


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of favourable short-term protective patent and drug product regulatory legislation to mergers, acquisitions, strategic alliances and similar consolidation measures. (1) Retaining existing brand profit and market share by reducing multiple brand promotion expenditures through:

(A) Mergers and acquisitions -

Ciba-Giegy Rhone Poulenc-May & Baker Bristol-Myers -Squibb Merck-Frosst Rhone-Poulenc-Rorer Warner-Lambert-Parke Davis Hoechst-Rousell Marion-Merrell-Dow-Nordic

Hoechst-Marion-Roussell Glaxo-Wellcome Glaxo-Smith-Kline Beecham AHP-Robbins Ciba-Geigy-Sandoz (Novartis) Hoechst Marion Roussell - Rhone Poulenc (Aventis) Pfizer-Parke Davis

(B) Brand divesting/acquisitions and strategic alliances:

Connaught-Novo, (insulins) Procter & Gamble-Searle (Metamucil) Ciba-Geigy (Airwick)-Reckitt-Coleman

(2) Acquiring generic companies, strategic alliances, with existing generic companies, or introducing own generic product lines:

Glaxo-Kendall Fujisawa-Lyphomed Merck-Novopharm Pfizer

Warner-Lambert Johnson & Johnson, American Cyanamid (Lederle) 3M Pharmaceutical

(3) Protectionist and discreditation initiatives:

USA - The Waxman-Hatch Act, 1991

Canada - Bill C-91, 1991

USA and Canada - Introduction of cost-recovery measures for regulatory approvals in home markets

USA - Punitive measures – Super 301 and Special 301 legislation

Dr. Reddy’s Labs - Ibuprofen Glaxo vs. Apotex - Salbutamol, Ranitidine Merck vs. Apotex –Enalapril

USA - Discreditation efforts – Rep. Dingell’s consistent anti-India tirades in the US Congress

USA - The Raju Vegesna case


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However, the inevitable resorting to cost-containment measures that their home governments have already initiated in various forms, the loss of patent protection for most products ($8.1 billion from 1995-2005), and the resulting dramatic growth of generic drug companies are posing serious challenges, and have begun to erode their profitability in their home bases, and over the medium to long-term, will seriously undermine their dominance in world markets. The developments in the international scenario today have taken the shape of a complex set of relationships between national governments, international organizations and TNCs, setting the stage - through a process of consultation, negotiation, and eventually through alliance - for the present and future patterns of industry.

The drug question is now being debated in the global theatre as a major issue. Almost all participants have entered into the arena - developing and developed countries, international organizations, producers and consumers. Amid raging controversies and discussions on the sanctity of free-market and private enterprise, intellectual property rights, patents and trademarks, social needs and responsibilities, safeguarding the public interest, managed health care and South versus North concerns, the process for moving forward towards consistent national policies in the pharmaceutical field, and for setting international norms embracing trade, marketing, distribution and transfer and development of heath care technology is well under way under the WTO umbrella. TNCs and their home bases - the developed countries of the North, spearheaded by the United States - have set the stage well in their favour, prior to forcing a discussion of the issues on these platforms, and appear to have retained their dominant positions in the initial rounds without having to make any major concessions.

The Implications of India’s joining the WTO:

Einstein, while proposing the theory of relativity, brought out the fact that there is only one thing, which is absolute, and that is the velocity of light; everything else is in relation to that. Under today’s post WTO scenario, the same analogy may be used by saying that there is only one thing absolute and that is Intellectual Property Rights and the existence of other things is related to that. Trade Related aspects of Intellectual Property (TRIPs) was first brought up at the Uruguay Round of multilateral trade talks under GATT. The initiative was launched by technology leaders of developed nations primarily to protect their high stakes in areas such as information technology, biotechnology, new plant varieties, and other technological innovations which lend themselves more easily to replication than many others. India became a signatory to various multilateral agreements, including the agreement on TRIPs, as well as the one establishing the WTO at Marrakesh, Morocco in April 1994. The WTO was formally inaugurated to succeed GATT on January 1, 1995.


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I will not go into the details of the WTO agreements, except to say that the most important changes are to be made in the area of patents. The term of patent protection must be 20 years from the date of filing, instead of 7/14 years available under the Indian patent law.

However, there are two aspects of the WTO agreements that often escape attention. Both of them are extremely significant because they have immediate as well as long-term impact on the future of Indian industry.

One important provision in TRIPs requires protection of test data submitted for obtaining marketing approval for new pharmaceutical and agricultural chemical products. This provision applies to new chemical entities and has been interpreted by other developed countries, at the insistence of the US, to mean the grant of at least a five-year period of marketing exclusivity, regardless of whether a patent is granted or not in the target country after the transition period, under the revised patent law. This would mean the grant of exclusive marketing rights even for products that are not otherwise eligible for patents, effectively a back-door entry for "pipeline protection".

The other aspect is related to the WTO Agreement on Technical Barriers to Trade - the so-called "TBT Agreement". Its objective is to ensure that unnecessary obstacles to international trade are not created. One important principle in this agreement is that technical regulations and procedures should be based on scientifically developed, international standards, guidelines and recommendations. The WHO, in its key message preceding the 1999 WTO review, has strongly endorsed the position that “Health regulations should not create technical barriers to trade.” It has stressed that in the area of pharmaceuticals, WHO norms, standards, and guidelines represent international consensus. However there are a number of additional regional and cross-regional efforts aimed at harmonization of regulatory requirements. These efforts often require technologically demanding standards. One example is the International Conference on Harmonization (ICH). Although the WHO has reiterated that such initiatives, involving smaller groupings of countries be used to serve public health interests, but without creating trade barriers, the fact remains that well before the WTO was formed, ALL of the developed nations already put into place elaborate regulatory approval procedures, which are now internationally accepted. These have typically been designed to deter firms from developing nations from entering their markets, even with generic products, not protected by patents. The deterrents have further been enhanced by introduction of regulatory fees, which are often beyond the reach of many firms in developing countries. Even though the harmonization of regulatory approval mechanisms under the ICH guidelines is supposed to make the playing field level, most developing countries have


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stayed away, or have been excluded from the debates and discussions leading up to the final agreements, which are more or less a mirror image of the elaborate regulatory systems of the US, Canada, and the European Union. The Indian regulatory system is nowhere close to the sophistication of the regulatory systems of developed nations, and because the legislation is much weaker than internationally accepted norms, the entry barrier for developed nations into the Indian market is practically non-existent. By joining the WTO, India has committed itself to alter its existing Patent Act to offer wider and stronger protection to intellectual property rights of any member nation. The time frame for complete transition to the new law allowed by the WTO is ten years. So far, the new law, although drafted and placed before the Indian Parliament, has been mired in controversy and inaction because most of the legislators are opposed to it in its present form, regardless of their political affiliation.

As per the April 1998 agreement reached between the U.S. and India at Geneva, a patent amendment bill has finally been passed by India's lower house of parliament, enabling the country to meet the WTO’s April deadline for complying with TRIPs.

The bill replaces the ordinance issued in February after the lower house failed to pass a patent amendment bill before the end of the parliamentary session. The bill gives companies exclusive marking rights in India for patented pharmaceutical and agrochemical products and provides a legal framework for the "mailbox" provisions for new product patent applications, as required under TRIPs.

The introduction of full product patent protection now looks likely to be deferred until 2005, the latest date allowed under the TRIP's provisional arrangements.

Although India has now taken the first steps towards strengthening its intellectual property laws in line with WTO agreements, debates within the country show few signs of abating. Opinion is still sharply polarized between those who would like to see India adopt full product patent protection as soon as possible, with no strings attached, and those who argue that it should be delayed for as long as possible and that measures such as compulsory licensing should be retained to protect the domestic pharmaceutical industry.

For the pharmaceutical industry, the new law, whatever be its final form, signifies a transition to product, rather than process patents. There is a very strong demand from developed countries that the importation of a patented product be considered on par with working the patent in the importing country, and generally to restrict compulsory licensing of the patent on this ground. This means that Indian companies would no longer be in a position to introduce new products if they are not the original innovators of those products. However, they would enjoy the same protection in all member countries for new products that they develop.


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Although this regression seems to be totally unfair from the point of view of Indian industry, with its limited capabilities with respect to new product development, the real impact of this provision for the pharmaceutical industry will, at best be marginal over the short to medium term.

The primary reason for this, as mentioned earlier, is the diminishing rate of return on R&D investments in the pharmaceutical sector. Whereas as many as 50 to 60 new molecules were being introduced annually as new drugs in the world market during the 60s up to the mid-eighties, far fewer new molecules are being introduced as new drugs today. Most of these new entrants are largely me-too products, which are derived by molecular manipulation of existing drugs, without any significant advantages over their precursors in terms of efficacy, safety, or cost. New drugs/molecules development in the past 10 years has been at a virtual standstill. Most new patents have been granted in the area of new delivery systems, dosage forms, polymorphs, or other physical forms of existing compounds, or in the area of alternative uses. What should the Indian Approach Be? An Analysis of Capabilities: The Indian pharmaceutical industry today has come a long way from its modest beginnings in the early 1950s. Its transition from a multinational dominated, import-dependent industry to a vibrant, self-sufficient, vertically integrated industry in which 6 out of the top ten firms are not multinational, but Indian firms, largely came about as a result of the Indian Patent Act of 1970, and the Drugs (Prices) Control order of 1979, which on the one hand, provided the necessary impetus for reverse engineering leading to alternative, more efficient production process for bulk drugs, and on the other, largely served as a disincentive for major TNCs to increase and consolidate their investments in the Indian market. Indian companies, therefore, were able to introduce new drugs into the Indian market within 2-5 years of the innovator companies introducing them abroad. The downside of this approach was, that no major new product development research was ever taken up by Indian companies and TNCs alike, as the level of patent protection under the Indian law did not give them any opportunity even to recoup their development costs.

The introduction of product patents in the country will definitely lead to a shake-out in the industry.

The 10-year transition period was granted so that Indian companies could put up R & D facilities to meet new challenges thrown up by the product patent regime. The


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pharmaceutical industry at the time had 12 years to transform itself from a 're-engineering' industry to an industry of 'innovation'.

Unfortunately, the Indian industry so far has not geared up to the challenge. Over the long-term, companies will have to re-orient towards R & D in order to survive.

In the interests of time, I will only focus on a short analysis of Indian capabilities and achievements as they stand today. The Indian industry is completely self-sufficient in dosage-form manufacturing capabilities. Many of the larger firms have state-of-the-art plants. Investment in formulation manufacture and upgradation of existing facilities to meet world standards are relatively low (only four units are US FDA approved). The industry is self-sufficient for the manufacture of approximately 80% if its bulk drug requirements. It has emerged as the world’s largest producer of several important bulk drugs...for example, sulfamethoxazole, ibuprofen, and ethambutol, and its bulk drug sales record in the developed countries’ markets is slightly more encouraging (20 firms supplying to US markets). It exports approximately 16% of its total production; however, over 60% (Rs. 2500 crores) of the exports are low yield exports of bulk drugs, eventually ending up in developing country markets largely through intermediaries, and 40% (Rs. 1500 crores) of the total exports are finished products. Of these, 33% of exports are to the ex-Soviet bloc alone, where realizations are typically lower as compared to the markets in developed countries. The industry is extremely fragmented. In 1995-96, the total number of bulk drug manufacturers was over 23,000. There are about 16,000 formulation firms, although approximately 60% of the total production is by roughly 50 companies. (The USA has only about 500 firms in comparison) Most of the medium to large companies have sufficient financial strength to now embark upon expansion programs for existing and new products. However, most companies have only looked at immediate and short-term gains from local markets and other “soft” markets that are easily penetrable, but yield less in terms of profits, rather than investing relatively modest amounts in developing far more larger and profitable markets in the West, which would yield them far better returns over the medium to long term.


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The Opportunity: The overall world pharmaceutical sales today stand at over US $ 320 billion. Of these, $270 billion come from products free from patent protection

Over US$ 8.1 billion worth of products will go off patent between 1996-2005 The forecast for the future is that the global pharmaceutical market will grow at a compound annual growth rate of 6.2% in the next five years to reach $378 billion in 2001 according to the recent IMS Report. Both production and sales are heavily concentrated in the developed countries; the US, Europe and Japan account for about 80% of both production and sales. During the last decade, both Chinese and Indian markets have registered substantial increases and are likely to provide the largest jump in the market share during the next five years according to the latest IMS Global Pharmaceutical Forecast for 1997-2001. However, India today accounts for only 1.2% of its total volume (US$ 3.8 billion) (INR 17,000 crore, of which 4000 crore (US $ 0.9 billion) was exported in 1999) Expenditure on health care as % of GDP: 0.8 %; Drugs: US$ 3 per capita (16.1% world pop.)

Today, almost 80% of the pharmaceutical market is concentrated in three different zones: the United States (33%), the European Union (26%) and Japan (21%), where less than 20% of the world's population actually resides.

The USA accounts for 33%(US$ 105 billion) (4.7% world pop.) (exports: approx. $ 35 billion) Expenditure on health care as % of GDP: 12.4%;

Canada accounts for 2.4% (US $ 8 billion) (0.5% world pop) (no significant exports; net importer) Expenditure on health care as % of GDP: 9% The European Union accounts for 26% (US $ 83 billion) (5% world pop.) (exports: approx. $ 20 billion) Expenditure on health care as % GDP: 10% Japan accounts for 21% (US $ 67 billion) (2% of world pop.)


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Strategic Options before the Indian Pharmaceutical Industry:

Issues facing Indian Industry - Idealistic, Ineffectual Defense or Pragmatic Penetration?

Times have changed. The new world order, whether the industry likes it or not, is already a reality. As far as the industry is concerned, the playing field is level, in view of its manufacturing and process development capabilities, but not with respect to its new product research and development capabilities. Transnational companies are now once again looking to expand their horizons in the phenomenally growing markets of Asia, this time, armed with weapons of protected research technologies, having secured their home markets by the non-tariff barriers of extended patent protection and complicated regulatory approval mechanisms. An increasing number of developing countries are also adopting such measures and are insisting on products that have been previously approved by either US, Canadian or British regulatory agencies in response to pressures linked directly with economic and defense aid packages. One of the possible ways to counter this would be for Indian Industry to lobby for tightening up India’s own regulatory approval mechanisms, and making it just as difficult for new companies and new products to get approved. However, this may end up backfiring upon Indian industry, particularly in light of the already huge problems that the bureaucracy already presents to industry and public alike, and also prove to be a stumbling block in light of the Indian government’s so-called liberalization policy. Successive Indian Governments that have come to power since 1995, regardless of their political affiliations, have so far procrastinated on the introduction of the new patent legislation, primarily because of the adverse perceptions about the new law over a cross-section of all the vote-banks in the country. There are important lessons to be learnt from the devastating events of September 11 in the United States and the subsequent change in the tide of world affairs. The fears of further terrorist acts all over the world with biological agents following the September 11 terrorist attacks in the United States have yet again brought under renewed scrutiny a number of vital issues concerning drug patents and regulations that have always been a subject of great concern and controversy, in developed and developing nations alike. Despite having the capability to meet the unprecedented emergency demand for antibacterial drugs at a fraction of the costs being charged by the patent holders in the United States, pharmaceutical firms in India are precluded from supplying these drugs to the United States and other countries where there are perceived threats of such terrorist attacks.


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The question is, should overall public interest be compromised to safeguard the interests of patent holders? The WHO has consistently given five messages to highlight public health concerns in using patents for pharmaceuticals:

1. Patent protection stimulates development of needed new drugs, but countries must ensure a balance between the interests of the patent holders and the needs of society.

2. The Research & Development priority setting for pharmaceuticals and vaccines does not respond to the needs of the majority of people, therefore public involvement is needed to ensure development of new drugs for certain priority health problems.

3. Generic competition should begin promptly upon patent expiration.

4. Preferential pricing is necessary for lower-income countries and should be actively

pursued.

5. Health regulations should not create technical barriers to trade.

However, the TRIPs agreements have resulted in a regime that mirrors, and even extends beyond the provisions of the Paris Convention. There is no clear-cut provision for Compulsory Licensing, and only the patentee is generally allowed to work the patent. Patent protection for drugs has been extended from 17 to 20 years (with additional periods of “exclusivity”). Several of the developed nations, such as Canada, which had fought and won protracted legal battles to exercise License of Right, and already had Compulsory licensing in force before the Uruguay Round, had to pass laws revoking the provisions of Compulsory Licensing. Since the time of implementation of TRIPs, various NGOs and other public interest groups in the United States, Canada, and Europe, have been trying to muster support against TRIPs in its present form. Over a period of time, this support has slowly been growing, as was evident from the failed WTO meet at Seattle. The movement has assumed significant proportions, and, in the present scenario of fear, is now emerging as a powerful lobby in its own right in these countries. In the interests of the public at large, all over the world, and also in the interests of the Indian pharmaceutical industry, perhaps the time has come to seriously question the implementation of the TRIPs agreements as envisaged by the powerful lobby groups in the United States, and take proactive action, which may possibly result in opening up of these large and profitable markets to Indian pharmaceutical companies, while, at the same time, also result in protecting the interests of Indian companies in the domestic market.


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At the international level, India needs to participate more actively and make its presence felt in the WTO forum. The WTO Ministerial Meeting in Doha may well have set the stage for raising the issue of Compulsory Licensing in future negotiations. There is also a lot to be gained if Indian Industry joins hands with many of the international NGOs and special interest groups in their campaign for building a case for making drugs available at cheaper prices in the United States, Canada, and the European Union, and perhaps even lobby for the implementation of an international Compulsory Licensing Law.

Can a Compulsory Licensing Law Comply with TRIPs?

The TRIPs code specifies a term of patent protection of at least 20 years, without explicitly ruling out the practice of compulsory licensing by name which opens up a debate concerning whether it might be possible to draft a compulsory licensing law compatible with the intellectual property provisions of these agreements. There are three options open to any government wishing to design a law governing the compulsory licensing of pharmaceuticals within the confines of the WTO. Option A: The Limited Exception Clause One option is to treat compulsory licensing as a “limited exception” to the TRIPs codes. In a legal opinion drafted for the Canadian Drug Manufacturers Association, Jean-Gabriel Castel, Professor of International Business Law at Osgoode Hall Law School, argues that compulsory licensing is covered by Article 30 of the TRIPs text. This Article allows: ... limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking into account the legitimate interests of other persons. Option B: The “Other Use” Clause A second option for drafting a compulsory licensing law is to accept that any such law must conform to TRIPs Article 31 which deal with allowing for “the use of the subject matter of a patent, other than the use allowed under [the limited exceptions clause]”. Option C: Renegotiate TRIPs A third option is to seek amendments to the TRIPs code that would clarify the scope of compulsory licensing. For example, “reasonable commercial terms”, “reasonable periods of time” and “adequate remuneration” need to be defined.


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It is very important to keep in mind that the TRIPs Agreement is flexible and there is room for maneuvering in several important areas such as:

• Definition of invention; • Scope of patentability; • Exception of patentability; • The principle of exhaustion of rights (parallel imports).

At the national level, the new Indian patent law, in its final form, should take into account this flexibility, and provide for appropriate safeguards.

STRATEGY FOR INDIAN FIRMS

To meet the challenges posed by the product patents regime, the main strategies that are expected to be adopted by Indian companies include:

1. Investing in R&D and new drug development 2. Backward integration 3. Brand marketing in key developing countries 4. Marketing of Generics in the multi-billion dollar markets of North America, and

Europe

The first three alternatives will necessarily have to be backed by R & D. However, in order to run a successful research program and to be able to introduce high-value products in the marketplace, companies require formidable financial strength, which Indian companies mostly lack.

However, some Indian companies have the capability of conducting pre-clinical research, which they can then license out for an upfront payment and royalties.

For example, in 1998 Dr Reddy's Laboratories Ltd. (DRL) successfully discovered a new molecule to combat diabetes, costing the company $ 8 million in pre-clinical trials. The molecule and an improved version have been licensed to Novo Nordisk, who will launch the product worldwide and retain exclusive marketing rights for all countries except India, where the drug will be co-marketed with DRL. DRL will manufacture the bulk drug for global sales. The ownership and manufacturing rights have been retained by DRL.

This option, that of joining hands with the transnationals for reciprocal access to each other’s markets, is at best, a short to medium-term solution, which could lead to acquisitions of Indian companies by the major TNCs, and further consolidate their presence in the Indian market. We have to remember that historically, the transnationals have always come out on top.


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The real options before Indian industry are twofold: (A) Invest in basic new product research and join the patent bandwagon. In general, however, most Indian companies lack the capacity as well as the know-how of taking an idea all the way into the global market, as it would involve expenditure running into millions of dollars. New Drug Discovery Research (NDDR) requires an estimated investment of $ 350-400 million. Over the long term, Indian companies will have to do this to survive.

or,

(B) Invest in penetrating the patent-free 200 billion dollar segment of the vast and profitable markets of North America and Europe. Over the short as well as the long-term, this is the most lucrative option for Indian companies, because it does not require heavy investments. The amount of money needed for plant upgradation, regulatory approvals, and market development for generics is only a fraction of that required for new drug development.


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The Paris Convention, 1883

1. Provision for product patents for industry, commerce, agriculture, extractive industries and natural products.

2. Patent rights on importation, improvements and

additions (Article 5 implies that importation of a patented article into another member country is tantamount to working of the patent).

3. A Compulsory License can be applied for on the

grounds of failure to work the patent or insufficient working after 3 years of grant of the patent. Compulsory License can be refused if the patentee can justify inaction due to legitimate reason.

4. Revocation proceedings may be instituted two years

after the grant of compulsory license, and may take any length of time.

5. Right of Priority is extendable for 12 months in all

member countries from the date of registration of the patent in any one country.

6. Member countries have to assure effective

protection against unfair competition, which includes reasons which may be contrary to honest trade practices.

7. Renunciation of membership is not possible for at

least 6 years after joining the Convention.


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The Indian Patents Act

(enacted in 1859, amended in 1911, 1970)

The 1970 amendment abolished product patents for pharmaceuticals, and granted limited process patents for seven years.

The Drugs (Prices) Control Order, 1979

Limited the maximum prices which pharmaceutical companies could charge for their products.

This was corroborated by the late Mrs. Indira Gandhi while speaking at the historic session of the 34th World

Health Assembly in Geneva on May 6, 1981.

In her words:

"Affluent societies are spending vast sums of money understandably on the search for new products and processes to alleviate suffering and to prolong life. In the process, drug manufacturers have become a powerful industry. My idea of a better ordered world is one in which medical discoveries would be free of patents and there would be no profiteering from life or death."


by Asaf Shamsi

20

TNC Counter-Measures and Consolidation

Combination of market and non-market actions…

• Pressurizing governments of developing

countries through simple requests, propaganda and lobbies for revision of patent legislation

• Court actions claiming applicability of the Paris Convention in those countries who were

signatories.

• Influencing governments in home markets, and other countries to enact legislation for more stringent product registration requirements.

• Countering the price-control systems, by overvaluing intra-firm imports of raw materials

with the objective of obtaining higher prices, and at the same time, diminishing taxable income and

remitting hidden profits.


by Asaf Shamsi

21

Problems faced by TNCs…

• Investments in research and development are

yielding diminishing returns.

• The rate at which new and more efficacious drugs are being introduced into the marketplace has dropped drastically.

• Patents on large dollar-value drug products have expired, or are due to expire shortly.

• Although TNCs hold approximately 85% of all current drug patents, approximately 90% of all drugs used currently have ceased to enjoy patent protection.

• Patent-free drug products represent about 85% of world sales (approximately US $270 billion).

• TNCs are now faced with increasing competition from generic producers as patents have expired.


by Asaf Shamsi

22

Top ten US prescription drugs in 1983, their ranking in US in 1988 and in the world in 1997

Product 1983 sales

1983 rank

1988 sales

1988 rank

500 prescription

drugs by worldwide

sales,

1997 - rank

Tagamet (SK&F) 1 2 154

Inderal (Ayerst) 2 13 321

Dyazide (SK&F) 3 12 365

Motrin (Upjohn) 4 39 -

Aldomet (MS&D) 5 72 -

Valium (Roche) 6 25 296

Feldene (Pfizer) 7 10 153

Naprosyn (Syntex)

8 4 146

Keflex (Dista) 9 44 -

Diabinese (Pfizer)

10 98 -

Source: (1) 1983 & 1988 US ranking, SCRIP No. 1381, Jan 27, 1989, p. 17. (2) 1997 Ranking: Annual Report 500 Drugs: 500 Prescription Drugs by worldwide sales, Pharma Business, July/August 1998.


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TNCs have tried to maintain their dominance by:

(1) Retaining existing brand profit and market share by reducing multiple brand promotion expenditures:

(A) Mergers and acquisitions - Ciba-Giegy

Rhone Poulenc- May & Baker

Bristol-Myers - Squibb

Merck - Frosst

Rhone-Poulenc - Rorer

Warner-Lambert – Parke-Davis

Hoechst - Rousell

Marion - Merrell-Dow - Nordic

Hoechst – Marion – Roussell

Glaxo – Wellcome

Glaxo - Smith-Kline-Beecham

AHP – Robbins

Ciba-Geigy – Sandoz (Novartis)

Hoechst Marion Roussell - Rhone Poulenc (Aventis)

Pfizer-Parke Davis

(B) Brand Divesting/Acquisitions and Strategic Alliances: Connaught-Novo (insulins)

Procter & Gamble-Searle (Metamucil)

Ciba-Geigy (Airwick)-Reckitt-Coleman


by Asaf Shamsi

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(2) Acquiring generic companies, strategic alliances with existing generic companies, or introducing own generic product lines:

Glaxo-Kendall

Fujisawa -Lyphomed

Merck-Novopharm

Pfizer

Warner-Lambert

Johnson & Johnson

American Cyanamid (Lederle)

3M Pharmaceuticals

(3) Protectionist and discreditation initiatives:

USA - The Waxman-Hatch Act, 1991

Canada - Bill C-91, 1991

USA and Canada –

Introduction of cost-recovery measures (Regulatory Fees) for product approvals in home markets

USA - Punitive measures –

Super 301 and Special 301 legislation

Dr. Reddy’s Labs – Ibuprofen

Glaxo vs. Apotex - Salbutamol, Ranitidine

Merck vs. Apotex – Enalapril

USA - Discreditation efforts –

Rep. Dingell’s consistent anti-India tirades in the US Congress - The Raju Vegesna case


by Asaf Shamsi

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A Typology of the World’s Pharmaceutical Industries

Number of Countries Stage of Development Total Industrial Developing

Sophisticated pharmaceutical industry with significant research base

10

Belgium, France,

Germany, Italy, Japan, Netherlands,

Sweden, Switzerland, UK & USA

Nil

Innovative capabilities[1]

17 12

5

Argentina, China, India,

Mexico, Korea

Countries producing both therapeutic ingredients & finished products.

14 6

8

Bahamas[2] , Bolivia, Brazil, Cuba, Egypt, Indonesia[3] ,

Macau[4] , Puerto Rico

Countries producing finished products only.

89

2

Albania, Greece

87

Countries/states without a pharmaceutical industry.

60 1

Luxembourg

59

[1]Each country in this group discovered and marketed at least one new chemical entity between 1961-1996. [2] Bahamas - Firms produce therapeutic ingredients for export. [3] Indonesia - Every foreign-owned factory is required to produce at least one therapeutic ingredient within five years of start-up. [4] Haviones (Portugal) subsidiary produces antibiotics and corticosteroids for export.


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The Implications of India’s joining the WTO:

• The most important changes are to be made in the area of patents.

• By joining the WTO, India has committed itself to

alter its existing Patent Act to offer wider and stronger protection to intellectual property rights of any member nation.

• For the pharmaceutical industry, the new law

signifies a transition to product patents rather than process patents.

• The term of patent protection must be 20 years

from the date of filing, instead of 7/14 years available under the Indian patent law.

• The time frame allowed for complete transition to

the new law is 10 years (1995 –2005).

• The real impact of this provision for the Indian pharmaceutical industry will, at best, be marginal over the short to medium term, but will be significant over the long term, and could result in stagnation, or serious erosion of market shares of Indian companies in India.


by Asaf Shamsi

27

What Should the Indian Approach Be?

Indian Industry Capabilities:

• Indian industry is completely self-sufficient in dosage-form manufacturing capabilities.

• Most formulation manufacturers have held back from investing in upgradation of existing facilities to meet world standards (only four units are US FDA approved).

• The industry is self-sufficient for the manufacture of approximately 80% if its bulk drug requirements.

• India is the world’s largest producer of several important bulk drugs... sulfamethoxazole, ibuprofen, and ethambutol,

• India’s bulk drug sales record in the developed

countries’ markets is slightly better than formulations

• Indian companies never took up major new product development research. The level of patent protection under the Indian law, and the DPCO did not give them any opportunity to recoup their development costs.

• Indian companies have largely focused on “reverse

engineering” of production processes for bulk drugs, and were able to introduce new drugs into the Indian market within 2-5 years of the innovator companies introducing them abroad.


by Asaf Shamsi

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Time lag between the introduction of some of the new drugs in the world market and their introduction in India

after the domestic enterprises developed their own technologies to manufacture them:

Drug Introduced in World Market

Introduced in India

Ibuprofen

Salbutamol

Mebendazole

Rifampicin

Cimetidine

Bromhexin

Naproxen

Captopril

Ranitidine

Norfloxacin

Acyclovir

Ciprofloxacin

Astemizole

1967

1973

1974

1974

1976

1976

1978

1981

1983

1984

1985

1985

1986

1973

1976

1976

1980

1981

1982

1982

1985

1985

1988

1988

1989

1988


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Indian Industry Performance

India accounts for only 1.2% of the global pharmaceutical market

Total Production: INR 17,000 crore (US$ 3.8 billion)

Exports (1999):

Bulk Drugs: INR 2500 crore

Formulations: INR 1500 crore

Total: INR 4000 crore (US$ 0.9 billion)

• Over 33% of formulation exports are to the ex-Soviet bloc alone, where realizations are typically lower as compared to the markets in developed countries.

• Most companies have only looked at immediate and short-term gains from local markets and other “soft” markets that are easily penetrable, but yield less in terms of profits.


by Asaf Shamsi

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EXPORT DESTINATIONS OF A SAMPLE OF 50 BULK DRUG AND FORMULATION

COMPANIES OF GUJARAT

REGIONS TO WHICH PRODUCTS EXPORTED

NUMBER OF

LARGE SCALE EXPORTING COMPANIES

NUMBER OF

SMALL SCALE EXPORTING COMPANIES

HIGH ENTRY-BARRIER, HIGH-RETURN MARKETS (85% of Global Market)

1. USA 1 1

2. Canada 1 NIL

3. European Union and Affiliates 2 6

4. Australia and New Zealand

2 2

5. Japan NIL NIL

6. South Africa 2 4

LOW ENTRY-BARRIER, LOW-RETURN MARKETS (15% of Global Market)

7. Other African Countries and West Asia

5 30

8. CIS Countries and former USSR satellites

6 11

9. Latin America 4 5

10. Nepal, Sri Lanka, Pakistan, Bangladesh

4 11

11. Far East andSouth East Asia 6 24


by Asaf Shamsi

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The Opportunity:

• The overall world pharmaceutical sales today are US $ 320 billion.

• US $ 270 billion come from products free from patent protection

• Over US$ 8.1 billion worth of products are going off patent between 1996-2005.

Today, almost 80% of the pharmaceutical market is concentrated in three different zones where less than 20% of the world's population actually resides:

United States and Canada: 35.4%

European Union: 26%

Japan: 20%


by Asaf Shamsi

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Turnover, Exports, Global Market Share of Pharmaceuticals, and the Population of Some Important

Countries:

Country Turnover ( $ billion)

Exports ( $ billion)

Percentage of Global

Market Share

Population (millions)

USA

Japan

European Union

Brazil

China

Canada

Korea

Australia

India

105.0

63.0

83.0

7.8

6.1

8.0

3.5

2.1

3.8

35.0

15.0

20.0

0.9

33%

20%

26%

2.4%

2%

2.4%

1.1%

0.6%

1.2%

260

130

300

159

1190

30

67

18

1000


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STRATEGY FOR INDIAN FIRMS

-Investing in R&D and new drug development

-Backward integration

-Brand marketing in key developing countries

-Marketing of Generics in the multi-billion dollar markets of North America, and Europe

Joining hands with TNCs for reciprocal access to each other’s markets is at best, a short to medium-term solution, which could lead to acquisitions of Indian companies by the major TNCs.

The real options before Indian industry are twofold:

(A) Invest in basic new product research and join the patent bandwagon.

or,

(B) Invest in penetrating the patent-free US $ 200 billion segment of the vast and profitable markets of North America and Europe.

Documents

WTO Impact - Sinhgad COP (Nov 18 2003)