The Indian Pharmaceutical Industry Impact of Changes in the IPR Regime

The Indian Pharmaceutical Industry Impact of Changes in the IPR Regime

This chapter explains why the author selected India as her research subject and goes on to discuss the roles of the World Trade Organization (WTO) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). This chapter also outlines the research subject and objectives.

Background


The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which came into force in 1995, is an international agreement administered by the World Trade Organization (WTO) (Note 1: TRIPS). The Agreement sets out the minimum standards of protection to be provided by each member (Note 2: Minimum Standards). Each member country, whether it is a developed or a developing country, is required to apply the provisions of the Agreement to its own intellectual property- related legislation.
In the formulation stages, developed countries, especially the US, argued forcefully for strong intellectual property (IP) protection. As a result, the Agreement required every member country, including developing countries, to introduce the kind of IP protection frameworks that advanced countries were adopting at that time, including product patents #1. Some countries, notably developing countries, argued that the IP frameworks required under TRIPS posed a high hurdle for less advanced economies.
For advanced countries, IP protection plays a vital role in fostering their industries. IP functions as a driving force for economic development. For the pharmaceutical industry, which demands very high levels of technology, patents particularly product patents—are extremely important because they protect ownership and marketing rights to new chemical entities (NCEs) and biologics over many years (Note 3: Importance of Patents for the Pharmaceutical Industry).Some earlier studies showed that introduction of product patents in developing countries tended to hamper industrial development. In 1996, La Croix and Kawaura examined prices of pharmaceutical company stocks before and after introduction of product patents in Japan and Korea, and they found that introduction of product patents in developing countries was likely to have a negative impact on industrial development.
TRIPS came into effect in 1995. The Agreement required not only developed countries but also developing ones to introduce intellectual property protection frameworks. However, developing countries were given an extended transition period of 5–10 years over which to introduce such frameworks.
Even after TRIPS took effect, not only developing countries but also several other stakeholders, including international NGOs/NPOs, developed countries, academics, and patient communities expressed concerns about the potential negative impact that the TRIPS standards could have on the pharmaceutical industries in developing countries.
India, which is home to the world’s second largest population, is still categorized as a developing country. As a former colony of Great Britain, it has a long history of intellectual property protection based on the British system. The history of patent law in India is said to date from 1911, when the Indian Patents and Designs Act, 1911 was enacted [1].
However, the 1911 law was amended in 1970 as part of a sequence of domestic industrial protection policy measures. Its replacement, the Patents Act, 1970, came into force on April 20, 1972. One notable feature of the new law was that it allowed only “process” patents with regard to inventions relating to drugs, medicines, food, and chemicals (Note 4: The Patents Act, 1970).
Under the Patents Act, 1970, Indian pharmaceutical companies were permitted to “legally” manufacture pharmaceutical products which had patent protection in other countries. As a result, the Indian pharmaceutical industry developed so rapidly that, by 2005, it had become the fourth largest (by volume) pharmaceutical industry in the world.
India is a foundation member of the WTO. In 2005, as required by the provisions of the TRIPS Agreement, it revised its patents legislation and reintroduced product patents [2].
Once the country decided to reintroduce a product patents regime into the Indian Patents Act, many stakeholders expressed concerns about the potential negative impact of introducing product patents into the Indian pharmaceutical industry. For example, drug prices could soar; Indian pharmaceutical companies would no longer be permitted to produce currently patented pharmaceutical products.
This study started with selecting “India”—which has a very interesting back-ground in terms of both its pharmaceutical industry and intellectual property protection schemes—as a case for analyzing the impact of introducing product patents on industries.

Trend of Indian Pharmaceutical Industry and Indian 

Patent Policies

1.2.1  Trend of Indian Pharmaceutical Industry
In the wake of TRIPS enforcement, Indian pharmaceutical companies were obliged to depart from their conventional business model—exclusively producing generic drugs #2 utilizing reverse engineering #3 technology.
Annual reports of leading Indian pharmaceutical companies show that, from the mid-1990s, these companies began increasing R&D investment and started to develop value-added generic drugs and/or new chemical entities (NCEs). They were apparently seeking to avoid the negative impacts of patent introduction on business performance by developing branded generic drugs #4 and brand-name drugs #5, in addition to the conventional simple generic drugs.
1.2.2  TRIPS Enforcement and Background to Introduction  
of Product Patents
India has had some kind of intellectual property protection system since colonial times. Immediately after the country won its independence from Britain in 1947, the domestic pharmaceutical industry was immature. Then, foreign pharmaceutical companies began entering the Indian market and would soon dominate it.
According to “The Current Status of the Indian Pharmaceutical Industry,” com-piled by the International Committee of the Japan Pharmaceutical Manufacturers Association (JPMA), foreign-owned companies commanded 68% of the Indian pharmaceutical market as of 1970 [3].
According to “Pharmaceutical Industry and the Indian Patent Act with Particular Reference to Madras High Court’s Novartis Rulings,” in 1960, drug prices in India were the highest in the world [4].
Then Prime Minister Indira Gandhi, disappointed at seeing the Indian pharma-ceutical market dominated by foreign-owned companies, implemented a series of policy measures aimed at forcing those companies out (Note 5: Protectionist Policies Introduced by the Government of Indira Gandhi).
An important aspect of the policy package was passage of the Patents Act, 1970 (effective April 1972) (Note 6: The Patents Act, 1970).
India’s Patents Act, 1970 exempted “pharmaceutical, food and agricultural chemical products” from product patent compliance, and only “process” patents in these fields were protected under the law [5].
The exemptions prompted a steady exodus by foreign pharmaceutical companies out of the Indian market [6].
With product patent protection exempted under the Patents Act, 1970, Indian Pharmaceutical companies in India could “legally” manufacture brand-name drugs 
which were protected in other countries and market them both domestically and in overseas markets without infringing patents [7].
Since the Patents Act, 1970 allowed many new, local companies to enter the Indian pharmaceutical industry, fierce competition erupted in the domestic market, pushing drug prices ever lower. In due course, India would boast some of the lowest prices in the world [6].
Due to their affordability, drugs manufactured by Indian companies gained strong acceptance both at home and abroad. That is why the Indian pharmaceutical industry developed so rapidly and successfully.
However, as mentioned above, India, as a foundation member of the WTO, was eventually obliged to revise its existing patent law into a TRIPS-compatible, inter-national patents system by 2005.
Despite many expressions of concern, the Indian government moved—by way of an external pro forma measure—to introduce product patents by January 1, 2005, the deadline set by TRIPS. In order to protect the Indian pharmaceutical industry against penetration of the domestic market by foreign-owned companies, the Indian government inserted a safeguard article, Section 3 (d), into the Patents (Amendment) Act, 2005. Section 3 (d) strictly limits the scope of patentability [8].
1.2.3  Discussion around Introduction of Product Patents  
into the Indian Patent Regime

As mentioned, after TRIPS required every country, including developing countries, to introduce product patents, various stakeholders voiced concerns [9].
There were three main areas of concern:
 1. High drug prices and access to drugs: If product patents were introduced in developing countries, drug prices would increase; as a result, lower-income peo-ple in those countries would lose access to drugs.
 2. Constraints on industrial development: If product patents were introduced in developing countries, local industrial development would suffer.
 3. Penetration by foreign-owned companies: If product patents were introduced in developing countries, foreign-owned companies would penetrate into domestic markets, which would be swamped with overseas-manufactured products. 

Because Indian pharmaceutical companies, taking advantage of advanced technology and low production costs, were exporting large volumes of inexpensive but high-quality drugs to Third World countries, international NGOs/NPOs, including Médecins Sans Frontières (MSF) #6, raised objections to introduction of product patents in India. According to MSF, Indian pharmaceutical products accounted for some 80% of the drugs sent by MSF to African countries to support the health of impoverished local communities [10].

Research Subject and Objectives of This Study

Some prior studies suggest that introduction of stringent patent systems, including product patent regimes, in developing countries tends to inflict deleterious impacts on local pharmaceutical industries and cause their decline.
In contrast, data from financial reports and annual reports of leading Indian phar-maceutical companies show that those companies continued to achieve healthy development, even after 2005, the year in which product patents were introduced in India.

If the Indian pharmaceutical industry continues to develop, avoiding the nega-tive impacts from introduction of product patents indicated by some prior studies,
analysis of the causes/factors in their healthy development could provide guidelines for strategies/tactics to help other developing countries find a way to balance inter-national cooperation against domestic industry development.
One possible approach might be found in Section 3 (d), which the Indian govern-ment inserted into the Patents (Amendment) Act, 2005. Did Section 3 (d) play an important part in enabling India to maintain a responsible stance in the international community while also protecting Indian pharmaceutical manufacturers against incursions by foreign-owned companies and allowing the local pharmaceutical industry to continue to flourish? Another possible factor in the ongoing success of the Indian pharmaceutical industry could be the changing of companies’ business models: leading pharmaceutical manufacturers adapted their models to suit the new business environment that was brought about by introduction of product patents in the Patents (Amendment) Act, 2005.
Financial reports and annual reports show that leading Indian pharmaceutical companies, around the mid-1990s, began increasing R&D investment and initiating new drug development. Did the introduction of product patents in 2005 trigger a change in the business models of these major players? This study is aimed at explor-ing those two research questions.
In the wake of TRIPS enforcement, other newly industrialized countries (NICs) and developing countries started introducing product patents into their own patent regimes. This study may provide some guidance to help those countries to formulate patent regimes appropriate to their current status. In that sense, this study may have significant value.


 


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