India’s pharma industry: at a patent disadvantage

From the mid-19th century till Independence and a little after, the Indian market was an outlet for foreign pharmaceutical companies. This is due to the patent legislation first introduced in 1856, based on the British Patent Law of 1852, which was renewed in 1859 and amended in the 1870s and 1880s. In 1911, replacing all previous patent legislations, The Patents and Designs Act was introduced that provided patents in all product categories for 16 years from the date of filing.

Western MNCs controlled 80 to 90% of the Indian pharmaceutical market and held almost 99% of patents granted in the country. While the product patent regime was one cause behind this, the absence of the policy of import substitution specifically in the case of the pharmaceutical industry resulted in importing of the finished products.

On the other hand, the privileges granted in the form of patents resulted in exorbitant drug prices and serious hindrance in access to medicines for Indians. The Ayyangar Committee constituted in 1957 to look into these issues produced the Ayyangar Committee Report in 1959 that recommended only process patents in chemicals, drugs and food.

These recommendations led to the introduction of a bill in the Lok Sabha in 1965 that lapsed but was finally passed with amendments as the Patents Act, 1970. The bill started operating in 1972 with rules laid down as Patent Rules, replacing the Product Patent Act of 1911. The Patents Act, 1970, also reduced the period of patent protection to seven years. In 1969, the government also enacted the Monopolies and Restrictive Trade Practices (MRTP) Act that contained monopolistic expansions at Rs 20 crore.

The 1973 Foreign Exchange Regulatory Act (FERA) obligated foreign firms operating in India to bring their equity to 40%, resulting in a significant decline in the number of foreign subsidiaries (from 10 to two between 1973 and 1985) and their equity stakes. Some MNCs abandoned the country altogether.

Domestic firms in India grasped these opportunities and became self-reliant within 20 years and through reverse engineering techniques ensured the supply of low-cost medicines to the Indian public. By 1991, domestic firms were supplying 70% of Active Pharmaceutical Ingredients (APIs) and 80% of the formulations required in the Indian market. It also resulted in a growth in exports, initially to developing countries and later to the US and Europe.

In 1971, while there were just two domestic companies in the top 10 by sales, in 1996 there were six. Today, the industry ranks eleventh in terms of exports, and it is the third largest producer of medicines in terms of volume and the fourteenth in terms of value. This successful trajectory of the industry was put in peril through a major policy made by the Government of India, which was to introduce the ‘product patent’ regime from 2005. This was in accordance with the Trade Related Intellectual Property Rights (TRIPS) agreement that all World Trade Organisation members are obliged to introduce in their respective countries.

Escalating costs

The introduction of the product patent regime implies that the success story of Indian industry, ensured through a reverse engineering process, would stall. On the other hand, it is becoming increasingly evident to the US and Europe how the cost of bringing a new drug to the market has escalated and how financialisation has become an integral part of the pharmaceutical industry. A study by the Tufts Centre for the Study of Drug Development estimates that currently the cost of bringing a new drug to the market is around $1.395 billion. Only one in every five drugs that enter clinical trials is successful.

Adding to this high cost of drug development is the innovation deficit and patent cliff that raised serious apprehensions in the industry. This, in turn, encouraged pharma companies to diversify strategies to mitigate risks and maximise shareholder value. Given the high rate of risk and uncertainty, the terrain of drug development has generated an entire value chain in itself through various processes of diversification such as outsourcing research, mergers and acquisitions, out-licensing molecules from upstream biotech companies, outsourcing clinical trials, etc.

This interweaving of the global pharmaceutical industry with the financial markets concomitant with the policy changes in the Indian patent regime obliged the Indian pharmaceutical industry to restructure itself. In this process of restructuring, several strategies have been adapted by the industry such that they engaged themselves in a non-equity modes of partnership with MNCs.

This restructuring also had an impact on the Indian populace, particularly the most vulnerable among them, bringing to the forefront the question of access to medicines in the light of expensive patented drugs, the recruitment of vulnerable sections in clinical trials and the disasters resulting thereof. Issues such as challenging the sovereignty of the Indian Parliament have also been witnessed.

Novartis, a Swiss-based MNC in India, in May 2006 challenged the Indian Patent Office in the Madras high court for denial of patent based on section 3(d) that prevents evergreening of patents. The company challenged the denial of patent and also the constitutional validity of section 3(d) in court. It was not just challenging the denial of patent to its drug by name ‘Gleevec’ but rather the provisions made by Indian parliament and therefore its sovereignty.

Novartis asserted that section 3(d) violates the government’s constitutional duty to harmonise its national legislations with its international obligations. Eventually, Novartis lost the case both in Madras high court and the Supreme Court. But it did show how far pharma MNCs could go in order to assert their hegemony.

(The writer is a PhD student at the Institute for Social and Economic Change (ISEC), Bengaluru)