Indian Pharmaceuticals: Emerging Scenario and Future Challenges
India's pharmaceutical sector is currently undergoing unprecedented change. Much of this is due to the country's introduction of product patent with effect from January 2005, an agreement on TRIPS (Trade-Related Aspects of Intellectual Property Rights) under WTO on April 15, 1994. Before that, only patents for processes were permitted to be issued, a fact that has been instrumental in the domestic industry's huge success as a worldwide exporter of high quality generic drugs. The new patent regime has also led to the return of the pharmaceutical multinationals, many of which had left India during the 1970s. Now they are back and looking at India not only for its traditional strengths in contract manufacturing but also as a highly attractive location for research and development (R&D), particularly for clinical trials (KPMG, 2006).
The Indian pharmaceutical industry (IPI) is one of the most interesting national industries in the world today, in large measure because its character has been so significantly shaped by patent regimes. The 1970 Indian Patent Act granted process as opposed to product patents on drug manufacture. This meant that Indian pharmaceutical companies can manufacture drugs that already existed on patent in the market, as long as they came up with their own method for doing so. This helped the industry into one that was capable of cheap reverse-engineered bulk drug manufacture, which has in turn enables Indian drug prices to be among the lowest in the world. In 1995, however, India became a signatory to World Trade Organization (WTO) - imposes patent regimes, which required the industry there to be completely WTO compliant by 2005. The change in patent regimes toward a WTO - imposed, one has therefore necessitated shift in the Indian industry as after 2005, Indian pharmaceutical companies will not be able to take a molecule already on the market, remake it through an indigenous process, and then sell it. Indian companies will now have to focus on novel drug discovery and development.
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In this preceding context my report has attempted to discus the changes in the economic growth of Indian pharmaceuticals industries in context of WTO regime (the Indian Patents Act, 2005) and argue available evidence on the extent to which the Patent Act, 2005 regime may be expected to raise prices of new patentable drugs in India creating monopolies (Flynn, 2008).
The changing nature of Indian Pharmaceuticals Industry
The Indian pharmaceutical sector has come a long way, being almost non-existent before 1970 to a prominent provider of healthcare products, meeting almost 95 per cent of the country's pharmaceuticals needs.
Presently, the Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units with severe price competition and government price control. It has expanded drastically in the last two decades. There are about 250 large units that control 70 per cent of the market with market leader holding nearly 7 per cent of the market share and about 8000 Small Scale Units together which form the core of the pharmaceutical industry in India (Corporate Catalyst India, 2009).
As per WTO, from the year 2005, India granted product patent recognition to all new chemical entities (NCEs) i.e., bulk drugs developed then onwards. Under this new law, India will be forced to recognize not only new patents but also any patents filed after January 1, 1995. Under changed environment, the industry is being forced to adapt its business model to recent changes in the operating environment.
Previously, only process patents were granted, a situation that led to India's role as a world leader in the production of high quality, affordable generics. The new regime may spell the end for the domestic sector's smaller players, while for others it could represent unprecedented opportunities. Nevertheless, the domestic industry is still spending far too little on R&D, which must change quickly if it is even to begin to address these new opportunities and challenges. On the international front, the industry still has some catching up to do in terms of quality assurance while, on the local market, pricing remains a problem (KPMG, 2006).
The above reason can be justified as, so far, Indian companies have made use of the cheap labour and the reverse engineering skills under the favourable conditions of process patent regime and developed generic replicas to drugs that were under patent in developed countries, which then were sold in the domestic markets and exported to other unregulated markets elsewhere in the world. This generic business enabled them to compete with multinational companies in India and abroad and resulted in good revenues. However, once the product patent regime got implemented from the year 2005, one is not allowed to reverse engineer drugs that are patented after 1995, and the revenues from this business may suffer. Whereas, the multinational companies in India, which have an impressive new product portfolio will get exclusive marketing rights to sell their products at higher prices and will be in a position to dictate the terms.
Impact of the Patents (Amendment) Act, 2005
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The Patents (Amendment) Act, 2005 has introduced product patent protection for pharmaceuticals from 1 January, 2005. Hence unless otherwise authorized, Indian pharmaceutical companies cannot produce new drugs developed abroad. It is widely believed that the global product patenting of medicines will enhance the monopoly power of the MNCs and result in higher prices and lesser access of medicines (Thomas, 2008).
Patents create monopolies where there is no equally effective substitute for the patented product. In the case of Indian Pharmaceutical Industry, the 2005 patent covers the active ingredient for a needed medicine if other medicines cannot be readily substituted for it in all of its applications. This patent gave its holder (MNC's) the ability to set price for the good without regard to competitive substitutes. In a product patent regime, this can also be provided by an easy to use compulsory licensing system. A substantial amount would have to be spent by Indian firms towards royalties and license fees, which leads to higher prices (Flynn, 2008). Below figure shows the change in drug prices after the patent act 2005, implementation in India.
Impact of “The Patent Act, 2005” on “IPI”
Creates forces leading to increase in prices
In the above graph figure 1, to maximize its profits, the monopoly will raise its price or licence value of the product above the level that would exist in a competitive market, thus serving a smaller segment of the potential demand (i.e. it will reduce its output), until resulting losses of sales make further price increases unprofitable. The more the demand for the goods is inelastic (meaning that consumers are less likely to decrease consumption with each price increase), the higher the price that can be profitably demanded by the monopolist. Pricing above marginal costs creates two losses for consumers. The first loss is a wealth transfer from consumers to the monopolist, since every unit purchased is at a higher price than consumers would pay a competitive producer. In the case of an innovative monopolist, including a monopoly created by a patent, such a transfer from consumers to the monopolist may be thought to be the reward for innovation. The second loss from monopoly pricing is a “deadweight loss” from forgone transactions which would have taken place at the lower competitive price. These lost sales are known as “deadweight” because they do not create surplus for the buyer or seller; the surplus benefit that would have gone to consumers simply disappears, and is not compensated by any gain to the monopolist. In pharmaceutical markets, this deadweight loss is often referred to as the problem of “access”: the poor may not purchase a drug product because of its high price, and as a result are untreated. If the drug price had been lower, they would have been able to afford the drug and would have been treated. Thus, for drugs those are essential to life and health, the term deadweight loss created by patented drug pricing takes on added significance (Flynn, 2008).
Thus, Indian Pharmaceutical Industries need to spend more on R&D to develop patentable substances in order to compete with MNC's and also to lower the drug prices in India (Maskus, 2001).
Research & Development - a challenging prospect for IPI
India's comparative advantages lie in its cost competitiveness; it's reverse engineering experience, its large pool of less expensive English-speaking scientific and engineering workers, and its well-developed chemical industry infrastructure (Saranga, 2005).
After 2005, implementation of patent regime, India's Pharmaceuticals Industry recognized that they could not survive as global players (competing MNC's) without significant R&D capabilities. Thus, the leading Indian pharmaceutical majors are altering their business strategies by placing greater focus on R&D and the discovery of new chemical entities. Traditionally, the vast majority of India's pharmaceutical R&D spending was concentrated on reverse engineering and the adaptation of patented foreign drugs to the Indian market. Most of the industry's funding went to research rather than to new drug discovery and development. Low levels of industry productivity and the relatively small size of India's pharmaceutical companies have limited funding for R&D as they dedicated only less than 2 percent of their annual turnover to R&D compare to 15%-20% Western innovator companies (Greene, 2007).
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Thus, the new patent regime will enable the development of innovative new drugs, which will increase profitability for MNCs. This will force Indian Pharmaceutical players to focus on R&D, which, for those who can afford to do so, will have long-term beneficial effects, lowering the drug prices (KPMG, 2006).
Thus, Indian Pharmaceutical Industries need to increase there research & development to produce innovative drugs which can lower the drug prices in India as shown in below graph.
Impact of “R&D” on “IPI”
Creates forces leading to decrease in prices
From above graph, it is observed that the increase in “appropriation rates” from R&D can lead to a greater supply of innovations. This will lower prices of innovations. As a consequence producers of consumption goods can offer goods at lower prices.
Thus, Indian pharmaceutical industries should develop basic level of process R&D capabilities through imitative R&D and as a response to change in patent law these firms should also move towards the development of advance level process and product R&D capabilities to compete with MNC's.
The Indian pharmaceutical firms should respond well to the challenge of a strict intellectual property rights (IPR) regime by increasing their R&D spending and, simultaneously, must improve technological capabilities to produce innovative and patentable drugs. This indeed will lower the drug prices and can compete with the MNC's in the globalization of pharmaceuticals R&D. Thus, the innovative firms in India should explore areas for complementary growth to obtain a slice of the market for R&D outsourcing (Thomas, 2008).
Also, the goals set out in the Indian government's draft National Pharmaceuticals Policy for 2006 in terms of domestic market development are ambitious, and will require a positive pricing environment if the country's 1 billion people are to be able to access the life-saving and innovative medicines they need. Again, partnership is key: industry leaders are keen to work with government on issues of affordability and point out that price controls will do nothing to increase access to new and effective treatments. (KPMG, 2006). Thus, Indian Pharmaceutical Industries need proper environment for R&D in terms of skilled labour, subsidies, government support, etc to succeed in the current WTO regime.
To conclude from the perspectives of above observations, it can be argued that Indian Pharmaceutical Industry can challenge the Patent Act, 2005 by strongly increasing their R&D in order to provide the cheaper drugs to poor and also to compete with the MNC's in the globalization of research in Pharmaceuticals.
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