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


Asaf Shamsi, B. Pharm., MBA


Address at the Seminar on 
Impact of WTO on Industry
Confederation of Indian Industry
August 17, 2000 

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 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 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.

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 of the global market. The total worldwide sales of the top 10 companies were $130 billion, or 40 per cent of the global market. These firms are exceptionally large; annual sales of individual companies are in the region of several billions. 

How did this happen?
TNC / Medical / Regulatory Nexus of the North
The emergence of the dominant TNCs has been attributed to perhaps one single event, 117 years ago.
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 in the 1970’s. Led by India and Brazil, substantial momentum was given to an effort by developing nations to counter the inequalities in health care.

Many 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 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 Price (Control) Order in 1979, limiting the maximum prices which pharmaceutical companies could charge for their products.

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 favorable, 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).
They have tried to maintain their dominance by :
Retaining existing brand profit and market share by reducing multiple brand promotion expenditures through :
  Mergers and acquisitions
Rhone Poulenc-May & Baker, 
Bristol-Myers -Squibb, 
Warner-Lambert-Parke Davis, 
Glaxo-Smith-Kline Beecham
Ciba-Geigy-Sandoz (Novartis),
Hoechst Marion Roussell - Rhone Poulenc (Aventis)
Pfizer-Parke Davis
Acquiring generic companies, strategic alliances with existing generic companies, or introducing own generic product lines :
Glaxo-Kendall, Fujisawa-Lyphomed, Merck-Novopharm Pfizer, Johnson & Johnson, American Cyanamid (Lederle) Warner-Lambert, 3M, etc . 
3. Protectionist and discreditation initiatives :
USA - Waxman-Hatch Act, 1991 (sometimes also referred to erroneously as the Hatchman-Wax Act)
Canada - Bill C-91, 1991
USA and Canada - Introduction of cost-recovery measures for regulatory approvals in home markets                           
USA-Punitive measures – Special 301 and Super 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 and the Raju Vegesna case
The developed countries of the North, spearheaded by the United States - have set the stage well in their favour to protect their interests, prior to forcing a discussion of the issues in the GATT talks, and appear to have retained their dominant positions in the initial rounds without having to make any major concessions.

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 under the WTO umbrella.
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, pharmaceuticals, 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.

I will not go into the details of the WTO agreements, except to say that the most important changes with respect to the pharmaceutical industry 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 had 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 which are 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 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 sophisticated 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. 

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 drug 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 processes 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 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.

However, 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. 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 (about 20 US FDA approvals).

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. Today, 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.
The Opportunity :
The overall world pharmaceutical sales today stand at 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.

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)

India accounts for only 1.2% of its total volume (US$ 3.8 billion), (world pop. 16.1%), (INR 17,000 crores, of which 4000 crores (US $ 0.9 billion) was exported in 1999) Expenditure on health care
as % of GDP: 0.8 %; Drugs: US$ 3 per capita per annum
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 European 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 would also prove to be a political stumbling block in light of the Indian government’s so-called liberalization policy.

At the International level, India needs to participate more actively and make its presence felt in the ICH discussions, and in the WTO forum. 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 patent law, in its final form, should take into account this flexibility, and provide for appropriate safeguards. 
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 US $ 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.
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.
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.
I would like to thank you all for taking the time to listen to me, and would welcome your questions.
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