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Economic Reforms and Drug Policy:

A Micro Level Analysis

Arvind Badiger
G.K. Kadekodi
Nayanatara S.N.

Series Editors:
Aasha Kapur Mehta, Pradeep Sharma
Sujata Singh, R.K.Tiwari
P.R. Panchamukhi

2006
Table of Contents

1 Introduction 1

2 A Macro View of the Sector 2

3 A Micro View of the Sector 4

4 Drug Policy in India 5

5 Patent Scenario 9

Economic Reforms of 1990s, Implications of WTO Commitments and


6 Trade Liberalisation 13

7 Evaluation of the Reforms Process in India 18

8 The New Patent Bill: Some Observations 20

9 Medecins Sans Frontieres’ (MSF) Views on India’s Role in the Provision of Drugs:
Expressions on the Indian Patent Bill, 2005 22

10 Summary and Conclusions 23

11 Insight for Policy Initiatives 24

Annexures 25

References 26
Chhattisgarh Infrastructure Report

List of Tables and Figures

List of Tables

1. Drug Production in Response to Price Policy ( percent) 5


2. Price Difference Between TNCs and Indigenous Firms in 1978 & 1982 6
3. Comparative Contributions of Major MNCs and National Companies in Antibiotic
and Simple Remedies Segments 6
4. Impact of DPCO 1995 7
5. Wholesale Price Index of Selected Components for Different Time Periods 7
6. Growth Rate of Drug Prices from 1982-2002 8
7. Comparative Prices of Selected Drugs 10
8. R & D Expenditure by MNCs in 1996 (millions of US $) 10
9. Time Lag Between Originator and Indian National Firms in Introducing
a New Drug in the World Market 14
10. Comparative Picture of Indian and other Developing Country Prices Before
Introduction of Product Patenting 14
11. Prices of Zantac in 1999 15
12. Reduction in the Work Force in Pharmaceuticals Industries 16
13. Some Top Pharma Company Mergers in the World 17

List of Figures

1. WPI of Medicines 2
2. Number of Drugs Under DPCO 3
3. Expenditure on Medicines as % of Per Capita Income 9
4. Export of Pharmaceuticals from India- 1998 10
5. Production of formulations and Bulk Drug in India 11
Economic Reforms and Drug Policy:
A Micro Level Analysis
Aravind Badiger, G.K. Kadekodi, Nayanatara S.N. *

1
Introduction

The drugs and pharmaceuticals sector has a direct link with price rise, non-availability of new drugs to the poor and
the health care system. Drugs are used to protect, maintain monopoly by foreign companies. This paper addresses
and restore the health of people. The pharmaceuticals in- some of the issues that influenced the development of
dustry therefore plays an important role in the provision the pharmaceuticals industry during the reforms period. A
of health care. The Indian pharmaceuticals industry is grow- brief discussion on the new Patent Bill is presented in the
ing and there is increased demand for Indian bulk drugs latter part of the paper.
and generics in other countries. This sector has a long his-
The objectives of the paper are to:
tory of internal reforms and has also been affected by
general reforms in other sectors. The Indian pharmaceuti- z Study the challenges to the Indian pharmaceuticals in-
cals industry benefited from the process patent that had dustry in the current era of liberalisation;
existed in India since 1970, because companies were able z Look at the micro level effects of globalisation on the
to produce new drugs introduced by foreign companies Indian pharmaceuticals industry;
by reverse engineering or by using a different process. z Study the impacts of the dilution of DPCO (Drug
However, Indian companies will no longer be able to pro- Price Control Order) from time to time since 1986;
duce new drugs patented by other companies because, the
z Analyse the policy frameworks of DPCO and WTO
Indian government has introduced the Indian Patent Bill
in relation to the accessibility and availability of the
2005, which recognises product patents. The new Bill is
drugs in India; and
likely to bring in many changes in the pharmaceuticals sec-
tor. Though there may not be any major immediate changes, z Discuss the overall implications of the product patent
in the long run there could be adverse effects in terms of regime on the Indian drug sector.

*
The present paper is the outcome of a detailed empirical exercise carried out by the Centre for Multi Disciplinary Development Research (CMDR),
Dharwad as part of its UNDP sponsored project “Economic Reforms and Health Sector in India”. The views expressed in this paper are those of the
authors and do not necessarily reflect the views of GOI, UNDP, IIPA or the collaborating institutions.

1
Economic Reforms and Drug Policy : A Micro Level Analysis

2
A Macro View of the Sector

The drugs and pharmaceuticals sector is one of the largest dex of drugs and medicines makes it very clear that drug
components in the category of chemical industries. Out price control has maintained a steady growth in prices till
of the total contribution of the chemicals sector to the 1998, as can be seen from Figure 1.
GDP of India, the share of drugs and pharmaceuticals The Indian pharmaceuticals industry, which used to de-
sector is 35 percent. Since Independence, and more so since pend solely on imported medicines and intermediates dur-
the 1960s, this sector has had the highest trade advantage ing 1950-60, has now emerged as a leader among the de-
compared to most other chemical sectors1. Compared to veloping countries.
the international situation, life-saving and other drugs were
available in India at much lower and affordable prices to How did Indian drug industry make such remarkable
the Indian masses. Pharmaceuticals exports were
Figure 1: WPI of Medicines
just 0.55 percent of the value of total Indian ex-
ports in the 1970s and rose to 4.5 percent by the
turn of the century. India’s share of the value of
world pharmaceuticals exports was just about 0.4
percent in the 1970s, and rose to over one percent
by 19982. Over the last 40 years there has been a
rising trend in the export of pharmaceuticals from
India. Since the 1960s, despite liberalisation, drug
prices within India were kept under control through
various orders. More importantly, with the estab-
lishment of the Drug Price Control Office in 1970,
the prices of essential drugs were frozen. Subse-
quently all the drugs were categorised as life-sav-
ing, essential, less essential and non-essential drugs.
Different price control regimes were introduced
to provide the Indian population with some secu-
rity for health. The trend in the wholesale price in- Source: Business Beacon, 2001, Centre for Monitoring Indian Economy Pvt.Ltd., Mumbai

1
Most other important exportables (e.g., gems and jewellery) either enjoyed a monopoly or are based on cultural and traditional linkages.
2
All other merchandise exports have been stagnating around 0.6% of world merchandise exports.

2
A Macro View of the Sector

progress? Was there a reforms process within the drugs z The establishment of DPCO in 1970 was yet another
and pharmaceuticals sector in India even before the 1990s? major policy reform (modified in 1979). As many as
A variety of policy instruments were introduced from time 347 major drugs came under the perview of DPCO.
to time to make this industry competitive and yet provide It encouraged small scale enterprises. New bulk drugs
health care support. Some of the major macro level poli- were encouraged through R&D (Research and De-
cies introduced were3: velopment). Fiscal incentives such as income tax relief
on in-house R&D expenditure4, capital subsidy via
z Introducing IPR (Intellectual Property Rights) for the
higher depreciation rates, etc., were introduced.
pharmaceuticals sector in the 1948 Industrial Policy
Resolution. z Finally, as the sector is quite competitive, modifica-
z The pharmaceuticals industry was in Schedule B of tions in DPCO orders were carried out from time to
the 1956 Industrial Policy Resolution (where both the time. In 1987 the scope of DPCO was reduced to
state and private sectors can operate). 166 drugs, in 1995 to 75 and in 2002 to only 39, mak-
ing price controls applicable to a smaller number of
z Under the Industrial Licensing Policy of 1973, MNCs drugs (Figure 2).
had permission to retain upto 74 percent of owner-
Figure 2: Number of Drugs Under DPCO
ship (against the general limit of 40% for all other
industries).
z The Hathi Committee recommendations were imple-
mented in toto, with a new drug policy from 1978.
The major policy implications were: self-reliance in
drug technology, self-sufficiency in drug production
and accessibility of quality drugs at affordable prices.
In a sense, the 1978 policy constituted land-mark re-
forms for the Indian drug sector. All these brought
new technologies, a shift in production from bulk to
formulations and the growth of MNCs in India.
z The most important aspect of reform policies was
price control. A large number of price control or-
ders were issued (starting from 1960), to ensure, (a)
Source: DPCO (1975-1995), Pharma pulse
the welfare of the consumers and (b) encourage the
producers. For instance, while the prices of essential Against this background of the on-going macro-level re-
drugs were reduced, the producers were given the free- forms process in the drugs and pharamaceuticals sector,
dom to earn reasonable profits on other drugs. this study addresses several micro level issues.

3
For more details, see Kumar, Nagesh and Jaya Prakash Pradhan (2002).
4
This trend has however increased over time.

3
Economic Reforms and Drug Policy : A Micro Level Analysis

3
A Micro View of the Sector

The industry was established with the birth of Bengal tion of bulk drugs and formulations has risen from Rs.
Chemicals and Pharmaceuticals in 1901. By the turn of the 38.40 billion in 1990-91 to an estimated Rs.197.37 billion
century it had grown in size to 21,000 manufacturing units. in the year 1999-2000.
About 75,000 formulations are being marketed indig-
With the introduction of economic reforms since the 1990s,
enously. The growth of the Indian pharmaceuticals indus-
there are two major concerns at the manufacturing unit or
try was the result of some major policy decisions. The
firm level. First, whether Indian manufacturing units will
biggest source of support to the industry was the decision
be able to produce the medicines at the present range of
to practice process patent regime in India (Indian Patent
prices with a minimum of expenditure on research. Second,
Act 1970). Further, the decision to have regular control
what will be the time lag in making these drugs available to
over the retail price of important drugs through the DPCO
the Indian masses, once they are brought under liberalisation
checked any uneven hikes in prices and controlled mo-
nopolistic tendencies. and WTO regimentation.

The Indian pharmaceuticals industry today produces a This study outlines the micro level effects of globalisation
complete range of formulations i.e., medicines ready for on the Indian pharmaceuticals industry. It aims to study
consumption by patients and about 350 bulk drugs i.e., the impact of the dilution of DPCO from time to time
chemicals having therapeutic value and used for the pro- since 1986. Further, there is an attempt to revoke the policy
duction of the country’s requirement of bulk drugs and framework of DPCO and WTO in relation to the acces-
almost all the demands for formulations. India’s total medi- sibility and availability of the drugs in India. Essentially, the
cine market is estimated to be Rs. 127 billion, of which the study focuses on the micro-product and unit levels, rather
retail formulations market is Rs. 105 billion. The produc- than the sectoral levels.

4
4
Drug Policy in India

Drug policy in India began with the establishment of the 55 percent and 100 percent, respectively. In all, 347 drugs
Hathi Committee to look into price trends, the competi- (about 90%) came under these price control categories.
tiveness and feasibility of making Indian drug units self- The philosophy behind the graded system was to make
sufficient. There were two major concerns. First, India was essential drugs cheaper. This approach of control on the
largely dependent on western countries for its supply of price of essential drugs resulted in a shift in the production
medicines and intermediates. While the basic drugs were pattern and this made it more difficult to avail essential
produced mainly by foreign units, Indian units produced medicines (Table 1).
only formulations. There was a lack of R&D both in the
A second major reform at the manufacturing unit level
public and private sector. The growing monopoly of
took place around the same time with the liberalisation
MNCs (multinational companies) in the pharmaceuticals
process. The MNCs pressurised the government to re-
industry was a concern. Second, though Indian drug prices
duce the number of drugs under the DPCO. The govern-
were quite low relative to international prices, the MNCs
ment decontrolled some of the drugs from the purview
tried to produce many non-essential drugs and kept the
of the DPCO in 1987, reducing them to 166. There was a
prices of essential drugs high relative to the purchasing
hike in the price of a few decontrolled drugs. Further, the
power of the Indian masses.
price difference between drugs supplied by TNCs and
Based on the recommendations of the Hathi Committee, indigenous firms became very significant (Table 2).
the DPCOs of 1978 and 1979 were established. For the
first time, a comprehensive price control was introduced From 1975 to 1984 there was an increase in the manufac-
in the drug industry (though a few measures had already ture of non-essential drugs by the MNCs as the profit
been in force since 1970). The new DPCO then grouped margin was higher in this segment than in essential drugs
the drugs into four categories: falling under the DPCO (Table 3).

1. Category – I (Life saving) Table 1: Drug Production in Response to


Price Policy (percent)
2. Category – II (Essential)
DPCO Category 1978 1979 1980
3. Category – III (Less essential) I Life saving 4.5 4.2 3.6
4. Category – IV (Non-essential / simple remedies) II Essential 16.7 14.8 13.2
III Marginal 67.1 67.0 68.6
Among these, the prices of the first three categories were IV Decontrolled 11.7 13.2 14.6
controlled with mark up (profits allowed) of 40 percent, Source: T. L.Narayana (1982).

5
Economic Reforms and Drug Policy : A Micro Level Analysis

Table 2: Price Difference between TNCs and Indigenous Firms in 1978 & 1982
Price (in Rs.)
Generic Name 1978 1982
of the Product Unit
Indigen- Difference TNCs Indigen- Difference
TNCs
ous firms in % ous firms in %
Analgin 0.50 gm 100 20.34 12 69.5 17.80 12 48.3
Ascorbic acid 500mg 10 1.73 0.50 246 2.64 0.50 428
Betamethsone 0.5mg 199 29.98 17.60 66.4 29.432 17.60 67.2
Chlorpropamide 100 mg 100 9.36 5.70 64.2 9.41 5.70 65.1
Chloramphenicol 250 mg 12 capsules 4.09 2.16 89.4 4.16 2.64 57.6
Chloroquin Sulphate 200mg 4 tablets 1.03 0.35 194.3 0.93 0.35 165.7
Chlorpromazine
Hydrochloride 25 mg 500 tablets 33.11 12.00 175.9 42.84 24.65 73.8
Diphenhydramine
Hydrochloride 50mg 50 capsules 7.43 3.70 100.8 8.49 3.70 129.4
Digoxin 0.25 mg 500 tablets 25.73 30 -14.20 25.86 36.88 -29.9
Glybenclamide 5mg 500 tablets 67.53 69.65 -3.0 67.53 69.90 -3.4
Isoniazid 100 mg 5000 tablets 127.22 110.00 15.7 124.42 110.00 13.1
Metronidazole 200 mg
Methergometrine 250 tablets 65.58 20.00 227.9 64.20 41.25 55.6
Oxytetracycline
Hydrochloride 250 mg 100 tablets 48.49 28.00 73.2 45.45 28.00 62.3
Prednisolone 5 mg 1000 tablets 179.67 146.37 22.8 180.58 145.20 24.4
Paracetamol 500 mg 250 tablets 23.29 10 132.9 23.4 13.7 70.2
Phenobarbitone 60 mg 500 tablets 16.58 11.63 42.6 16.6 14.9 11.2
Sulphaguanidine 500 mg 10 tablets 1.48 0.79 87.0 1.58 0.79 100
Sulphadiazine 5 mg 10 tablets 1.58 0.88 79.5 2.57 2.10 22.4
Tolbutamide 0.5 gm 1000 tablets 108.76 56.00 94.2 99.86 116.0 -13.9
Tetracycline Hcl 250 mg 100 capsules 50.91 28.00 81.8 43 28 53.6
Testosterone
Proprionate 25 mg 10 ampoules 11.65 3.40 242.6 14.69 3.78 286.5
TNCs: Trans National Companies
Source: Indian Pharmaceutical Guides, 1978-1982

Table 3: Comparative Contributions of Major MNCs and National Companies in


Antibiotic and Simple Remedies Segments

1975 1984
Total Antibiotics Simple Total Antibiotics Simple
Remedies Remedies
MNCs 82.8 16.9 23.8 196.9 18.4 73
(7 top companies) 20.4% 28.7% 9.4% 37.1%
National 49.3 29.1 11.9 150.2 86.1 21.4
(6 top companies) 59.0% 24.0% 57.3% 14.2%
Source: Operation Research Group reports, December, 1975 and December, 1984.

6
A Macro View of the Sector

The liberalisation policy contin- Table 4: Impact of DPCO 1995


ued and there was a further re-
Change in Retail price of 18 drugs 1993-1999
duction in drugs under the con-
Name of the drug Retail prices in Rupees % Change
trol of the DPCO. By 1995, as
1993 1999
few as 73 and by 2002 only 39
Controlled drugs
drugs remained under the pur-
Chloroquin phosphate tablet 150 mg. 0.52 0.90 73.0
view of the DPCO (Figure 2).
Cloxacillin capsule 500 mg. 3.80 4.50 18.4
The outcome of the dilution of
Ciprofloxacin tablet 250 mg. 7.10 3.56 -49.8
the DPCO was evident in the
Doxycycline tablet 100 mg. 2.10 3.20 52.4
increase in drug prices in India
Erythromycin tablet 250 mg. 2.92 3.50 19.8
(Table 4), particularly in the case
Famotidine tablet 20 mg. 2.10 0.60 -71.4
of decontrolled drugs. The av-
Griseofulvin 250 mg. 1.55 2.10 35.5
erage increase in price of 18 ma-
Penicillin G tablet 500 mg. 0.80 1.00 25.0
jor drugs was observed to be
Tetracycline tablet 250 mg. 0.90 1.45 61.1
44.6 percent during 1993-1999. Average Change 18.2
The average change in this pe- Decontrolled drugs
riod was mainly due to decon-
Amoxycilline Capsule 250 mg. 2.43 3.40 39.9
trolled drugs, which contributed
Ampicillin capsule 250 mg. 1.69 2.95 74.5
to the extent of 70.9 percent
Albendazole tablet 400 mg. 5.89 11.80 100.3
while the controlled drugs con-
Cephalexin capsule 250 mg. 4.10 5.80 41.4
tributed only18.2 percent. The
Co-trimaxazole DS tablet 0.80 1.55 93.7
liberalisation policy highlighted
Diclofenac sodium tablet 50 mg. 0.71 0.90 26.8
the significance of the Patent Paracetamol 500 mg. 0.29 0.50 72.4
Act 1970, which helped the In- Nifedipine tablet 10 mg. 0.58 0.90 55.2
dian pharmaceuticals industry Vitamin B complex tablet 0.49 1.15 134.7
develop generic versions of the Average Change 70.9
existing drugs. Average change (All) 44.60
Figure 1 and Tables 5 and 6 Source: CIMS, Sep-Dec,1993 and Sep-Dec,1999.
show the wholesale price index
and its growth rate during the period 1982 - 2002.The Table 5: Wholesale Price Index of Selected
Components for Different Time Periods
rate of growth in drugs and medicine prices was 11
percent after the recent reforms. 1982 1992 1994 2002
Drugs and Medicines 53.6 85.7 100 252.5
Invariably, fixing the criteria for keeping or withdraw-
Pencillins 49.9 95.9 100 129.6
ing drugs from the DPCO was the most difficult task.
Vitamin Liquid 47 64.3 100 103.2
It was observed that every time the drugs were brought
Ayurvedic Medicines 31.1 80.9 100 190.3
out of the DPCO, their prices increased. This was mainly
Antibiotics NA NA 100 127.7
due to the criteria used by DPCO. The DPCO consid-
Source: Business Beacon (2001), Centre for Monitoring Indian Economy Pvt.Ltd., Mumbai.
ers the total sale, monopoly and competition in the
production and marketing of a particular drug. The con- demand) automatically comes out of the purview of the
cept of essentiality is misquoted in this context. Any drug DPCO. Prices of drugs under the DPCO have often been
which has sales less than the prescribed quantity (based on less than the ceiling price fixed by DPCO/NPPA (Na-

7
Economic Reforms and Drug Policy : A Micro Level Analysis

Table 6: Growth Rate of Drug Prices from 1982-2002


alternative processes. Furthermore, it is the func-
1982-2002 Before During Recent tion of the NPPA to keep a watch on the prices
Reforms Reforms
of drugs and to fix the ceiling price for new
Drugs and Medicines 8.05 4.5 11 drugs/dosage forms.
Pencillins 4.8 7.5 2.5
Antibiotics - - 3.1 The DPCO was also finding it increasingly diffi-
cult to fix the drug prices due to the increasing
tional Pharmaceutical Pricing Authority). The system of
number of formulations (about 75,000) resulting from the
ceiling price is slowly becoming obsolete due to market-
relaxation in the patenting system. Also, the time taken by
driven prices. Thus the role of the DPCO is effective only
the authorities to fix a ceiling price for the formulations and
if the producer charges monopoly prices over and above
the ceiling prices. Thus, two forces acted simultaneously. the bulk drug was too long, leading to problems in the
While the prices of drugs going out of the DPCO’s con- production of the required drugs. Further, the need for the
trol increased, the competition driven market succeeded in DPCO’s intervention to control prices occurred only if
keeping the prices of such drugs below the level fixed by monopoly prices were charged. However, the process patent
the DPCO/NPPA. Competition among the decontrolled system enabled India to develop into a technologically ad-
drugs emerged due to the process patent, which permits vanced country in the field of bulk drugs. The following
any manufacturer to produce any drug by opting for some section therefore reviews the patent system in India.

8
5
Patent Scenario

India has been practising the process patent system in which pharmaceuticals in total imports from 1991 onwards. This
one can patent the process, but not the product. In other shows that the Indian pharmaceuticals industry is becom-
words, a producer can produce a given product through a ing self-sufficient and is capable of making indigenous
different process. The policy helped the Indian pharma- preparations. In fact, the export data clearly reveals the
ceuticals industry in many ways. India is the only country emerging technological hold that India has due to which it
that had the option to reverse engineer patented drugs and is supplying drugs to most of the developing and devel-
produce generic versions. The generic version will always oped countries in various capacities. Between 1994 and
be available at a lower price because it requires less time, 2001, India exported medicines and pharmaceuticals mainly
money and energy to produce the molecule. Further, the to USA (10 to 12%), Russia (11 to 6%), Germany (11 to
manufacturer will not be paying royalty to the patent holder. 5%), Hongkong (4 to 5%), Netherlands (4 to 2%) and
Moreover the system makes it possible for individuals to Nigeria (3.5 to 4%). Exports to Russia, Germany, Nether-
patent the reverse engineered scheme. lands, Italy and Japan have declined, while there is expan-
As a result, India is enjoying
Figure 3: Expenditure on Medicines as % of Per Capita Income
low cost medicines compared
to the rest of the world. In
the context of the purchas-
ing power or the income per
head, the expenditure on
medicine in India can be con-
sidered to be relatively low
(Figure 3 and Annexure I).

It can be safely inferred that


Indians can access medi-
cines at much lower prices
than other countries like
USA, UK, Pakistan, etc.
(Table 7). There has been a
continuous decline in the
share of medicines and
Source: http://www.indioppi.com/keystat.htm and Human Development Report (2000), UNDP, P.No.178.

9
Economic Reforms and Drug Policy : A Micro Level Analysis

Table 7: Comparative Prices of Selected Drugs sion of the market in China, Mexico
and Brazil. In value terms, India
Number of times costlier than in India
exports more than 80 percent of
Bulk drugs Pakistan USA UK its formulations and bulk drugs
Cefadroxil 2.7 10.8 3.4 (Figure 4).
Ciprofloxacin 4.6 6.1 6.3
Diclofenac 9.8 42.3 16.9 The Indian pharmaceuticals indus-
Piroxicam 5.6 43.5 12.2 try has come to this stage within a
Ranitidine 9.1 25.7 16.8 span of 25 years and this can be at-
Atenolol 11.6 30.5 13.8 tributed to the impact of the Indian
Aciclovir 10.8 10.6 17.2 patent system on R&D. Market com-
Source: Chemical Weekly, June 24,1997 pp.173. petition pushed research towards the
modification of the existing drugs
Table 8: Comparative Prices of Selected Drugs
and new combinations. The Indian
Bulk drugs R & D Spending Sales R & D as % of pharmaceuticals industry increased its
sale R&D expenditure from Rs. 10.50
Glaxo 1287.0 8484.0 15.2
crores in 1976-1977 to Rs. 320 crores
Roche 1226.3 5285.6 23.2 in 1999-2000 (Annexure 2). Yet,the
Merck 1120.0 8774.6 12.9 MNCs’ share in R&D was always
BMS 972.1 6524.0 14.9 quite high (Table 8). Clearly, India
Hoechst 955.8 6111.8 14.0 has not been able to invest as much
Sandoz 900.8 4972.9 18.1 as the multinationals on R&D, a fact
Pfizer 88.1 6210.3 14.3 attributable to the 1970’s process
Bayer 840.1 5788.4 14.5 patent system that encouraged the
SB 743.5 5231.3 14.2 production of generic versions of
Ciba 714.7 4466.0 16.0 drugs in India.
India (1995-96) NA NA 1.6
The process patent system
Source: S. Gautham and P. Parimao (1996)
allowed the Indian phar-
maceuticals industry to de-
Figure 4: Export of Pharmaceuticals from India - 1998
velop bulk drugs by reverse
engineering the original
molecule, making the In-
dian bulk drug industry a
leader among the develop-
ing countries. India is, at
present, producing bulk
drugs and formulations in
various capacities. Com-
pared to the period 1980-
81 to 1990-91, there has
been a galloping increase
Source: http://www.indioppi.com/keystat.htm.

10
Patent Scenario

in the production of formulations Figure 5: Production of Formulations and Bulk Drugs in India
and bulk drugs (Figure 5). The
growth in bulk drug production
pushed the formulations as well.

5.1 Why Do We
Need a System of
Patents?
In the context of examining the
reforms process it is worthwhile
to discuss certain basic aspects of
the patent system. First of all, are
patents really essential? What is
their impact on developing coun-
tries like India? Is the present sys-
tem beneficial to the people in
India? How are we going to cope
Source: http://www.indioppi.com/keystat.htm.
with issues such as upcoming chal-
lenges by MNCs?
cants include the cost of maintaining corporate patent de-
IPRs are a subset of property rights. A number of theo- partments, cost of patent counsel and lobbying activities
ries have been put forward to explain why patents are toward influencing patent policy.
needed. The natural rights theory suggests that the creator
is entitled to the intellectual fruits of his or her labour, en- Patents in the pharmaceuticals industry play a particularly
abling him or her to either prohibit others or charge a important role. Pharmaceutical innovation is quite costly.
royalty for using the outcome of the creator’s labour. The Development of a new drug can take 10 to 15 years and
prospect theory of patents (Kitch, 1977) posits that the cost more than $500 million (Sudarshan, 2002). Moreover,
rationale for granting patents is not so much a reward for the success rates for the complete process of drug devel-
past innovative activity, but an incentive for (future) devel- opment from synthesis to market approval have been es-
opmental activity. This perspective is consistent with con- timated at less than 0.1 percent. While development of
siderations such as commercial success. drugs is a lengthy and expensive process, their imitation is
Patent laws are not free from social costs. First, higher prices often simple and inexpensive, leading to significant rev-
may be charged for patented products. There are also higher enue loss for innovating firms. A study by the Pharmaceu-
transaction costs due to inefficiencies caused by patents on tical Manufacturers Association reported that in 1984,
inventions that would have been made without patent pro- unauthorised sales of patented U.S. pharmaceuticals by local
tection. Further, there are the costs of patent administra- firms in just five foreign countries amounted to $192 mil-
tion and patent application. The costs incurred by the patent lion, while the concomitant sales by U.S. firms were $162
administration system include the cost of processing ap- million (Mossinghoff, 1987). Therefore, effective patent
plications, the cost of granting applications and the cost protection is a necessary incentive to pharmaceutical and
of adjudicating disputes. Costs incurred by patent appli- chemical research.

11
Economic Reforms and Drug Policy : A Micro Level Analysis

5.2 Arguments Against Patents in environment conducive to indigenous participation in the


Pharmaceuticals pharmaceuticals industry. Redwood (1994) points out that,
in the 23 years since the introduction of the Indian Patents
There are some cogent arguments against patents for phar- Act in 1970, Indian ownership of drug firms increased
maceutical products. First, while patents are needed for
from 20 percent in 1970 to 61 percent in 1993. Fourth, it is
pharmaceutical innovation, prices are higher for patented
not clear that granting product patents will encourage fur-
pharmaceutical drugs. This price differential becomes evi-
ther investment in pharmaceutical R&D. Deardorff (1992)
dent when drugs lose their patent protection. For instance,
Griliches and Cockburn (1994, p.1214) noted that when argues that the availability of product patents for drugs is
the patent on the incumbent firm’s product expires, sev- not likely to substantially encourage new pharmaceutical
eral generic versions appear relatively quickly, selling at much R&D, given diminishing returns in new drug development.
lower prices, typically 30 to 50 percent cheaper than the Hamied also supports this view (cited in Cherukuri, Ravi,
original versions. Second, availability of patents for certain 1999). Finally, on humanitarian grounds, it can be argued
pharmaceutical products, and their higher prices, may make that essential drugs should be available to fight life-threat-
the pharmaceuticals industry less enthused to develop non- ening diseases irrespective of the patients’ ability to pay.
patented products that are necessary from a public health
Even though the Indian pharmaceuticals industry is enjoy-
policy perspective, but are not profitable to the innovator.
ing the existing patent system, it will have to change to
Third, patents may polarise the market in favour of larger
firms, which have the resources to invest in R&D and drive comply with WTO regulations. A large section of the In-
out smaller firms, which have essentially been producing dian population lives below the poverty line and will not
copies of drugs. In a developing economy, this might mean be able to afford the high cost of medicines that will enter
that foreign multinationals supplement indigenous manu- the market with enforcement of product patents. Obser-
facturers, as the latter cannot afford to invest huge resources vation of developing countries with product patents makes
in R&D. The absence of product patents may provide an it apparent that this is an area of concern.

12
6
Economic Reforms of 1990s, Implications of
WTO Commitments and TTrade
rade Liberalisation

The New Economic Policy was introduced in India in June The new economic policy (1991) also changed the restric-
1991. The Industrial Policy was also reformed in July 1991. tions on foreign ownership, by raising the ceiling on for-
GATT regulations were modified in 1994. WTO was es- eign equity holding to 51 percent, which was further raised
tablished in January 1995. All these internal and external to 100 percent by December 2001. Till the NPPA came
reforms have influenced the performance of the drug and into existence, DPCO kept reducing the number of drugs
pharmaceuticals sector during the 1990s. under price control based on the annual turnover. Similar
Under WTO, several objectives were incorporated (fol- modifications were made for the units in formulations.
lowing from the Uruguay Round in 1995). Among them, Under the WTO norms imposed from 2005 onwards,
the Agreement on Trade Related Aspects of Intellectual drugs can no longer be produced generically. This will
Property Rights (TRIPS), Agreement on Subsidies and change the drug supply considerably, as access to inexpen-
Countervailing Measures, Sanitary and Phyto-sanitary Regu- sive medicines, relative to the rest of the world, will no
lations and Agreement on Technical Barriers are directly longer be available. Since the prevailing process patent re-
relevant for this sector. The major changes introduced in gime allows the industries to market the reverse engineered
India under WTO are: form of the patented drugs without paying any penalty,
z A two-tier tariff structure, making essential drugs avail- firms were able to reproduce the drug in three to four
able at zero tariff and countervailing duty rates; whereas years without violating the Process Patent Laws (Table 9).
all other drugs are at 30 percent tariff and 16 percent
countervailing duty. 6.1 Effect of WTO/TRIPS: Some
z TRIPS agreements on technical matters extended to Case Studies
20 years from the existing seven and 14 years. There is a fear that implementation of WTO and TRIPS
z India agreeing to opt for switching to product pat- regulations will worsen access to the health care systems in
enting from 2005. developing countries. Watal (2000; 2001) has analysed this
using several case studies.
z As part of TRIPS, the Drug Development Promo-
tion Foundation, Pharmaceutical Research and Devel- WTO implementation can worsen the situation through
opment Support Fund, and National Pharmaceutical TRIPS regulations, which may ultimately result in increased
Pricing Authority (NPPA in 1997) have come into prices. Indian companies including Cipla and Cadila came
existence since 2002 in place of DPCO. up with the generic version of sildanafil citrate and Pfizer

13
Economic Reforms and Drug Policy : A Micro Level Analysis

Table 9: Time Lag Between Originator and Indian National Firms in exceptions, with countries able to
Introducing a New Drug in the World Market “adopt measures necessary to
protect public health and nutri-
Drug Year introduced
tion.” This is supposed to allow
By originator in the By Indian national firms
the granting of “compulsory
in the world market in the world market licenses” for the production of
vital drugs. It is also supposed to
Captopril 1981 1985
allow “parallel importing” of
Ranitidine 1983 1985
patented drugs, i.e., their purchase
Acyclovir 1985 1988
from whoever sells them the
Ciprofloxacin 1985 1989
cheapest. The difficulty is being
Source: B.K. Keayla (1998)
able to utilise the rules permitting
the innovator of the drug went out of the Indian market. exceptions. Most developing countries, including India, do
Indian companies marketed the drug at a considerably not have a pharmaceuticals industry that is capable of pro-
lower price, based on low costs due to reverse engineer- duction on a scale that can act on the basis of such ‘excep-
ing. Table 10 shows that Indian companies are selling the tions’ and bring down drug prices. They are only allowed
patented drugs at a rate far lower than other developing to import cheap “generic” drugs (copies of expensive drugs
countries and the world market. In fact, Indian firms are patented by Western companies), usually produced in coun-
exporting the medicines to countries like Thailand. Will tries such as India, Brazil and Thailand, if a compulsory
Indian firms be able to give the drugs at the same price license has been issued in the exporting country. Even in
after 2005? Prices are expected to go up by over 100 per- this case, the TRIPS agreement specifies that a compulsory
cent after product patenting is introduced. license can only be issued for “predominantly” domestic
needs. What is more, compulsory licensing can only be
The WTO rules are complex and appear to permit some obtained after efforts have been made to obtain a regular

Table 10: Comparative Picture of Indian and other Developing Country Prices
Before Introduction of Product Patenting

Retail prices of 100 units in USD Ratio


Generic name Originator/
Proprietary of
of drug Country Price Country Price
low :
name
Lowest Highest high

Acyclovir 200 mg Glaxo-Welcome/Zovirax Tongo 50 Indonesia 371 1:7


Acyclovir 800 mg Glaxo- Welcome/Zovirax India 94 South Africa 790 1:8
Atenolol 25 mg Zenaca/Tenormin India 03 Camerom 53 1:18
Ciprofloxacin 500 mg Bayer/Ciproxin India 15 Mozambique 740 1:49
Diclofenac 50 mg Novartis/Voltarin India 02 Argentina 118 1:59
Nifedipine 20 mg Seneca/ Adalat
Bayer Corporation India 03 Peru 96 1:32
Omeprazole 20 mg Astra/ Losec Zambia 30 Brazil 477 1:11
Ranitidine 150 mg Glaxo- Welcome/Zantac India 20 South Africa 116 1:58
Zidovudine 100 mg Glaxo-Welcome Pakistan 81 Argentina 316 1:4
Comment: Comparison of lowest and highest retail prices in USD for 100 units of proprietary brands of nine drugs in developing countries.
Source: Bala K. and Kiran Sagoo (2000)

14
Economic Reforms of 1990s, Implications of WTO
Commitments and Trade Liberalisation

license from the patent holder on commercial terms and Table 11: Prices of Zantac in 1999
if the patent holder is compensated. The WTO rules ef-
fectively mean, ‘Governments will no longer be permitted Countries Price in USD
to allow local companies to produce, market and export India 2
copies of patented drugs’. At present, there are a range of Nepal 2
examples of the staggering difference in prices between Pakistan 21
patented and generic drugs. Zantac, used to treat gastric Korea 61
ulcers, costs between 15 and 50 times more in the US and Zambia 82
Europe respectively, than its generic version made in In- Bolivia 94
dia5. When WTO rules are applied in India, drug prices Senegal 100
could rise significantly as a result of patenting (Table 11).
Burkina Faso 105
There are newer problems arising now. Oxfam (2001) South Africa 116
points to the vast increase of new strains of diseases, in- Note: The ratio of the lowest to the highest price of a multi-source drug, Zantac
in developing countries is 1:58. It is US $2 per 100 units in India and Nepal
cluding malaria and tuberculosis, which can only be treated while it is $116 in South Africa.
by recently developed patented drugs. For example, a
may lead to an increase in prices of the patented products.
World Health Organisation (WHO) study has shown that
The patent system is likely to affect availability of new drugs,
in the case of pneumonia, which kills 3.5 million people
annually, medications that were formerly effective now fail particularly for the treatment of cancer, AIDS, blood pres-
in 70 percent of cases because of drug resistance. A new sure, diabetes, TB, etc. So a poor man cannot afford treat-
range of antibiotics is being patented that will be ment involving new medicines even, if it is necessary or
unaffordable in developing countries. To ensure that the beneficial. Yet, the new patent system or WTO provisions
poorer countries do not find ways of using compulsory may not affect the availability of basic or essential drugs,
licensing or parallel importing to avoid WTO rules, the which are already in the market and those which are non-
major pharmaceutical companies are using what is described patented or for which the patent period is over. Indian
as “armies of lawyers” to press their case.6 In 1997, the companies can produce generic versions of drugs patented
South African government passed a law sanctioning the before 1995, the year in which India adopted the TRIPS
use of compulsory purchasing and parallel importing for agreement.
AIDS drugs and other medicines. Introduced in 1988, the
“Special 301” provision of the US government is used to Indians may have access to new drugs, if Indian compa-
impose trade sanctions on countries to enforce compli- nies can reverse-engineer new patented drugs, brought under
ance with WTO rules. India, the Dominican Republic, Ar- compulsory licensing by the government because of their
gentina, Vietnam and Thailand all face Special 301 sanc- significance to public health. In the past, Indian companies
tions by the US over patenting rules for medicines. have shown that they can produce patented drugs within a
short period. This may also be beneficial to other devel-
6.2 Patent Barriers to Access to oping countries, which do not have a strong pharmaceuti-
cals industry base. However, this depends on the stage at
Medicines at WTO: A Review
which compulsory licensing is issued by the government
Since the provisions under WTO allow protection of 20 and at what price (payment of royalty) it is available to
years for the patented product, it is likely that patent hold- Indian companies. The other option to minimise the im-
ers will have a monopoly over the market, which ultimately pact of WTO on the availability of new drugs is to pro-
5
If a country can import the drug fluconazole used in the treatment of cryptococcal meningitis, (an infection associated with AIDS) from Thailand,
the annual cost of treatment would be $104. However, Pfizer, the company owning the patent on the drug, charges $3,000 for an annual course of
treatment and is applying pressure through the WTO to stop Thailand from exporting the drug.
6
An indicator of the vast economic power of transnational corporations is Pfizer’s whose earnings are greater than the Gross Domestic Product of
most developing countries.

15
Economic Reforms and Drug Policy : A Micro Level Analysis

duce alternative medicines for the treatment of diseases Park Davis, Unichem, etc., have already offered a volun-
for which patented drugs are available. Government in- tary retirement scheme to workers, closed their factories
centives in the nature of provision of infrastructure and and sold their factory premises at premium prices. Pfizer,
removal of administrative hurdles are also necessary for Rhone Poulnec, Hoechst, Glaxo, etc., have reduced their
promoting R&D in the pharmaceuticals sector. work force. Crores of rupees have been spent on volun-
tary retirement schemes. These companies are manufac-
We need to watch how India will overcome the challenges
turing their products with the help of loan licences. Some
of monopoly and price rise that are likely to be brought
of them have opened smaller factories in new places and
about by the new patent system.
appointed workers with lower wages and heavier
workloads. More casual workers are being appointed. In
6.3 Globalisation: A Threat the Mumbai-Thane region of Maharashtra, around 30,000
The effect of globalisation on the pharmaceuticals sector workers have lost their jobs in the pharmaceuticals indus-
needs to be examined. Case studies have already proved try in the last two years.
that the medicines that are going to be invented after 2005 In addition, the distribution workers are gradually being
will be expensive and inaccessible. Added to this is the fact replaced by the cost and freight agency system. Under this
that the pharmaceuticals industry in India will have to face system, the original company does not have any responsi-
stiff competition from the multinationals, which have a stra- bility towards the workers. They are employed by agents
tegic plan to introduce their products in the Indian market. and have heavier workloads and lower wages. In the last
One strategy has been to shift production to third party decade, around 15,000 distribution workers have lost their
manufacturing units. In their attempt to do this, Hindustan jobs in the pharmaceuticals industry (Table 12). Moreover,
Ciba Geigy, Roche, Abbot, Boehringer Mannheim, Boots, because of the agency system, the government is deprived
of sales tax.

Table 12: Reduction in the Work Force in


In marketing too, the field workers or the sales promo-
Pharmaceuticals Industries tion employees are facing tremendous pressure in the name
of franchise, co-marketing, appointment of communica-
Company Year Reduction of work
force tors, etc. Many permanent sales promotion employees are
Glaxo 1995 1564 losing their jobs. Many others are appointed as so-called
Hoechst 1996 10429 executives to remove them from the fold of the union.
Knoll Pharma (Boots) 1995 600 (All workers) More casual and contractual workers are being recruited.
Smith Kline Beecham 1995 208
The total payment on voluntary retirement schemes by
E.Merck 1995 194
firms like Glaxo, Hoechst, Pfizer, Knoll Pharma, Rhone
Rhone Poulnec 1996 700
Hindustan Ciba Geigy 1993 907
Poulenc, Park Davis, Smith Kline Beecham, Duphar, Bayer,
Duphar Interferan 1996 154
etc., is more than Rs. 200 crores in the last three financial
Bayer 1996 590 years. Employment opportunities in these units have been
Abbott 1996 All workers reduced permanently.
Roche 1996 All 320 workers
Park-Davis 1997 All 650 workers 6.4 Mergers and Acquisitions
Pfizer 1995 215
Unichem 1997 All workers International and national level mergers, acquisitions and
takeovers have now become a common phenomenon in
Source: Annual reports of respective companies and interaction with the office bearers of
unions

16
Economic Reforms of 1990s, Implications of WTO
Commitments and Trade Liberalisation

the pharmaceuticals industry. Inter- Table 13: Some Top Pharma Company Mergers in the World
nationally, American Home Prod-
uct merged with Cyanamid, SKB Value of
Merged
(Smith Kline Beecham) with Ster- Company
Company Merger Year
ling, Rhone Poulenc with Fashions, (US $)
BSF with Boots, Glaxo with
Dow Chemicals Marion Labs 1986 6.21
Burroughs Welcome, Ciba Geigy Bristol Myers Squibb Corp 1989 12.09
with Sandoz, Warner Hindustan Beecham group Smith, Kline & French 1989 7.9
with Parke Davis, Hoechst with American Home Products American Cynamide 1994 9.7
Rhone Poulenc, etc. These are some Hoffman La Roche Syntex Lab. 1994 5.3
of the examples of big takeovers. Eli Lyly PCS Health System 1994 4
Through mergers and acquisitions, Sandoz Gerber 1994 3.7
these companies became even Smith Kline Beecham Sterling 1994 2.9
larger, with more financial power Glaxo Burroughs Wellcome 1995 14.2
at their disposal relative to their Hoechst MMD Roussel 1995 7.2
competitors (Table 13). Pharmacia Upjohn 1995 7
BASF Boots 1995 1.3
In the coming days, with the help
Ciba Geigy Sandoz 1996 30.1
of international financial compa-
Hoffman La Roche Comage Ltd. 1997 11
nies, the MNCs will capture and
Astra Zeneca 1998 67
take control of Indian companies
Source: Compiled from reports published in various newspapers.
in order to control the Indian
market. their business. SKB took over Crocin from Duphar,
Ranbaxy took over seven leading brands from Gufic, and
Companies in India are adopting the international meth-
Dr. Reddy’s Lab purchased six products of Dolphin and two
ods of mergers and takeovers. For example, Wockhardt
each from Pfimex and SOL Pharma. Sun Pharma purchased
took over Merind and Tata Pharma, Ranbaxy took over
all the leading brands of NATCO. After selling their popular
Crosslands, Nicholas Piramal took over Roche, Boehringer, brands companies are becoming sick and having to down their
Sumitra Pharma. The inevitable result is loss of jobs. Be-
shutters, making the workers jobless.
cause of overlapping of jobs, a large number of workers
are declared surplus. After their merger, Glaxo-Welcome Government permission to the MNCs to come to India with
and Ciba-Sandoz announced a worldwide reduction of 100 percent equity has threatened the existing companies and
15,000 and 10,000 respectively in their work force. Upjohn their workers. Through the process of mergers, acquisitions
and Pharmacia decided to close 24 of their 57 plants in and takeovers, MNCs will gradually increase their grip on the
different countries after their merger. Indian industry by creating a limited number of mega compa-
nies that have monopoly control and worldwide domination.
Some countries are adopting the ‘buy and grow’ method. In the absence of competition, people will have to pay exorbi-
They are taking over some popular brands and increasing tant prices, as happens in a sellers market7.

7
Such mergers are more predominantly observed during the reforms period in the sector and also in the chemical sector in general.

17
Economic Reforms and Drug Policy : A Micro Level Analysis

7
Evaluation of the Reforms Process in India

There is already sufficient evidence to indicate that compe- low-priced generic drugs available in every developing
tition has forced the multinationals to lower their prices to country. This is critical since price is one of the criteria used
compete with Indian firms. Interestingly, when faced with by developing countries for selecting drugs for their na-
competition, multinationals do not leave the market. They tional list of essential drugs. High cost drugs, for example
lower their prices and stay on to compete with the nation- some of the new anti-retroviral drugs for the treatment
als. This is due to the size of the Indian market.8 The best of HIV/AIDS, because of their high prices, are not in-
way for the Indian firms to compete is to produce the cluded in the lists of essential drugs in many developing
drug at very low costs. It takes a few years for manufac- countries.
turers to copy products by reverse engineering and enter
The case studies and Indian data clearly show that there is
the market (Table 9). A short period of three to four
need for national policies on the intellectual property sys-
years is not sufficient for them to capture a sizeable world
tem with provisions to enable national firms to initiate pro-
market share, increase production volume, lower pro-
duction of new drugs as early as possible. Indian firms
duction costs and effectively compete on price. In the
were able to do this by a process of reverse engineering.
past, Indian firms were able to market these drugs at about
This was possible because the Indian national legislation
half to one-fourth of the lowest prices of the originators
on patents did not provide patent protection for prod-
of the proprietary drugs. Then, the Indian manufacturers
ucts. However, this will change now.
had adequate time to capture a considerable market share,
increase production volume, lower production costs and With the TRIPS Agreement taking effect, all member coun-
offer low-priced drugs to consumers. tries of the WTO will have to provide patent protection
Time is crucial in introducing generic equivalents of essen- for products and processes for 20 years. The only way
tial drugs, soon after new drugs are put into the market. national firms can initiate production is by compulsory li-
This enables them to enter into price competition by skil- censing, which is allowed under the TRIPS Agreement.
ful promotion, well before the originators secure brand Nevertheless, only a few of the technically advanced de-
loyalty for their products. Many of the African countries veloping countries can use compulsory licensing to manu-
(where no patent protection exists) surveyed had only the facture new drugs. The vast majority of developing coun-
originators’ proprietary brands, which are monopoly mar- tries do not have the technical specialisation to produce
kets for eight multi-source drugs, while generic equivalents pharmaceuticals. These countries depend on imports of
of these drugs were available in the world market at lower raw materials and finished products. They can have access
prices. It will be in the interest of public health to have to lower priced drugs produced in the more advanced
8
Another example comes from Bolivia where 100 units of 100 mg of Retrovir (zidovudine) were priced at US$626 in 1997. Prices dropped to US$258
in 1998 when the competitor’s product of zidovudine was made available and sold at US$427

18
Evaluation of the Reforms Process in India

developing countries or by generic manufacturers in some higher. This is also allowed under the TRIPS Agreement.
developed countries only by parallel importing. Parallel This study shows that India can take advantage of this
import or trade in patented articles is governed by the ‘ex- situation (Tables 10 and 11).
haustion of rights’ doctrine, which stipulates that once the
producer of a patented item has sold the product, the Furthermore, in the interest of all developing countries in-
patent holders’ right to determine the conditions under cluding India, compulsory licensing and parallel imports are
which the product is resold are exhausted (Misra et al 2003). two provisions, which should be included in all national leg-
Parallel importing arises due to differential pricing of pat- islations on IPRs. The TRIPS Agreement allows these provi-
ented products in different markets. Parallel importing en- sions to be included in the national legislation on prices. This
ables the sale of patented products from a country where will enable developing countries to have regular access to
it is cheaper, to other countries where the prices may be good quality essential drugs at affordable prices.

19
Economic Reforms and Drug Policy : A Micro Level Analysis

8
The New Patent Bill: Some Obser vations
Observations

The Indian Patent Amendment Bill, power to issue a ‘compulsory license’ in the public in-
terest.
2005
z Generic manufacturers have to wait three years after a
The Indian Patent Amendment Bill, 2005 was passed in
patent is granted to a particular medicine before they
Parliament on 22nd March, 2005 reflecting India’s support
can apply for a compulsory license to manufacture it.
to the WTO product patent regime. The new patent re-
gime is applicable from January 1st, 2005. Under the new z There is provision for allowing the patent holder to
patent regime, India shifted from process patent to prod- contest ‘compulsory licensing’.
uct patent, making it illegal for domestic companies to make
generic copies of patented drugs. The Bill enables the In- z Patent protection is applicable for a period of 20 years.
dian government to grant product patents to pharmaceu-
The introduction of the Indian Patent Amendment Bill,
tical and agrochemical inventions. The patent mailbox al-
2005 has made India shift from process patent to product
ready has 8,926 applications in it for the period 1995-2005.
patent as per the provisions of WTO. Article 28 of the
Around 84 percent of these applications are from foreign
TRIPS Agreement removes the distinction between prod-
companies.
uct and process patent and recognises only product patent,
Important Provisions of Patent Bill, 2005 wherein the process for making the product is implicitly
z A patented product has to be a new entity, involving patented. As such, no manufacturer can produce the pat-
one or more innovative steps. ented product using different methods or processes. The
new Patent Bill in India provides patent protection for a
z The new Act restricts ‘ever-greening’ i.e., there is no
period of 20 years, up from the existing period of seven
provision for placing new-use patents for the already
years. Under the process patent, manufacturers adopted
patented drugs.
different processes to produce a patented product, but
z A system of automatic licensing, which allows generic product patent does not allow manufacturing and sale of
manufacturers already producing and marketing a drug patented products without proper authorisation. Product
that gets a patent from the Indian Patent Office to patent is supposed to be an incentive to pharmaceutical
continue production after paying a ‘reasonable roy- companies who make huge investments in research and is
alty’ to the patent holder. likely to boost research on the treatment of various dis-
z Provision for ‘compulsory licensing’ allowing compa- eases. A majority of the companies that have applied for
nies other than the patent holder to manufacture pat- patents in India are foreign. Exceptions include Dr. Reddy’s
ented drugs under license. The government has the Laboratories who have also applied for patents in India.

20
The New Patent Bill: Some Observations

The new Patent Bill provides for some precautionary mea- Companies have to show one or more inventive steps in
sures to prevent misuse of patents. The Bill specifies “new the production of the new drug. The Bill also provides for
entity”, which does not allow “ever greening” of patents compulsory licensing, which may be issued by the govern-
by companies trying to extend the period of a patented ment in the case of high prices of patented drugs and in
drug by introducing the same product with minor changes. the interest of public health.

21
Economic Reforms and Drug Policy : A Micro Level Analysis

9
Medecins Sans Frontieres’ (MSF) Views on
India’
India’ss Role in the Provision of Dr
Provision ugs:
Drugs:
Expressions on the Indian Patent Bill, 2005

z Examining the amendments that were proposed un- Union. MSF has warned that the new patent law could
der the Indian Patents Act, 1970, MSF reacted by say- threaten the supply of affordable and essential drugs.
ing that they will restrict and prevent the production
z MSF urged the Indian policy makers to ensure that the
and supply of vital therapies by Indian pharmaceuti-
new Act incorporates the full flexibilities and safeguards
cal companies to other developing countries.
of the TRIPS Agreement and reflects the outcome of
z MSF has recognised India’s role in treating AIDS in the Doha declaration on TRIPS and public health, which
developing countries. In its letter to the President of affirmed that the TRIPS Agreement can and should be
India, MSF writes that out of 7,00,000 people who interpreted and implemented in a manner supportive
receive antiretroviral treatment in developing countries, of WTO members’ rights to protect public health and
an estimated 50 percent rely on Indian generic pro- in particular, to promote access to medicines for all.
duction and 70 percent of the AIDS patients treated
z Expressing its concern over the developments, MSF
by MSF in 27 countries around the world use medi-
hopes that the new patent law will safeguard not only
cines that originate in India. These drugs cost about
the citizens of India, but also the millions of children,
five percent of the price of similar drugs sold by phar-
women and men in the developing world whose lives
maceutical companies in the US and the European
depend on access to affordable generic medicines.

22
10
Summar
Summaryy and Conclusions

Technological advancement has enabled India to become Indian companies can no longer enjoy the benefits of pro-
one of the leading pharmaceutical manufacturers that pro- cess patent. The new Patent Bill puts an end to the produc-
duces drugs at the lowest prices available internationally. tion of generic versions of a patented drug. Increased
Although prices have increased with the new liberalisation investment on R&D in the drug sector, formalising and
policies, Indians still have access to the latest drugs with the documenting the medicinal properties of plants by manu-
minimum time lag at costs that are 10 to 100 times less facturers and patenting ayurvedic drugs, framing a national
than those prevailing in foreign countries. forum of Indian Medical Association, pharmaceutical
manufacturers and health officials to promote products
The wholesale price data indicates that the overall growth
of Indian manufacturers and, negotiating with foreign drug
in prices of medicines is largely due to the rise in prices of
companies manufacturing in India to supply patented medi-
non-essential drugs. The effect of the DPCO 1995 also
cines for the treatment of diseases like AIDS at an afford-
indicates that the price of decontrolled drugs contributes
able cost for bulk purchase are some of the measures that
to most of the increase in the drug prices. The reforms can be taken in the interest of public health.
process has reduced the controls by DPCO. The net im-
pact has been a large increase in the basket of drugs. The mergers and acquisitions taking place on a large scale
in this industry have been of some concern. Many job losses
Further, Indian R&D is advanced in process research, which are reported due to the mega mergers. The profiteering
gives it a leading edge in developing drugs that are presently attitude of the MNCs has resulted in a reduction in the
available. However, it faces some drawbacks in not research- workforce and is a threat to the small-scale industries, which
ing new molecules. Much of the R&D by large pharmaceu- mainly practice generic manufacturing. This is a matter of
tical companies is not aimed at developing “new” drugs, very serious concern. Apart from loss of employment of
but is targeted at the development of substitutes for com- technical manpower, the tendency for mergers will create
petitors’ drugs with little or no contribution to the pool of more monopoly power in the industry.
available therapies, or to minor changes in existing products
and processes. In many cases these are intended to extend In short, the drug and pharmaceuticals industry in India
the term of the monopolistic position that patents confer. will have to face the challenges of economic reforms,
WTO and TRIPS regulations while trying to ensure that
It is worth mentioning that India has always shown that it is the welfare of the people, or the public health care system
possible to provide access to generic drugs within two to is not compromised in any significant way. Otherwise, the
three years of the introduction of the original drugs in the comparative advantage established till the 1980s could be
world market. lost in the coming years.

23
Economic Reforms and Drug Policy : A Micro Level Analysis

11
Insights for Policy Initiatives

z Encourage development of new drugs via fiscal z Introduce a system (maybe a panel of experts) to screen
incentives. the existing drugs, which could help in banning irratio-
nal, ineffective (therapeutically) and harmful drugs.
z Control prices of selected life saving drugs and basic
drugs used in primary health care. z Protect the interests of the poor in the light of the
new patent regime. The MNCs operating in the coun-
z Sign agreements with MNCs established in India for
try may be asked to set aside at least 25 percent of
the supply of new drugs (particularly for treatment of
their production for essential drugs. Issue public no-
diseases like TB, Malaria, AIDS, Hepatitis A & B) at
tices at all the health centres on banned drugs, side
concessional rates to Public Health Centres.
effects of major essential drugs and drugs not to be
z Regulation of drugs: used under self-medication. Ethics in production, mar-
i) Restrict marketing of banned drugs keting and prescription of medicines is what is required
today in a country with mass illiteracy, poverty and
ii) Use of restricted components in drug manufacturing
wide prevalence of morbidity, but this cannot be im-
iii) Quality control posed. It has to come out of self-decision on the part
z Create a platform for using compulsory licensing or of the respective players in the field. State intervention
parallel importing to have access to patented drugs through monitoring, guidelines and regulation can be
for curing TB, malaria, AIDS, pneumonia, etc. complementary measures.

24
ANNEXURES

Annexure-I Annexure-II

Per capita drug expenditure and per capita R & D Expenditure in India
income in 1998
Years Rs in crores
Countries Per Capita Drug Per Capita 1976-77 10.50
Expenditure(US$) Income PPP
1978-79 12.00
Japan 412 23257
1979-80 14.75
Germany 222 22169 1981-82 29.30
United States 191 29605 1983-84 40.00
Canada 124 23582 1985-86 48.00
United Kingdom 97 20336 1986-87 50.00
Norway 89 26342 1993-94 125.00
Costa Rica 37 5987 1994-95 140.00
1995-96 160.00
Chile 30 8787
1996-97 185.00
Mexico 28 7704
1997-98 220.00
Turkey 21 6492
1998-99 260.00
Morocco 17 3305
1999-00 320.00
Brazil 16 6625 R&D Expenditure as % 2.0%
Philippines 11 3555 of sales 2.0%
Source. http://www.indioppi.com/keystat.htm.
Ghana 10 1735
China 7 3105
Pakistan 7 1715
Indonesia 5 2651
Kenya 4 980
India 3 2077
Bangladesh 2 1361
Mozambique 2 782
Source: http://www.indioppi.com/keystat.htm. and Human Development Report
(2000), pp. 178

25
Economic Reforms and Drug Policy : A Micro Level Analysis

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Bala, K. and Sagoo, Kiran 2000. ‘Patents and prices’, Hainews, No. Centre for Study of Global Trade System and Development,
112. New Delhi, India.

Cherukuri, Ravi 1999. ‘In an interview with Mr. Y. K. Hamid, Kitch, Edmund W. 1977. ‘The nature and function of the patent
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Patents: A Bitter Sweet Pill’, Capital Market, Vol. 13, No. 22, pp.
Kumar, Nagesh and Pradhan, Jaya Prakash Undated. ‘Economic
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Current Index of Medical Specialities (CIMS) 1999. ‘Bio-Guard Mossinghoff, Gerald J. 1987. ‘Research-based pharmaceutical
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worldwide’, Journal of Law and Technology, Vol. 2, No. 6, pp.
Deardoff, Alan V. 1992. ‘Welfare effects of global patent protection’, 307-324.
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Narayana, T. L. 1982. ‘The Indian Pharmaceutical Industry Problems
Drug Price Control Order (DPCO) 1975-1995, Government of and Prospects’, National Council of Applied Economic
India. Research, New Delhi.
Drug Price Control Order (DPCO) 2002, Government of India. Operation Research Group Reports, December 1975 and December
1984.
Gautam, S. and Parimao, P. 1996. ‘Challenges and opportunities
for pharma industry’, The Eastern Pharmacist, Vol. 39, No. 462, People’s Democracy, Vol. 22, No. 50,December 1998, pp. 7-ff.
pp. 53-ff.
Rajiv, Misra; Chatterjee, Rachel and Rao, Sujata 2003. India Health
Griliches, Zvi and Cockburn, Iain 1994. ‘Generics and new goods Report, Oxford University Press, New York.
in pharmaceutical price indexes’, American Economic Review, Vol.
Redwood, H. 1994. New Horizones in India-the consequences of patent
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protection, Oldwicks press Ltd.
Human Development Report 2000. pp. 178-ff.
Sehgal, J. M. 1998. ‘Opportunities and challenges in the drug sector’,
Jayasekera, Deepal 2001. ‘AIDS becomes a serious health problem The Eastern Pharmacist, Vol. 41, No. 486, pp. 22-ff.
in India’, WSWS, May 14.
Sengupta, Amit 1996. ‘Economic reforms, health and
Kadekodi, G.K.and Kulkarni, Keerti 2002. ‘Status of Health and pharmaceuticals: conferring legitimacy to the market’, Economic
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26
References

Sudarshan, V. 2002. ‘Where all those cheaper drugs gone?’, Express Relevant Websites:
Pharma Pulse, Vol.8, No.11, p.8.
http://www.indioppi.com/keystat.htm.
Talbot, Chris Undated. ‘Adverse Health Impact of Drug Patents www.medindia.net/buy_n_sell/pharm_industry/ph_rdindia.asp
on Developing Countries’, Oxfam Reports, World Socialist
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Website.
Watal, Jayashree 2001. Intellectual Property rights in the WTO and
Developing Countries, Oxford University Press, New York.

WTO OMC Fact Sheet, April 2001.

27
About the Series Editors
Aasha Kapur Mehta is Professor of Economics at the Indian Institute of Public Administration, New Delhi and leads the
Chronic Poverty Research Centre’s work in India. She has a Masters from Delhi School of Economics, an M.Phil from
Jawaharlal Nehru University and a PhD from Iowa State University, USA. She has been teaching since 1975, initially at
a college of Delhi University and then at IIPA since 1986. She is a Fulbright scholar and a McNamara fellow. Her area
of research is now entirely focused on poverty reduction and equity related issues.

Pradeep Sharma is an Assistant Resident Representative and heads the Public Policy and Local Governance Unit in
the India Country Office of United Nations Development Programme (UNDP). A post-graduate from University of East
Anglia (UK) and Doctorate from Jawaharlal Nehru University, he has held several advisory positions in the Government
of India and has taught economic policy at LBS National Academy of Administration, Mussoorie. He has several
publications to his credit.

Sujata Singh is an Associate Professor at the Indian Institute of Public Administration. She completed her doctoral
studies in Public Administration and Public Policy at Auburn University, USA. Her primary research interests are in the
area of Comparative and Development Administration, Public Policy Analysis, Organizational Theory and Evaluation of
Rural Development Programmes.

R.K. Tiwari is Senior Consultant, Centre for Public Policy and Governance, Institute of Applied Manpower Research,
Delhi. He was formerly Professor of Public Administration at the Indian Institute of Public Administration (IIPA), New
Delhi. He received his education at Gwalior, Allahabad and Delhi. He has undertaken a number of research studies in
Development Administration, Rural Development, Personnel Administration, Tribal Development, Human Rights and
Public Policy. He has conducted consultancy assignments for the Department of Posts and in the Ministry of Rural
Development, Government of India; and for the Government of Orissa and the Narmada Planning Agency, Government
of Madhya Pradesh. He has published several books.

P.R. Panchamukhi, is Professor Emeritus, Centre for Multi-disciplinary Development Research (CMDR), Dharwad,
where he was Founder-Director. He has a doctorate in Pubic Finance from Bombay University. He has been
awarded a number of coveted scholarships and prizes including Seth Mangaldas Jeshingbhai Economics prize for
standing first in the Bombay University and V.K.R.V.Rao Award for significant original research contribution. He has
held the CN Vakil Chair in General Economics of Bombay University and has worked as Director, Indian Institute of
Education, Pune. He been Advisor to the Planning Commission and has served on a number of committees of Govt.
of India, Govt. of Karnataka, and Maharashtra, and been a consultant/adviser to international agencies like The
World Bank, UNICEF, UNESCO, Columbia University, WHO-Geneva, ESCAP-Bangkok, Indo-French Round Table.
He has been Chief Editor /Editor of different national level journals. He has authored 15 major research works and
has more than 89 research papers in national and international publications in the areas of Education, Health,
Public Finance and Developmental Economics.

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