COMPETITION LAW AS PATENT SAFETY NET IN THE

PHARMACEUTICAL INDUSTRY

RESEARCH PAPER

SUBMITTED TO:

MR. R N SAHAY
ADVISER (ECO)

COMPETITION COMMISSION OF INDIA

SUBMITTED BY:

NAVEEN DAHIYA

NATIONAL LAW SCHOOL OF INDIA UNIVERSITY

BANGALORE

1
 TABLE OF CONTENTS

ACKNOWLEDGEMENT…………………………………………………………………………………………….3

ABSTRACT……………………………………………………………………………………………………………4

CHATER ONE- INTRODUCTION………………………………………………………………………………...5

CHAPTER TWO- INDIAN PATENT LAW AND TRIPS……………………………………………………7

• Introductory

• History of Patent Law in India

• TRIPS- a major step forward

• Provisions specifically related to Patents

• Indian Patent Policy and TRIPS

CHAPTER THREE- COMPETITION POLICY AND PATENTS…………………………………………13

• Indian Competition Policy

• International Perspective

• Competition Issues in IPR: An Overview

CHAPTER FOUR- PATENTS AND INDIAN PHARMACEUTICAL INDUSTRY:

COMPETITION ISSUES …………………………………………………………………………………………19

• Indian Pharmaceutical Industry: An Insight

• Classification of Pharmaceutical Industry

• Anti-Competitive Practices in Pharmaceutical Industry & Competition Act, 2002

CHAPTER FIVE- CONCLUSION………………………………………………………………………………28

BIBLIOGRAPHY…………………………………………………………………………30

2
 ACKNOWLEDGEMENT

At the outset, I would like to thank my supervisor Mr. R. N Sahay, Adviser (Eco),
Competition Commission of India, for being a guiding force throughout the course
of this submission and being instrumental in the successful completion of this
project report without which my efforts would have been in vain. He has been kind
enough to give me his precious time and all the help which I needed. I am
immensely thankful for the strength that he has endowed me with.

I would also like to express my heartfelt gratitude to the other staff of Competition
Commission of India, for being immeasurably accommodating to the requirements
of this humble endeavor.

Naveen Dahiya
National Law School of India University
Bangalore

3
 CHARTER ONE

INTRODUCTION

The intersection of competition law and intellectual property rights (IPRs) is one of the most
complex areas of competition law. These two areas of law share a potentially conflicting
relationship, as competition law restricts the abuse of substantial market power while IPRs may
confer market power. Commentators in developed countries have proposed various ways to
resolve this conflict. Some of them give primacy to competition law, while others emphasize the
importance of protecting IPRs. Yet some others advocate solutions that require balancing the
policy considerations underpinning these two bodies of law.

The main objective of competition policy and law is to preserve and promote competition, as a
means to ensure efficient allocation of resources in an economy, resulting in the best possible
choice of quality, the lowest prices and adequate supplies to consumers. The Competition policy
would consist of laws to prevent practices having adverse effect on competition, to promote and
sustain competition in markets, to protect the interests of consumers and to ensure freedom of
trade carried on by other participants in markets. Its core aim would be the economic
development of the Nation.

On the other hand, Intellectual Property Rights (IPRs) allow their holders to exclude, for a
limited period of time, other parties from the benefits arising from new knowledge and, more
specifically, from the commercial use of innovative products and processes based on that new
knowledge. IPRs, by granting legal exclusivities, may also confer to their holders the ability to
exercise market power, at least when similar technologies and products representing viable
constraints are not present.

Although all the major IPRs grant their owners some proprietary rights, the focus of this research
is primarily on patents. Of the three major types of IPR — patents, copyrights and trademarks —
patents grant the strongest protection. A patent gives a patentee the exclusive right of
exploitation, which entitles the patentee to exclude others from copying or commercializing an
invention that falls within the scope of the patent. Patents are also more likely to endow their

4
owners with substantial market power. As will be discussed in greater detail later, whether an
IPR creates market power, and hence potentially raises competition law issues, crucially depends
on the availability of substitutes for the product incorporating the protected intellectual property.
In the absence of substitutes, the producer of such a product will wield substantial market power.

Such exercise of market power can lead to allocative inefficiencies. Tension can arise between
IPRs and competition law because IPRs create market power, even monopolies, depending upon
the extent of availability of substitute products. IPRs tend to restrict competition, while
competition law engenders it.

Hence, competition law frowns upon the unreasonable exercise of market power or the abuse of
dominant position obtained as a result of the IPR. In such a situation what is needed is a fine
balancing of IPRs and competition law.

This paper seeks to present the implications of patent rights on competition law and to bring
some light on anti-competitive practices prevalent in the pharmaceutical industry and healthcare
sector. And also to analyze the role of Competition Act 2002 in curbing the Anticompetitive
Activities Affecting the Pharmaceutical Industry.

5
 CHAPTER TWO

INDIAN PATENT LAW AND TRIPS

INTRODUCTORY

Patent is a monopoly right granted by the State to an inventor for a limited period, in respect of
the invention, to the exclusion of all others. A system of patents serves many useful purposes. If
the invention is commercially utilized, the patent ensures just reward in terms of money and
recognition for the inventor, for all the time and effort, knowledge and skills, money and other
resources invested to come up with the invention. For the society, commercial exploitation of an
invention means newer and better products, higher productivity, and more efficient means of
production. The objective of granting the patent is to ensure that it is worked (utilized) in the
country; and it is not meant to block production or further research and development. A patent
system encourages technological innovation and dissemination of technology. This in turn
stimulates growth and helps the spread of prosperity and better utilization of resources. In an age
when technology and knowledge are the greatest generators of wealth, the number of patents
filed and granted nationally and internationally is a good indicator of the health of science and
technology in a country. Patent is granted by a State and hence has territorial applicability. That
is, it is valid only in the country, which grants the patent. There is no mechanism to obtain a
global patent and you have to apply separately in all the countries where you want the invention
to be protected.1

HISTORY OF PATENT LAW

Post independence, a committee headed by Dr Bakshi Tek Chand was set up to examine the
patent system prevailing under the Patents and Designs Act 1911, which submitted its report on
30th April 1950. The report observed that — "The Indian Patents System has failed in its main
purpose, namely, to stimulate inventions among Indians and to encourage the development and

1
R. Gadbow and Richards, eds., Intellectual Property Rights: Global Consensus, Global Conflict?, (Boulder, 1988),
p. 2

6
exploitation of new inventions for industrial purposes in the country so as to secure the benefits
thereof to the largest section of the public.”2

In 1957, Govt. of India appointed Justice N. Rajagopala Ayyangar examines and review the
Patent law in India who submitted his report September 1959 recommending the retention of
Patent System despite shortcomings. The Patent Bill, 1965 based mainly on his
recommendations incorporating a few changes, in particular relating to Patents for food, drug,
medicines, was introduced in the lower house of Parliament on 21st September, 1965. The bill
was passed by the Parliament and the Patents Act 1970 came into force on 20th April 1972 along
with Patent Rules 1972. This law was suited changed political situation and economic needs for
providing impetus technological development by promoting inventive activities in the country.3

Under the new Act, a section 5 was introduced that stated that food, medicines, drugs etc will be
granted only process patents. While there will be both process and product patents in the other
fields of technology, there will only be process patents for inventions in the fields of drugs,
medicines, food, fertilizers and chemicals.4

The result of implementation of Section 5 was to ensure the absence of product patents on drugs
and medicines; which meant every new drug patented elsewhere could be legitimately reverse-
engineered and developed in India by way of any process that was not patented. The impact on
the Indian pharma scene and the health sector was immediate and significant. It resulted in the
presence of a number of pharmaceutical companies that could quickly develop any drug new or
old by every process that had not been patented. Since the drugs were not on patent, these could
be made available in markets at very reasonable prices.5

TRIPS- A Major Step Forward

The General Agreement for Tariffs and Trade (GATT) was set up in 1948 to deal with the
multilateral trade issues. The latest round of GATT negotiations, the Uruguay Round was finally
concluded in April 1994, and led to establishment of World Trade Organization (WTO), which
became operational on 1 January 1995. The agreement on Trade Related Aspects of Intellectual

2
P. Narayanan,”Patent Law”, Eastern Law House Publishers, New Delhi, 2002 Ed. paragraph 1-10, p4.
3
Ibid.
4
Ibid.
5
Ibid.

7
Property Rights (TRIPS) was adopted as an integral part of the Final Act of the Uruguay Round,
so that all the countries which become members of WTO must accept the provisions of the
TRIP’s as a part of deal.6

The TRIP’s agreement covers a whole range of intellectual property issues including patents,
trademarks, geographical indications, industrial designs, integrated circuits, copyright and trade
secret protection etc.

PROVISIONS RELATING SPECIFICALLY TO PATENTS

Articles 27-34 of TRIP’s require WTO member states to introduce strong patent protection, the
most important elements of which are:

Patents to be available under essentially the same criteria of patentability as in the

European Patent Convention (EPC) for all fields of technology, including product patents
for pharmaceuticals (Article 27).

Patents rights to be without discrimination as to whether products are locally made or
imported (Article 27).

Provisions defining what constitutes infringements: this includes importation of a
patented product (Article 28.1(a)) and using, selling or importing the direct product of a
patented process (Article 28.1(b)).

Compulsory licenses to be allowed only under strict conditions (Article 31).

Patent term to be at least 20 years from filing date (Article 33). According to the
transitional provisions (Article 70.2) this should also apply to patents which are already
granted.

Reversal of onus of proof for process patents (Article 34).7

India’s Patent Policy and TRIPs

The following table illustrates the basic differences between India’s patent system and TRIPs

Table*

6
Philip W. Grubb, “Patents for Chemicals, Pharmaceuticals and Biotechnology”, Oxford University Press, New
York, 4th ed., 2004, p33.
7
Ibid.

8
Comparison of India’s Patent Act and TRIPs

Indian Patent Act of 1970 TRIPs

Only process not product patents in food, Process and product patents in almost all
medicines and chemicals. fields of technology.

Term of patents 14 years; 5-7 in chemicals, Term of patents 20 years

drugs.

Compulsory licensing- In a compulsory Limited compulsory licensing- under

license, a government can force the holder specific circumstances only compulsory
of a patent right to grant use to the state or license can be granted.
others.

Several areas excluded from patents Almost all fields of technology patentable.
(method of agriculture, any process for Only area conclusively excluded from
medicinal surgical or other treatment of patentability is plant varieties; debate
humans, or similar treatment of animals regarding some areas in agriculture and
and plants to render them free of disease or biotechnology
increase economic value of products)

Government allowed to use patented Very limited scope for governments to use
invention to prevent scarcity patented inventions

*Source: Adapted from Patent Office Technical Society, Indian Patent Act, 1970 and Rules, 1991
and MVIRDC, GATT Agreements: Results of the Uruguay Round, World Trade Centre, January
1995

9
These differences in patent systems led to disputes in the GATT negotiations on the inclusion of
IPRs in the WTO. The type of patent system that India established was clearly against the global
IP regime promoted by the US. The main objection of the US is to the provision in India's patent
law that allows for process but not product patents in the area of food, drug or medicine. The United
States terms the activities of India to find alternative processes as “piracy”. According to the US,
Indian firms are copying technology developed by advanced nations. This is leading to large-scale
losses for the US. The Pharmaceutical industry in the US has been especially vocal on this issue.
Pharma, the association that represents US based pharmaceutical companies’ points out, “Based on
the refusal of the Government to provide pharmaceutical patent protection, India has become a
heaven for bulk pharmaceutical manufacturers who pirate the intellectual property of the world’s
research- based pharmaceutical industry.”8

India is a signatory to the TRIPS Agreement hence it modified its patents law in conformity with
TRIPS Agreement. India was put under the contractual obligation to amend its patents act in
compliance with the provisions of TRIPS. India had to meet the first set of requirements on 1- 1-
1995. This was to give a pipeline protection till the country starts giving product patent. It came
to force on 26th March 1999 retrospective from 1-1-1995. It lays down the provisions for filing
of application for product patent in the field of drugs or medicines with effect from 01.01.1995
and grant of Exclusive Marketing Rights on those products although the domestic industry in
India began to mobilize to counter India’s policy shift in on IPRs. Pharmaceutical companies and
other interests were totally against changing patent laws.9

India amended its Patents Act again in 2002 to meet with the second set of obligations (Term of
Patent etc.), which had to be effected from 1-1-2000. This amendment, which provides for 20
years term for the patent, Reversal of burden of proof etc. came into force on 20th May, 2003.
The Third Amendment of the Patents Act 1970, by way of the Patents (Amendment) Ordinance
2004 came into force on 1st January, 2005 incorporating the provisions for granting product
patent in all fields of Technology including chemicals, food, drugs & agrochemicals and this

8
Jagdish K. Patnaik, "India and TRIPs : some Notes on the Uruguay Round Negotiations" India Quarterly vol.
XLVIII no.4 Oct-Dec-1992, p.32.
9
Ibid.

10
Ordinance is replaced by the Patents (Amendment) Act 2005 which is in force now having effect
from 1-1-2005 .10

10
Ibid at pg-34.

11
 CHAPTER THREE

COMPETITION POLICY AND PATENTS

INDIAN PERSPECTIVE

In India, the competition policy is set out in the Competition Act, 2002. It replaces the age-old
MRTP Act, 1969. The purpose behind the enactment of this new law was for upholding
competition in the Indian market. One of the objects of the Act as stated in the preamble is to
prevent practices having adverse effect on competition. The principal objective of suppliers of
goods and services who are in a position to manipulate the market is to maintain their profits at
pre-determined levels. Agreements for price-fixing, limited supply of goods and services,
dividing the market etc., are the usual modes of interfering with the process of competition and
ultimately reducing or eliminating the competition. Where competition is adversely affected to
an appreciable extent, such agreements would be anti-competitive.

The new Competition Act focuses on four core areas:

• Anti- Competitive agreements. ( Section 3)

• Abuse of Dominance position. ( Section 4)

• Combination Regulation (mergers, alliances etc.) ( Section 5)

• Competition Advocacy. ( Section 49)

The Indian Competition Act, 2002, recognizes the importance of IPRs such as patents,
copyrights, trademarks, geographical indications, industrial designs and integrated circuit
designs. While Section 3 prohibits anti-competitive agreements, sub-section (5)11 thereof says

11
Sec 3(5) - Nothing contained in this section shall restrict—
(i) the right of any person to restrain any infringement of, or to impose reasonable conditions, as
may be necessary for protecting any of his rights which have been or may be conferred upon him
under—
(a) the Copyright Act, 1957 (14 of 1957);
(b) the Patents Act, 1970 (39 of 1970);
(c) the Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade Marks Act, 1999 (47 of 1999);
(d) the Geographical Indications of Goods (Registration and Protection) Act, 1999 (48 of

12
that this prohibition shall not restrict “the right of any person to restrain any infringement of, or
to impose reasonable conditions, as may be necessary for protecting any of his rights” enjoyed
under the statutes relating to the abovementioned IPRs.

Section 3(5) saves the rights of the proprietor of any of the intellectual property listed therein to
restrain the infringement of any of those rights regardless of Section 3. There is no violation of
the competition law if the owner of the articles (patented or otherwise) seeks to dispose them
directly to the consumer or fixes the price by which his agents transfer the title from him directly
to such consumer. The law relating to the intellectual property gives the right holder to exclude
others from the use of his monopoly right, absolutely or on terms. The right has to be confined
within the relevant law. The plan of the conspiracy to control the prices and distribution is not
within its protection. If it could be established that the owner of a monopoly right has acted in
concert with others to restrain trade and fix prices, the protection is not available.

INTERNATIONAL PERSPECTIVE

Monopoly imposes heavy costs in every society and is a conspiracy against the public to raise
prices. It is totally against the concept of competition because competition lowers price to a
level, which is fair and honest, earned under competitive environment. Monopoly can be
exercised in various ways and in the generally, are unlawful because of their restriction upon
individual freedom of contract and their injury to the public. Thus there emerges the need for
competition policy, which is also known as antitrust action. Antitrust action is taken to prevent
the emergence of monopoly power and restore competition to a monopolistic industry. In other
words, it protects competition and the competitive process by preventing certain types of conduct
that threaten a free market.

1999);
(e) the Designs Act, 2000 (16 of 2000);
(f) the Semi-conductor Integrated Circuits Layout-Design Act, 2000 (37 of 2000);
(ii) the right of any person to export goods from India to the extent to which the agreement relates
exclusively to the production, supply, distribution or control of goods or provision of services for
such export.

13
The first antitrust law was passed in 1890 in the United States. The Sherman Act of 1890
attempts to sustain the competitive process. Section 1 of the Act12 sets forth the basic prohibition
against contracts and conspiracies “in restraint of trade” or commerce; and, section 2 prohibits
monopolization13 and “attempt to monopolization” and conspiracies to monopolize any part of
trade or commerce. It is, therefore, designed to protect consumers from conspiracies and
monopolies and also small competitors from unfair trade practices. But the Sherman Act had
some loopholes. It did not deal with corporate amalgamations. It forbids collusion and
monopolization, including predation. It does not deal with anti-competitive mergers14.

Hence, the Clayton Act, 1914 expands on the general prohibition of the Sherman Act and
addresses anti-competitive problems in their infancy. Section 2 of the Clayton Act prohibits as
unlawful any price discrimination the effect of which discrimination may be substantially to
lessen competition or tend to create a monopoly in any line of commerce. It is to be noted that
much of the US law relating to antitrust is judge-made law, viz. the Supreme Court of the United
States.15

Firms in Europe are increasingly confronted by the requirements of EU competition law. This
law applies not only to companies based in the European Commission, but potentially to any
company operating in the EC. Articles 81 and 82 of the Treaty of Rome regulate competition in

12
Section 1of Sherman Act, 1890- Every contract, combination in the form of trust or otherwise, or in conspiracy, in
restraint of trade or commerce among the several states, or with foreign nations, is declared to be illegal. Every
person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall
be deemed to be guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000
if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said
punishments, in the discretion of the court.
13
Section 2 of Sherman Act, 1890- Every person who shall monopolise, or attempt to monopolise, or combine or
conspire with any other person or persons, to monopolise any part of the trade or commerce among the several
states, or wit foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by
fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not
exceeding three years, or by both said punishments, in the discretion of the court.
14
Further in passing this Act, the Congress did not give any indication of its intention about what the expressions
“restraint of trade” and “attempts to gain monopoly” mean and stand for. Uncertainty prevailed about what is legal.
In an effort to clear up some of the ambiguity, Congress passed the Clayton Act, 1914. With its passage, the three
routs to monopoly are closed by prohibiting collusion, monopolization including predation and anti-competitive
mergers.
15
http://www.phrma.org/issues/intl/india.html

14
EU. Article 81 of the treaty is the law regulating anti-competitive agreements in the EC. Article
82 deals with abuse of dominant position.16

The principal domestic law relating to competition in UK is the Competition Act, 1998. the
Enterprise Act, 2002 is complementary to their Competition Act. Section 2 of the Competition
Act, deals with anti-competitive agreements, decisions and concerted practices.

COMPETITION ISSUES IN IPR: AN OVERVIEW

Patent law, thought by the experts to be an exception to a general rule in favour of competition,
the argument for patent is that without granting a temporary monopoly, there would be no profit
incentive and that they would be profitable only if the consumers are willing to pay what the
patentee charges. So their conflict depends upon understanding the role of profits in providing
the incentive for undertaking efficient production of those things consumers value. While
exercising their rights, patentees often impose conditions which go beyond their lawful rights.
The law is that a patentee may impose only such conditions on his licensees or buyers that are an
exercise of his rights granted under a patent issued to him and beyond that, the patentee, or for
that matter, the owner of any other IPR, cannot, in the purported exercise of those rights, directly
or indirectly interfere with the competitive process.

In the apparent exercise of IPRs, the owners of these rights, frequently patentees and copyright
holders, impose conditions on their licensees that go beyond the limits of the rights conferred on
them by law. This may reduce or actually eliminate competition in the relevant market. Usually,
patentees resort to resale price maintenance, in addition to imposing other restrictions on their
licensees. Competitors may also cross-license their patents and allocate territories among
themselves and create entry barriers.

The usual practices resorted to by patentees are refusal to license, resale price maintenance,
patent pooling and cross licensing.

Resale price maintenance- In United States v. General Electric Co.17, the court upheld the
condition in the licenses. It ruled that such a term would be valid ‘provided the conditions of sale

16
Ibid.

15
are normally and reasonably adapted to secure pecuniary reward for the patentee’s monopoly.
The higher the price, the greater the profit, unless it is prohibitory. But this decision has been
distinguished by lower courts in different contexts, as for example, where the patentee does not
manufacture the product, but only licenses another to work the patent.

Patent pooling- It is a consortium of at least two companies agreeing to cross-license patents

and other IP rights relating to a particular technology. The creation of a patent pool can save
patentees and licensees time and money. Competition law issues are usually important when a
large consortium is formed. In United States v. New Wrinkle, Inc.18, the Supreme Court held that
‘ an arrangement made between patent holders to pool their patents and fix prices on the products
for themselves and their licensees plainly violate the Sherman Act.’

Cross licensing- Hartford- Empire Co. v. United States19 was a case where competitors cross-
licensed amongst themselves their patents relating to glass making machinery, and as a result of
the monopoly acquired through these patents, others were excluded from a fair opportunity to
freely engage in commerce in such machinery and in the manufacture and distribution of glass
products. The Supreme Court held that the company had violated the Sherman Act.

Refusal to license- Court decisions has generally recognized that a patentee is under no
obligation to use its patent or to license it to others20. But this principle is not absolute. In 1975,
the FTC brought an action against Xerox for refusing to license high-speed plain-paper copiers21.
If the refusal to license other parties is seen as part of conspiracy between the licensor and a
licensee, or used to enforce illegal restrictions on licensees, it is a contravention. More generally,

17
272 US 476 (1926); General Electric held 3 patents to cover completely the making of electric lights with tungsten
filaments. It licensed the Westinghouse Co. to make, use and sell lamps under condition that prices and terms of sale
would be fixed from time to time by the General Electric Co.
18
342 US 371 (1952); US government filed a civil suit charging the defendants for conspiring to fix uniform prices
and to eliminate competition in the wrinkle finish industry by means of patent license agreements. The case was
dismissed by district court. On appeal, the Supreme Court reversed the decision.
19
323 US 386 (1945)
20
Hartford Empire Co. et.al. v. United States 323 US 386 (1945); SCM Corp. v. Xerox Corp. 564 F 2d 1195 (2d Cir.
1981).
21
Xerox Corp. 86 FTC 364 (1975). As part of an out-of-court settlement, Xerox and foreign joint-ventures were
obligated to license the technology and know-how in the United States.

16
competitors cannot agree to refuse to license or to refrain from practicing a patent as part of a
conspiracy or anticompetitive arrangement22.

22
Blount Mfg Co. v. Yale & Towne Mfg. Co. 166 Fed. 555 (C.C. Mass. 1909).

17
 CHAPTER FOUR
PATENTS AND INDIAN PHARMACEUTICAL INDUSTRY
(COMPETITION ISSUES)

INDIAN PHARMACEUTICAL INDUSTRY- AN INSIGHT

The Indian pharmaceutical industry is a successful, high-technology-based industry that has

witnessed consistent growth over the past three decades. Indian Pharmaceutical Industry has an
important role in promoting public health. The net worth of the industry is about 8 Billion
Dollars with a growth rate of 8-9% PA. It is 4th in the world in terms of volume drug output and
exports to nearly 212 countries.23 The growth of an industry is highly dependent on the
regulatory environment. India had a product patent regime for all inventions under the Patents
and Designs Act 1911. However, in 1970, the government introduced the new Patents Act, which
excluded pharmaceuticals and agrochemical products from eligibility for patents. This exclusion
was introduced to break away India’s dependence on imports for bulk drugs and formulations
and provide for development of a self-reliant indigenous pharmaceutical industry,24 and the same
helped in-

Reduction in the manufacturing costs in terms of license fee.

Reduction in the costs involved in R&D.

Diffusion of technology and knowledge through reverse engineering.

The lack of protection for product patents in pharmaceuticals and agrochemicals had a
significant impact on the Indian pharmaceutical industry and resulted in the development of
considerable expertise in reverse engineering of drugs that are patentable as products throughout
the industrialized world but unprotectable in India. As a result of this, the Indian pharmaceutical
industry grew rapidly by developing cheaper versions of a number of drugs patented for the
domestic market and eventually moved aggressively into the international market with generic

23
M S Nair, India: Product patent regime & Pharmaceutical industry in India- The Challenges ahead, LEX ORBIS,
Jan 2007, 58-65.
24
Zafar Mirza, WTO/TRIPs, Pharmaceuticals and Health: Impacts and strategies, The Society for International
Development, SAGE Publications.

18
drugs once the international patents expired. In addition, the Patents Act provides a number of
safeguards to prevent abuse of patent rights and provide better access to drugs. The Indian
Patents (Amendment) Act, 2005 introduced product Patents in India and marked the beginning of
a new patent regime aimed at protecting the Intellectual property rights of patent holders. The
Act was in fulfillment of India’s Commitment to World Trade Organization (WTO) on matters
relating to Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS
Agreement).25

CLASSIFICATION OF PHARMACEUTICAL INDUSTRY

The global pharmaceutical industry structure can be divided into two:

• Bulk drugs (20%) The bulk drug segment of the market has increased in the past decade
at around 20% annual growth rate.

• Formulations (80%) Production of formulations has increased by around 15% annually.

The Indian Pharmaceutical Industry among top five producers of bulk drugs in the world. The
largest firms account for the majority of the R& D investment in the industry and hold the
majority of the patents. A small number of multinational enterprises (MNEs) dominate the global
pharmaceutical industry, top twenty-five MNEs having accounted for 64.5 percent of the world
(2003)

Firms can be either in production of bulk drugs or formulations or may manufacture both. Firms
in to formulations may be further classified into innovating firms and non- innovating firms.
However, R&D is insignificant when compared to MNEs. There are about 8174 bulk drug
manufacturing units and 2389 formulations units spread across India. Total: 10563 units.26

25
Supra note 17.
26
Supra note 23.

19
Anticompetitive Practices in Pharmaceutical Industry & Competition Act 2002

The pharmaceutical industry in India is gearing up to face new challenges. The product patent
regime is no longer the challenge - it is a reality that the Indian pharma industry has accepted.
The new set of challenges stem from the deeper implications of the imminent product patent
regime. With the exception of a few, most Indian pharma companies are unfamiliar with the
nuances of complex patent prosecution strategies. The research-based pharmaceutical
companies, on the other hand, have firsthand knowledge of successfully designing and
implementing, sophisticated patent prosecution strategies.27 Therefore, the first hurdle for the
Indian pharma industry is unevenness in the domain knowledge on patents. The Generic
Competition is also an important issue where Brand-name drug companies have used a number
of strategies to prevent generic competition. Let take a look over on some of issues and Anti-
Competitive practices involved in it.

Generic Drugs
A generic drug (generic drugs, short: generics) is a drug which is produced and distributed
without patent protection. The generic drug may still have a patent on the formulation but not on
the active ingredient. A generic must contain the same active ingredients as the original
formulation. According to the U.S. Food and Drug Administration (FDA), generic drugs `are
identical or within an acceptable bioequivalent range to the brand name counterpart with respect
to pharmacokinetic and pharmacodynamic properties. By extension, therefore, generics are
considered identical in dose, strength, route of administration, safety, efficacy, and intended use.
In most cases, generic products are available once the patent protections afforded to the original
developer have expired. When generic products become available, the market competition often
leads to substantially lower prices for both the original brand name product and the generic
forms. The time it takes a generic drug to appear on the market varies from country to country. 28

27
Quoted in Jean Lanjow, “The Introduction of Pharmaceutical Product Patents in India: ‘Heartless Exploitation
of the Poor and Suffering’?, Economic Growth Center, Yale University, August 26, 1997, p. 1
28
http://en.wikipedia.org/wiki/Generic_drug

20
Economics
Generic drugs can save patients and insurance companies substantial costs. The principal reason
for the relatively low price of generic medicines is that competition increases among producers
when drugs no longer are protected by patents. Companies incur fewer costs in creating the
generic drug, and are therefore able to maintain profitability at a lower cost to consumers. The
costs of these generic drugs are so low that many developing countries can easily afford them.
For example, Thailand has imported millions of doses of a generic version of the blood-thinning
drug Plavix (used to help prevent heart attacks), at a cost of 3 US cents per dose from India, the
leading manufacturer of generic drugs.29

Generic manufacturers do not incur the cost of drug discovery, and instead are able to reverse-
engineer known drug compounds to allow them to manufacture bioequivalent versions. Generic
manufacturers also do not bear the burden of proving the safety and efficacy of the drugs through
clinical trials, since these trials have already been conducted by the brand name company.

Generic drug companies may also receive the benefit of the previous marketing efforts of the
brand-name drug company, including media advertising, presentations by drug representatives,
and distribution of free samples. Many of the drugs introduced by generic manufacturers have
already been on the market for a decade or more, and may already be well-known to patients and
providers (although often under their branded name).30

For as long as a drug patent lasts, a brand name company enjoys a period of “market exclusivity”
or monopoly, in which the company is able to set the price of the drug at a level which
maximizes profitability. This price often greatly exceeds the production costs of the drug, which
can enable the drug company to make a significant profit on their investment in research and
development, thus enabling them to fund the research and development of new medicines which
most generic companies cannot afford to do. The advantage of generic drugs to consumers
comes in the introduction of competition, which prevents any single company from dictating the
overall market price of the drug. Competition is also seen between generic and name-brand drugs

29
Philip W. Grubb, “Patents for Chemicals, Pharmaceuticals and Biotechnology”, Oxford University Press, New
York, 4th ed., 2004, p36.
30
Ibid.

21
with similar therapeutic uses when physicians or health plans adopt policies of preferentially
prescribing generic drugs as in step therapy. With multiple firms producing the generic version
of a drug the profit-maximizing price generally falls to the ongoing cost of producing the drug,
which is usually much lower than the monopoly price.31

When can a generic drug be produced?

When a pharmaceutical company first markets a drug, it is usually under a patent that allows
only the pharmaceutical company that developed the drug to sell it. Generic drugs can be legally
produced for drugs where: 1) the patent has expired, 2) the generic company certifies the brand
company's patents are either invalid, unenforceable or will not be infringed, 3) for drugs which
have never held patents, or 4) in countries where a patent(s) is/are not in force. The expiration of
a patent removes the monopoly of the patent holder on drug sales licensing. Patent lifetime
differs from country to country, and typically there is no way to renew a patent after it expires. A
new version of the drug with significant changes to the compound could be patented, but this
requires new clinical trials. In addition, a patent on a changed compound does not prevent sales
of the generic versions of the original drug unless regulators take the original drug off the
market.
This allows the company to recoup the cost of developing that particular drug. After the patent
on a drug expires, any pharmaceutical company can manufacture and sell that drug. Since the
drug has already been tested and approved, the cost of simply manufacturing the drug will be a
fraction of the original cost of testing and developing that particular drug.32

Challenging patents
Brand-name drug companies have used a number of strategies to extend the period of market
exclusivity on their drugs, and prevent generic competition. This may involve aggressive
litigation to preserve or extend patent protection on their medicines, a process referred to by
critics as “evergreening”. Patents are typically issued on novel pharmacological compounds
quite early in the drug development process, at which time the ‘clock’ to patent expiration begins
ticking. Later in the process, drug companies may seek new patents on the production of specific

31
http://en.wikipedia.org/wiki/Generic_drug

32
Ibid.

22
forms of these compounds, such as single enantiomers of drugs which can exist in both “left-
handed” and “right-handed” forms, different inactive components in a drug salt, or a specific
hydrate form of the drug salt. If granted, these patents ‘reset the clock’ on patent expiration.
These sorts of patents may later be targeted for invalidation by generic drug manufacturers.

Large pharmaceutical companies often spend millions of dollars protecting their patents from
generic competition. Apart from litigation, companies use other methods such as reformulation
or licensing a subsidiary (or another company) to sell generics under the original patent.
Generics sold under the exclusivity period as they fall under the patent holder's original drug
application.33

PATENTS AND ABUSE OF DOMINANCE POSITION

A dominant position has been defined in the Act in terms of the ‘position of strength’ enjoyed by
an enterprise in the relevant market in India, which enables it to operate independently of
competitive forces prevailing in the relevant market; or to affect its competitors or consumers or
the relevant market in its favour. The ownership of an IPR does not necessarily create a
dominant position. Whether or not dominance results from the ownership of an IPR depend upon
the extent to which there are substitutes for the product, process or work to which the IPR
relates. The Act does not consider dominance as such, as prejudicing competition. But it outlaws
abuse of dominance. The legitimate exercise of an IPR by a dominant undertaking is not an
abuse. It is, however, possible that the way in which an IPR is exercised may give rise to concern
if it goes beyond the legitimate exploitation of the IPR; for example, if it is used to leverage
market power from one market to another or to prevent the development of a new market.

Patent rights provide the carrot for originators, allowing them exclusivity to produce the patented
drug for a limited period. Pharmaceutical companies that have invested in the development of
medicines should achieve a return on their investments. But this does not mean they can abuse
these exclusive rights by excessive prices and seeking patents over minor changes to extend
monopoly prices. This would be considered as anti-competitive. Competition law provides the

33
Ibid.

23
stick, preventing originators from abusing their exclusivity and protecting the entry of generics
into the market at the expiry of patents.

In Europe, Indian generics Unichem Laboratories, Matrix Laboratories and Lupin have notably
been implicated in the investigation, along with the originator French firm Les Laboratories
Servier. Servier developed the anti-hypertension drug, perindopril and allegedly entered into
agreements with Unichem, Matrix, Lupin and others to delay the launch of a generic version of
perindopril in Europe. It was found that they have infringed European competition law; the
Indian companies face fines of up to 10% of their annual turnover.34

The report by the European Commission found that originators were abusing their dominance
and delaying the entry of generics into the market by a number of strategies including:35

(a) Filing large numbers of EU-wide patents and pending patent applications for a single
medicine;
(b) Launching lengthy patent litigation with generics: the majority of which were won by the
generics potentially signalling that much of it was unwarranted (out of around 700 reported
cases, 60% were won by generics);

(c) concluding over 200 settlement agreements, half of which restricted generic entry and over
10% of which included “reverse payment settlements” (where originators essentially paid
generics not to enter the market); and

(d) Intervening in national procedures to approve generic medicines, leading to an average delay
of four months to their entry into the market.

34
http://www.phrma.org/issues/intl/india.html
35
Philip W. Grubb, “Patents for Chemicals, Pharmaceuticals and Biotechnology”, Oxford University Press, New
York, 4th ed., 2004, p33.

24
In particular, reverse payment settlement agreements were identified by the European
Commission as being especially debilitating to competition and the CCI’s research has identified
that these abuses also exist in the Indian market.

REGULATION OF COMBINATIONS

Presently, the market is highly fragmented and the Mergers and Acquisitions could lead to
consolidation of market shares. The Act prohibits any person or enterprise form entering into a
combination which could cause or is likely to cause an appreciable adverse effect on competition
in India.36 Combinations, in terms of the meaning given to them in the Act include mergers,
amalgamations, acquisitions and acquisitions of control, which are above a certain threshold.
Though, combinations are a legitimate means by license from the patent holder are known as
authorized generics; they are not affected by which firms can grow, and are as much a part of the
organic process of industrial evolution and restructuring as new entry, growth and exit, they may
raise competition concerns. The Commission is empowered to declare such combinations as
void. The commission can look into the merger or amalgamation upon receiving a notice from
the parties or a statutory authority.

In India, the competition legislation provides for merger review beyond a threshold level of
assets/turnover. The Act has made the pre-notification of combinations voluntary for the parties
concerned. Still, if the parties to the combination chose not to notify the Competition
Commission of India (CCI), they run the risk of a post-combination action by the CCI, if it is
discovered, subsequently, that the combination has an appreciable adverse effect on competition.
However, the Standing Committee on Finance has recommended such notification to be
mandatory in a report submitted to Parliament.

Outright buyout of generic companies in India by global pharma companies or consolidation of

generic companies in India may give rise to competitive concerns within India as they may lead
to monopoly status. Such deal needs detailed scrutiny by the Competition authorities to examine
the impact on different therapeutic segments. For example- Acquisition of 51% stake in
Ranbaxy by Daiichi Sankyo Company Ltd, Japan The deal was valued at Rs.19, 780 crores

36
(Sec.6 (1) of the Competition Act, 2002)

25
and Ranbaxy valued at 8.5 Billion Dollars. Ranbaxy become an independent generic arm of the
company. Daiichi primarily looked at Ranbaxy’s marketing network in 60 countries as opposed
to its (21 countries).37
In such deals the role of competition law is very significant Acquisition of the only generic
companies with the wherewithal to manufacture variants could have adverse implications for
availability of off patent drugs. It may have adverse implications for specific therapeutic areas.

37
http://www.phrma.org/issues/intl/india.html

26
 CHAPTER FIVE
CONCLUSION

Although IPRs and Competition Policy have a joint impact on economic incentives and
performance, there is little need for explicit coordination. The supposed ‘conflicts’ between IP
Law and competition law can be resolved by abiding by a few simple rules. Intellectual property
law differs from competition law in both its function and its goals. Broadly speaking, the main
function of IP law is to properly assign and defend property rights on assets that might have
economic value. The main function of competition law is to regulate the use of (intellectual)
property rights when these rights are sources of market power. It is also important to consider the
fact that intellectual property law and competition law tend to intervene at different stages of the
economic lifecycle of an asset. Property rights are generally assigned very soon after the asset
has been created, while competition law only intervenes significantly later, once using the asset
has become the basis for some market power. An important consequence of this difference in
timing is that the information available when property rights are granted is not the same as the
information available when competition law cases arise. In particular, competition law
authorities are likely to have much better information about the economic importance of a given
innovation and about the structure of the market(s) where the innovation is used.

The fact that the two fields of Law have distinct functions and objectives does not necessarily
mean that they can be designed and implemented separately. In fact, there seems to be an
unavoidable source of conflict between the two bodies of Law. While IP rights do not necessarily
confer significant monopoly power, they can only be effective if they sometimes do. After all, it
is the expectation of some monopoly rents that drive both the reward and disclosure effects. As
Competition Laws effectively constrains an agent‘s ability to exploit its monopoly power, the
two approaches appear to be on a collision course. Therefore to avoid such a collision, as the
distinct characteristics of various types of property are already adequately reflected in their
specific property rights regimes, all types of assets should be treated equally by competition law.
From the point of view of competition law, the only relevant difference between assets is the
degree of monopoly power that their ownership confers.

27
It is well known fact that the IP scenario of India changed substantially since 1st January 2005.
It’s true that Indian Pharma Industry started exploring various business models for R&D to
sustain, but one cannot conclusively say that Indian Drug Companies entered into only two
strategies, one being strategic alliances with large generic companies and the other being contract
manufacturing agreements with innovator companies. These strategies were adapted by few
Indian Companies, the success and failure of it or impact of such strategies on the future of
Indian Pharma Industry as a whole or on a country like India is yet to be accessed completely
and is yet to be evaluated conclusively. There are many more strategies or paths adapted by
small, medium and large Indian Pharma Companies to overcome the challenges posed due to the
current Indian Patent System, global economies, research/innovation challenges and various
other aspects like price control etc.

One thing is for sure that the Future for Indian Pharma is too bright, provided we adapt
appropriate measure and policies (balanced approach), which has been well elaborated by many
participants of this event in their comments on how to make India a potentially strong global
Pharma hub.

The generics industry is presently facing a period of unprecedented growth, with $82 billion
worth of global blockbusters set to go off patent soon. The Indian Pharma Industry will continue
to grow at an accelerated pace by seizing greater share of the fast growing global generics
market. The industry is expected to significantly boost its share of the generics market on the
back of its expertise in process engineering and its low cost advantage. With many drugs going
off patent, a huge opportunity in the global generics market is set to emerge.

India does have a long way to go but is sure to emerge as a substantial player in the generics
market as well as innovative market. The best incubator for innovation is that the Indian Pharma,
MNCs, Research Institutes and Government should focus in creating a balance between the
stringent patent regime and drug price. To pursue open innovation we need to build more and
improved partnerships and global collaborations. We need to and we are in the path of
capitalizing on opportunities created by this New Patent Regime and Global Market Approach.

28
 BIBLIOGRAPHY

Philip W. Grubb, “Patents for Chemicals, Pharmaceuticals and Biotechnology”, Oxford

University Press, New York, 4th ed., 2004.

Jean Lanjow, “The Introduction of Pharmaceutical Product Patents in India:

‘Heartless Exploitation of the Poor and Suffering’?, Economic Growth Center, Yale
University, August 26, 1997.

M S Nair, India: “Product patent regime & Pharmaceutical industry in India- The
Challenges ahead”, LEX ORBIS, Jan 2007.

Zafar Mirza, WTO/TRIPs, “Pharmaceuticals and Health: Impacts and strategies, The
Society For International Development”, SAGE Publications, 2007.

Jagdish K. Patnaik, "India and TRIPs : some Notes on the Uruguay Round Negotiations"
India Quarterly vol. XLVIII no.4 Oct-Dec-1992.

P. Narayanan,”Patent Law”, Eastern Law House Publishers, New Delhi, 2002.

R. Gadbow and Richards, eds.,” Intellectual Property Rights: Global Consensus, Global
Conflict?”(Boulder, 1988).

WEBSITES

http://www.phrma.org/issues/intl/india.html

http://en.wikipedia.org/wiki/Generic_drug

http://www.jstor.org/pss/4394794

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