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Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 1 CMDR Monograph Series No. - 42
ECONOMIC REFORMS, WTO AND INDIAN
DRUGS AND PHARMACEUTICALS INDUSTRY:
IMPLICATIONS OF EMERGING TRENDS*
Nagesh Kumar**
Jaya Prakash Pradhan**
ECONOMIC REFORMS, AND HEALTH SECTOR IN INDIA
United Nations Development Programme (UNDP)
and Government of India
CENTRE FOR MULTI-DISCIPLINARY DEVELOPMENT RESEARCH
Jubilee Circle, DHARWAD-580001, Karnataka, India *Commissioned study for the project.
** Deputy Director General and Consultant of Research and Information Sytem for the Non-aligned and othr Developing Countries (RIS), respectively.
Economic Reforms, WTO and Indian Drugs and
Pharmaceuticals Industry: Implications of Emerging Trends
Nagesh Kumar
Jaya Prakash Pradhan
1. Introduction
included building a national innovation system for developing process innovation capability in the country, through incentives for R&D period has been ability to ensure availability of life saving drugs at affordable prices. The framework designed to facilitate indigenous fact that the life saving and other drugs are process development of known compounds.
available in India at a fraction of prices widespread attention from other countries.
produces bulk of the country’s requirement indigenous and cost effective processes.
combination of policies consciously followed since late 1960s with the specific objective of providing affordable drugs for the masses.
there have been a number of changes in the policy framework developed since the late pharmaceutical industry, giving incentives for removal of restrictions on foreign firms, localization of production right from bulk undergoing important changes as per India’s branded products, and regulation of prices by 2005 and provision of pipeline protection Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 3 through EMRs (exclusive marketing rights) commitments under the WTO Agreements.
in the transition period. All these trends of Section 4 examines the aspects of the Indian the past decade viz. liberalization of trade, resulting from the policy package followed emerging changes in the IPRs are likely to have implications for the availability and availability of drugs and relative prices.
prices of pharmaceutical products in India.
Section 5 analyzes the implications of the policy frame on the pharmaceutical industry reviews different elements of integrated drug particularly in terms of prices, availability of 1960s and 1990 and their effectiveness in production and technology transfer etc.
bringing down drug prices. Then it discusses Finally Section 6 concludes the paper with trends taking place since 1990 that tend to some remarks for policies to minimize the alter the policy framework evolved thus far that are likely to affect the availability of drugs and their prices in the coming years such as 2. Evolution of the Policy Regime
liberalization of trade, investment and pricing TRIPs Agreement, among other policies.
decades to ensure the availability of life saving medicines at affordable prices for the health system of country catering to the needs follows: Section 2 summarizes the contours of the poor masses. The government policy of the integrated policy package evolved by broadly classified into two categories- (i) period that led to rapid transformation of the industrial policy including policies relating to pharmaceutical industry in India. Section 3 foreign investment and technology and (ii) overviews the changes brought in the policy pricing policy. The evolution of both these economic reforms and as a part of India’s Industrial policy
imports of bulk drugs and its processing into pharmaceutical industry were laid in 1901 when Prof. P.C. Ray established the Bengal (BCPW), the country was largely dependent 1956, grouped the pharmaceutical industry on imports for most of her requirements of in the schedule ‘B’ where both state and private sector could operate. Although FDI was welcomed and given national treatment Independence, the pharmaceutical industry in the industry, government was finding it has received due policy attention given its importance for the health security of the poor.
In the first Industrial Policy Resolution 1948 dependence on imports. Given the reluctance industry was included in the list of ‘basic bulk drugs such as antibiotics in the country, industries’ and its growth was subjected to the government set up Hindustan Antibiotics plan targets and monitoring. However, the industry had little domestic technological Pharmaceuticals Ltd (IDPL) in 1961. These drugs at that time. Whatever little growth role in not only starting domestic production impetus the industry had during the World of key bulk drugs but have had substantial spillovers in the form of generation of a new shown that founders of one third of the 200 drugs like sulpha, antibiotics, vitamins, domestic enterprises surveyed had initially hormones, antihistamine, tranquilizers, and Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 5 namely, self-sufficiency in drugs production, imported bulk drugs and other raw materials.
accessibility of quality drugs at reasonable prices. In order to achieve these objectives, industry was included the Appendix I of the the pressure was built on MNE affiliates to indigenize the production of bulk drugs from priority status meant that under the Foreign the basic stage. Thus the higher level of 74 per cent foreign equity was made applicable only to those MNE affiliates producing high ownership in their affiliates in India against a technology drugs and others producing low foreign shareholding permissible. However, keeping in mind the critical importance of required to reduce their foreign equity holding building a self-reliant pharmaceutical industry, to 40 per cent. Foreign companies producing examine the status of the industry and make required to start production from the basic Committee, after its chairman Mr Jaisukhlal Hathi made extensive investigations into the given only if the production involves high factors that were preventing achievement of pharmaceutical industry in the country and took the decision of abolishing brand names for five categories of drugs as mentioned Report published in 1975 (Hathi Committee analgin, aspirin, chlorpromazine, ferrous for a discussion). A New Drug Policy 1978 sulphate, and piperazine along with its salt.
recommendations of the Hathi Committee.
with a court injunction. Another aspect of the government policies concerning the drugs and pharmaceutical industry was canalization will hamper the growth of the industry and of imports of bulk drugs. After the detection in the long run limit its ability to meet rising substantial overpricing in imports of bulk Tariff Commission to examine the prices of affiliated sources, the government started 18 basic drugs and their single ingredient canalizing the imports of these bulk drugs formulations in August 1966. Following the submission of the Tariff Commission report subsidiary of the State Trading Corporation) Control) Order was issued in May 1970.
and MNE affiliates were required to lift their requirements from them. The drug policy has balancing the welfare of consumer and that objective of strengthening the indigenous essential drugs and at the same time ensuring production capability of drugs for ensuring their abundant availability at reasonable industry by taking account of the prices of materials, conversion cost, packing charges, mark-up, excise duty and sales tax in the Price Controls
calculation of the retail price of a formulation.
The government has acquired both the rights to fix the maximum selling prices of essential pharmaceutical industry right from the 1960s bulk drugs (those included in the Schedule I of the appendix of the Order) and to change 1970, accounted for less than 9 percent of Prices) Order, 1963 and Drugs (Display and Control) Order, 1966. The attempt to control prices of other bulk drugs were frozen at prices by the government met with resistance the level prevailing immediately before the from the industry that argued that the controls Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 7 revised in 1979 following the promulgation the included formulations. As will be seen later that the scope of price controls has been further restricted in the 1990s as a part of IPR Regime and Incentives to Domestic
Remedies. Of these the first three categories R&D Activity
came under the ambit of price controls with Amendment of the Patent Act
mark-up (profits allowed) of 40 per cent, 55 Per cent and 100 per cent respectively.
In all 347 drugs came under the purview of that provided for protection of all inventions except those relating to atomic energy and a industry. Two other measures of the Order chemical and pharmaceutical enterprises that small scale sector out of price control and tried to develop their own technology in the (ii) the new bulk drugs developed through 1960s ran into trouble with foreign patent local R&D in India also exempted from the owners. A number of cases highlighted that purview of price control for a period of five their patents for domestic manufacture nor allowing them to be used by local firms1 .
That led to a build-up of pressure in the late increase their focus on the production on the less essential and non-essential formulations.
conducted in 1969 found that by and large Growing resistance of the industry to the foreign firms were against any liberalization of patent laws, Indian firms were not against modified DPCO in August 1987 that reduced besides enhancing the stipulated mark-up for owners not allowing their patents to be used.
Incentives to Domestic R&D Activity
patents had been used to prevent entry of systems, the government in India has spent Indian firms. Therefore, a new Patents Act was adopted in 1970 that reduced the scope development, scientific and technological pharmaceuticals to only processes and not technology development in the public funded national laboratories (see Kumar 2001).
processes, the scope of patent protection Besides creation of S&T infrastructure the enterprises to take up in-house R&D activity drugs and chemicals and to 14 years for other through other policy instruments. In 1974 a products. The compulsory licenses could be scheme for recognition of in-house R&D establishments of industrial units was started.
The recognised R&D units received facilities for import equipment, raw material, samples, the abolition of product patents in chemicals prototypes, etc., for their R&D work under Open General License, without any ceiling.
development of local technological capability Sometimes foreign collaboration approvals/ in chemicals and pharmaceutical industry by enabling the domestic firms in their process understanding that importer would undertake innovative activity. A number of quantitative R&D activity to absorb the technology.
activity of Indian domestic enterprises was facilitated by the softer patent regime under catalytic support for accelerated absorption and adaptation of imported technologies by the industrial units. It was made mandatory Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 9 to highlight efforts taken towards absorption incentives and support measures presently of technology imports in a separate chapter of the annual report of all the importing firms  Full Income Tax relief on the in-house (DSIR, 1986). In addition industry research Research Organizations (SIROs).At present established good infrastructural facilities for obliged the foreign companies with turnover in excess of Rs. 50 million to have R&D facilities within the country with capital  R&D units can also avail, weighted tax investment of at least 20 percent of their net block and to spend at least 4 percent of their turnover on R&D. It also specified one to two percent higher profit ceiling for drug measures to encourage R&D in industry and increased utilization of locally available R&D options for industrial development. Fiscal  Expenditures made on capital equipment  All SIROs are eligible for custom duty specific goods imported for use in R&D assets and rationalized the rate structure research institutions, universities, IIT, IIS  Donations given to scientific research associations, institutions and universities are exempted from income tax provision.
 All SIROs are eligible for excise duty agricultural, natural and applied sciences Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 11  Public funded research institutions are and consumables for scientific research.
 Department of Biotechnology (DBT) has R&D and commercialization of indigenous aspects of biotechnology R&D activity institutions including applications in drugs Public Funded R&D in 1987 given annually.
Over the years a number of programmes for directly supporting R&D activity in the scientific agencies of the Indian government.
to support R&D projects in Industry.
 In the Budget for the year 2000-2001, these projects involve collaboration with pharmaceutical industry was announced.
 DST is funding several industrial R&D Incentives for Utilization of Indigenous R&D enjoyed a preferential treatment in industrial (NRDC) with the specific responsibility of indigenous technologies are completely free of tax, and those earned within the country commercialises the technologies developed with government support, undertakes further technological entrepreneurship in the country, know-how, setting up pilot plant, etc., and the public sector financial institutions such even provides risk finance to development projects. In addition, utilization of indigenous R&D is sought to be promoted by various generation of techno-entrepreneurs. Private other incentives. All goods manufactured by venture capital funds and angel investors country of the EU for a period of three years.
Business Incubation Centres at the research institutions to facilitate speedier transfer of indigenously do not fall in purview of the Drugs Price Control Order for the first five technology institutions are setting up industrial consultancy and extension centres to facilitate utilization of domestic R&D and encourage applicable to plant and machinery installed (since 1987) for manufacture of goods based alumni. DST has set up S&T Entrepreneurial Parks. These Parks provide infrastructural facilities to techno-entrepreneurs to start their from provisions of industrial licensing and Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 13 3. Reforms and Implementation of
the 14 specified industries that continue to WTO Commitments
remain under the ambit of licensing given the foreign direct investments (FDI) than ever in the post Independence India. The Policy undertaken by the government and also the allows automatic approval system for priority within two weeks subject to their fulfilling specified equity norms. As one of the select been brought about in the industrial policy priority industries specified in Annexure III- cent was to be allowed on automatic basis for pharmaceutical industry for manufacture controls. In what follows we summarize the of bulk drugs and formulations thereof. Later included in the list for automatic approval 1986 which includes measures like abolishing industrial licensing requirements for majority governing the industrial investments.
of drugs barring few; removing restriction Although the NIP dismantled the industrial licensing (or approval) system by abolishing the requirement of obtaining an industrial percentage of bulk drug production need to be supply to non-associated formulators), pharmaceuticals industry is included among and limiting the scope of price control and providing for establishment of the National Drug Authority to monitor quality and the up to 100 per cent and foreign technology National Pharmaceutical Pricing Authority agreements will also be available for all the cases except those included in the industrial been substantial dilution of the price controls.
initiatives ‘towards promoting accelerated under the ambit of price controls to 74 from competitive’. This covered implementation that the Government had appointed in 1999.
about 40 percent of the total market thus These include the Pharmaceutical Research market out of price controls. In identifying this list, the Government has followed an exclusion-cum-inclusion criterion, excluding drugs in which there is a sufficient market competition and including those where there is a monopoly situation. Secondly, there is a Policy has abolished the industrial licensing single list of drugs under the price control requirements for all bulk drugs cleared by Manufacturing Expenses) of 100 percent.
intermediates and formulations except for Thirdly, all formulations under DPCO drugs technology, those requiring in-vivo use of nucleic acids as the active principles, and specific cell/ tissue targeted formulations.
by indigenous R&D has been increased from Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 15 seen a substantial reduction in the scope of price controls in the industry. It is likely to has been set up in 1997 to administer the have affected the prices of drugs as will be proposed further dilution of the price controls WTO Commitments: Trade
1999. The guiding principle for identification Liberalization and TRIPs
of specific bulk drugs for price controls to be mass consumption nature of the drug and absence of sufficient competition in such commitments, the tariff rates applicable to price controls under the new policy if the moving annual total value for any formulator applicable with a zero per cent tariff and zero is more that Rs 25 crores and the percentage per cent countervailing duty for essential items share of any formulators is 50 per cent or and 30 per cent tariff and a 16 per cent cvd more, or in case of less than Rs 25 crores for all others4 . The new tariff structure therefore, does not differ according to value any formulator is 90 per cent or more. The indigenously manufactured formulations and 50 per cent of the landed cost in case of imported formulations. The exemption from industrialized countries for higher international indigenously has been extended to 15 years extension of patentability to virtually all fields indigenous new drug delivery system2 . With country patent systems, by prolonging the these changes the scope of price controls will be reduced to only 22 per cent of the total market3 . Therefore, the 1990s have recognition of the patentee’s exclusive rights to import the patented products. The patent rights are enjoyable without discrimination have been brought in the Indian Patents Act as to the place of invention, the field of brought to provide for exclusive marketing rights (EMRs) a pipeline mechanism during signatories to the trade negotiations are, therefore, obliged to harmonize their IPR patents. India has a ten years transition to regime and to provide product patents for provide product patents viz. till the end of coverage of the patent protection has also Indian Patents Act 1970 to extend the term been expanded by the provision for patents of patents to 20 years is in the Parliament.
on micro-organisms and protection of plant India has also joined the Paris Convention varieties either by patents or by an effective and the Patent Cooperation Treaty in 1998.
sui generis system or by any combination These changes in the IPR regime are likely pharmaceutical industry as will be seen later.
likely to have major implications for the drugs Incentives for Domestic Innovative Activity and pharmaceutical industry. India will have to extend the scope of patenting to chemical to take challenge of TRIPs, the government and pharmaceuticals and increase the term has taken several initiatives. As observed of patents to 20 years from the present 7 and 14 years. However, developing countries not providing product patents are given a by Dr RA Mashelkar was set up in 1999.
patents. However, in the interim period a transforming the country into a knowledge to applicants for product patents. In order Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 17 critical bulk drugs but generates exports surpluses. In 1970 much of the country’s imports and the bulk of domestic production subsidiaries. Of the top ten firms by retail Organization has also been proposed to set sales in 1970 only two were domestic firms up to administer safety, efficacy and quality 1996 six of the top ten firms in the industry are Indian firms. By 1991, domestic firms 4. Government Policies and
accounted for 70 per cent of the bulk drugs Development of Indigenous
production and 80 per cent of formulations Capability in the Indian
produced in the country (Lanjouw 1998).
Pharmaceutical Industry in the
Pre-Reform Period

of the industry, it is useful to look at the formulations and of bulk drugs in terms of private sector —large and small scale over national innovation system facilitating the Table 1. It is apparent that MNE affiliates development of local technology, and price dominated the output of formulations in the controls have led to a rapid development of market. However, their share had gradually come down to 40 per cent while that of the consumption in to a US$ 4 billion industry by 2000 AD, one that is not only self reliant gradually increased. A much sharper change sector which has been facilitated by various has gradually declined from nearly 40 per favorable policies like the exemption from cent in the mid-1970s to only 18 per cent.
the DPCO, reservation of drugs for exclusive The local public sector and private sector production in small scale sector, process enterprises including small-scale firms have patents permitting them to develop their own process of making a drug at a lower cost, production to achieve self-sufficiency. This etc. Over the years small scale sector has diversified its production base to produce concentrate on production of formulations many important bulk drugs/intermediates like names. Public sector enterprises played an Trimethoprim, Sulphamethoxazole, Analgin, important role in starting the indigenous production of bulk drugs in the country in scale firms account for the bulk of the 20,000 the 1960s and 1970s a trend that was later companies that exist in the industry now.
on picked up by other domestic enterprises.
One striking feature of the evolution of Indian industry is broad based and not dominated drugs industry is faster growth of small-scale Table 1: Growth of Production of Pharmaceuticals in India by Ownership Groups, 1974-75 to 1985-86
Formulations
Bulk Drugs
Note: * includes production in small-scale sector and ** includes production in foreign sector.
Source: (i) Department of Chemicals and Fertilizers, Basic Data on Drugs Industry, 1977-78 (ii) IDMA (1989) Annual Publication (iii) DSIR (1990) Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 19 Availability and Prices of Drugs
short time lag. Table 2 shows that most of industry has been development of domestic technological capability. Facilitated by the market. Table 2 also shows that the prices abolition of product patent regime with the Patents Act of 1970, and the availability of cheaper compared to rest of the world. For S&T infrastructure in the country local instance, Ranitidine, Famotidine, Astemizole, Ondansetron sell in the US market at about initiative to develop cost-effective processes prices of drugs have made them affordable chemical compounds and other bulk drugs.
thus have served an important social cause capability of Indian enterprises has enabled of providing access of modern medicine to them to introduce newer medicines within a Table 2: Introduction of New Drugs and Relative Prices Patentable Drugs in India
Source: constructed on the basis of Lanjouw (1998), Watal (2000) with other supplementary information. Local Technological Capability and
Comparative Advantage
build up on local technological capability emerged in the country as one with a much increasing domestic technological capability is reflected in terms of rising exports of drugs development and R&D activity. An analysis and pharmaceuticals. With their cost effective of about 900 R&D performing companies process innovations, Indian companies have in the Indian corporate sector summarized in Table 3 shows that R&D to sales ratio for world of a large number of generic drugs.
the entire sample for the 1992/3 to 1998/9 was 0.846 per cent, the average ratio for India’s exports of drugs and pharmaceuticals.
the drugs and pharmaceuticals industry was summarized in Table 3 shows that domestic that generates increasing export surplus for enterprises in the industry are more active in R&D with an R&D intensity of 1.72 per cent pharmaceutical exports has resulted in their share in India’s exports rising from 0.55 per cent in 1970-71 to over 4 per cent by the Table 3: R&D Intensities in Indian Corporate Sector
(percentages)
Note : Parentheses show S.D; the bottom figure represents number of observations.
Source: Kumar and Agarwal 2001 Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 21 Table 4: India’s Trade in Pharmaceutical Products, 1970-71 to
1999-2000 (Current prices)
Trade in medicinal and pharmaceutical Source: RBI (2000), Handbook of Statistics on Indian Economy , Bombay: the Reserve Bank of India pharmaceuticals has risen by 2.5 times while stagnated at about 0.6 per cent throughout show that India’s share in world exports of Table 5: India’s Pharmaceutical exports in World Trade, 1970 to 1998
(Current prices) In US$ million
Source: India, Economic Survey 2000/01 and the UN International Trade Statistics Yearbook 1998, United Nations Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 23 Table 6: Major Exporters of Medicinal and Pharmaceutical Products
in the World
Countries
Source: UN International Trade Statistics Yearbook 1998, United Nations in key international markets. As a result the received a boost in the late 1980s when a international markets after obtaining FDA approval. Therefore, in the late 1980s, as pharmaceutical exports accounting for 10- 12 per cent of exports. The export basket larger and more dynamic Indian enterprises Metronidazole, Amoxycilline, Ampicilline, such as Ranbaxy Laboratories, Dr Reddy’s Pappain, Potassium Iodide, Brucine Salts, marketing their own formulations in different countries with the help of a growing network of overseas offices and subsidiaries set up Table 7: Composition of India’s Pharmaceutical Exports
(Current prices) In Rs. Crores
Source: Department of Chemicals and Petrochemicals, various Annual Reports Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 25 country, despite the fact that Indian patent regime does not provide product patents.
note of it. For instance, Eli Lilly established Ownership, Firm Size and Technological
Dynamism: Recent Trends in Enterprise
1990s for development of a cost effective Performance
of MNE affiliates and domestic enterprises latter’s process development capabilities.
in Indian pharmaceutical industry is made over the 1990s based on a balanced sample subsidiaries) in terms of different parameters of investment and output, export-orientation, public funded R&D institutions for synthesis R&D activity, technology purchases from of new molecules and process development.
abroad, labour productivity and profitability.
among others, that have commissioned Indian trends are summarized in the Annex Tables.
Here we use graphs to quickly examine the relative performance of the two groups of details). Astra (now Astra-Zeneca) has set enterprises have grown faster than foreign up a full fledged R&D centre in Bangalore firms in the industry in terms of growth of Figure 2: Sales of Domestic and Foreign Firms in
Indian Pharmaceuticals Industry, 1993-99
In terms of exports dynamism, whether judged in terms of proportion of sales (Figure 3) or as a ratio of exports to imports (Figure 4), domestic firms reveal a greater dynamism compared to foreign firms. Therefore, the recent export success of the industry is clearly led by domestic enterprises.
Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 27 Source: based on CMIE sample extracted by the authors In case the sample firms are reclassified by firm size, one finds that the smaller firms are no less dynamic in terms of exports orientation especially since the mid-1990s. In fact smaller firms have performed better than medium sized firms since the mid-1990s as shown in Figure 5. In terms of export to import ration, the three size groups are quite Figure 5 Firm Size and Export Intensity (%), 1989-2000 Source: based on CMIE sample extracted by the authors Figure 6 Firm Size and Exports to Imports ratio (%), 1989-2000 Source: based on CMIE sample extracted by the authors The technological dynamism is examined in terms of R&D intensity (Figure 7) and intensity of technological purchases from abroad (Figure 8). In both these respects againdomestic firms appear to be more dynamic compared to their foreign owned counterparts.
R&D Expenditure to Sales Ratio in %, 1989-2000 Source: based on CMIE sample extracted by the authors Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 29 Figure 8: Intensity of Technology Purchases from Abroad Royalty Payments to Sales (%), 1989-2000
Source: based on CMIE sample extracted by the authors Productivity performance is examined in terms of defined as the net value-added per rupee spent on labor. In terms of labour productivity too, domestic firms do better than their foreign owned counterparts although the gap is narrowing since 1998, as shown in Figure 9. Figure 9: Labour Productivity in Indian Pharmaceutical Industry Net Value Added per Rupee Spent on Labour, 1989-2000
Source: based on CMIE sample extracted by the authors In terms of profit margins on sales, the pattern observed is reverse. Despite their greater technological and export dynamism and higher levels of productivity, domestic firms report significantly lower levels of profit margins compared to their foreign owned counterparts. MNE affiliates enjoy considerably higher profit margins because of their greater focus on more value adding formulations and their well-established brand names Figure 10: Profit Margins in Indian Pharmaceutical Industry Profit before taxes as a proportion sales, %, 1989-2000 Source: based on CMIE sample extracted by the authors Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 31 upon imports and some formulation activity in the late sixties to one which is able to changes have significant implications for the prices of drugs as well as for the industry as relatively short lag and at a fraction of the cost, and export a growing proportion of its produce to emerge as a net foreign exchange a) Prices of Medicines and Loss of
Consumer Welfare
especially because it has been accomplished increase on two accounts. First, because of dilution of price controls in the 1990s, and secondly because strengthening of the patent 5. Implications of Reforms and TRIPs
for Pharmaceuticals Industry
scope of price controls during the 1990s with that facilitated rapid evolution of the local Pharmaceutical Policy 2002 is likely to affect the drug prices. The prices of drugs that have considerably in the 1990s with reforms and DPCO have already increased significantly.
Table 8 shows that prices of select drugs liberalized while the scope of price controls 1995 and 1998. The further dilution of the changes in the patent regime are in the offing policy is likely to lead to a similar effect.
Table 8 Price Increase in Some Selected Drugs Unlisted from DPCO, 1995
Discopyramide Phosphate (Cardiac problems) Source: D.P. Dubey at http://revolutionary democracy.org/rdv5n1/pharmacy.htm and Watal 2001, and Panagariya 1999].
Nogues (1993) finds the welfare losses to 6 is also likely to affect drug prices in a large number of drugs especially those under the patent protection. A number of studies have examined the effect on prices of medicines after introduction of product patents and depending upon the assumptions. The gains have simulated welfare losses for consumers to the patent owners from such introduction in developing countries. It is widely believed would range between $ 2.9 billion to $ 14.4 that drug prices will go up upon introduction billion. The welfare loss to India could be between $ 1.4 billion to $ 4.2 billion in a Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 33 introduction of product patents in 22 existing drugs in India is significant in three categories increase between 26 per cent (for a linear constant elasticity-type demand function).
least 20 percent includes Anthelmintics Ex An earlier study by Subramanian (1994) had found the maximum price increase of 67 per cent for India following the introduction of immediate impact of introducing a product product patents. Fink (2000) finds the range patent regime will have different impact on controversy shows that effective treatment medicines significantly and unless new drugs cancer, cardiac failures, renal problems, are more efficient, there will be a decline in the health levels of population (May 2000).
The recent case of huge differences between holders in South Africa and their generic cheaper prices? That does not appear to be substitutes just provides a further evidence the case . In fact the opposite result may to the potential of price increases following hold good if the findings of recent studies the introduction of product patents.
are any guide. In pharmaceutical industry competition does not lead to lower prices because of monopolistic and inelastic nature majority of drugs are out of patent protection of demand with consumer unable to consider and hence will not be affected. The criticality generic substitutes of the specific brand therapy groups. Figures for the year 1993 audited pharmaceutical market suggests that (CMH) using data from different countries finds that tariff reduction on pharmaceutical for the known chemicals and bulk drugs. This products and bulk drugs is likely to increase imitative duplication or reverse engineering final drug prices rather than reducing them activity is an important source of learning in production and hence suggests the need for industrialized countries of today and newly a careful assessment before further reduction industrialized countries encouraged local learning through soft patent laws and the absence of product patents in chemicals in b) Local Technological Capability
Building
have shown that the innovative activity of c) Industrialization, Technology
Indian domestic enterprises was facilitated Transfers and Trade
by the softer patent regime under the 1970 regime encouraging innovative activity in Indian pharmaceutical industry is very little.
worldwide has considerable implications for A study of the impact of strengthening of pharmaceutical patent protection in Italy provision of product patents on chemical and R&D expenditures or on new inventions.
pharmaceutical products, for instance, would Furthermore, R&D activity is found to be adversely affect the process of innovative significantly determined by absorption of spillovers of others’ R&D activity particularly in the case of chemicals and electrical and electronics. The importance of foreign R&D spillovers as a determinant of R&D activity capability of most Indian enterprises in view could be even more critical in developing of the huge resources involved. Therefore, countries where much of the R&D activity they focus attention on process innovations is of an adaptive nature. A number of studies Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 35 have empirically demonstrated the ability of rather weaker IPRs in stimulating domestic same token, imports of India are likely to go innovative activity in developing countries.
up as the patent owners may like to import Therefore, the evidence on the role of IPRs the drugs rather than producing them in the as a determinant of innovative activity is quite affect the innovative activity adversely by spillovers that are important determinants of transfer? Stronger protection increases the innovative activity (see Kumar 2002, for a revenue productivity of a firm’s intellectual making counterfeiting more difficult as has IPRs, Trade and FDI Inflows
been corroborated empirically by studies.
However, the effect of IPR strength on FDI affect India’s trade? India’s exports of and licensing is not that straight forward. By reducing the transaction cost of transfer of stronger protection may encourage arm’s length licensing of the knowledge and reduce the need for undertaking FDI. On the other continue to export to these countries if they do not provide product patents for 10 more years. The introduction of product patents investment climate and hence the probability will lead to an international division of labour of MNE investments. Empirical studies have where developed countries will specialize on promotes arm’s length licensing but they have countries like India will concentrate on more generally no significant effect on internalized price competitive off-the-patent drugs and generics. It is clear therefore, exports will location of R&D investments abroad by come down to the extent some of India’s generation as evident from the 95 per cent ownership of US patents (see Kumar 1998), protection will facilitate greater inflows of the strengthening and harmonization of IPRs FDI in the country is rather weak in either regime will lead to a substantial increase in theoretical or empirical terms (see Kumar developing countries to developed countries.
trends suggest a reversal of trend of the growing importance of arm’s length licensing patent harmonization finds that it has the capacity to generate large transfers of income between countries, with US being the major beneficiary. World Bank (2002: Table 5.1) strengthening of IPRs regime may further limit suggests that the net patent rents derived by country enterprises. Kim (1997) provides a the US (in 2000 US$) could add up to over number of examples of Korean corporations $ 19 billion, to Germany $ 6.7 billion, and being denied technology licenses by patent Japan $ 5.7 billion. Among the developing holders in the Western world forcing them to reverse engineer the products. A number patent rents of the order of $ 903 million.
of local enterprises in developing countries will come under pressure to close down or form alliances with larger firms, resulting in a to plant varieties could further increase the concentration of the industry [World Bank outgo of royalties for the breeder lines of raw material for the development of these varieties, viz. genetic diversity which is largely d) Income Transfers from Developing
Countries
Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 37 e) Impact on Global Technological
affecting follow-on innovations and actually Activity and Availability of Drugs
development)’. Furthermore, the research stronger IPR regime is based on the premise that expenditures on R&D were significantly purchasing power and very little R&D is determined by appropriability conditions.
currently done on tropical diseases (World by the international community, such as those discussed by the recent report of WHO’s sustaining the pace of innovation in the global economy. The empirical literature, however, Health (CMH), the pattern is not likely to does not support this presumption as patent change significantly in the future (see Kumar protection was found to be instrumental for only a small proportion of innovations. On the other hand, studies show that spillover 6. Concluding Remarks and Strategic
effects of R&D activity of other firms to be Policy Options
a lot more important in inducing firms to appropriability. The R&D outputs of other firms form valuable inputs for the R&D been successful in developing a highly vibrant efforts of these firms. Hence, tightening of and self-reliant industry that not only meets IPRs is likely to affect innovative activity adversely by stifling these spillovers.
generates increasing amount of net exports strengthening of IPRs will increase innovative diseases faced by developing countries. As World Bank (1999) cautions ‘there is now a risk of excessively strict IPRs adversely into strategic alliances with local companies pharmaceutical industry? In what follows we outline a few strategic policy options to keep and was facilitated in large measure by the soft patent regime that the country adopted a) Stronger focus on R&D activity
and new product development:
trade and price policies in the 1990s has started to affect the prices of medicines.
Even trade liberalization and reduction of tariffs actually lead to higher rather than lower prices of medicines due to peculiar nature patents by the end of 2004 as a part of the implementation of the commitments of India under WTO’s TRIPs Agreement is likely to simulation exercises available. It is also likely to adversely affect the technological activity of Indian companies, curb exports, lead to income transfers from the country. On the other hand the favourable effects of stronger IPR regime that are claimed namely higher innovative activity and greater inflows of FDI Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 39 b) Exploiting Market Potential of
Indian System of Medicines
of Chinese balms, medicinal oils etc.
c) Consolidation of Market
Position in the off-the-patent/
Generics Markets:
e) Exploiting the Flexibility in the
d) Protecting Leading Indian
TRIPs Agreement
Pharmaceutical Companies
from Threat of Foreign
Takeovers:
Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 41 understand the invention more fully.
f) Resisting the Attempts to Evolve
TRIPs Plus Regime and Ever-
greening of Patents
g) Price Controls for Essential Drugs
These steps may help in moderating the effect of liberalization and TRIPs on the Indian h) Mobilizing Support for Review of
TRIPs at WTO
Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 43 References
Industry’, Economic and Political Business India (1994) ‘Coming of Age’, Business India (1994) ‘Facing the Fikkert, Brian (1993) An Open or Closed Challenge’, June 20-July 3, pp. 141.
Business India (1994) ‘Leaders in Technology’, July 4-17, pp. 52-60. Business India (2001) ‘The Doctor in Search Industrial Sector Firms, Ph.D.
Business Week (2001) ‘Coming at You, Fink, Carsten (2000) How Stronger Patent Correa, Carlos (2000a) ‘Intellectual Haksar, Vikram (1995) ‘Externalities, Growth Kim, Linsu (1997) Imitation to Innovation: Economy, Vol. 23(6), June 2000, pp.
Cullet, Philippe (2001) ‘Patents Bill, TRIPs and Right to Health’, Economic and Kumar, Nagesh (2002) ‘Intellectual Property Desai, A.V. (1980) ‘The Origin and Direction Countries’, RIS Discussion Paper Research Policy 9(Jan. 1980), pp.
Kumar, Nagesh (2001) National Innovation DSIR (1990) Technology Export Potential Nogues, Julio J. (1993) ‘Social Costs and Developing Countries’, Journal of Internationales Asienforum, Vol.
Panagariya, Arvind (1999) TRIPs and the Research Policy, 25(5): 712-22.
Phase, Centre for Studies in Science Pharmaceutical Industry’, Social Political Weekly, pp. 528-529, Vol.
Lanjouw, Jean O. (1998) ‘The Introduction Prasad, H. Ashok Chandra and Shripad Bhat Pharmaceutical Sector’, Economic and Political Weekly, pp. 1037-1058, Mashelkar, R.A. (2001) ‘Revisiting TRIPS: Raizada, B.K. and Javed Sayed (2002) ‘IPR A Developing World Perspective’, RIS Digest, Vol. 18(1-3), September May, Christopher (2000) A Global Political Bibek Devroy (eds.), Salvaging the Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 45 Raizada, Bimal K. (2002) Trade, IPR and Watal, Jayashree (1997) ‘Implementing the Sahai, Suman (2001) ‘ TRIPS Review: Basic Economic and Political Weekly, pp.
Watal, Jayashree (2000) ‘Pharmaceutical Sengupta, Amit (1994) ‘New Drug Policy: Watal, Jayashree (2001) Intellectual Industry’, Economic and Political Srinivasan, S. (2001) ‘Drug Price Control: Woodward, David (2001) ‘Trade Barriers and Subramanian, Arvind (1999) India as User World Bank (1999) World Development The Economist (2001) ‘A War Over Drugs WTO (2001) TRIPs and Pharmaceutical and Patents’, pp. 47-48, March 10.
Patents, World Trade Organization, The Financial Times (1999) ‘Winning the upon Excel Industries produced the fumigant in cases. In one case Hoeshst prevented Unichem 2.5 months and marketed it at half the cost of im- Laboratories from producing tolbutamide using a ports. The foreign firm then sent Excel a notice to technology licensed from Haffkine Institute of cease infringement of its patent. After the Unichem Bombay which had patented the process. In a judgment the Patents Office began to reject a case that became famous, Unichem Laboratories larger proportion of applications on the grounds produced tolbutamide on licence from Haffkine of vagueness or incompleteness. The proportion Institute of Bombay which had patented the pro- of examined applications so rejected went up from cess. The major difference between the patents 5 per cent in 1968 to 11 and 16 per cent in the next was that the Hoechst patent specified at a certain point that sulphur was to be eliminated from athiouria ‘in a conventional manner’, and at an-other point that the elimination was to be done by 2 [http://www.nic.in/cpc/pharma4.htm].
‘a heavy metal oxide or a salt thereof’. The HaffkineInstitute patent specified elimination by hydro- gen peroxide. The judge disallowed the defen-dants’ plea that the Hoechst patent was so gen- 4 CVD at 16 per cent is applied as the excise duty eral as to cover millions of products of which only on domestic production is applicable at the same 220 had been synthesized by Hoechst and still fewer pharmacologically tested, and ruled that thetwo patents referred to the same invention and 5 Barton 1999 and Sachs 1999 (as cited by Correa that Unichem had infringed Hoechst’s patent. In 1999) have acknowledged the need for a differen- another instance aluminium phosphite, a concen- tial standard for developing countries. Mashelkar trated fumigant, was patented and imported by a (2001) calls for ‘TRIPS Plus Equity and Ethics’.
foreign firm. In the payments crisis on 1966 theDirectorate-General of Technical Development 6 Kumar 2002 has suggested a threshold of US$ asked the firm to produce it, but the firm said the process was too difficult to be tried in India. There- Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 47 Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 49 Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 51 Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends 53

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