The US Drug Companies perspective on the Indian patent regime

2015[Type the company name]Abishek.S, Soumyajeet Ghosh

[ The US Drug Companies perspective on the Indian patent regime ]

The US Drug Companies perspective on the Indian patent regime[footnoteRef:1] [1: Under Topic 18: Should Medicines and Drugs to be kept out of Patent regime?]

IntroductionA patent is an exclusive right granted for an invention, which is a product or a process that provides a new way of doing something, or offers a new technical solution to a problem.[endnoteRef:1] The debate of affordability v. innovation has been long lasting. Innovative products would not become commercially available unless market exclusivity is guaranteed, at the same time if a product is not affordable it is as good as it being not innovated. While such guarantees are essential conditions for investments necessary for beneficial innovation and commercialisation, a balance has to be struck in favour of affordability too. In practice, patent systems have developed over time in response to changing domestic circumstances and identified priorities. [1: Wipo.int. 2013.Intellectual Property - Some basic definitions. [online] Available at: http://www.wipo.int/about-ip/en/studies/publications/ip_definitions.htm [Accessed: 29 Sep 2013].]

The US pharmaceutical companies have been facing stiff competition from their Indian counterparts over the last decade. US companies have been steadily losing out their markets in the emerging markets to Indian companies, to the extent that India is today dubbed as the pharmacy of the developing world. Most Indian companies are generic while US companies are innovator companies. The tussle arises out of the fact that prospectively over the years since 2005 patent law amendment, Indian laws and courts have shifted towards social welfare at the cost of innovator companies. The following work tries to strike a balance by suggesting measure that stimulates innovation and at the same time address affordability. Points of issues raisedThere are three issues that the essay would look at. These issues are the nodes of contention between Indian laws and originator drug companies. These issues significantly affect the investments in drug research and development. 1. Compulsory licensing2. Unfair revocation of patents3. Recent incidents of patent denial due to Section 3 (d) of the Indian patents Act.Compulsory licensing: The compulsory licensing is a move, whereby a government allows someone else to produce the patented product without the consent of the patent owner.[endnoteRef:2] Though, India till date has compulsorily licensed only one drug, it is important to deal with it owing to the immense effect it has on the pharmaceutical industries.[endnoteRef:3] Section 84 of the Indian patents Act provides that after three years from the date of patent grant, any interested person in that patent may make an application for grant of compulsory license on the grounds of public demand, price of the product or ineffective working of the product in Indian Territory due to some reason. Article 31 of TRIPS agreement lays down certain pre-conditions and conditions as, when and how compulsory licensing shall be employed.[endnoteRef:4] [2: Wto.org. 2013.WTO | intellectual property (TRIPS) - TRIPS and public health: Compulsory licensing of pharmaceuticals and TRIPS. [online] Available at: http://www.wto.org/english/tratop_e/trips_e/public_health_faq_e.htm [Accessed: 29 Sep 2013].] [3: India in March 2012 had compulsory licensed sorafenib tosylate a cancer drug. The patent holder here was Bayer and the drug was licensed to Natco Pharma Ltd. Till date this remains the only compulsorily licensed drug in India.] [4: Some are failure to obtain license through commercial terms, situations set out in domestic law, national emergency and for the purposes of local markets.]

Revocation of patents: Section 66 of the Indian patents Act provides for revocation of patents where the patent is prejudicial to public interests. Section 85 of the Act provides for revocation of patent after compulsory licensing has been administered on application by any interested party if the invention even after compulsory licensing has not worked or the invention is not available at affordable costs to the public.[endnoteRef:5] This trend has struck wrong chords with multi-national pharmaceutical companies, the effect of which in the long term would kill funding of innovation. [5: Nexavar of Bayer, lapatinib of GlaxoSmithKline, pegylated interferon alfa2a and Herceptin of Roche are some drugs whose patents have been revoked recently due to revocation provisions in the Patents Act.]

Patent denial due to Section 3 (d): The 2005 amendment to the Patents Act introduced Section3(d), and denies patent to what it sees as mere discovery that does not result in enhancement of know efficacy. It aims at curbing ever greening of patents by validating only those inventions which pushes the limits of existing science and not mere add-ons. The Section has left the determination of efficacy of a new product open ended, thus leading to immense interpretational problems.[endnoteRef:6] The effects of Section 3(d) though might be fruitful in the short term; the interpretation of it has hit the commercial sense of originator companies the effects of which would surface in long term. [6: The first of the victims of the Section is Novartis which has been denied patent for its drug Glivec as it failed the test of Section 3 (d).]

Unfair Revocation/Compulsory licensing Public Interest: The threats of compulsory licensing, patent refusal and revocation of patents act as discouragement for pharmaceutical companies from investing in India. This affects the business plans of pharmaceutical companies and arguably is financially impractical. The only case of compulsory licensing in India saw one applicant applying for the license.[endnoteRef:7] The public interest sought by the Government of India would have seen a natural course, if the government had encouraged multiple licenses thus creating competition resulting in lower prices of the drug. But in the given case Natco became the sole producer, raising doubts about the governments intention. A weak patent regime repeals investment and threatens local research and development affecting public interest in the long run. [7: Natco was the sole applicant whenSorafenib tosylate was compulsorily licensed from Bayer.]

Boost of Generic-Drug manufacturing sector: Indias efforts to legally limit abusive patenting practices and to improve access to affordable generic medicines are not entirely ingenuous, where critics have accused India of seeking to boost its generic-drug manufacturing sector, the worlds third-largest by volume.[endnoteRef:8] The justification of a compulsory licensing for a cancer medication because it was imported rather than manufactured locally[endnoteRef:9] seems to indicate a state-driven industrial policy and is at odds with the rules governing international trade. Currently, Indias economy is approximately $4.7 trillion and trades close to $1 trillion in goods and services each year.[endnoteRef:10] The socialist actions of the Indian government will pose major concerns to the multinational companies and the US pharmaceutical industries. [8: The Economic Times. 2012. Pharma, engineering to topple IT as big paymaster. Available at: http://articles.economictimes.indiatimes.com/2010-06-08/news/28423319_1_salary-hikes-manufacturing-sector-survey [Accessed: 24 Sep 2013].] [9: Case of Natco] [10: Pipes, S. 2013. India's War On Intellectual Property Rights May Bring With It A Body Count. Available at: http://www.forbes.com/sites/sallypipes/2013/09/16/indias-war-on-intellectual-property-rights-may-bring-with-it-a-body-count/ [Accessed: 27 Sep 2013].]

Local Assessment too subjective for TRIPS: The articulation of public interest in the judges decision to uphold the grant of the compulsory license to Natco has been deemed controversial. It was held that the benefit of the patented invention must be available at a reasonably affordable cost. Such a condition has led to the consideration of price as a factor of public interest. It is arguable whether reasonable affordability constitutes an additional basis for the grant of a compulsory license. Furthermore, the local assessments of affordability announced by the court may be too subjective for an international trade regime such as the TRIPS agreement, which is based on universal, albeit minimal, standards of patent protection.[endnoteRef:11] Under the TRIPS agreement, the authorization of the grant of a compulsory license shall be considered on its individual merits and may be approved in cases of public non-commercial use.[endnoteRef:12] As reasonable affordability seems likely to fall under Article 31(b) of the TRIPS agreement, it is difficult to exclude reasonable affordability from the TRIPS agreement. [11: India at LSE. 2013.Compulsory Licenses for pharmaceuticals: An inconvenient truth? Available at: http://blogs.lse.ac.uk/indiaatlse/2013/03/25/compulsory-licenses-for-pharmaceuticals/ [Accessed: 27 Sep 2013].] [12: Article 31(a) and Article 31(c) of the Agreement on Trade-Related Aspects of Intellectual Property Rights. ]

Violation of acquisition principles: The state can obtain private property for sovereign welfare. But a private persons right to property can be infringed only when the following has been proved.i. There is a legitimate sovereign objectiveii. There exists a nexus between the acquisition and the objectiveiii. There was no other way than the acquisition to reach that objective.[endnoteRef:13] [13: state of bihar v. kameshwar singh air 1952 sc 252]

In the case of patent revocation and compulsory licensing for public interest, the objective show here is affordability of life saving drugs. It is a legitimate sovereign objective. There also exists a nexus between revocation and price reduction as when patents are revoked generic companies enter the market thus reducing the prices. But if price reduction was the sole objective, then the state should have exhausted all other option before taking away the private property of the person which in this case in the patent. Here tax reduction, reasonable negotiation to buyout and other method should have been employed before taking this extreme step of patent revocation. Section 3(d) Indian Patents ActMarket effects: A similar version Section 3 (d) of the Indian patents Act has been emulated by the patent regimes in Philippines and Argentina.[endnoteRef:14] Maldives, Pakistan, Sri Lanka, Vietnam, Indonesia, Malaysia and Bangladesh are contemplating a similar move to counter ever-greening of patents.[endnoteRef:15] The market size of pharmaceutical products in these countries as against the rest of the world is 32%.[endnoteRef:16] This number is only on the presumption that all of the stated countries adopt a similar version of Section 3(d) and further all of their courts render a pharmaceutical company hostile interpretation to the said law. The spread of such a notion is detrimental not just to companies of the developed economies but also to India on two counts. First, Indian pharmaceutical companies are increasingly growing from being generic to originator.[endnoteRef:17] There is now a possibility of Section 3(d) backlash on the Indian industry, if they claim patent for their research in a certain drug in other countries where Section 3(d) has been emulated, thus getting a taste of its own medicine. The other count on which Section 3(d) is detrimental is the collective action effect in the international scenario. With other countries emulating Section 3(d) the financial effects on pharmaceutical companies grows significantly, thus shifting the argument in favor of protecting innovation from dying out completely due to non-profitability thus rendering Section 3(d) mute. [14: Blogs.law.harvard.edu. 2013.Of Evergreening and Efficacy, Part III |. [online] Available at: http://blogs.law.harvard.edu/billofhealth/2013/04/16/of-evergreening-and-efficacy-part-iii/ [Accessed: 29 Sep 2013].] [15: The Economic Times. 2007.Copycats popping patent law pill. [online] Available at: http://articles.economictimes.indiatimes.com/2007-08-13/news/27677651_1_patent-law-section-3d-dg-shah [Accessed: 29 Sep 2013].] [16: ims consulting group. 2012.IBC Asia South East Asia Pharmaceutical Forum. [online] Available at: http://www.imsconsultinggroup.com/deployedfiles/consulting/Global/Content/Our%20Latest%20Thinking/Static%20Files/pharmerging_landscape.pdf [Accessed: 29 Sep 2013].] [17: Indian pharmaceutical companies filed 417 Drug Master Files (DMFs) with the US FDA during the year 2012 as against 404 DMFs in the previous year. The DMF filings during the year 2010 and 2009 were at 311 and 271 respectively. Pharmabiz.com. 2013.Indian pharma companies filed 417 DMFs in US during 2012 and 79 in Q1 of 2013. [online] Available at: http://pharmabiz.com/ArticleDetails.aspx?aid=75539&sid=1 [Accessed: 29 Sep 2013].]

Violation of TRIPS: TheAgreement on Trade Related Aspects of Intellectual Property Rights(TRIPS) administered by theWorld Trade Organization sets down minimum intellectual property standards. All member states have to comply with the provisions of TRIPS, failing which the affected state can take the issue to the WTO dispute settlement mechanism. Article 27.1 of the TRIPS agreement mandates member states to provide for trade protection through patents in all fields of technology without discrimination, provided that they are new, involve an inventive step and are capable of industrial application. Section 3 (d) falls foul of Article 27.1 on two counts. One, it lays down a fourth new test other than mandates. TRIPS lays down novelty, inventive step and industrial production as the three tests against which products will be tested and on clearing which patent shall be given. Section 3(d) lays a new test efficacy test. This test does not further the existing novelty test because it is solely for the purpose of countering ever greening of patents. Further unlike other tests, it is applicable only for known products, and finally, it tests against efficacy which none of the three tests seek to question. And it is because of these reasons that Section 3(d) is a new test hence violating TRIPS. Two, Section 3 (d) violates Article 27.1 as it discriminates based on field of technology. Though it does not in worded law do so, the practical application proves this. Ever since the Section came into existence it has singled out only pharmaceutical companies and farming chemical companies, while at the same time granting patents to other products in other fields of technology which would clearly fail the efficacy test.[endnoteRef:18] These actions of the Patent office show clear practice of discrimination, thus attracting TRIPS sanction. [18: Roche, GSK, Allergan, Novartis, Pfizers and others happen to be Pharmaceutical Companies that were affected by the Section, while in the same period Apple was granted patent for 4S, which when tested against Apple 4 would have failed due to lack of efficacy.]

Possible Solutions1. Trade Sanctions: The US Government may impose trade sanctions on India, but this may not help much in persuading India to a take a lenient stand with respect to patents. But the options that are available to the US government arei. Placing India in priority watch list in Special 301 Report: The special 301 report is prepared annually by the Office of the United States Trade Representative. It identifies trade barriers in intellectual property laws to US companies and the government takes us these issues with the countries in the list. India, Indonesia, Algeria, Chile, Argentina, China, Pakistan, Thailand, Russia, and Venezuela are currently in the watch list as of 2013. [endnoteRef:19] [19: Ustr.gov. 2013.USTR Releases Annual Special 301 Report on Intellectual Property Rights | Office of the United States Trade Representative. [online] Available at: http://www.ustr.gov/about-us/press-office/press-releases/2013/may/ustr-releases-annual-special-301-report [Accessed: 18 Oct 2013].]

ii. Revoking Most Favored nation Status: The most favored nation status gives the favored nation equal trade advantages as that of the favoring country. When this status is revoked Indian exports will be taxed to their disadvantage and will lose out in competition as compared to other exporters.[endnoteRef:20] [20: Wto.org. 2013.WTO | Understanding the WTO - principles of the trading system. [online] Available at: http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm [Accessed: 18 Oct 2013].]

iii. Revoking Generalized System of Preferences (GSP): Under this the US privileges imports from India as against imports from other countries in terms of import tariffs. The trade sanctions are unlikely to work because the total GSP import of USA from India constitutes only 3% of Indias total exports. Besides, retribution in terms of trade is not in the best interest of the US as India is an essential ally in global politics to counter a growing China, in the Asian region.

2. Investor-State Dispute Settlement: With the uncertainty surrounding the WTO-based approach and the insignificance of the removal of the trade preferences, the Investor-State Dispute Settlement (ISDS) appears to be a viable instrument through which the US government may elicit a policy change from the Indian government. If incorporated into the upcoming Bilateral Investment Treaty (BIT) currently in negotiation between the US and India, dissatisfied US pharmaceutical companies will be able to bypass the Indian Supreme Court and sue the government for expropriation in foreign tribunals.[endnoteRef:21] Such a key element in bilateral investment treaties has been invoked in previous instances.[endnoteRef:22] This resolution by arbitration is appealing to disgruntled multinational companies for two reasons.[endnoteRef:23] First, the US Company will be able to avoid the local court system and directly claim against the offending government in front of a tribunal of neutral arbitrators. Second, a successful claim for expropriation under the BIT will likely lead to a higher award than the adequate remuneration[endnoteRef:24] recommended in the TRIPS agreement. Under TRIPS, the Indian government is responsible in deciding the amount of remuneration. As the objective of the Indian government, in issuing the compulsory license, is to reduce the costs of production of the drug, the amount awarded will potentially reflect an amount below the lost profits calculated by the US pharmaceutical company. Conversely, in an arbitration convened under the ISDS provision, it is the Intellectual Property investor which demands what it perceives to be a fair compensation. Under the BIT, the common phrase of prompt, adequate and effective compensation is akin to full compensation, while adequate compensation merely reflects some financial remuneration.[endnoteRef:25] This difference in terminology may be crucial for a dis-satisfied US drug company in claiming a higher compensation as compared if it proceeds by the TRIPS agreement. [21: The Times Of India. 2013. US wants MNCs to have right to sue India abroad. Available at: http://articles.timesofindia.indiatimes.com/2013-09-25/india/42392317_1_white-industries-protection-agreement-bilateral-investment-promotion] [22: US pharmaceutical company Eli Lilly is currently using similar ISDS provisions of the North America Free Trade Agreement to pursue legal actions against the Canadian government for loss of expected profits due to the invalidation of a patent by the Canadian court.] [23: Mercurio, B. 2011. The Untapped Potential of Investor-State Dispute Settlement Involving Intellectual Property Rights and Expropriation in Free Trade Agreements. Professor of Law and Associate Dean (Research). Chinese University of Hong Kong] [24: Article 31(h) of the Agreement on Trade-Related Aspects of Intellectual Property Rights.] [25: Mercurio, B. 2011. The Untapped Potential of Investor-State Dispute Settlement Involving Intellectual Property Rights and Expropriation in Free Trade Agreements. Professor of Law and Associate Dean (Research). Chinese University of Hong Kong]

3. Beneficial Taxation: Local taxes on medicines in India work out to be between 13%-24%, which varies depending on the state where the medicines are sold.[endnoteRef:26] This constitutes 4% of Value added tax, 5 -16% state excise duty, 3% national education cess.[endnoteRef:27] Most pharmaceutical companies being companies under the Companies Act and for the purposes of taxation are taxed on their business profits. Foreign companies are taxed at 42.024% while domestic companies are taxed at around 32.445%.[endnoteRef:28] It is here recommended that government policies and taxation can be so modified to route the taxes on medicines and the taxes on pharmaceutical companies to the final consumers, thus leading to a price reduction of around 45%-66%. This is beneficial to enhance affordability, along in keeping compulsory licensing and revocation of patents at bay, thus boosting innovation. [26: haiweb.org. 2011.Medicine Prices and Availability. [online] Available at: http://www.haiweb.org/medicineprices/05062011/Taxes%20final%20May2011.pdf [Accessed: 29 Sep 2013].] [27: Ibid.] [28: 2011-12 Tax rates]

4. Partnership with India drug industry: The US government could persuade the US MNCs who are in better position to deal with pricing strains to invest in and partner with India domestic pharmaceutical industry instead of focusing on acquiring Indian firms. Collaboration to invent low-cost versions of their medicines specific to developing markets would go a long way in the interests of both the countries. The suggested alternative to compulsory licensing would be a patent buy-out by a group of Indian companies (patent pooling).[endnoteRef:29] They shall form a cartel as per competition laws in India and share markets and profits, where the companys share in the investment is in direct proportion with quantity of drugs. [29: For example, 5 Indian generic drug companies come together to pay up a substantial part of the formidable R&D costs the innovator-company has borne.]

5. Fixed reduced price: To circumvent the arbitrariness of compulsory licensing, it is suggested that the Indian government could negotiate with the US pharmaceutical companies to purchase the drug, on conditions that the latter would make these supplies available without cost or at reduced prices through government institutions. In exchange, the US pharmaceutical companies will receive the right to price its product at a premium in the private market without fear of the imposition of a compulsory license.[endnoteRef:30] Such a proposal appears to be adopted by the Department of Pharmaceuticals in Mumbai. A new draft policy has been suggested that once the price of the medicines is fixed and accepted by the government, it would not be possible for the government to use the tool of compulsory license on the ground of reasonable affordability of the drugs. [endnoteRef:31] [30: Kamath, G. 2012. Guest post : Why the compulsory licence to Natco is a bad idea. Available at: http://apothecurry.wordpress.com/2012/04/03/guest-post-why-the-compulsory-licence-to-natco-is-a-bad-idea/ [Accessed: 29 Sep 2013]] [31: The Economic Times. 2012. Pharma, engineering to topple IT as big paymaster. Available at: http://articles.economictimes.indiatimes.com/2010-06-08/news/28423319_1_salary-hikes-manufacturing-sector-survey [Accessed: 29 Sep 2013]]

6. Internal Regulations of US pharmaceutical companies: In the utilization of Intellectual Property laws, the balance between private commercial interests and public health must always be carefully weighed by the US government. The US government continues to make substantial adjustments to the US domestic Intellectual Property Laws to seek out the right balance. In the 2014 budget, the US government has proposed recommendations to limit ever greening, and has introduced a package of executive actions and legislative proposals to curb lawsuits by patent trolls.[endnoteRef:32] Additionally, the US pharmaceutical industry has long pressurized the government for incentives and concessions on grounds of claims involving risks and costs in developing pharmaceutical products. These have resulted in patents being granted for lower levels of inventiveness, and has arguably infantilized the pharmaceutical industry. Efforts must be placed to factor in other considerations in the pharmaceutical industry. These include social responsibility and the deliberate consideration of local affordability in the strategies of the pharmaceutical industries. [32: Doctorswithoutborders.org. 2013. India's Access to Medicines Policies Under Attack | Doctors Without Borders. Available at: https://www.doctorswithoutborders.org/news/article.cfm?id=6838&cat=field-news [Accessed: 29 Sep 2013].]

7. Patent Pooling: Patent pooling is a popular option that can be used to save interests of both the consumer and the innovator. In this a number of firms come together to setup a joint licensing program. The innovator company then sells out its patented drug with costs and the expected profit to the pool. The firms in the pool then buyout the patent and then divide the costs or as in a certain proportion. Then the license of that drug is given out as per the contributions made, thus a firm that has paid more to the buyout will get to produce in that proportion. Since the cost price of the drug is divided amongst all the firms in the pool, the final cost of the drug is also lesser at the same time the innovator company is also financial benefit thus stimulating innovation. Further joint licensing connects dependant technologies, erases uncertainties over patent availability, reduces litigation, establishes a fair market and also reduces costs on transaction for the innovator and generic firms.[endnoteRef:33] [33: Vermeulen, F. 2013.Patent Pools: Do They Kill Innovation? [online] Available at: http://www.forbes.com/sites/freekvermeulen/2013/01/22/patent-pools-do-they-kill-innovation/ [Accessed: 18 Oct 2013].]

8. Centralizing Research: The International monetary fund and the World Bank, were initiated to help states from defaulting on their loans in the post world war era. It was started with combined contributions of 29 nations and today it has 188 nation states as its members.[endnoteRef:34] The fund pooled has helped various nations from time and again. The criticism of the IMF and World Bank aside, the structure tells us that it is possible to manage a joint fund. A similar centralized fund for drug research alone can be set up which could be used to steer drug innovation out of corporate hands. Such a facility would attract talented researchers who as of now are forced to work with large firms due to lack of cheap research facilities. Contributions can come from nations in proportion to their gross domestic production. The facilities shall be free of politics with diseases from all over the globe should have funding for their research proportionately allotted. This would not leave out diseases in third world countries, for the research on diseases in first world countries. Besides it acts as a forum to research on diseases prevalent in the less lucrative markets. [34: Imf.org. 2013.About the IMF: History: Cooperation and reconstruction (194471). [online] Available at: http://www.imf.org/external/about/histcoop.htm [Accessed: 18 Oct 2013].]

ConclusionThe example of Cipla helping in the drastic reduction of AIDS treatment drug prices is often quoted as the success story against patent regimes. The drug prices fell from 15,000 $ per annum to 300$ per annum thus saving millions of lives around the world. But it needs to be understood that Cipla also profited from such sales and the shares of Cipla grew at the cost of Pzifer who was the innovator company here. After the setback Pfizer never ventured into AIDS related research. Today, Indian pharmaceutical industrys growth has slowed down, owing to the developing pharmaceutical industries in China, Thailand and South Africa. While there are more and more generic producers, innovation has also seen a similar growth. But with duplicates of Section 3(d) finding resonance in more and more countries, investing in drug innovation is bound to get less profitable. There is and remains the crucial debate surrounding incentivizing creation and providing access to medicines. The originator companies should recognize the importance of medicine in saving lives and believes that in this discourse it is critical to look at stakes involved and examine the claims of the stake holders. This is especially so in light of Indias current policy toward the protection of intellectual property. Co-operation between the government and the originator a company is ideal, and perhaps be the precedent for other developing nations to follow suit. Although difficult to attain, an appropriate balance between innovation and access to medicines has to be struck, both domestically and internationally. And the measures as suggested above would help strike this balance.