5    Multinationals and monopolies

The pharmaceutical Industry in India after TRIPS

Sudip Chaudhuri¹

Background

In the 1960s, a United States (US) Senate Committee, the Kefauver Committee, found that India was among the highest priced nations in the world for pharmaceuticals.² In 2007, however, Médecins sans Frontières, the international medical aid organization which operates in more than seventy countries, described India as the ‘pharmacy for the developing world’.

One of the most important factors contributing to this remarkable transformation was the abolition of product patent protection for pharmaceuticals in 1972. After independence, when India wanted to develop its pharmaceutical industry, multinational corporations (MNCs) were invited to come to the country to help in these efforts. But until 1972, while the MNCs were not themselves very keen on manufacturing in India, they used their patent rights to prevent Indian companies from manufacturing. As a result, on the one hand the industry remained underdeveloped, while on the other, the monopolies led to high prices. The abolition of product patents eliminated the MNCs’ monopoly power. The cost-efficient processes developed by the indigenous sector, often in collaboration with government laboratories, could be used for manufacturing the latest drugs, introducing them at a fraction of international prices and dislodging the MNCs from their position of dominance in the domestic market. India became self-reliant in drugs. It emerged as a major player in the global pharmaceutical industry, receiving worldwide recognition as a low-cost producer of high-quality pharmaceuticals. India supplies medicines not only to other developing countries, but also to developed countries such as the US.³

As of 1 January 2005, however, drug product patent protection has been re-introduced in India, to comply with requirements under the World Trade Organization’s (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). How are the MNCs responding to the new policy environment? Is India likely to see monopolization of the industry and high prices, as it did before 1972? Will the positive features of the post-1972 experience be diluted or negated? This chapter deals with the MNCs’ behaviour in the post-TRIPS situation.

Rising MNC dominance

Indian generic companies are no longer permitted to manufacture new patented drugs, which can now be manufactured only by the patentees and their licensees. Thus, depending on the rate of introduction of new patented drugs, the MNCs’ market share is expected to go up. We discuss the changes in the patented drug market in India later in this chapter.

But the MNCs are interested not only in the patented markets; they are trying to grow aggressively in the generic segments, as well. Traditionally, MNCs have relied on patented drugs for their growth and have focused mainly on developed-country markets. The high monopoly prices of patented drugs yielded high returns. But recent years have witnessed a sharp fall in the number of new drugs introduced in the market. MNCs are finding it increasingly difficult to fill the product gap as the patents on their blockbuster drugs are expiring and they are facing constraints on further profitable growth in developed-country markets. Pfizer, for example, is set to lose a revenue stream of USD 10 billion a year as the patent on its blockbuster drug Lipitor expires. The company’s desperate attempts to find a replacement have not yielded results.⁴ The net profit of the top fifteen MNCs declined sharply by 20.1 per cent in 2010, with major setbacks for companies such as Merck, Bristol-Myers and GlaxoSmithKline (GSK).⁵ On the other hand, some developing-country markets are experiencing rapid growth. The seven emerging markets of China, Brazil, India, Russia, South Korea, Mexico and Turkey contributed to more than half of pharmaceutical market’s worldwide growth in 2009, compared to a contribution of only 16 per cent from the developed-country markets of North America, Western Europe and Japan. In 2001 these figures were respectively 7 and 79 per cent, respectively (Tempest 2011). Not unexpectedly, the MNCs are targeting the generic industry in these emerging markets as well.

MNCs’ involvement in the generic market is nothing new in India. When product patents were abolished in India in 1972, the MNCs did not stop their business in India. All the major MNCs decided to stay back. GSK (earlier known as Glaxo) in fact remained the largest seller in the domestic formulations market until recently. But the MNCs in general maintained a low profile. They were hesitant to introduce their latest products. Some of them continued to compete, but created new local brands rather than using their international brands. Others stopped selling products they considered to be priced too low (Chaudhuri 2005: chapter 4).

What is new in the post-TRIPS situation is the vigour with which the MNCs are trying to expand not only in the patented markets, but also in the generic markets. MNCs such as Pfizer, GSK and Merck previously opted not to introduce some of their blockbuster drugs to India. These drugs are now being introduced. Examples are Pfizer’s azithromycin and quinapril, simvastatin by Merck and carvedilol by GSK. In fact, MNCs are not hesitating to market even products developed by other MNCs. Pfizer, for example, is marketing telmisartan, which was developed by Boehringer Ingelheim (IDFC-SSKI 2010: 16).

As far as India is concerned, the most obvious reflection of such changes in strategy is MNCs’ takeovers of Indian companies and strategic alliances between MNCs and Indian companies (Table 5.1). Indian companies such as Dr Reddys, Aurobindo, Cadila Healthcare and Torrent have entered into supply agreements with MNCs such as GSK, AstraZeneca and Abbot. Dr Reddys, for example, will supply about 100 branded formulations to GSK for marketing in different emerging markets across Latin America, Africa, west Asia and Asia-Pacific, excluding India. Dr Reddys will get a pre-determined share of the revenue earned by GSK for these products. In some markets where Dr Reddys has a presence, the formulations will be marketed jointly. Another example is the Aurobindo–Pfizer deal. Aurobindo will supply more than 100 formulations to Pfizer for the regulated markets of the US and the European Union (EU), and more than fifty products for about seventy non-US/EU markets. It has been reported that apart from revenue sharing, the deal involves Pfizer paying upfront licence fees to Aurobindo. These deals enable the MNCs to get access to low-cost, reliable products without undergoing the lengthy process of getting regulatory approvals in different markets and without incurring any capital expenditure for setting up manufacturing plants. The Indian companies gain by having access to the MNCs’ formidable marketing resources. Experience suggests that it is not easy to simultaneously enter into different markets alone. Efforts by some Indian companies to enter and expand in foreign markets with their own marketing infrastructure have not always led to the desired results. The Indian companies hope to better realize their manufacturing capacities and capabilities through these alliances with MNCs (IDFC-SSKI 2009, 2010).

More significant than these alliances is MNCs’ takeovers of Indian companies. The MNCs’ share in the domestic formulations market dramatically increased from less than 20 per cent in March 2008 to 28 per cent in December 2010 with the acquisition of Ranbaxy by Daiichi Sankyo in June 2008; Dabur Pharma by Fresenius Kabi Oncology in August 2008; Shantha Biotechs by Sanofi-Aventis in July 2009 and the domestic formulations business of Piramal Healthcare by Abbott in May 2010. In March 2008, there was only one MNC (GSK) among the top ten companies in India. By December 2010 the number of MNCs in the top ten had risen to three (GSK, Ranbaxy and the Abbott group). The latter of these, comprising Abbott, Piramal Healthcare and Solvay Pharma, is now the largest company in India, with a market share of 6.2 per cent – the second-largest, Cipla, has a share of 5.7 per cent. Abbott was the thirtieth-largest company in the domestic formulations market in March 2008, with a market share of only 1.1 per cent.⁶

Thus the declining trend in the MNCs’ aggregate market share which started in the 1970s has been reversed. The MNCs are recovering lost ground. The post-TRIPS environment and the strategy being adopted by the MNCs suggest that they are on the way to dominating the industry again. First, the MNCs are aggressively pursuing growth in the generic segments. Second, they will enjoy monopoly power in the patented drugs market. Third, they have the financial capacity to take over more Indian companies. If a few other major Indian companies – for example, Cipla (5.7 per cent market share in 2010), Sun (4.3 per cent), Cadila Healthcare (3.9 per cent), Mankind (3.2 per cent), Alkem (3 per cent) and Lupin (2.9 per cent) – are taken over, the MNCs’ share will exceed 50 per cent.

MNCs are not only taking over Indian companies; they are also consolidating their control over their Indian counterparts. Under the Foreign Exchange Regulation Act 1973 (FERA), pharmaceutical MNCs which were manufacturing only formulations or bulk drugs not involving ‘high technology’ were required to reduce foreign equity to 40 per cent or below. With the abolition of FERA as part of the economic reforms of the 1990s, unsurprisingly the MNCs have increased their equity stakes. Currently, all the pharmaceutical MNCs listed on Indian stock exchanges have majority shareholdings of more than 50 per cent. The tendency to increase the equity stake has actually accelerated in the past few years (Table 5.2). Novartis has increased foreign equity from 50.93 per cent in 2005 to 76.42 per cent in 2010, Pfizer from 40 to 70.75 per cent, Abbott from 61.7 to 68.94 per cent and Aventis from 50.1 to 60.4 per cent.

Rising imports of finished formulations

Legitimately, the abolition of product patent protection in India has attracted most attention; but two other policies which helped the growth of the Indian pharmaceutical industry were FERA and the New Drug Policy 1978 (revised in 1986). The drug policy imposed restrictions on the FERA companies (i.e. those with more than 40 per cent foreign equity) which were not applicable to Indian companies. One of the most important policies implemented was that the MNCs were not allowed to market formulations unless they themselves produced the bulk drugs in specified ratios. This compelled the MNCs to undertake manufacturing investment from basic stages. In fact, as with the Indian companies, the MNCs’ manufacturing activities also expanded after the 1970s.⁷

After the mid-1990s and the withdrawal of such restrictions, however, the MNCs started disinvesting in manufacturing operations. They sold a number of plants which they had set up earlier under government pressure. Thanks to the development of the bulk drugs industry in India from the 1970s onwards, most of the bulk drugs are now produced by a number of Indian producers and are available at very low competitive prices. Since it was no longer mandatory for MNCs to manufacture bulk drugs, they could afford to close down the plants they had previously set up and rely on cheaper supplies from Indian bulk drugs manufacturers (see Chaudhuri 2005: chapter 4).

In 1994, investment in plant and machinery (including computers and electrical installations) on the part of the top nine MNCs amounted to Rs 455.51 crores, accounting for about 70 per cent of the top ten Indian companies’ investment.⁸

Thereafter, as Figure 5.1 shows, whereas plant and machinery investment by Indian companies increased rapidly, that of the MNCs essentially stagnated. By 2010, MNCs’ investment accounted for only 5 per cent of the investments of Indian companies of Rs 13765.25 crores. These data, at current prices, suggest that real investment by MNCs has been falling in absolute terms. If we use the Wholesale Price Index (1993–4 series) of the broad manufacturing group ‘machinery and machine tools’,⁹ then MNC investments at 1994 prices show a decline from Rs 455.51 crores in 1994 to Rs 406.56 crores in 2009.

Thus the manufacturing activities of the MNCs after economic liberalization are reminiscent of the 1950s and 1960s, when the official policy was quite liberal but MNCs were reluctant to undertake manufacturing. In fact, as in the previous period, one finds that the propensity to import finished medicines for the purposes of marketing in India has increased.

India’s success as a pharmaceutical exporter has attracted widespread attention. What is less noticed is that in recent years, imports of formulations have been rising sharply. Figure 5.2 shows the impressive growth of formulations exports.

The same figure also shows the sharp rise in formulations imports. Exports exceed imports, but between 1995 and 2010, imports have grown at a faster rate than exports, leading to a decrease in the formulations trade surplus. Imports of formulations have expanded from US$ 69.5 million in 1995 to US$ 1096.1 million – that is, at a compound annual rate of growth of 20 per cent. Exports have grown at a 17 per cent rate, from US$ 503.2 million in 1995.

Further details about the composition of these formulations imports are not available. But there is reason to believe that much of these imports relate to the MNCs’ high-priced products for which there are no generic equivalents in the country. In 2010, about 65 per cent of these imports came from the five countries – Switzerland, the US, the UK, Germany and France – where most MNCs are located. Switzerland alone accounted for a third of these imports.¹⁰ India has demonstrated its cost competitiveness in pharmaceutical manufacturing. As mentioned earlier, a number of MNCs are entering into alliances with Indian companies to supply not only bulk drugs but also formulations for generic markets across the globe. Thus it is unlikely that anyone would be importing mature generic formulations from these countries. In patent-protected monopoly markets, costs are not so important. In fact, costs may account for a small fraction of the high prices that can be charged. As we will discuss below, MNCs have started marketing high-priced patented products.

The MNCs which are already operating in the country are directly involved in such imports. Figure 5.3 shows how the imports of finished products by seven major MNCs have grown in recent years. After increasing sharply in the late 1990s, imports stabilized somewhat, and began to increase once more in the mid-2000s. The Indian companies and agents are also involved in such imports of finished drugs. MNCs not operating in India are entering into marketing alliances to sell their products. Indian companies which act as authorized agents for imported formulations include Elder, USV, Emcure, Cadila Healthcare, Piramal and Ranbaxy.¹¹ One of the ways in which patented drugs can be made more affordable is to impose price controls. This is an important policy tool for countries – none of the WTO agreements forbid price control. Prices of selected drugs are controlled by the National Pharmaceutical Pricing Authority (NPPA) under the Drugs Price Control Order 1995 (DPCO). If the current provisions of DPCO are to be strictly followed, the NPPA cannot ask for details of the imported cost of drugs. In fact, a past attempt by NPPA to do so failed – the concerned MNC went to the courts to prevent the NPPA from asking for cost data.¹² The NPPA is required to accept whatever costs the importers declare. Thus, importing high-priced drugs is one way of avoiding price control. It is important to change the provisions of the DPCO. The DPCO can and should be changed to find out whether the costs and prices claimed by the importers are reasonable.

That MNCs with huge technological resources can help host countries to develop industries is one of the basic expectations of foreign direct-investment policy. Technology imports, assimilation and diffusion can help to build the technological base of a country. But this cannot happen unless manufacturing activities are undertaken by MNCs in the host country. If they are more interested in selling imported drugs and/or drugs manufactured by others in India, obviously the question of beneficial technological impact does not arise. In view of the Indian companies’ progress, the country may not require foreign technology for mature products. But the new drugs being introduced may require new technologies. If these products are manufactured in the country, the country may gain, but if that is not happening then it is legitimate to question the role of the MNCs and ask for proper regulations to bring their activities more in line with the country’s interest.

This is not only the case with respect to manufacturing technology. On several other counts, MNCs’ performances compare unfavourably with those of the top Indian companies (Table 5.3). Unlike the Indian companies, MNCs spend more on foreign exchange for imports, interest payments, royalty/technical fees, dividend remittances and so on than they earn through exports and other means. Whereas the MNCs’ foreign-exchange deficit increased from US$ 20.52 million in 1994 to US$ 205.05 million in 2010, i.e. at a rate of 15 per cent per annum, the foreign-exchange surplus of the top Indian companies increased at 29 per cent per annum during the same period. Between 1994 and 2010, MNC export earnings increased by only 5 per cent per annum (compared to 22 per cent on the part of the Indian companies), but dividend remittances increased by 16 per cent per annum. Export intensity, i.e. exports as a percentage of sales, remained stagnant for the MNCs at around 4 per cent in 2010, compared to about 50 per cent for the Indian companies.

Market structure and prices of patented products

Considering the role that the abolition of product patent protection played in the pharmaceutical industry in India, the re-introduction of product patent protection in 2005 has crucial significance. The basic apprehension is whether India will go back to the pre-1972 situation of MNC monopoly and high prices? Although product patents were re-introduced as of 1 January 2005, ten years earlier, on 1 January 1995, a mailbox facility was put in place to receive and hold product patent applications.¹³ As per the TRIPS agreement, since 1 January 2005, processing of these applications has been undertaken to decide the granting of patents. Thus, to understand the impact on the market structure and prices, we consider the period since 1995.

Indian generic companies are no longer permitted to manufacture and market new drugs for which patents have been granted in India. But not all new drugs are patentable in India. Under Article 70(3) of TRIPS, a WTO member country has no obligation to provide patent protection for any subject matter which had fallen into the ‘public domain’ before the WTO came into being, i.e. before 1 January 1995. Thus any drug product patented abroad before 1995 can continue to be manufactured and sold in India after 1995, even though it may be under patent protection in other countries.

Drugs patented after 1 January 1995 can be classified into the following categories:

1. Those involving new chemical entities (NCEs) (also known as new molecular entities (NMEs), and new biological entities (NBEs) patented after 1995;
2. Those involving NCEs/NBEs developed before 1995 but with patents after 1995 for:
   1. new formulations and compositions
   2. new combinations
   3. new chemical derivatives (salts, esters etc.)

According to Article 27(1) of TRIPS, patents are required to be provided for inventions which are ‘new, involve an inventive step and are capable of industrial application’. The agreement however does not define these terms. This provides some flexibility. India has taken advantage of this flexibility by enacting Section 3(d) in the amended Patents Act and restricting product patents to some extent. Section 3(d) states that India is not obliged to provide protection to any secondary patents (of new formulations/combinations/chemical derivatives) after 1995 involving NCEs developed before 1995 ‘unless they differ significantly in properties with regard to efficacy’.

Further, in cases where Indian companies were already producing and marketing before 1 January 2005 – the products for which patent applications were sent to the mailbox – they need not suspend production even if MNCs get the patents. Under Section 11A (7), they can continue to produce on payment of ‘reasonable royalty’.

We have listed elsewhere the 180 new drugs marketed in India between 1995 and 2010 (Chaudhuri 2011: Appendix). We consider as new drugs all NCEs and NBEs approved for marketing in the US by the United States Food and Drug Administration (USFDA). This information was obtained from the website of the USFDA. We used the website of India’s Central Drugs Standard Control Organization to find out whether and when these were approved for marketing in India. Since it is difficult to get systematic information on pharmaceutical product patents granted by the patent office in India, we used the website of the USFDA for this purpose as well.¹⁴

As Table 5.4 shows, the sales of the 180 new drugs being marketed in India constituted about 9.1 per cent of the total pharmaceutical market in India in 2010. These 180 drugs are further classified into:

1. 62 drugs for which patents have expired in the US (3.8 per cent of the Indian market)
2. 67 drugs for which patents were granted in the US before 1995 and hence are not patentable in India in accordance with the TRIPS agreement (4.2 per cent)
3. 51 drugs for which patents were granted in the US after 1995 and hence are patentable in India subject to Section 3(d) provisions (1.2 per cent).

Thus the market share of the patentable new drugs market in India is still very small. It would however not be correct to infer from this that patented drugs are not a problem in the country. As we will see, in the treatment of life-threatening diseases such as cancer, exorbitant prices are being charged for the new patented drugs. For these patients it is a question of not getting proper treatment if they cannot afford the high cost of the drugs. Moreover, it is just a few years since product patent protection was re-introduced in India. Considering the lag between the time at which an NCE/NBE is patented and when it is finally approved for marketing, it is clear that not all the post-1995 NCEs/NBEs are ready for the market. Some MNCs – for example, GSK – have revealed ambitious plans to launch a basket of patented products. They are expanding their marketing infrastructure in anticipation of the future patented market.¹⁵

Table 5.5 shows the nature of competition in these three categories of new drugs. In the first two categories, where there are no patent barriers in India, the markets are much more competitive than in the third category. For patent-expired molecules, there are five or more sellers for forty-three products accounting for 97.9 per cent of the market. For pre-1995 molecules the figures are forty-six products and 97.9 per cent respectively. There are monopolies for only 1 per cent of the market. Thus these markets are essentially competitive.

For the third category of post-1995 drugs, however, there are monopolies in 50 per cent of the products, accounting for 20 per cent of the market. Surprisingly, even for the post-1995 products, for about three-fourths of the market the number of sellers is five or more. Two TRIPS flexibilities may explain this. Under Section 11A(7), Indian generic companies which started manufacturing before 2005 are not required to suspend production even if patents are granted (after 2005).

More important, however, is the Section 3(d) flexibility. Consider for example two post-1995 products: Novartis’ anti-cancer drug imatinib mesylate and Gilead’s anti-HIV/AIDS drug tenofovir disoproxil fumarate. Product patents are in force in the US for these products. But for both these products, the original compound – imatinib and tenofovir respectively – was disclosed before 1995. What has actually been patented is a particular beta crystalline form (mesylate) and a particular salt (disoproxil fumarate). Hence these are not patentable in India, subject to the enhanced efficacy clause of Section 3(d). Patent Office/High Courts have rejected these patent applications. The matter is currently with the Supreme Court.¹⁶ In the absence of any legal barrier to entering these markets, a number of Indian generic companies are manufacturing and selling these products on the market: fourteen companies are selling imatinib mesylate and six tenofovir disoproxil fumarate. Another product for which the MNC product patent has been contested relates to the anti-cancer drug erlotinib, which is manufactured by six Indian companies.

In a product patent regime, the main interest lies in the behaviour of the MNCs. In India, they are involved in marketing ninety-two of the 180 new drugs. As Table 5.6 shows, MNCs have monopolies in thirty-three products, accounting for 31 per cent of their Rs 517.14 crores’ worth of sales of these ninety-two products. In fact, in fifty-three products accounting for more than three-fourths of their sales, they have a market share of 50 per cent or more. It is interesting to note that eight of these thirty-three products–anidulafungin, caspofungin, micafungin and pegaptanib, for example – are pre-1995 molecules or have expired patents. This suggests that there are entry barriers other than those related to patents – for example, complex manufacturing processes.¹⁷

Table 5.7 gives an idea of the pricing policy adopted by the MNCs for these thirty-three monopoly products. A 50ml injection of Roche’s anti-cancer drug Herceptin (generic name: trastumuzab) costs Rs 135200. Among the other high-priced drugs are Merck’s Erbitux (cetuximab; Rs 87920), Bristol-Myers-Squibb’s Ixempra (ixabepilone; Rs 66430), Pfizer’s Macugen (pegaptanib; Rs 45350), Sanofi-Aventis’ Fasturtec (rasburicase; Rs 45000) and Roche’s Avastin (bevicizumab; Rs 37180). There are six products costing between Rs 10000 and Rs 45000, such as Wyeth’s Enbrel (etanercept; Rs 15761); eight costing between Rs 10000 and Rs 1000, such as GSK’s Tykerb (lapatinib; Rs 4468); another six products costing between Rs 100 and Rs 1000; such as Bayer’s Xarelto (rivaroxaban; Rs 480); and only eight products with prices below Rs 100, such as MSD’s Januvia (sitagliptin; Rs 43).

It is important to note that the prices mentioned in Table 5.7 are for a single dose. The cost of treatment per person per year would be much higher. Consider, for example, dasatinib, used for the treatment of chronic myeloid leukaemia. The price of a 70mg dasatinib tablet is Rs 3905. Assuming a treatment regimen of 100mg per day, the cost of treatment per person per year exceeds Rs 20 lakh. The corresponding cost in the UK is £30,477, suggesting that the company (Bristol-Myers Squibb) is essentially charging the same price and not using differential pricing.¹⁸

All of the drugs listed in Table 5.7 are monopoly drugs, in the sense there are only one seller of the molecule concerned. Effective competition in pharmaceuticals takes place within therapeutic categories, for example cardiac, anti-diabetic and so on, where different molecules may compete against each other. It is important to note that in therapeutic categories such as cardiac and anti-diabetic, where different molecules are available on the market, the prices of the monopoly molecules in Table 5.7 are relatively low – examples include cerivastatin, dronedarone, saxagliptin, sitagliptin. But in relation to life-threatening diseases such as cancer, for essential drugs without effective substitutes, prices are exorbitant – as in the cases of trastuzumab, cetuximab, ixabepilone and so on. Similarly, the prices of vital drugs such as Wyeth’s Enbrel (etanercept; Rs 15761 per injection), which is used for rheumatoid arthritis, a condition that can incapacitate people; Pfizer’s Macugen (pegaptanib; Rs 45350 per 90ml injection), which is used for preventing loss of vision in the case of age-related mascular degeneration and Sanofi-Aventis’ Fasturtec (rasburicase; Rs 45000 per injection), which is used to treat the side-effects of chemotherapy treating leukaemia and lymphoma, are very highly priced.

Table 5.7 does not cover all the patented and monopoly drugs marketed in India. We have tried to focus on products where MNCs have a monopoly. There are also products where MNCs do not have a monopoly but are charging very high prices pending the settlement of patent disputes. This chapter has not systematically studied these products, but an example can be given. The price of pegalyted inter-ferons beta (Roche’s Pegasys) costs between Rs 14000 and Rs 18000 per dose. It is used for hepatitis co-infected with HIV. Roche got the product patent in India, but due to patent disputes, some Indian generic companies are also manufacturing and marketing it.¹⁹

Table 5.7 lists the monopoly products directly marketed by MNCs but, as we have mentioned above, MNCs not operating in India are using the marketing infrastructure of Indian companies to import and sell their products. We have not been able to find out the structure of prices of these imported products, but the example of poractant alfa shows that these prices can also be very high. The drug is imported by Piramal²⁰ which, as the sole seller, charges a price of Rs 17957.8 per 80mg injection/3ml vial.

Although we have not been able to list all the products with high prices in Table 5.7, it is clear that the days of monopolies and high drug prices are back again in India, particularly for drugs without close substitutes.

In the product patent regime, the prices of new drugs will depend upon:

• the prices charged by the MNCs holding the patents;
• the steps that can be taken to regulate such prices, including price control or price negotiation;
• the steps which are taken to provide competition from generic producers.

If MNCs charge affordable prices for patented drugs in developing countries, access may not be adversely affected. Some MNCs are selling drugs at a discount compared to the prices charged in developed-country markets. GSK is an example – the company has adopted the policy of selling drugs at a discount compared to the US price. But even with a discount, the cost of treatment with Tykerb is about Rs 6 lakh per person per year.²¹ If the MNCs give voluntary licences to generic companies to manufacture the patented drugs, the consequent competition could make drugs more affordable, but voluntary licences have mainly been given for products which have very little patent life left, and have rarely been given voluntarily. Usually they follow some public pressure or legal action, and sometimes they have been used as a strategy to thwart opposition by generic companies.

Price control is not forbidden under TRIPS or any other WTO agreement. India’s Draft National Pharmaceuticals Policy 2006 recommended mandatory price negotiations on patented drugs before granting marketing approval and stressed the importance of studying the experiences of Canada, Australia, France and other countries believed to have a good system (p. 15). In fact, a Committee on Price Negotiations on Patented Drugs has been set up in the Department of Pharmaceuticals. This is an important initiative and efforts should be expedited to initiate measures to control the prices of patented drugs. One important difference between direct price-control measures and efforts to enhance generic competition to keep prices under control indirectly may be noted. The former, if properly implemented, makes drugs more affordable but does not provide any room for the generic companies. The latter not only makes prices more affordable through competition but also ensures some space for the generic companies, which is vital for their long-term sustenance.

The importance of generic competition is clear from the cases of Section 3(d) of the amended Patents Act. Like dasatinib, imatinib mesylate is indicated for chronic myeloid leukaemia. For dasatinib, there is only one seller, and the price is very high (Table 5.7); however, there are about fourteen Indian generic companies manufacturing imatinib mesylate. As a result, the cost of treatment with the latter has gone down sharply compared to that of the MNC (Novartis) product. Sun, the market leader, charges Rs 203 for a 400mg tablet. Similarly, there are six manufacturers of tenofovir. Cipla, the market leader, charges Rs 150 per 30mg tablet. Again for erlotinib, compared to Roche’s Tarceva’s price of Rs 4200 (150mg tablet), Cipla’s Erlocip costs Rs 1530.

While Section 3(d) has played quite a useful role in India in recent years, the policy option that is much more potent and sustainable in the longer run is compulsory licensing. Compulsory licensing is permission given by the government to a non-patentee to manufacture a drug without (or even against) the patentee’s consent. As is widely recognized, compulsory licensing is one of the ways in which TRIPS attempts to strike a balance between promoting access to existing drugs and promoting R&D into new drugs. If generic companies are given licences to produce a patented drug on payment of royalty, then competition among manufacturers would drive down prices, but the royalty paid to the innovators would continue to provide funds and the incentive for R&D.

The exorbitant prices being charged by MNCs for some of their products provide a very good rationale for compulsory licensing intervention. It is surprising that this has not yet attracted the attention it deserves among generic companies, civil society organizations and government.

Conclusions

The most important conclusion of this study is that the days of product monopolies and high prices are back in India. MNCs have started marketing new patented drugs, at exorbitant prices particularly for life-threatening diseases such as cancer.

The manufacturing and importing behaviour seen since the 1990s bears a close resemblance to that experienced before the 1970s. Imports of high-priced finished formulations are expanding rapidly, with manufacturing investments lagging far behind.

The MNCs are also expanding vigorously in the generic segments. They are trying to grow not only organically, but also through M&As and strategic alliances with Indian generic companies. The aggregate market share in the formulations market has gone up dramatically with some Indian companies being taken over by MNCs. The MNCs are on their way to dominating the industry again.

Notes

1  This chapter was originally published in Economic and Political Weekly, March 24, 2012. The author thanks Sunil Sriwastava and Sushanta Roy for research assistance and Amitava Guha for discussions. The chapter is a condensed version of a Working Paper of the Indian Institute of Management Calcutta (Chaudhuri 2011). A research grant from the institute is gratefully acknowledged.

2  Cited by Kidron 1965: 251.

3  See Chaudhuri 2005, chapter 2 for an account of the rise and growth of the Indian pharmaceutical industry.

4  ‘Drug firms face billions in losses as patents end’, New York Times article re-produced in Business Standard, 3 August, 2011.

5  Sanjay Pingle, ‘Leading 15 global pharma majors suffer setback in 2010, net falls by over 20%’, www.pharmabiz.com, June 6, 2011.

6  As mentioned in Table 5.4, sales data have been obtained from AIOCD-AWACS. The MNC sector comprises the following two groups. The first group of thirty-five companies (see Table 2, Chaudhuri 2011) are those which have been identified by us as MNCs from the 671 companies reported by AIOCD-AWACS based on miscellaneous sources, including the list of the world’s top fifty MNCs in Pharmaceutical Executive’s May 2010 issue (www.pharmexec.com); CMIE Prowess database; the list of MNCs from market survey reports of ORG-IMS as used in Chaudhuri (2005), Table 2.2 and relevant company websites. The second group of four companies are the Indian companies which have been taken over by MNCs in recent years and are now part of the MNC sector. Another Indian company, Matrix – taken over by Mylan in August 2006 – is not a domestic formulations player and is not considered above.

7  MNCs invested more in India during 1972–94 than they did in the earlier period: see the interview with N.H. Israni in IDMA Bulletin, XXXIII (42), 14 November, 2002.

8  CMIE Prowess database. Consistent data for 1994 to 2010 are available for only these nine MNCs of the seventeen MNCs considered by the CMIE Prowess database. For the names of these MNCs and the top ten companies, see Table 5.3.

9  Accessed on 1 March, 2012 from the website of the Office of the Economic Adviser, Ministry of Commerce and Industry (www.eaindustry.nic.in).

10  Calculated from CMIE India Trades database.

11  See, for example, ‘List of finished formulation registered from 2003 to 2009’, accessed from the website of Central Drugs Standard Control Organization (www.cdsco.nic.in).

12  ‘Eli Lilly insulin brand paves way for hike in imported drug prices’, Economic Times, 11 June, 2011.

13  Under Articles 65.2 and 64.4 of TRIPS, India had until 1 January, 2005 to introduce product patent protection in pharmaceuticals. But Articles 70.8 and 70.9 put a limitation on the transition period allowed under Article 65 – India was required to introduce ‘mail box’ and ‘exclusive marketing rights’ from 1 January, 1995.

14  See the notes to the Appendix in Chaudhuri (2011) for further elaboration of the methodology and also of the limitations.

15  Business Monitor, ‘India: Pharmaceuticals and Healthcare Report’, June 2011.

16  For the background, see Park (2010).

17  Another possibility is that the use of USFDA Orange Book did not correctly reveal the patent status. As explained in the notes to the Appendix in Chaudhuri (2011), we have considered the patent with the earliest expiry date as the NME patent. The earliest patents for these four products, for example, expires during 2011–13 and hence these have been treated as pre-1995 molecules. But there are also other patents listed expiring after 2014 and if any of these are the relevant product patents, then these are actually post-1995 products.

18  ‘Leukaemia (chronic myeloid) – dasatinib, high dose imatinib and nilotinib (review): appraisal consultation document’, on the website of the National Institute for Health and Clinical Excellence, http://guidance.nice.org.uk/TA/WaveR/99/Consultation/DraftGuidance. Foreign exchange rates fluctuate. Assuming a rate of Rs 70 per GBP, the cost of treatment is same.

19  ‘Hepatitis C virus – prevention and treatment’, Press statement issued by International Treatment Preparedness Coalition – India (ITPC-India), 21 October, 2011.

20  See, for example, ‘List of finished formulation registered from 2003 to 2009’, accessed from the website of Central Drugs Standard Control Organization (www.cdsco.nic.in).

21  ‘GlaxoSmithKline launches two cancer drugs at reduced prices’ The Hindu Business Line, 22 July, 2011, http://www.thehindubusinessline.com/companies/article2285697.ece.

References

Chaudhuri, Sudip (2005): The WTO and India’s Pharmaceuticals Industry: Patent Protection TRIPS and Developing Countries. New Delhi: Oxford University Press.

Chaudhuri, Sudip (2011): ‘Multinationals and Monopolies: Pharmaceutical Industry in India after TRIPS’, Working Paper Series Number 685, Indian Institute of Management Calcutta, November (http://facultylive.iimcal.ac.in/sites/facultylive.iimcal.ac.in/files/WPS%20685_0.pdf).

DIPP (2010): ‘Discussion Paper: Compulsory Licensing’. New Delhi: Department of Industrial Promotion and Policy, Government of India.

IDFC-SSKI (2009): ‘Recent MMNC alliances: Signalling Paradigm Shift?’, IDFC-SSKI Securities Ltd, June.

IDFC-SSKI (2010): ‘MNC Pharma: New Avatar?’, IDFC-SSKI Securities Ltd, March.

Kidron, Michael (1965): Foreign Investments in India. London: Oxford University Press.

Park, Chan (2010): ‘Implementation of India’s Patent Law: A Review of Patents Granted by the Indian Patent Office’ in Chaudhuri, Sudip, Chan Park and K M Gopakumar (2010): Five Years into the Product Patent Regime: India’s Response. New York: United Nations Development Programme. (http://content.undp.org/go/cms-service/download/publication/?version=live&id=3089934).

Médecins sans Frontières (2007): ‘Examples of the Importance of India as the “pharmacy for the developing world”’, 29 January (www.msfaccess.org).

SBICAP (2010): ‘India Equity: Pharma’, SBICAP Securities Ltd.

Tempest, Brian (2011): ‘The Structural Changes in the Global Pharmaceutical Marketplace and their Possible Implications for Intellectual Property’, UNCTAD-ICTSD Project on IPRs and Sustainable Development, Policy Brief Number 10, July (http://ictsd.org/i/publications/111430/).