Indian Pharmaceutical Industry

Controlling Stake Matters

Sujoy Bala

Capitalism emerged from the internal contradictions of the late Middle age and Renaissance Europe, to become the dominant economic system of the modern world. This system is driven by stimulus of 'so called free' competition to achieve profit and public interest takes a back seat. Nowhere is the difference between capitalists and public interest more pronounced or more important in the sphere of public health. As a universal concern, health and healthcare has enormous potential for profit, and unsurprisingly the pharmaceutical industry responsible for developing and producing medicines is big business which is set to rake in $1.1 trillion in world-wide revenue next year. Unfortunately, profit does not parallel maximization of health outcomes, and those who are most desperate for medical help, the third world countries, are precisely those who cannot attract private investment into solving their health problems because there are limited financial incentives to do so. Only 1% of drugs that have come onto the market in the last 30 years have been developed for combating tropical diseases and tuberculosis. On the other hand, the world spends US$2 billion a year on surgical procedures for hair loss compared to US$547 million for malaria. This seems absurd when one considers the enormous impact of these diseases: WHO estimates that the so-called neglected tropical diseases impair the lives of 1 billion people, while tuberculosis kills approximately 1.4 million and malaria 660,000 annually.

An American Senate Committee (Kefauver Committee) found in the 1960s that India was among the highest priced nations in the world in pharmaceuticals. In the early 1960s the Indian government started to encourage the growth of drug manufacturing by Indian companies to achieve self-sufficiency in pharmaceutical production. The first step was to revamp the colonial patent legislation and abandon product patent protection for medicines. A new Patents Act in 1970 was established which allowed only process patent protection for pharmaceutical inventions. With expertise in reverse-engineering, Indian companies could copy an overpriced original patented molecule and introduce these generic medicines in the Indian market and abroad within a short period of time at a fraction of the originator's price, thereby eliminating the monopoly power of MNCs and position of dominance in the domestic market. Further, competition was generated among Indian pharmaceutical manufacturers because, with no product patents, many companies introduced the same products in the market. Government also introduced other control measures like restricting foreign ownership under which foreign companies were not allowed to hold more than 50% of equity along with direct price control on all formulations of about 347 bulk drugs. This competition, coupled with price control on essential medicines up to the mid-1990s (a 1995 order limited the number of medicines under price control to 74), resulted in the availability of medicines at low prices.

With the 1970 Patent Act in place, the Indian Pharmaceutical Industry turnover grew from a mere $0.3 billion in 1980 to about $21.73 billion in 2009-10. Today, the industry consists of more than 5,000 small, medium and large manufacturers. The domestic market is valued at $9.44 billion, while pharmaceutical exports in 2009-10 amounted to some $8.79 billion in value terms. The pharmaceutical industry in India is the world's third-largest in terms of volume [10% of global share] and stands 14th in terms of value [1.5%]. The Indian pharmaceutical industry plays a critical role in supplying medicines to various global treatment programmes. For instance, Indian generic drugs accounted for approximately 50% of the essential medicines that the UNICEF distributes in developing countries. Besides this, 75-80% of all medicines distributed by the International Dispensary Association (IDA) to developing countries are sourced from India. Similarly, the Global Fund to Fight AIDS, Tuberculosis and Malaria and the US President's Emergency Plan for AIDS Relief (PEPFAR) also source a substantial percentage of their medicine procurement from Indian manufacturers. Thus any development that impacts the generic production capabilities in India would compromise access to affordable medicines not only in India itself but also in other countries, developed and developing alike.

The global pharmaceutical industry is undergoing unprecedented levels of transformation. Traditionally MNCs have relied for their growth on patented drugs [new drugs] and 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 and the MNCs are increasingly finding it difficult to fill up the product gap as the patents on their blockbuster drugs are expiring or going to be off-patent in the near future. Pfizer, for example is set to lose a US$ 10 billion a year revenue stream as the patent on its blockbuster drug Lipitor expires. The net profit of top 15 MNCs declined sharply by 20.1 per cent in 2010 with major setback for companies such as Merck, Bristol-Myers and Glaxo-SmithKline. In addition, Indian generic companies started challenging patents on blockbusters. As a result, global generic market, especially in the regulated market, is growing rapidly.

Another important problem facing the industry is that, with the global financial crisis, the developed countries have begun cutting social security spending as part of their economic austerity measures. This is expected to have implications for out-of-pocket drug expenditures as well as public procurement of drugs.

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 the growth of the pharmaceutical market of the world in 2009 compared to only 16% by the developed country markets of North America, Western Europe and Japan. The figures were respectively 7% and 79% in 2001 (Tempest 2011). Indian pharmaceutical Industry itself recorded spectacular growth from 1991 till the first half of the 2000s. Not unexpectedly, the MNCs are targeting the generic industry in these emerging markets as well. But it is now facing serious threats to its self-sufficiency and ability to compete in the generic medicines market.

Two policy decisions by the Indian government can be identified as crucial in the emergence of the present crisis facing the industry. The first of these was the change in the government's policy on foreign investment, and the other was the radical change in the country's intellectual property regime to comply with World Trade Organization (WTO) treaty obligations. Thus the growing control of the Indian pharmaceutical industry and market by MNCs and their ruthless exploitation and abuse of the product patent protection afforded by India's current patent regime has set the country on the present destructive course.

In 2001 India liberalized foreign direct investment (FDI) norms for the pharmaceutical sector. As a result, 100% FDI was allowed through the 'automatic route' (without prior permission) in pharmaceutical manufacturing (except in sectors using recombinant DNA technology). The FDI policy did not make any distinctions between 'Greenfield' (new facilities) and 'Brownfield' (take-over of existing facilities) investments. However, during the last 12 years MNCs did not make any major effort to undertake Greenfield investments in India, largely opting for Brownfield investments, i.e., acquisition of Indian companies. The share of the MNCs in the domestic formulations market has dramatically increased from less than 20% in March 2008 to 28% in December 2010 with the taking over of Ranbaxy by Daiichi Sankyo in June 2008; Dabur Pharma by Fresenius Kabi Oncology in August 2008; Shantha Biotechs by Sancifi-Aventis in July 2009 and the domestic formulations business of Piramal Healthcare by Abbott in May 2010. At times MNCs offered purchase prices which were many times higher than the actual sales turnover of the acquired firms. For instance, Abbott paid $3.7 billion for Piramal Healthcare, whose sales revenue was reported to be approximately $400 million. In March 2008, there was only one MNC (GSK) among the top 10 companies in India. By December 2010 the number of MNCs in top 10 went up to three (GSK, Ranbaxy and the Abbott group). The Abbott group comprising Abbott, Piramal Healthcare and Solvay Pharma is now the largest company in India with a market share of 6.2% ahead of the second largest Cipla (5.7%). Abbott was the 30th largest company in the domestic formulations market in March 2008 with a market share of only 1.1%. Thus the declining trend in the aggregate market share of the MNCs which started in the 1970s has been reversed.

The same period witnessed a series of strategic alliances between MNCs and Indian pharmaceutical companies. ‘Dr Reddys’, for example will supply about 100 branded formulation to Glaxo SmithKline [GSK] for marketing in different emerging markets across Latin America, Africa, Middle-East and Asia-Pacific excluding India. In Aurobindo-Pfizer deal, Aurobindo will supply more than 100 formulations to Pfizer for the regulated markets of USA and EU and more than 50 products for about 70 non-US/EU markets. 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. Experience suggests that it is not easy to simultaneously enter into different markets on their own. On the other hand, the Indian companies gain by having access to the formidable marketing resources of the MNCs. This would also deter the Indian generic companies from entering into R&D activities which would result in the development and marketing of new drugs or the aggressive introduction of generic versions of patented drugs.

The MNCs are not only taking over Indian companies. They are also consolidating their control over the Indian counterparts. Under the Foreign Exchange Regulation Act, 1973, (FERA), the pharmaceutical MNCs, which were manufacturing only formulations or bulk drugs not involving 'high technology' were required to reduce foreign equity to 40 percent or below. With the abolition of FERA as a part of economic reforms of the 1990s, not surprisingly the MNCs have increased their equity stakes. Currently all the pharmaceutical MNCs listed in Indian stock exchanges like Cipla (5.7% market share in 2010), Sun (4.3%), Cadila Healthcare (3.9%), Mankind (3.2%), Alkem (3%), Lupin (2.9%) have majority shareholding of more than 50%.

Earlier, the New Drug Policy, 1978 (revised in 1986) imposed restrictions on the FERA companies (i.e., those with more than 40% foreign equity) such 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 investments from basic stages. In fact together with the Indian companies, the manufacturing activities of the MNCs too expanded after the 1970s. But after the mid-1990s with the withdrawal of such restrictions, the MNCs started disinvesting in manufacturing operations which they had set up earlier under government pressure. This has led to increase in the propensity to import finished medicines for the purposes of marketing in India. One of the basic expectations behind the FDI policy is that MNCs with huge technological resources can help host countries to develop industries. But this happens only when manufacturing activities are undertaken by the MNCs. If they are more interested in selling imported drugs and/or drugs manufactured by others in India, obviously the question of technological progress does not arise.

Patented drugs can be made more affordable by imposing price controls. None of the WTO agreements forbid price control. Prices of selected drugs are controlled by the National Pharmaceutical Pricing Authority under the Drugs Price Control Order, 1995. If the current provisions of DPCO are to be strictly followed, NPPA cannot ask for the details of the imported cost of drugs. In fact an attempt by NPPA to do so has failed—the concerned MNC went to the court to prevent NPPA from asking for cost data. NPPA is required to accept whatever costs the importers declare. Thus importing high priced drugs is one way of avoiding price control.

In 2005 India reintroduced the product patent regime to comply with the obligations of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) which mandates patent protection on both products and processes for a period of 20 years. This replaced one of the Important policy tools used for the development of the Indian pharmaceutical industry. The reintroduction of product patentability takes away the freedom of Indian pharmaceutical companies to introduce generic versions of new chemical entities (NCEs) in the normal course because NCEs often come with product patent protection. Though product patents have been introduced from 1 January 2005, earlier from 1 January, 1995, a mailbox facility was put in place to receive and hold product patent applications. As per the TRIPS agreement, these applications are being processed since 1 January, 2005 for grant of patents. Thus to understand the impact on the market structure and prices, one should 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 after 1 January, 1995. Thus any drug product patented abroad before 1995 can continue to be manufactured and sold in India after 1995 even though these may be under patent protection in other countries.

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. Under Section 3(d), 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 I January, 2005, the products for which patent applications have been made in 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". This is the case for Novartis anticancer drug, imatininb mesylate.

Seven years after the introduction of product patent protection, there is ample evidence of growing control of MNCs in the Indian pharmaceutical market. Figures released by the Indian Patent Office reveal that out of 3,488 product patents issued from 2005 to March 2010, 3,079 were granted to MNCs. Today, the market share of patentable new drugs market in India is still very small. But it would however not be correct to infer from here that patented drugs are not a problem in the country since companies are charging exorbitant prices for certain life-threatening diseases such as cancer. For these patients it is a question of not getting proper treatment if they cannot afford the high cost. Moreover, it is just a few years that product patent protection has been introduced in India. Considering the time lag between the time when an NCE/NBE is patented and when it is finally approved for marketing, all the post- 1995 NCEs/NBEs are not yet ready for the market. Some of the MNCs, for example GlaxoSmithKline have revealed ambitious plans to launch a basket of patented products. They are expanding their marketing infrastructure in anticipation of the future patented market.

But even in the product patent regime, price control is not forbidden under TRIPS or any other agreement of the WTO. Way back in 2001, World Trade Organization, released the Doha Declaration, announcing that a member Government can declare a public health emergency and start manufacturing copies of a patented drug, or take other steps to protect public health. More-over, there is ample scope to bring down the prices of the new drugs by 'compulsory licensing'. As per 'Indian Patents Act', compulsory licensing is a permission given by the government to a non-patentee to manufacture a drug without (or even against) patentee's consent after three years of the grant on drugs that are not available at affordable prices. This 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 licenses 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 the MNCs for some of the products provide a very good rationale for compulsory licensing intervention. Recently the Indian Patent Office issued domestic drug company Natco Pharma with a compulsory license (CL) to produce pharmaceutical MNC Saver's anti-cancer medicine Nexavar [sorafenib tosylate). As a result, the medicine would be available to patients in India for Rs 8,800 per month, against Bayer's price of Rs 80,000 per month.

The days of product monopolies and high prices are back in India. As expected, because of the ongoing global financial crisis, MNCs have started to target the emerging markets like India. Judging from previous takeovers, it is evident that the MNCs are mainly targeting Indian companies with a high level of technological capability. If the takeover drive is left unchecked, India would suffer severely especially in the realm of innovation. Since Indian companies would get locked into the lower end of the value chain, India would be forced to compromise on need-based R&D and become completely dependent on MNCs for meeting the country's drug needs in the long run. Thus, a company like Cipla, for example, can no longer see a repeat of its historic announcement in 2000 of making available generic first-line HIV/AIDS medicines for just $350 per person per year against MNC prices of $10,000-12,000.

Secondly, the presence of an active domestic sector with technological capabilities is needed to make use of the TRIPS flexibilities such as compulsory licensing and patent opposition. MNC acquisitions of domestic generic companies would either fully eliminate or restrict the use of flexibilities. For instance, immediately after its takeover by Daiichi, Ranbaxy withdrew all the patent challenges against Pfizer's blockbuster cholesterol drug Lipitor.

Thirdly, these acquisitions would result in the capture of the marketing and distribution networks of Indian generic companies. With it the MNC's would substitute low-cost medicines with higher-priced, including patented, versions. For example, the main objective of Abbott's acquisition of Piramal Healthcare was to acquire the latter's marketing and distribution network, as Abbott acquired only one manufacturing facility from the Piramal group. With this takeover, Abbott now ranks first in market share in India. (Abbott has also made it clear that there is no plan to start exporting from India.)

Fourthly, the MNCs are seeking to buy and kill off the competition in a global generic market which is growing at a fast pace. MNCs want to restrict the Indian companies from getting into the regulated markets with their low-priced generic products. At the same time, the MNCs are also devising their strategies to capture the Indian market, which, while relatively small in global terms, is one of the fastest-growing pharmaceutical markets.

Fifthly, these acquisitions would result in high medicine prices. According to the Indian Pharmaceutical Alliance, an association of Indian pharmaceutical companies with R&D activities, Abbott increased the prices of medicines produced by Piramal immediately after its takeover. For example, price of Haemaccel was Rs 99.02 in May 2009; by May 2011 it had gone up to Rs 215—a 117% increase in the space of two years. While, epilepsy drug Cardenal registered a price hike of 121% during the same period.

To counter the 'inevitable' global financial crisis, World Trade Organization [WTO] with its 'free trade and open market' policies has been instrumental in promoting monopoly capitalism [imperialism] with more aggressiveness. Indian Pharmaceutical Industry is a classic example of the distorted and one-sided development promoted by the WTO TRIPS agreement. Historically, the Indian pharma industry constituted mostly small-to-medium enterprises depending solely on reverse engineering to produce cheap generic drugs for the Indian market. Although some of the larger companies did take baby steps towards new drug innovation to compete against the MNC's, market leaders such as Ranbaxy and Dr Reddy's Laboratories spent only 5-10% of their revenues on R&D, lagging behind Western pharmaceutical, like Pfizer [world's 2nd largest pharmaceutical company], whose research budget last year was greater than the combined revenues of the entire Indian pharmaceutical Industry. This historical disadvantage of 'capital accumulation' forms the basis of current imperialist policies. In reality, the industry as a whole is mainly operated as well as controlled by dominant foreign companies having subsidiaries in India due to availability of cheap labour in India at lowest cost. Thus, it was only due to the 1970 'Patent Act', the bleak scenario looked more deceptive till now.

Henceforth, the current prevailing crisis in the Indian Pharmaceutical Industry has once again reaffirmed the true 'parasitical nature' of the modern day 'monopoly capitalism' and exposed the 'semi-colonial' character of the Indian state.

Vol. 47, No. 38, Mar 29 - Apr 4, 2015