Brief History of Indian Pharma Market
Until 1970, the Indian pharmaceutical market was dependent on imports and dominated by multinational corporations. Drug prices were amongst the highest in the world. The scenario changed dramatically after the Patents Act of 1970 allowed process but not product patents for pharmaceuticals, enabling Indian firms to imitate foreign drugs by making minor modifications to the manufacturing process. In the same year, a new and far more extensive Drug Prices Control Order was promulgated, bringing a swathe of medicines under stringent price controls.
The Foreign Exchange Regulation Act of 1973 limited foreign equity ownership to 40% except for products involving high technology. Those firms that were allowed to maintain higher equity stakes were forced to produce bulk drugs in the country rather than rely on imports. Finally, like other industries, domestic pharmaceuticals manufacturing benefited from the highly protectionist trade regime based on high tariffs and stringent import licensing. All these policies were put into reverse gear from the late 1980s. In particular, imports and foreign investment which had been kept at bay were now permitted to increase their penetration of the domestic market, and product patents were reintroduced in 2005 as part of India’s obligations under the WTO TRIPS Agreement.
Growth of Pharma Industry over the years
Along with a new Patent Law regime, the Foreign Exchange Regulation Act (1973) limited foreign ownership of Indian companies to 40% except for some exceptional cases, and they were required to produce most of the bulk drugs (intermediate products) that go into formulations (products sold to retail customers) in India rather than importing them. In addition to this, price controls in the form of Drug Price Control Orders (DPCOs) under the framework of National Drug Policy, 1978 were introduced. These sets of events eliminated incentives of foreign multinationals to sell their products in India; and in their place, domestic pharmaceutical companies specializing in manufacturing generic versions of patented pharmaceutical drugs developed.
Revision of Drugs Price Control Order (DPCO)
Also in 1970, the Drugs Price Control Order (DPCO) was substantially revised. The DPCO is an order issued by the Government, under Section 3 of the Essential Commodities Act, l955, empowering it to fix and regulate the prices of essential bulk drugs and their formulations. The order incorporates a list of bulk drugs whose prices are to be controlled, the procedure for fixation and revision of prices, the procedure for implementation, the procedure for recovery of dues, the penalties for contravention, and various other guidelines and directions. The order is subject to the guidelines of Drug Policy and supposedly aims to ensure equitable distribution, increased supply, and cheap availability of bulk drugs. It played a vital role in directing the pharmaceutical industry’s fortunes. The order was a landmark regulation and has had several implications in shaping the Indian pharmaceuticals industry.
WTO Regulations- proved to be a set-back
Thus, the Indian Patent Act was amended in 2005 to allow for the WTO regulations. An immediate artefact of this is that the previous strength of the Indian pharmaceutical industry, i.e., reverse engineering a patented drug and producing it through a different process to sell in countries that allowed it was rendered moot, and the industry had to look for a different competitive strategy.
TRIPS - Impact of International standards can be felt directly on Competition Act dealing with Pharma Industry
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was adopted as an integral part of the Final Act of the Uruguay Round of GATT negotiation which led to the establishment of World Trade Organization (WTO).
Article 3 of the TRIPS agreement mandates all member countries to WTO to treat their own nationals as well as foreign nationals in the same way and apply the same principles on both . Therefore, Any advantage, privilege, favour or immunity granted with respect to any intellectual property by a member to the nationals of any other country shall be accorded immediately and unconditionally to the nationals of all other members.
Birth of "Product Patent" AND "Process Patent"
Articles 27 – 34 of TRIPS agreement require WTO member states to introduce strong patent protection, under which “Patents shall be available for any inventions, whether products or process, in all fields of technology, provided they are new, involve an inventive step and are capable of industrial application.”
All such patent shall confer on its owner an exclusive right:
- Where the subject matter of a patent is a product, to prevent third parties to either make, use, offer for sale, or import without the owner’s consent.
- Where the subject matter of a patent is a process, third parties are not allowed to use the process or offer the process for sale without the owner’s consent.
In the modern Patent law regime in India - pharmaceutical companies are allowed to patent their process of manufacturing drugs.
One of the most important regulations in the pharma industry across the world is related to the patent laws. Patents are important for incentivising research and development that is crucial for the pharma industry. However, a patent gives its owners the monopoly rights over the molecule. The Patents Act 1970 formed the centrepiece of a new policy regime that had the explicit purpose of promotion of a self-reliant indigenous drug industry.
Even when compared to the other pharmaceutical regimes in the world, change in patenting regime (product patenting to process patenting to product patenting), unique nature of competition (for example, branded generics), etc. have made the Indian pharmaceutical market unique. With the enactment of the Indian Competition Act in 2002, India has become one of the newer countries that have a robust competition regulation. Given the unique nature of the pharmaceutical markets, it is important to understand how competition law applies to this sector.
In the modern Patent law regime in India - pharmaceutical companies are allowed to patent their process of manufacturing drugs. The patents were valid for seven years. With the introduction of GATT, due to India becoming a signatory to it in 1994 many changes occurred in the Indian Market. It was now mandatory to comply with GATT as well as the TRIPS Agreement. Not complying with these standards meant that the defaulting party would no longer be a member of the WTO (World Trade Organization).
The pharmaceutical industry also had to meet the minimum standards which were provided under TRIPS. Hence, not only process patent, but product patent was also introduced, and the period of patents was increased from 7 years to 20 years. India got some extension to introduce these new measures as it got the benefit of being a developing country.
Intersection of intellectual property standards and competition law
Article 40 of TRIPS is regarded as the intersection of intellectual property standards and competition law.
The essence of Article 40 can be stated to allow protection for patents while ensuring a balance with competition law.
It provides that “Nothing shall prevent Members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market.”
In India, competition policy is set out by enacting Competition Act in 2002 by repealing MRTP Act, 1969. The Act was enacted to prevent all such practices which are having an adverse effect on competition and thereby upholding healthy competition in the Indian market. Such anticompetitive practices may occur in a number of ways viz. a. Anti-competitive agreements; b. Abuse of dominance; and c. Various combinations of mergers, alliances etc.
Concept of Competition vis-a-vis Pharma Industry
Competition from generic drugs is a desirable policy objective as it typically brings substantial savings to pharmaceutical buyers. However, it should be balanced against the incentives of manufacturers' need to invest in developing innovative new products and having a regime in place to protect their investments. Competition between branded and generic pharmaceutical manufacturers can provide consumers with substantial savings.
However, Generic entry into pharmaceutical markets raises a number of important questions and challenges for competition policy. The generic product entry into the market can reduce prices and thereby benefit final consumers. However, the desirability of the price reductions pursuant to generic entry must be considered in light of the need to maintain incentives in the pharmaceutical industry for development of new drugs and continued investment in the improvement of mature drugs.
Compulsory licensing is also considered as an antitrust remedy as it is against the exorbitant pricing by a patent owner.
The abuse of IPR is a very reasonable likelihood where an enterprise has its rights protected under Intellectual Property (IP) laws. The monopoly protected by IPRs is though permissible under laws but the fact remains that it is very much prone to abuse.
A compulsory license, also known as a statutory license or mandatory collective management, provides that the owner of a patent or copyright licenses the use of their rights against payment either set by law or determined through some form of arbitration. In essence, under a compulsory license, an individual or company seeking to use another's intellectual property can do so without seeking the rights holder's consent and pays the rights holder a set fee for the license.
The enterprises are often tempted to indulge in anticompetitive and exclusionary practices and they try to extend their monopoly into areas where they do not have rights protected by IPRs. Specifically, in the pharmaceutical area, the issues are sensitive since the core products concerned are related to human beings and their health.
Section 84 of the Patent Act states that compulsory licensing can be provided only after three years has elapsed from the time when a patent was granted. Compulsory licensing can be granted in the following cases-
- The invention which has been patented is not available to the public at an affordable price.
- The reasonable requirement of the public with respect to the patented invention has not been satisfied.
One of the advantages in India is that through the practice of compulsory licensing may pose particular problems, there is a specific provision which says that there cannot be a challenge to the patent of the third party to whom the compulsory licensing has been granted. This is one of the conditions which have been incorporated under the India Patents Act for compulsory licensing to be granted. Hence, once the license has been granted the original holder of the patent cannot challenge the validity of the patent of the licensee
In the 21st century, the cost of healthcare and the related issues are hotly debated on moral grounds. The very basic question is that should a patient be deprived of a medicine only because the drug is patented and the price for the same is exorbitant? The regulators have tried to find a balance between intellectual property rights in the pharmaceutical area and the affordability of drugs by a mechanism through compulsory licensing.
Licensing and Pricing- Regulatory Framework
The regulatory framework in the pharma industry operates at two levels: licensing and pricing.
The need to provide protection to pharmaceutical companies for their innovation is well recognized under the Competition Act, 2002 (“Act”) however the same is restricted by providing specific inclusions under Section 3(5) of the Act.
Horizontal agreements- with respect to the pharma sector refer to agreements entered at the same level between pharmaceutical companies to restrict supply/fix prices similar to situations including “payment of delay” as prevalent in the United States.
Vertical agreements- agreements entered between players at different levels in the supply chain being pharmaceutical companies and pharmacists/hospitals in the form of tie-in arrangements.
The provisions of Section 3(3) and 3(4) of the Competition Act pertain to agreements entered between enterprises restricting
- purchase/sale prices,
- curtailing supply/production of goods and services
- as well as entering exclusive supply/distribution arrangements, creating tie-in arrangements with the intention of adversely affecting the market.
Only the pharmaceutical companies holding valid patents can enter into agreements with hospitals/pharmacists restricting prices if unregulated by the Drug Price Control Order (“DPCO”) and entry in the absence of generic drug manufacturers, as well as inter-se between pharmaceutical companies may lead to possible violations under the Act.
Abuse of Dominant Position in context Patent laws dealing with Pharma Industry-
A patent right provides the inventor with an exclusive right to exploit their invention for a limited period, that doesn’t necessarily constitute a dominant position. It depends upon the extent to which there are substitutes for the product, process or work to which the patent relates. However, many of the patent holders try to abuse their patent rights. It happens in the number of ways like ever-greening of patents. Evergreening of patents basically give the patent holder the chance to retain a monopoly over its product after the patent period has expired by bringing about small changes and then claiming a patent right for another twenty years31.
The patent holder in order to retain its royalty payments sometimes buys out competitors or frustrates competitors out of the market for a longer period of time. In India, mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of that substance or the mere discovery of any new property or new use for a known substance or of the mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant are not considered an invention
Innovations which cannot be Patented
There are certain kinds of innovations which do not fall under the category of inventions. Section 3 states those innovations which do not fall under the category of inventions. Some of them are:
- Any invention which is contrary to the well-established natural law or is frivolous in its claim.
- A method of agriculture of horticulture.
- A process for the medical treatment of human being and animals.
- A presentation of information.
- An invention whose use is against public morality or public order.
- A discovery of a new property or getting to know a new use of a known property.
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