“Intelligence is gifted to mankind to know God, not to amass wealth”

--- Anonymous
The society has never exhibited such a high level of maturity where
intelligence is used for lofty purpose of serving mankind without achieving
huge economic benefits. Intelligent people should use intelligence to serve and
uplift society along with earning their livelihood. If this simple principle is
followed then inventions would help mankind and at the same time ensure
benefits to the inventor then the world would be a happy and healthy place to
live. Indira Gandhi at the World Health Assembly in 1982 remarked “The idea
of a better ordered world is one in which medical discoveries will be free of
patents and there will be no profiteering from life and death.
This sums up the attitude of developing countries like India towards the
“Product Patent Regime” proposed by WTO TRIPS. These and many similar
arguments were put forward so as to oppose changes in the Indian Patent Act
1970 which grants process patents as against product patents as propagated by
WTO regime.

History of Pharmaceutical Industry & Patents in India

The modern system of medicine is a 20th century phenomenon though the

traditional system of medicine has been in practice for many centuries.
Production of modern medicines by indigenous units started in India with
setting up of Bengal Chemicals and Pharmaceutical Works. Patents in India
have their origin in the 1856 Act for granting exclusive privileges to inventors
which along with other acts was consolidated into The Patent and Design Act
1911. This act was creation of British rulers of India with clear intentions of
opening Indian pharmaceutical market for western organizations particularly
British companies. During this period companies were engaged in importing
drugs and medicines from their country of origin and selling it in colonial India
at exorbitant prices. During 1947 to 1957 99% of 1704 drugs and patents in
India were held by foreign companies clearly indicating vice like grip which
these foreign companies had on Indian pharmaceutical market. No effort was
made by these companies to make financial investments and technological help
to establish drug production centers in India. As a result drug prices in India
were highest though it was a poor country and vast majority of its population
could not afford such a high cost of medicines.
A need to comprehensively review the Act was felt soon after the
independence and become a subject of analysis of two expert committees:
1) The Tek Chand Patents Enquiry Committee and
2) The Ayyangar committee.
The recommendations of the expert committees was referred to a joint
committee of Parliament, which received oral and written testimonials from
individuals, firms and groups from India and abroad. Thus a well debated,

1
development oriented and patriotically processed statute of 1970 was created,
which came to be known as The Indian Patent Act 1970. This act provided for
the protection of the process of manufacturing the drug for seven years from the
date of filling the application or five years from the date of the grant of the
patent. Under this act only one process that was used in the actual
manufacturing could be patented. This act was in force till 1st Jan 2005. This act
was the most suitable patent regime for developing countries. By 1972 over 100
essential drugs covering a wide spectrum of therapeutic group like antibiotics,
sulpha drugs, anti-leprosy drugs, analgesics, antipyretics, vitamins,
tranquillizers etc were produced in India from basic stages. After this act many
companies were started in India, today there are around 27000 companies in
India including loan licensees. India is not only self sufficient in meeting its
needs of majority of drugs and medicines, it ranks second only to China in
exports of medicines amongst developing countries and is having huge trade
surplus pharmaceutical sector.

Effect of Indian Patent Act 1970 on pharmaceutical industry in India

The growth of Indian pharmaceutical industry was very slow till 1970.
During this period India put into place a series of policies, which included
1) Drug (Price Control) Order,
2) Compulsory licensing,
3) Strengthening of public sector etc.
4) Indian Patent Act 1970.
Out of these the most important was Indian patent Act 1970.These policy
measures were aimed at moving the country towards self sufficiency in
availability of low cost medicines. At this time national sector was very small
contributing less than 25% of entire domestic pharmaceutical market. Amongst
top ten pharmaceutical companies by retail sales only two were Indian rest all
were subsidiaries of multinational companies. Much of the country’s
pharmaceutical consumption was met by imports. During 1970-71 a total of
3923 patents were granted of which only 639 were for Indian applicants. This
number fell by almost 75% in a decade. In 1980-81 number of patents granted
came down to 1019 of which 349 were Indian. This clearly indicates that all
inventors were affected by the weakened patent regime it is clear that
multinational companies in particular no longer found taking patent in India
worthwhile.
The Patent Act of 1970 started an era of reverse engineering in Indian
pharmaceutical industry, where firms developed new products by changing the
process of production. This insulated Indian pharmaceutical companies from
innovative research and development of new medical treatments, but helped in
gaining significant expertise in imitative reverse engineering process research
and development. As a result Indian Pharmaceutical companies have

2
accumulated extensive knowledge in process research and development i.e.
synthetic and organic chemistry. But severe weaknesses in other specific
disciplines like medicinal chemistry and biology.
The Patent Act of 1970 was more than successful in accomplishing its
objective of ensuring abundant availability of medicines at very economical
prices. The ease of imitation in reverse engineering resulted in intense
competition among Indian firms. The pattern of competition also changed from
development of new medical treatment to competition for volume and lower
prices.
Thus by 1991 domestic firms accounted for 70% of bulk drugs
production and 80% of formulations produced in country, and by 2001 eight
firms of top ten pharmaceutical companies were Indian. This industrial
restructuring was accompanied by rapid growth of pharmaceutical industry; a
substantial part of this growth was absorbed by exports, with pharmaceutical
now being one of the largest export industries. Even while India’s share of
world merchandise export stagnates its share of world pharmaceutical exports
have increased 2.5 times.
Another important feature of Indians lack of protection for
pharmaceutical products was that it enabled Indian firms to develop commercial
production capabilities for an on patent drug much before expiry of its patent
and move rapidly into world market on the day the patents get lapsed. This was
possible as Indian firms could manufacture and market patented products of
Multinational Corporations much before the expiry of patent gaining valuable
expertise in the process of manufacturing and would be ready to launch its
generic version as soon as the patents get expired. This ability to swiftly launch
the products going off patent in U S and European market is very important. A
report by Lehman Brothers notes that in the U S the first generic entrant can sell
at a 30% discount to the branded product compared to 75% discount for later
entrants. Moreover industry experts say 80% of profits are milked out of a drug
in first 18 months of its reincarnation as generic.
The reverse engineering prowess of Indian companies also ensured that
the molecules which are launched internationally were made available in India
as early as two to three years from their international launch and that to at
fractional prices. In other words there is relatively short time lag between
international launch and domestic introduction of new medicines. Importantly
domestic launch was largely by indigenous firms who discover new processes
to produce parented products. The following table clearly indicates that the time
from 1976 onwards time lag between international launch by an innovator and
Indian launch by an imitator has progressively reduced from cefuroxime to
ciprofloxacin. In case of ciprofloxacin the time separating international launch
and Indian launch was just 3 years.

3
 Drug name Year of Year of Time Year of patent
global launch in lag expiry in Europe
launch India
Cefuroxime 1978 1988 10 1994
Cefaclor 1979 1991 12 1994
Netilmicin 1980 1988 8 1994
Acyclovir 1981 1988 7 1995
Ranitidine 1981 1985 4 1997
Captopril 1980 1985 5 1997
Norfloxacin 1984 1988 4 1998
Ketoconozole 1981 1988 7 1998
Famotidine 1984 1989 5 1999
Ciprofloxacin 1986 1989 3 2001
Ceftazidime 1983 1988 5 2000
Roxithromycin 1992 2001

The prowess of Indian firms in reverse engineering was proved beyond

doubt in 1991 when Ranbaxy after 20 million dollars and three years of efforts
developed a new process to produce Eli Lilly’s patented drug cefaclor. It was a
spectacular success because Eli Lilly had already patented 56 different
processes for manufacturing cefaclor and was under impression that no other
process can be developed to produce cefaclor but Ranbaxy found 57th process in
1991. The patent for cefaclor expired in 1992 but Eli Lilly was confident that it
will be able to protect its monopoly with patents for 56 processes under its belt
till 1994. Ranbaxy shattered its dreams by discovering 57th process. Impressed
with capabilities of Ranbaxy, Eli Lilly entered into mutually beneficial
agreements with Ranbaxy. Many such examples can be given from companies
like Dr. Reddy Laboratories, Dabur, Glenmark, etc.
The Managing Director of Glaxo (India) Ltd. noted that they had tried to
be first into Indian market with their patented anti-ulcer drug ranitidine (Zantac)
but were met with seven Indian competitors at the time of Launch.
Indians working abroad particularly in country like US carry lot of
medicines while returning to work from their home leave. One such popular
drug is ciprofloxacin. The antibacterial ciprofloxacin was under patent in US till
2003 from German manufacturer Bayer. Indian versions of a 500 mg tablet is
available at Rs. 4 to Rs. 6 depending on manufacturer, where as the cost of
Bayer’s tablet during patent protection in US was $6 a whooping 60 times
The AIDS drug price war was started when Cipla Ltd. An Indian
company offered a cocktail of three anti AIDS drugs (Lamivudine, Stavudine
and Nevirapine) for an annual price per patient of US $ 350 to Medicins Sans
Frontiers. Cipla made this offer through a three tier pricing mechanism, under
which the same combination drugs will be offered at $ 600 per patients per year

4
to governments and $ 1200 to distributors. The offer by Cipla created ripples in
the international drug Industry because the prices of these drugs in the US and
other developed countries were between $ 10000 and $ 15000 per patient per
year. The Multi National Companies immediately launched a campaign against
Cipla terming it a “Pirate”. Responding to this charge Y K Hamied Chairman of
Cipla said “I am not a westerner marketing drugs for western markets. I
represent the third world and the capabilities of a country with a population of a
billion. We haven’t broken any laws. The average cost of the AIDS cocktail in
the west is $ 10000 to $ 15000 per patient per year – not because the drugs are
prohibitively expensive to produce they are not. It is the drug pricing structure
imposed by the multinational manufacturers which makes the drugs
prohibitively expensive. Cipla has not indulged in Charity it has made some
profits.” As a result of Cipla’s offer almost every pharmaceutical multinational
company announced substantial reductions in their drug prices. The following
table gives an idea of some current prices of AIDS drugs.

Drug Company US price Cipla Hetro Latest company offer in

Africa
Zerit (Bristol-Myers) 3589 70 47 252
Crixivan (Merck) 6016 N.A. 2300 600
Combivri (Glaxo) 7093 635 293 730

Note: Prices are in US $ for AIDS drugs per patient per year.

It is precisely for these and similar reasons Indian Patent Law was
targeted by the US and European organizations. The essence of the developed
countries position regarding intellectual property is simple. They want to
strengthen intellectual property protection and establish an obligation for
countries to enforce stronger standards. Their goal is to lengthen patents
lifespan, making inventions of all products patentable, sharply limiting
restrictions on patent and ensuring that countries prohibit copies of products,
which then can be conveniently exported at exorbitant prices which they think
market can bear.

The need for patents

High technology multinational pharmaceutical companies claim that it is

only 1 in 5000 molecules which finally finds its way into the market as a
beneficial pharmaceutical product. This entire process of getting just one
molecule into market could set companies back by as much as half a billion
dollars. Thus the argument put forward by Innovating multinational
pharmaceutical companies is that large scale imitation of their products
encouraged by weak patent laws cause them to loose huge amount, thus
justifying very high prices of their products and need for strict intellectual

5
property laws in developing countries. However a close look on the operation of
such companies reveal that they spend much more on the marketing than on
production and put entire bill of marketing expenses on the patient. More over
the point that a lot of money was spent on inventions which has to be recovered
through profits is not correct because many discoveries were done by university
– industry collaboration with huge funding from government. This clearly
indicates that US multinational companies have hiked up the prices artificially
and are thirsting for a similar hike all over world. If the claim of multinational
pharmaceutical companies that justify high prices of their products were true
then these companies would have never implemented strategy of “Ever
Greening” of patents. It is nothing but the greed for profits of these
multinational pharmaceutical companies which encourages them to adopt
strategy of ever greening of patents. Consider this example, in 1992 an
antihistamine Terfenadine was introduced in India. At the time of introduction,
it was known that the drug can have marked side effects on the heart. This
information was down played and the molecule was aggressively marketed.
However in the late 1990s, the discoverer of Terfenadine requested the FDA of
US for permission to withdraw the drug citing side effects on the heart as its
serious drawback. FDA agreed and a world wide withdrawal of the drug took
place. Simultaneously the makers of Terfenadine launched a new derivative of
the drug. The patent of Terfenadine expired during the withdrawal from the
world market. So the strategy of the company was to substitute a drug going off
patent with a drug belonging to the same class which is under patent protection.
Second strategy adopted for ever greening of patent is to introduce a number of
drugs which are more or less similar. For example the first drug of a class of
drugs called ACE inhibitors introduced was Captopril; which was followed by
Enalapril. Now we have in the market Lisinopril, Ramipril, Perindopril,
Quinapril, Cilazapril, Benazepril, Fosinopril, etc. Each drug will claim marginal
benefit over others but for that reason its absence is not a major problem, but
because these are under patent protection the price for marginal benefits which
many time are difficult to prove is very high and cannot be justified,
Industrialized countries and high technology multinationals claim that
stronger intellectual property laws will not hurt the developing countries on the
contrary improved protection will lead to increased investments, innovation and
technology transfer. It will also encourage domestic companies to innovate.
However historical record suggests that most of current developed or
industrialized countries never had strong intellectual property laws when they
were developing, and it is precisely this advantage which these now developed
countries want to deny to developing countries. For example United States in
19th century and Japan through most of 20th century were engaged in exactly the
sort of activities the United States now labels as ‘piracy’. More recently the four
tigers of Asia Taiwan, South Korea, Hong Kong and Singapore got
industrialized with the help of weak intellectual property protection.

6
 Now with the emergence of high technology copying inventions seems
especially beneficial to third world countries. While high technology in areas
such as pharmaceuticals, chemicals and computers requires significant
investments to develop new products, the inventions themselves are easy and
cheap to copy. This could be because high technology is knowledge intensive
rather than capital intensive. Copying can enable countries to accumulate the
vital inputs for industrialization quickly. Thus once the skill level in any country
has reached a critical mass the opportunity for benefiting from the skills are
considerable. They offer developing countries unparallel opportunities of short
circuiting the development process, of leapfrogging over several phases of
technological evolution. In the process acquire technological expertise. Once
existing technology is mastered then new technology can be developed. This
will create competition for the multinational companies of developed countries.
It is precisely this competition which the multinational companies do not want.
Thus the key to development of third world countries could be the
technology transfer or by way of having patented item produced (“worked”) in
the third world countries either by patentee, licensee or by imitator. Thus
technology transfer or technological development is possible only if the patent
is worked in patent granting country. If it is used only as an import monopoly
then it will have adverse effects on industrialization and innovation in
developing countries.
This points to a very important contradiction in the position of
industrialized countries their point of view is that genuine technology transfer,
involving the development of infrastructure and an educated workforce follows
from foreign investments in third world countries which is in turn contingent on
the third world countries having strong intellectual property laws. Yet this
proposed strong laws guarantee companies the right not to produce in the third
world countries by eliminating developing countries ability to require patents to
be worked domestically. United States had strongly rejected provisions which
allowed third world countries to require patents be worked locally calling them
“as antithetical to trade as you can get”. But for third world countries the
technological consequences of the industrialized countries trips proposals are
antithetical to development. Certainly they would undermine successes like
those achieved under India’s Patent Act of 1970.

What does this mean for developing country like India?

In order to fulfill its obligations under WTO TRIPS agreement, India was
required to formally recognize pharmaceutical product patents with effect from
1st January 2005, which it did by amending immensely popular Indian Patents
Act 1970 by introducing The Patents (Amendment) Bill 2005 amidst lot of
opposition. The following table gives comparison of the provisions of The
Indian Patent Act 1970, and the Patent System post WTO TRIPS regime.

7
 Sr. Indian Patent system as per
No Patent Act1970
1 Actual process of manufacturing
can only be patented
2 Patent for 7 years form the date
of application
3 Compulsory licensing was
available (this helps in ensuring
availability drugs for society)
4 When a company alleges another
company of patent infringement,
it was complainant’s burden to
prove the fact of infringement.
5 Plants and Microorganisms can
not be patented.
Indian patent system as per WTO TRIPS
regime
Process as well as product can be
patented
Patent granted for up to 20 years
Compulsory license can be given only in
emergency situations (In Doha meeting
of WTO it was decided to allow
compulsory licensing for AIDS
Tuberculosis and Malaria)
Reversal of burden of proof will be there.
When a complainant lodges a
complainant. The company against which
complainant is lodged should stop
production and prove that it has not been
copying
Plant varieties and microorganisms in
which genetic modification work is done
can be patented. All over the world this
clause is being used for “Biopiracy”
India’s neem, wheat were patented and
Indian Government could get the patents
cancelled only after a big fight in the
WTO dispute settlement body.

Now that the product patent regime and strong adherence to intellectual
property protection is a reality how it will affect India and vast majority of its
population is the question foremost in the minds of everybody. It is being
widely predicted that that the prices are set to increase to astronomical level
with immediate effect. Let’s examine some facts and determine the
consequences of product patent regime.
Indian government has released a list of 300 drugs considered essential
and sufficient to care of 90% to 95% of healthcare needs of majority population
of these 300 drugs only 90% of drugs are off patent. For the large number of
drugs on which patents have already expired there need not be any fear of
increase in the price.
Even if a drug is under patent and available at very high price it will be
prudent to know as to which class of drugs it belongs and which are the earlier
discovered drugs in that class which may be off patent, then it makes sense to
insist FDA to test the new drugs against the best existing drug in that category
and then explain it to doctors that they should not easily discard existing drugs
in favor of new drugs just because it is a recent introduction. Easier said than
done. Companies with strong marketing team having with lot of funds, can
always find ways to influence doctor’s pen. Companies are known to provide

8
incentives to doctors for prescribing their patented drugs as against older but
equally effective off patented drugs.
During 1970 Japan was in similar situation in which we are finding
ourselves. Today Japan is one of the largest pharmaceutical producers in world.
This clearly suggests that the challenge of global competition spurned Japanese
pharmaceutical industry. However it will be dangerous to extrapolate this result
to India. However some insight can definitely be gained by understanding the
process which helped Japanese pharmaceutical industry in becoming one of the
largest producers of pharmaceutical products after adopting strict standards of
product patent regime. Following table gives some indication of transformation
which took place in Japanese pharmaceutical industry.

Before patent protection After patent protection

1 R & D expenditure 6% of sales in 1975 R & D expenditure 10.8% of sales in1990
2 Net profit 3.6% IN 1975 Net profit 6.7% in 1990
3 In 20 years 4 new global drugs In 10 years 25 new global drugs

In order to keep control over the prices of medicines, Government of

India has established a regime in which prices are fixed by a Drug Price Control
Order. The numbers of drugs under the purview of this order are steadily
decreasing still Government is having an eye on the market and if in its opinion
any company is overcharging it will not hesitate to ask that particular company
to reduce prices. A well establish mechanism to achieve this objective does
exist and is at disposal of Government of India. There is nothing in GATT and
WTO which can prevent Indians from continuing to use price regulation to
protect consumers from patented drugs being sold at higher prices.
This may appear very simple on the face of it but the policy is not without
its share of loopholes. First the price control regime is set up such that the
ceiling prices are determined as a markup on input costs. This means there is a
transfer price loophole. For example multinational company may export the
patented active ingredient to its Indian subsidiary at an artificially high transfer
price and thereby attain a higher controlled price for its formulation. History
suggests that multinational companies are not averse to using this loophole.
Pfizer charges $9000 per kg for patented active pharmaceutical ingredient
where as same is available in Italy for $135 per kg. This practice can be
controlled on the basis of uniform global transfer price but even this will not be
able to bring the prices any where near to the level of prices already existing in
India. Very strict price control regime may prompt a patent holder to simply
refuse supply of a drug placed under what it views a too stringent price control.
This may give a good case to government for waiving the restriction on
compulsory licensing citing national emergency or other extreme urgency as
allowed in the treaty. This is possible in India as it has well developed
capabilities of reverse engineering. Domestic firms when granted compulsory

9
licenses can produce drugs at marginal costs. Multinational companies are
aware of this fact and hence may not like that the compulsory licenses are
issued and the drug be produced at marginal cost. This will start the lengthy
process of negotiations and bargaining leading to time lag where innovator
launches its products in developing country like India at a very late stage when
price of a product is not at all an issue in the world market. (Price is very
important issue at the time of the launch of the product).
The TRIPS agreement contains a safeguard clause allowing developing
countries faced with national emergencies to put in place compulsory licensing
and permitting parallel imports. The WTO Ministerial Conference in Doha of
November 2001 adopted a declaration on TRIPS confirming on the one hand
the recognition of intellectual property rights by the contracting parties and
stating on the other hand that in case of conflict public health may override
commercial interest. It confirmed the right of government to grant compulsory
licenses and the freedom to determine the grounds upon which such licenses are
granted. It also confirmed the freedom of countries to decide on their own rules
for implementing parallel imports. In practice the application of the
‘flexibilities’ built in to TRIPS are challenged by multinational companies. It
has been found that the pharmaceutical industry continues to intimidate and
penalize those countries that explore the use of this legitimate clause. (This is
exactly what happened when South Africa imported anti aids drugs from Cipla
India at a fraction of cost at which it was offered by the innovator companies)
Thus it is of paramount importance to know how important patented
drugs are in total pharmaceutical sale. In June 1993 out of top 500 brands in
audited pharmaceutical market contained 24 active substances which were
under product patent in Europe. Sales contribution of drugs containing these
substances was just 10.9% since audited sales exclude small firms and
government procurement it is quite possible that this fig of 10.9% is on a higher
side.
Thus one can safely conclude that introduction of patent protection will
not have large effect on the welfare of most drug consumers. If the rate of new
product innovations is stable over time then there will be equilibrium between
the drugs coming under and going off patent. Thus initially the number of drugs
under patent in India will increase but then it will top off by the year 2015. An
important question is how safely and accurately can one extrapolate the rate of
pharmaceutical innovation in future. In past innovations had come in waves
with important breakthroughs such as sulpha drugs were followed by
incremental developments of the newly discovered families. There is a clear
trend that the drug research in recent years has been relatively unfruitful and
hence we may currently be at a low point in terms of important drugs still under
patent protection.
It is now very clear that:
1) Product patent regime is a reality and cannot be wished away.

10
 2) Patented drugs will be very costly whatever government may try to do
with price control.
3) The doors for Indian companies on reverse chemical engineering will
be closed permanently in near future.

The closed door

With WTO TRIPS regime in place Indian pharmaceutical companies will

not be able to produce on patent drugs through different process. They will not
be able to market the same in India and export it to other countries where
intellectual property laws are lax. Indian companies will not get an opportunity
to hone their skills of manufacturing and perfecting process to produce on
patent drugs before the expiry of patent so that same can be introduced as a
generic the day its patent expires. But it is said that when one door closes, many
other presenting different opportunities will open. A prudent person should not
keep staring at close door hoping that it will open some day. Instead one must
explore the opportunities presented by change. One such change that has
happened in the environment for Indian pharmaceutical industry is brought by
WTO TRIPS regime. There has been lot of debate and work on the effect of
WTO TRIPS regime on the prices of pharmaceutical products in India. Many
have elaborated in great detail the loss which may accrue to pharmaceutical
companies due to TRIPS agreement. Not much work has been done in the area
of opportunities presented by WTO TRIPS regime to Indian pharmaceutical
industry. This is very important and will decide the future direction of Indian
pharmaceutical Industry.

11