Introduction to WTO
What is the WTO?
The World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.
World Trade Organization, international body established to promote and enforce global free trade. The World Trade Organization (WTO) was founded in 1993 by the Final Act that concluded the Uruguay Round (1986-1994) of multilateral negotiations under the General Agreement on Tariffs and Trade (GATT) of 1947, which it supersedes, and exists to administer and police the 28 free-trade agreements in the Final Act, oversee world trade practices, and adjudicate trade disputes referred to it by member states.
Based in Geneva, the WTO began operation on January 1, 1995, with its general council comprising 76 member states; by November 2000 it numbered 140 members. Unlike its predecessor, it is a formally constituted entity whose rules are legally binding on its member states, but it is independent of the United Nations. It provides a framework for the rule of law in international trade, expanding the brief of GATT regulations to include trade in services, intellectual property rights, and investment. Its standing general council is made up of member states’ ambassadors to the WTO, who also serve on various subsidiary and specialist committees.
This is overseen by the ministerial conference that meets every two years and appoints the WTO’s director-general. Renato Ruggiero, former Italian trade minister, became the first full-time director-general of the WTO on May 1, 1995. He was replaced on September 1, 1999, by the former prime minister of New Zealand, Michael Moore. Trade disputes referred to the WTO are adjudicated by a disputes panel composed of WTO officials; nations can appeal against rulings to a WTO appellate body, whose decision is final.
In February 1997 the WTO concluded a landmark agreement liberalizing telecommunications trade between its members. In March 1999 the United States imposed sanctions on selected European Union (EU) goods following a WTO ruling against EU tariffs on bananas; the dispute broadened later the same month when the WTO ruled against an EU ban on US beef reared with growth hormones. In May 1999 the WTO suffered a severe internal dispute over the choice of a successor to Renato Ruggiero.
At the Seattle summit in November 1999 the WTO's failure to reach any kind of agreement on the opening up of previously protected areas of trade was seen as a major blow to the free-trade movement. In the same month China and the United States signed a historic agreement that paved the way for China to join the WTO. However, the deal still required formal approval from the United States, the EU, Canada, and other countries. As of early 2001, such agreement had still to materialize. The settlements administered by the WTO are expected to increase annual world trade by at least US$755 billion by the year 2002, raising annual world income by some US$235 billion.
How it works ?
The WTO Secretariat, based in Geneva, has around 550 staff and is headed by a director-general. Its annual budget is roughly 143 million Swiss francs. It does not have branch offices outside Geneva. Since decisions are taken by the members themselves, the Secretariat does not have the decision-making role that other international bureaucracies are given.
The Secretariat’s main duties are to supply technical support for the various councils and committees and the ministerial conferences, to provide technical assistance for developing countries, to analyze world trade, and to explain WTO affairs to the public and media.
The Secretariat also provides some forms of legal assistance in the dispute settlement process and advises governments wishing to become members of the WTO
Benefits of being a WTO member nation
Peace
This sounds like an exaggerated claim, and it would be wrong to make too much of it. Nevertheless, the system does contribute to international peace, and if we understand why, we have a clearer picture of what the system actually does
Disputes
As trade expands in volume, in the number of products traded, and in the numbers of countries and companies trading, there is a greater chance that disputes will arise. The WTO system helps resolve these disputes peacefully and constructively.
Rules
The WTO cannot claim to make all countries equal. But it does reduce some inequalities, giving smaller countries more voice, and at the same time freeing the major powers from the complexity of having to negotiate trade agreements with each of their numerous trading partners.
Cost of living
We are all consumers. The prices we pay for our food and clothing, our necessities and luxuries, and everything else in between, are affected by trade policies.
Choice
Think of all the things we can now have because we can import them: fruits and vegetables out of season, foods, clothing and other products that used to be considered exotic, cut flowers from any part of the world, all sorts of household goods, books, music, movies, and so on.
Incomes
Lowering trade barriers allows trade to increase, which adds to incomes — national incomes and personal incomes. But some adjustment is necessary.
Growth and jobs
Trade clearly has the potential to create jobs. In practice there is often factual evidence that lower trade barriers have been good for employment. But the picture is complicated by a number of factors. Nevertheless, the alternative — protectionism — is not the way to tackle employment problems
Efficiency
Many of the benefits of the trading system are more difficult to summarize in numbers, but they are still important. They are the result of essential principles at the heart of the system, and they make life simpler for the enterprises directly involved in trade and for the producers of goods and services.
Lobbying
The GATT-WTO system which evolved in the second half of the 20th Century helps governments take a more balanced view of trade policy. Governments are better-placed to defend themselves against lobbying from narrow interest groups by focusing on trade-offs that are made in the interests of everyone in the economy
Good government
Under WTO rules, once a commitment has been made to liberalize a sector of trade, it is difficult to reverse. The rules also discourage a range of unwise policies. For businesses, that means greater certainty and clarity about trading conditions. For governments it can often mean good discipline.
Misconceptions about the WTO
WTO dictates
The WTO is member-driven which means the rules of the WTO system are agreements resulting from negotiations among member governments, the rules are ratified by members; parliaments, and decisions taken in the WTO are virtually all made by consensus among all members.In other words, decisions taken in the WTO are negotiated, accountable and democratic.The only occasion when a WTO body can have a direct impact on a governments policies is when a dispute is brought to the WTO and if that leads to a ruling by the Dispute Settlement Body (which consists of all members). Normally the Dispute Settlement Body makes a ruling by adopting the findings of a panel of experts or an appeal report.
Blindly for trade
It all depends on what countries want to bargain. Yes, one of the principles of the WTO system is for countries to lower their trade barriers and to allow trade to flow more freely. After all, countries benefit from the increased trade that results from lower trade barriers.But just how low those barriers should go is something member countries bargain with each other. Their negotiating positions depend on how ready they feel they are to lower the barriers, and on what they want to obtain from other members in return.
Ignores development
Sustainable development is a principal objective. Underlying the WTOs trading system is the fact that freer trade boosts economic growth and supports development. In that sense, commerce and development are good for each other.At the same time, whether or not developing countries gain enough from the system is a subject of continuing debate in the WTO. But that does not mean to say the system offers nothing for these countries.
Anti-green
The preamble of the Marrakesh Agreement Establishing the World Trade Organization includes among its objectives, optimal use of the worlds resources, sustainable development and environmental protection This is backed up in concrete terms by a range of provisions in the WTOs rules. Among the most important are umbrella clauses (such as Article 20 of the General Agreement on Tariffs and Trade) which allow countries to take actions to protect human, animal or plant life or health, and to conserve exhaustible natural resources.
Anti-health
Safety concerns are built into the WTO agreements.Key clauses in the agreements (such as GATT Art. 20) specifically allow governments to take actions to protect human, animal or plant life or health. But these actions are disciplined, for example to prevent them being used as an excuse for protecting domestic producers protectionism in disguise.
Wrecks jobs
The WTO does NOT destroy jobs or widen the gap between rich and poor The accusation is inaccurate and simplistic. Trade can be a powerful force for creating jobs and reducing poverty. Often it does just that. Sometimes adjustments are necessary to deal with job losses, and here the picture is complicated. In any case, the alternative of protectionism is not the solution.
Small left out
Small countries would be weaker without the WTO. The WTO increases their bargaining power.In recent years, developing countries have become considerably more active in WTO negotiations, submitting an unprecedented number of proposals in the agriculture talks, and working actively on the ministerial declarations and decisions issued in Doha, Qatar, in November 2001. They expressed satisfaction with the process leading to the Doha declarations.
All of this bears testimony to their confidence in the system.At the same time, the present rules are the result of multilateral negotiations (i.e. negotiations involving all members of GATT, the WTOs predecessor). The most recent completed negotiation, the Uruguay Round (1986-94), was only possible because developed countries agreed to reform trade in textiles and agriculture both issues were important for developing countries. In short, In the WTO trading system, everyone has to follow the same rules. As a result, in the WTOs dispute settlement procedure, developing countries have successfully challenged some actions taken by developed countries. Without the WTO, these smaller countries would have been powerless to act against their more powerful trading partners.
Tool of lobbies
The WTO is NOT the tool of powerful lobbies.The WTO system offers governments a means to reduce the influence of narrow vested interests. Governments can use the WTO to resist lobbying This is a natural result of the rounds type of negotiation (i.e. negotiations that encompass a broad range of sectors). The outcome of a trade round has to be a balance of interests. Governments can find it easier to reject pressure from particular lobbying groups by arguing that it had to accept the overall package in the interests of the country as a whole. A related misunderstanding is about the WTO’s membership. The WTO is an organization of governments.
The private sector, non-governmental organizations and other lobbying groups do not participate in WTO activities except in special events such as seminars and symposiums.
They can only exert their influence on WTO decisions through their governments.
Weak forced to join
Weaker countries do have a choice, they are NOT forced to join the WTO.Most countries do feel that its better to be in the WTO system than to be outside it. Thats why the list of countries negotiating membership includes both large and small trading nations.Countries willingly want to join.The reasons are positive rather than negative. They lie in the WTO’s key principles, such as non-discrimination and transparency. By joining the WTO, even a small country automatically enjoys the benefits that all WTO members grant to each other.
And small countries have won dispute cases against rich countries they would not have been able to do so outside the WTO.The alternative would be to negotiate bilateral trade agreements with each trading partner. That could even include regularly negotiating the renewal of commitments to treat trading partners as equals. For this, governments would need more resources, a serious problem for small countries. And in bilateral negotiations smaller countries are weaker. By joining the WTO, small countries can also increase their bargaining power by forming alliances with other countries that have common interests.
Undemocratic
The WTO is NOT undemocratic.Decisions in the WTO are generally by consensus. In principle, thats even more democratic than majority rule because no decision is taken until everyone agrees Decisions are by consensus. Agreements are ratified in parliaments.It would be wrong to suggest that every country has the same bargaining power. Nevertheless, the consensus rule means every country has a voice, and every country has to be convinced before it joins a consensus. Quite often reluctant countries are persuaded by being offered something in return. Consensus also means every country accepts the decisions. There are no dissenters.What is more, the WTO’s trade rules, resulting from the Uruguay Round trade talks, were negotiated by member governments and ratified in Member parliaments.
PHARMACEUTICAL INDUSTRY
Indian Scenario
The Indian pharmaceutical industry is a success story providing employment for millions and ensuring that essential drugs at affordable prices are available to the vast population of this sub-continent. However, the new 'trade' rules of the World Trade Organization now pose a serious threat to the industry and to the millions who are dependent on it for their health and livelihood. INDIA has a highly efficient pharmaceutical industry, which started blossoming thanks to the virtual absence of patent protection of medical drugs. It produces, for example, its own AIDS drugs, which are sold much more cheaply than the original products from abroad. The new rules of the game of the World Trade Organization (WTO) benefit the pharmaceutical multinationals from countries such as the USA, Great Britain and Switzerland, and threaten India's achievements.
Backdrop
In the 50 years since independence, the Indian pharmaceuticals industry has evolved significantly. Initially, the MNCs had a near monopoly. They imported and marketed formulations in India, mainly low cost generics for the masses and also a few specialties, life saving, high priced products. With the Government increasing pressure against imports of finished products, the MNCs set up formulating units and continued importing the bulk drugs.
In the ’60s, the Indian Government laid the foundation of the domestic pharmaceuticals industry by promoting Hindustan Antibiotics Ltd (HAL) and Indian Drugs and Pharmaceuticals Ltd (IDPL) for manufacture of bulk drugs. However, MNCs maintained a lead due to the backing of their global R&D. High cost for basic research deterred local players (in the private sector).
1970 - A Revolutionary Year
• The Indian Patent Act (IPA) was introduced. This has been one of the single most important factors to spur the domestic pharmaceutical industry. Under the IPA (Refer Annexure 1), substances used in foods and pharmaceuticals could not be granted product patents. Only process patents were allowed for a period of 5 years from date of patent grant or 7 years from date of filing for patent, whichever was earlier. Process modifications to develop MNCs bulk drugs were far easier for the local players and there was an influx of domestic manufacturers, who first started making bulk drugs and then progressed to formulations. For local players a wide possible portfolio mix was possible while the MNCs were constrained to their parent company’s product range. With the IPA, cost of local manufacture reduced, so also, absence of royalty payments on reverse engineered drugs.
• The Indian Government also introduced drugs Price Control Order (DPCO) in 1970. The DPCO effectively put a ceiling on prices of certain mass-usage bulk drugs and their formulations so as to prevent any undue profiteering. This further deterred the MNCs as selling their products at much lower prices in India meant global repercussions and possible uproar in their home countries. So MNCs curtailed new product launches, giving further scope to Indian players.
• FERA (Late 70’s) : MNCs were compelled to reduce holding in their Indian ventures to 40%, else comply with export obligations to retain a maximum 51% stake. As a result some MNCs curtailed the scope of their operations. This further strengthened the position of the local pharmaceutical companies.
Present Scenario
Over 20,000 registered pharmaceutical manufacturers exist in the country. The market share of MNCs has fallen from 75% in 1971 to around 35% in the Indian pharmaceuticals market, while the share of Indian companies has increased from 20% in 1971 to nearly 65%. PSUs have almost lost out completely.
The sector has undergone several policy as well as attitudinal changes over the past two years. It was one of the major beneficiaries from the budget proposals. Some of the positive steps taken were:
• Pharmaceutical industry is recognized as knowledge based industry. The government has plans to increase the investment in research and development.
• Rationalization of excise duty and reduction in interest rates in export financing.
• Additional deductions under Income Tax laws for R&D expenses.
• Foreign direct investments permit up to 74% through automatic route.
• Setting up two high levels committees to review the drug policy for strengthening R&D capabilities and reducing the price control regime.
Besides, the Indian Parliament has enacted the required changes in the Indian Patent Act 1970 (IPR) regarding mailbox arrangement and exclusive marketing rights (EMR).
Emerging Trends:
• Increased focus on R&D : Major domestic players namely Ranbaxy, Dr Reddy’s Labs, Cipla, Nicholas Piramal and Wockhardt are aggressively investing in R&D. Dr Reddy’s Labs and Ranbaxy have already discovered one new chemical entity (NCE) and are in Phase II and Phase I of the clinical trail respectively. Wockhardt is expected to come out with in new molecule by F12/2000.
• Marketing tie-ups: Domestic players and MNCs have entered into marketing arrangements to increase market penetration and further strengthen positions in respective therapeutic segments. Ranbaxy has tied up with Cipla, Glaxo and Hoechst Marion for products in specific therapeutic segment. Similarly Hoechst Marion has tied up with Nicholas Piramal.
• Product rationalization/ brand acquisition/ company acquisition: Most of the top pharmaceutical companies are consolidating their position in the domestic market either through product rationalization brand acquisition or company acquisition. Hoechst, Glaxo, Wockhardt and Ranbaxy have cut down their product portfolio in order to be more focused. Similarly companies such as Sun Pharma, Nicholas Piramal and Dr Reddy’s Labs have opted for brand/ company acquisition to increase the therapeutic reach and market penetration.
The Global Pharmaceutical Industry
An insight
Pharmaceuticals industry is driven by a global need to conquer disease. Medicines are developed to treat new diseases or improve upon the existing treatment. An in-depth understanding of human physiology and disease mechanism is a pre-requisite to Parma R&D.
Pharmaceuticals are medicinally effective chemicals, which are converted to dosage forms suitable for patients to imbibe. In its basic chemical form, pharmaceuticals are called bulk drugs and the final dosage forms are known as formulations.
Usage of pharmaceuticals is governed by the underlying medical science. The four primary medical sciences are as under.
Allopathy or modern medicine has gained global popularity.
Ayurveda, an ancient Indian science, mainly uses herbal remedies.
Unani, having Chinese origin, is prevalent in South East Asia.
Homeopathy, founded by a German physician, was fairly popular in the early 19th century.
Global price variations...
Drug prices vary from country to country for a number of reasons including patent regulations, government controls, income differences, currency exchange fluctuations etc.
Patent regulation: Patents provide the innovator exclusivity of manufacture over the life of the patent. To maximize gains, pharmaceutical companies charge high premium on their under patent products. As patent laws are stringent only in the developed nations, accordingly formulation prices too are much higher in these markets.
Government control: Due to lax of patent laws in developing countries, local players are able to infringe upon the original patent holder’s rights without payment of royalty. Hence, the cost of manufacture of reverse engineered pharmaceuticals is significantly reduced.
To prevent undue profiteering by local pharmaceutical companies, the Governments in such countries often impose price controls on popularly used drugs and formulations. Even some major industrialized countries of Europe distort the market mechanism by imposing price controls. This in turn causes higher prices in free markets like USA, as companies try to enhance sales/ profits by charging what the traffic bears.
Income disparity: In developing nations with low per capita income and low standard of living, Parma MNCs are faced with the choice of either selling products at artificially low prices or denying patients the benefits of the drugs.
...Its impact
Due to fear of piracy and low product prices in third world countries, most MNCs are reluctant to introduce their top-of-the-line products in these places. So, patients in these countries compulsorily lose out on better treatment. Majority of the MNCs’ conduct research on those diseases that affect the population in developed nations while tropical diseases get low priority.
Wide variations in Parma prices between developed and developing nations have resulted in increasing resistance to runaway healthcare costs in the developed nations, especially USA. Within a therapeutic segment, generic substitutes to the under-patent drugs generally exist. Though often-lesser effective, they are able to reduce the cost of treatment significantly. This methodology has been gaining popularity in last few years. Managed Healthcare, as it is called, is akin to medical insurance and it usually follows the principle of encouraging generic substitutes to curtail medical expenses.
Developing nations that impose price controls reduce the competitiveness of Parma companies in these countries. Price & volume controls provide few incentives for innovation. While price controls lower drug prices, they do not necessarily reduce healthcare costs. A more expensive drug may mean faster recovery, possibly eliminating future hospitalization and hence, overall it may prove cost effective.
MNC’s vs. Local Players
Overall, the Parma MNCs are at a disadvantage compared to local players, due to :
• Limitation to parent company’s portfolio and lack of freedom to reverse engineer any other MNC’s products.
• Higher DPCO coverage due to a more mature product range.
• Parent company’s reluctance to launch new products due to absence of patent protection and threat of process piracy and compulsion to price the product lower in India compared to other countries.
• Lack of export opportunities due to parent’s global presence.
• Higher cost of manufacture due to parent company’s insistence on stricter compliance of GMP (Good manufacturing Practices).
Factors Affecting Profitability
The Indian pharmaceutical industry is highly regulated. The Government controls prices of a large number of bulk drugs and formulations. Profit margins of players vary widely in both domestic and export sales due to many factors, these are mentioned below:
In the domestic arena, profitability depends on:
• Presence in large, high growth therapeutic areas eg antibiotics, cardiac care, NSAIDs etc.
• Management foresight to select new high potential molecules for launch in India.
• Reverse engineering capability to pioneer new processes.
• DPCO coverage (new launches help reduce proportion of products under DPCO).
• Competition from other players.
• Backward integration into bulk drugs.
• Established track record of product quality.
• Franchise among doctors.
• Domestic sales force (Medical Representatives ie MRs) strength.
• Distribution network in India.
Export prospects are linked to :
• FDA, USA/ MCA, UK approval for plants.
• Marketing tie-up with overseas pharmaceuticals companies.
• Tapping the high potential US generics market.
• Development of products which have recently gone off patent or which are scheduled to go off patent in near future.
• Under-patent product exports to other developing/ third world countries without strict patent regulation.
• Franchise manufacturing of formulations for overseas Parma MNCs.
• Own marketing network in other countries
The Role of WTO
Due to pressure from the developed countries, across the world uniformity in patent laws is being implemented under WTO (World Trade Organization - earlier GATT i.e. General Agreement on Tariffs & Trade). Presently, different countries have different patent types and life period. WTO has decided upon a product patent life of 20 years in all countries. However, to ensure a smooth transition and provide local players in the developing countries, ample time for gearing themselves, a moratorium up to the year 2005/AD has been provided. So, new products i.e. drugs introduced after this date will have to be accorded product patent protection even in countries like India or Argentina. However, existing pharmaceuticals and new products that will be introduced in the interim period will all continue to be reverse engineered in nations which do not have product patent laws.
Future Prospects
As per WTO, from the year 2005/AD, India will grant product patent recognition to all new chemical entities (NCEs) ie bulk drugs developed then onwards. This leaves another 5 years of MNCs research output open to process piracy. But, long-term prospects for MNCs are good. The pre-WTO and post-WTO scenarios are expected to be as under:
Pre-WTO: The transition phase in preparation of WTO has commenced. Established local Parma majors will try to corner a larger part of the domestic formulations market prior to aggressive product launches by MNCs post-WTO. Towards this end, these players are expediting the launch of new products and also looking at brand acquisition opportunities from other relatively smaller players. The latter, unable to sustain the stiff local competition, will either close down or be taken over by larger companies. Overall, the currently fragmented industry will consolidate. The MNCs have started strengthening their ranks. Most have already restructured their operations and focused on the Parma business. Parent companies are re-assessing India’s market potential and have accordingly increased stakes in existing ventures or set up new subsidiaries.
Post WTO : MNCs will be able to freely introduce top of the line, new products ie those patented after 2005/AD in the domestic market. However, these are expected to be priced at a significant premium in line with the MNCs global policy of earning returns on their R&D investment. So, within a therapeutic segment, the masses will still continue to resort to the older, lesser efficient and cheaper medicines. Thus, new launches by MNCs will be high margin, but low volume products and these will be mostly imported from overseas bases and only marketed in India. MNCs, which do not have a base in India, will enter into tie-ups with local players to license their new products. Local players will continue to make and market, in India, the popular generics and also those pre-WTO products, which may still be under, patent overseas. They will take up franchise manufacturing and marketing for overseas MNCs. Local players may also enter into research tie-ups with MNCs to leverage on their relatively low-cost, efficient skill base of trained pharmacists and chemists.
Strategies Of Domestic Players
• Most of the domestic companies are expanding the therapeutic reach through new product launches in the high margin segment, thus enhancing the product portfolio (proper basket of products helps in convincing the medical fraternity) and increasing the critical mass. Increased focus on prescription sales and acceptance in the medical fraternity through increased awareness and visibility.
• Increasing the market penetration through enhanced distribution channel. This will both increase the geographical reach in the domestic market and will facilitate licensing of products from MNCs in the post product patent regime.
• Most of these companies have already upgraded the manufacturing facility and have approval or are in the process of getting approval from USFDA, UKMCA and other international agencies. This is the basic requirement for access to the high margin but highly regulated developed market of Europe and US.
• On the back of state of the art manufacturing facilities the companies are pursuing contract manufacturing / global sourcing base for supply of bulk drugs/ intermediates for multinational corporations. Getting a breakthrough in area of contract manufacturing will help in increasing global acceptance in terms of quality and credibility in the export market.
• The companies are setting up subsidiary abroad or strategic alliances to exploit the tremendous opportunity in the generics market arising out in the next 5 to 10 years. They have started applying for drug master file / product registration / abbreviated new drug application (ANDAs) worldwide.
• The medium term objective is to focus on process engineering of products going off patent in next 5-10 years, which will help in tapping the emerging generics market in the next 5-10 years. At the same time R&D would also facilitate in new product launches in the domestic market in order to have a stronger product portfolio.
• The long-term objective will be to enter into higher platform of biotechnology and drug delivery systems.
FUTURE OF THE PHARMACEUTICAL INDUSTRY IN THE NEW IPR REGIME
What the market will bear
Will drug prices rise dramatically? On the one hand, there are several checks and balances within the Indian drug market that could prevent this from happening, such as India’s low purchasing power, the government’s price control mechanism and competition in the drug market itself.
Whilst India comprises 16% of the world’s population, it accounts for a mere 1% of global healthcare spending. Its per capita consumption of drugs amounts to less than US$3 per annum, compared to US$191 in the US. India’s domestic healthcare system only covers 3.7% of its population of over 980m. Therefore 75% of expenditure on medicines is borne privately by patients. Given these circumstances and the low per capita incomes, prices have to be maintained at an affordable level. If they exceed the threshold of affordability, the government price control mechanism will keep prices in check.
In other words, “the self paying Indian pharmaceutical market will in effect be self-regulating in terms of drug pricing, without the need for government intervention”.
Moreover, competition amongst multiple producers of the same drug has resulted in lowering the price of drugs in India, to the extent that they are now amongst the cheapest in the world. Drugs outside the price control mechanism have experienced a particularly dramatic fall in prices, owing to competition.
“The antibacterial Ciprofloxacin created pharma history, by capturing a Rs 2.6bn market in less than five years after being introduced”, says Surendra Somani, managing director of Kopran Ltd, a major Indian drug manufacturer.
Fierce competition between manufacturers pushed prices down phenomenally. When it was launched in 1989, the bulk drug cost Rs 25,000 per kg. Today, it costs Rs 4,000 and prices of formulations have fallen from Rs 14 per tablet in 1990, to Rs 9 in 1993. Industrialists predict that competition between firms will continue to act as a safeguard against price escalations resulting from patent protection.
India has one of the most efficient pharmaceutical industries in the world.
Pharmaceutical firms grew mainly thanks to the absence of patent protection of medical drugs in the country. For instance, Indian companies are now producing their own AIDS drugs, which are available cheaply, compared to the original products from foreign countries.
But the imposition of the new WTO rules will begin to threaten India's achievements in the pharmaceutical field. The Indian Patents Act, introduced in 1970, boosted Indian Parma companies. The Act allowed them to develop and patent alternative processes for products discovered and patented elsewhere.
According to the Indian Drug Manufacturers' Association, self-sufficiency in Indian pharmaceutical sector is more than 70 per cent.
"Worldwide, India is a country of very low prices for high-quality medicines," points out the IDMA president Nishchal H Israni. But now the rules of the game in the pharmaceutical industry will change as India has committed to toe the WTO line on product patents. Product patent rules and Exclusive Marketing Rights (EMR) under the WTO could affect a paradigm shift in India's Parma majors.
As per the EMR provision, a product for which original patent was granted prior to 1995, is not fit for an EMR in the country. This has forced nine leading domestic Parma companies to form the Indian Pharmaceutical Alliance that has demanded a more transparent WTO regime for EMR grants. The Indian Parma-industry is a success story. Five hundred thousand people are employed in this sector, in roughly 20,000 firms. In the pre- and post-production sector, a further 2.5 million jobs are thought to be involved. Compared to the general price index, drug prices have risen much less in the last 15 years and remain far below average. 'Worldwide, India is a country of very low ... prices (for) high-quality medicines,' Nihchal H Israni, president of the Indian Drug Manufacturers' Association (IDMA), states proudly. Self-sufficiency with regard to pharmaceuticals is far above 70% - in spite of the policy of a more open economy pursued by India since 1991.
TRIPS (Trade Related aspects of Intellectual Property Rights)
It is an important aspect of phasing out of quantitative restrictions and latest international developments are likely to have a far reaching impact on the pharmaceutical industry. On July 2, 1996 the United States requested WTO dispute consultations with India regarding India's lack of compliance to TRIPS. A panel was formed and recently the panel concluded that India has not complied with its obligations for few important facts like failure to establish a mechanism that adequately preserves novelty and priority in respect of application for product patents in the field of pharmaceutical and agricultural chemical inventions As per TRIPs article 70.9, the transitional arrangements for developing countries, an exclusive marketing right had to be granted only for a maximum period of five years.
This five-year period corresponded to the five-year period by which developing country members might delay the application of the provisions on product patents in areas of technology not protect able on 1 January 1996, i.e. the period between 1st January 2000 and 1st January 2005. The purpose of article was thus to give inventors of pharmaceutical and agrochemical products the economic privilege of EMRs for the five year period preceding 1st January 2005,if their products were denied patent ability even beyond the normal five-year transitional period for developing countries.
Common sense and practical experience indicated that all these steps took a long time and normally the products in question would not get on the market in a developing country before the expiry of the ten-year transitional period. The provisions had been made for the grant of exclusive marketing rights of up to five years only to tide over the gap between the obtaining of marketing approval and the grant of patent protection for the product in question in a developing country benefiting from the ten-year transitional period.
The inventions that met the criteria for patent ability on or after the date of entry into force of the agreement would become eligible for protection in such countries by the time that protection became of commercial significance, either by the grant of a patent after the expiration of the ten year period or by an exclusive marketing right for products getting marketing approval before that time.
Although it was difficult to provide evidence or state with absolute certainty when products would start becoming eligible for exclusive marketing rights under article 70.9, a delay of ten or more years between the date of filing of application for patents and the grant of marketing approvals seemed likely. In India registration and approval of new drugs required submission of technical data on safety and efficacy as well as analytical specifications in relation to steps of manufacture, in process control and marketing status in other countries clinical trial data generated within the country and examination labels and package inserts. The technical data were examined in consultation with the experts. The final bulk drug was required to be tested at the central drug laboratory, Calcutta as per analytical specifications furnished. A new drug derived out of cell-line and recombinant DNA based products also needed approval from the ministry of science and technology and the ministry of environment.
IMPACT OF TRIPS ON THE INDUSTRY
India, too, became a WTO member in 1995 and will have to apply the new TRIPS rules for medical drugs in its national patent legislation by 1 January 2005 at the latest. First steps have already been taken in the patent law of 1999. But the US Parma-producers still call India a 'center of commercial piracy'. Israni of the IDMA considers the situation very bleak unless the Indian government makes a countermove: 'Indian producers are being pushed out of the market and multinational suppliers are going to dominate the market with far higher prices. Jobs will be lost and India's balance of trade in the area of pharmaceuticals will in future be in deficit - in brief, a situation similar to the one before the patent law of 1970.' Israni is appealing to the Indian government to exhaust fully those positive options that are still contained in the international TRIPS rules and especially to provide for effective enforced licenses.
The inclusion of Trade-Related Intellectual Property Rights (TRIPS) into the mainstream of the WTO system establishes new disciplines for many countries in copyright, trademarks, industrial designs and patents.
Two groups of issues dominate the debate on intellectual property in India —patents for pharmaceuticals and agricultural chemicals; and the implications of the WTO agreement on products based on local species. In India, there is one big paradox. The Indian drug industry has been protected from foreign competition for two decades. And yet it is one of the most competitive in the world. Indian drug exports grew by 35% annually over the past decade to reach $71m in 1994.
It has been said that India was violating its obligations on pharmaceutical and agricultural chemicals patents.
Broadly speaking, the issue was a technicality concerning the transition to full patent protection, although it does have serious implications. But behind it lies an intense debate within India, not least within the Indian drug industry itself.
The Governments Point of view While the government — along with foreign multinationals — is keen to implement the agreement, it has faced resistance from local drug manufacturers and consumers.
The Indian Drug Manufacturers Association (IDMA) protested in 1994 “prices of drugs shall go up by 5 to 20 times as a consequence of accepting the TRIPS [Trade-Related Aspects of Intellectual Property Rights] proposals”
However, the government claimed, “once the crutches of weak patent law are removed, we can successfully negotiate with research-based international companies ... to boost export earnings, create more employment ... and benefit from the transfer of technology” .The government had some reservations about the TRIPS Agreement. But it signed the deal, taking the view that the package of agreements in all areas of trade — the result of the 1986-94 Uruguay round of negotiations — was on balance in India’s interests.
“The crux of the matter is that when the world is moving in one direction, it makes no sense for India to move in the opposite direction. At best, India can seek amelioration, which it has done successfully”, said A.V. Ganesan, Indian commerce secretary, in 1993.
This is not happening overnight. As a developing country, India has a 10-year transitional period (until 2005) for giving full patent protection for pharmaceutical and agro-chemical products. It also has until 2000 to comply with other aspects of the TRIPS agreement. These provisions are designed to allow India and other developing countries time to adjust.
The fear: drug prices to rise dramatically?
In 1975, then Prime Minister Indira Gandhi, declared, “medical discoveries will be free of patents and there will be no profiteering from life and death”. Some Indians fear that costs of medicines will rise as a result of royalty payments and increased prices for products manufactured under license. Local companies could face foreign competition.
After India ratified the WTO agreements, the press accused the government of “selling out to rapacious multinationals” and “making Indian patients pay for the sell out”.
The EU and US have filed two separate cases against India in the WTO on the grounds that it has not fulfilled these obligations under the TRIPS Agreement. Cases are pending — rulings have been made, and the disputes are in the stage when India is required to take action to conform to its commitments under the TRIPS Agreement.
However, one result of the transitional clause is that patent protection will have limited impact on the Indian drug industry until the year 2005. Even then, the impact will be limited as India is starting from a point of virtually zero patent protection in the sector.
One recent estimate suggests that only 15% of the Indian drug market will be covered by patents after 2005 and be subjected to price premiums as a result. The remaining 85% of the market will continue to be exposed to “the full impacts of generic [i.e. non-brand name drugs] competition, to which patented products will themselves ultimately contribute when their patents expire”.
Moreover, as the TRIPS Agreement does not allow for backdating, drugs already in the market will be exempt from patenting.
MOREPEN LABORATORIES
K.B. Suri established Morepen Laboratories in the year 1984. It has sales outlet at Mumbai and USA. The head office is at New Delhi. Morepen basically deals in bulk drugs. It has trade relations with China, Honk Kong, and European countries. Morepen has an annual turnover of around 1000 crores.At present, Morepen is ranked 9th among the Indian Pharmaceutical industries. As the patent system will start prevailing in India from 2005, there will be a cut- throat competition between the Indian industries. At present, Morepen is not ready to cope up with those implications. The following are the key features.
1. Morepen has constructed a plant in Himachal Pradesh according to the WTO norms, which is currently the biggest strength of morepen. This is the first kid of a plant in Asia.
2. This will help Morepen to get exclusive patent rights from other country, which have registered their patent.
3. Also Morepen does not have many types of products.
4. Morepen is the second largest manufacturer of a drug called loratadine.
5. Morepen presently thrives on other companies for orders of drugs.
6. Its R&D department is not doing well. So Morepen is not presently spending more on its R&D department.
What is the WTO?
The World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.
World Trade Organization, international body established to promote and enforce global free trade. The World Trade Organization (WTO) was founded in 1993 by the Final Act that concluded the Uruguay Round (1986-1994) of multilateral negotiations under the General Agreement on Tariffs and Trade (GATT) of 1947, which it supersedes, and exists to administer and police the 28 free-trade agreements in the Final Act, oversee world trade practices, and adjudicate trade disputes referred to it by member states.
Based in Geneva, the WTO began operation on January 1, 1995, with its general council comprising 76 member states; by November 2000 it numbered 140 members. Unlike its predecessor, it is a formally constituted entity whose rules are legally binding on its member states, but it is independent of the United Nations. It provides a framework for the rule of law in international trade, expanding the brief of GATT regulations to include trade in services, intellectual property rights, and investment. Its standing general council is made up of member states’ ambassadors to the WTO, who also serve on various subsidiary and specialist committees.
This is overseen by the ministerial conference that meets every two years and appoints the WTO’s director-general. Renato Ruggiero, former Italian trade minister, became the first full-time director-general of the WTO on May 1, 1995. He was replaced on September 1, 1999, by the former prime minister of New Zealand, Michael Moore. Trade disputes referred to the WTO are adjudicated by a disputes panel composed of WTO officials; nations can appeal against rulings to a WTO appellate body, whose decision is final.
In February 1997 the WTO concluded a landmark agreement liberalizing telecommunications trade between its members. In March 1999 the United States imposed sanctions on selected European Union (EU) goods following a WTO ruling against EU tariffs on bananas; the dispute broadened later the same month when the WTO ruled against an EU ban on US beef reared with growth hormones. In May 1999 the WTO suffered a severe internal dispute over the choice of a successor to Renato Ruggiero.
At the Seattle summit in November 1999 the WTO's failure to reach any kind of agreement on the opening up of previously protected areas of trade was seen as a major blow to the free-trade movement. In the same month China and the United States signed a historic agreement that paved the way for China to join the WTO. However, the deal still required formal approval from the United States, the EU, Canada, and other countries. As of early 2001, such agreement had still to materialize. The settlements administered by the WTO are expected to increase annual world trade by at least US$755 billion by the year 2002, raising annual world income by some US$235 billion.
How it works ?
The WTO Secretariat, based in Geneva, has around 550 staff and is headed by a director-general. Its annual budget is roughly 143 million Swiss francs. It does not have branch offices outside Geneva. Since decisions are taken by the members themselves, the Secretariat does not have the decision-making role that other international bureaucracies are given.
The Secretariat’s main duties are to supply technical support for the various councils and committees and the ministerial conferences, to provide technical assistance for developing countries, to analyze world trade, and to explain WTO affairs to the public and media.
The Secretariat also provides some forms of legal assistance in the dispute settlement process and advises governments wishing to become members of the WTO
Benefits of being a WTO member nation
Peace
This sounds like an exaggerated claim, and it would be wrong to make too much of it. Nevertheless, the system does contribute to international peace, and if we understand why, we have a clearer picture of what the system actually does
Disputes
As trade expands in volume, in the number of products traded, and in the numbers of countries and companies trading, there is a greater chance that disputes will arise. The WTO system helps resolve these disputes peacefully and constructively.
Rules
The WTO cannot claim to make all countries equal. But it does reduce some inequalities, giving smaller countries more voice, and at the same time freeing the major powers from the complexity of having to negotiate trade agreements with each of their numerous trading partners.
Cost of living
We are all consumers. The prices we pay for our food and clothing, our necessities and luxuries, and everything else in between, are affected by trade policies.
Choice
Think of all the things we can now have because we can import them: fruits and vegetables out of season, foods, clothing and other products that used to be considered exotic, cut flowers from any part of the world, all sorts of household goods, books, music, movies, and so on.
Incomes
Lowering trade barriers allows trade to increase, which adds to incomes — national incomes and personal incomes. But some adjustment is necessary.
Growth and jobs
Trade clearly has the potential to create jobs. In practice there is often factual evidence that lower trade barriers have been good for employment. But the picture is complicated by a number of factors. Nevertheless, the alternative — protectionism — is not the way to tackle employment problems
Efficiency
Many of the benefits of the trading system are more difficult to summarize in numbers, but they are still important. They are the result of essential principles at the heart of the system, and they make life simpler for the enterprises directly involved in trade and for the producers of goods and services.
Lobbying
The GATT-WTO system which evolved in the second half of the 20th Century helps governments take a more balanced view of trade policy. Governments are better-placed to defend themselves against lobbying from narrow interest groups by focusing on trade-offs that are made in the interests of everyone in the economy
Good government
Under WTO rules, once a commitment has been made to liberalize a sector of trade, it is difficult to reverse. The rules also discourage a range of unwise policies. For businesses, that means greater certainty and clarity about trading conditions. For governments it can often mean good discipline.
Misconceptions about the WTO
WTO dictates
The WTO is member-driven which means the rules of the WTO system are agreements resulting from negotiations among member governments, the rules are ratified by members; parliaments, and decisions taken in the WTO are virtually all made by consensus among all members.In other words, decisions taken in the WTO are negotiated, accountable and democratic.The only occasion when a WTO body can have a direct impact on a governments policies is when a dispute is brought to the WTO and if that leads to a ruling by the Dispute Settlement Body (which consists of all members). Normally the Dispute Settlement Body makes a ruling by adopting the findings of a panel of experts or an appeal report.
Blindly for trade
It all depends on what countries want to bargain. Yes, one of the principles of the WTO system is for countries to lower their trade barriers and to allow trade to flow more freely. After all, countries benefit from the increased trade that results from lower trade barriers.But just how low those barriers should go is something member countries bargain with each other. Their negotiating positions depend on how ready they feel they are to lower the barriers, and on what they want to obtain from other members in return.
Ignores development
Sustainable development is a principal objective. Underlying the WTOs trading system is the fact that freer trade boosts economic growth and supports development. In that sense, commerce and development are good for each other.At the same time, whether or not developing countries gain enough from the system is a subject of continuing debate in the WTO. But that does not mean to say the system offers nothing for these countries.
Anti-green
The preamble of the Marrakesh Agreement Establishing the World Trade Organization includes among its objectives, optimal use of the worlds resources, sustainable development and environmental protection This is backed up in concrete terms by a range of provisions in the WTOs rules. Among the most important are umbrella clauses (such as Article 20 of the General Agreement on Tariffs and Trade) which allow countries to take actions to protect human, animal or plant life or health, and to conserve exhaustible natural resources.
Anti-health
Safety concerns are built into the WTO agreements.Key clauses in the agreements (such as GATT Art. 20) specifically allow governments to take actions to protect human, animal or plant life or health. But these actions are disciplined, for example to prevent them being used as an excuse for protecting domestic producers protectionism in disguise.
Wrecks jobs
The WTO does NOT destroy jobs or widen the gap between rich and poor The accusation is inaccurate and simplistic. Trade can be a powerful force for creating jobs and reducing poverty. Often it does just that. Sometimes adjustments are necessary to deal with job losses, and here the picture is complicated. In any case, the alternative of protectionism is not the solution.
Small left out
Small countries would be weaker without the WTO. The WTO increases their bargaining power.In recent years, developing countries have become considerably more active in WTO negotiations, submitting an unprecedented number of proposals in the agriculture talks, and working actively on the ministerial declarations and decisions issued in Doha, Qatar, in November 2001. They expressed satisfaction with the process leading to the Doha declarations.
All of this bears testimony to their confidence in the system.At the same time, the present rules are the result of multilateral negotiations (i.e. negotiations involving all members of GATT, the WTOs predecessor). The most recent completed negotiation, the Uruguay Round (1986-94), was only possible because developed countries agreed to reform trade in textiles and agriculture both issues were important for developing countries. In short, In the WTO trading system, everyone has to follow the same rules. As a result, in the WTOs dispute settlement procedure, developing countries have successfully challenged some actions taken by developed countries. Without the WTO, these smaller countries would have been powerless to act against their more powerful trading partners.
Tool of lobbies
The WTO is NOT the tool of powerful lobbies.The WTO system offers governments a means to reduce the influence of narrow vested interests. Governments can use the WTO to resist lobbying This is a natural result of the rounds type of negotiation (i.e. negotiations that encompass a broad range of sectors). The outcome of a trade round has to be a balance of interests. Governments can find it easier to reject pressure from particular lobbying groups by arguing that it had to accept the overall package in the interests of the country as a whole. A related misunderstanding is about the WTO’s membership. The WTO is an organization of governments.
The private sector, non-governmental organizations and other lobbying groups do not participate in WTO activities except in special events such as seminars and symposiums.
They can only exert their influence on WTO decisions through their governments.
Weak forced to join
Weaker countries do have a choice, they are NOT forced to join the WTO.Most countries do feel that its better to be in the WTO system than to be outside it. Thats why the list of countries negotiating membership includes both large and small trading nations.Countries willingly want to join.The reasons are positive rather than negative. They lie in the WTO’s key principles, such as non-discrimination and transparency. By joining the WTO, even a small country automatically enjoys the benefits that all WTO members grant to each other.
And small countries have won dispute cases against rich countries they would not have been able to do so outside the WTO.The alternative would be to negotiate bilateral trade agreements with each trading partner. That could even include regularly negotiating the renewal of commitments to treat trading partners as equals. For this, governments would need more resources, a serious problem for small countries. And in bilateral negotiations smaller countries are weaker. By joining the WTO, small countries can also increase their bargaining power by forming alliances with other countries that have common interests.
Undemocratic
The WTO is NOT undemocratic.Decisions in the WTO are generally by consensus. In principle, thats even more democratic than majority rule because no decision is taken until everyone agrees Decisions are by consensus. Agreements are ratified in parliaments.It would be wrong to suggest that every country has the same bargaining power. Nevertheless, the consensus rule means every country has a voice, and every country has to be convinced before it joins a consensus. Quite often reluctant countries are persuaded by being offered something in return. Consensus also means every country accepts the decisions. There are no dissenters.What is more, the WTO’s trade rules, resulting from the Uruguay Round trade talks, were negotiated by member governments and ratified in Member parliaments.
PHARMACEUTICAL INDUSTRY
Indian Scenario
The Indian pharmaceutical industry is a success story providing employment for millions and ensuring that essential drugs at affordable prices are available to the vast population of this sub-continent. However, the new 'trade' rules of the World Trade Organization now pose a serious threat to the industry and to the millions who are dependent on it for their health and livelihood. INDIA has a highly efficient pharmaceutical industry, which started blossoming thanks to the virtual absence of patent protection of medical drugs. It produces, for example, its own AIDS drugs, which are sold much more cheaply than the original products from abroad. The new rules of the game of the World Trade Organization (WTO) benefit the pharmaceutical multinationals from countries such as the USA, Great Britain and Switzerland, and threaten India's achievements.
Backdrop
In the 50 years since independence, the Indian pharmaceuticals industry has evolved significantly. Initially, the MNCs had a near monopoly. They imported and marketed formulations in India, mainly low cost generics for the masses and also a few specialties, life saving, high priced products. With the Government increasing pressure against imports of finished products, the MNCs set up formulating units and continued importing the bulk drugs.
In the ’60s, the Indian Government laid the foundation of the domestic pharmaceuticals industry by promoting Hindustan Antibiotics Ltd (HAL) and Indian Drugs and Pharmaceuticals Ltd (IDPL) for manufacture of bulk drugs. However, MNCs maintained a lead due to the backing of their global R&D. High cost for basic research deterred local players (in the private sector).
1970 - A Revolutionary Year
• The Indian Patent Act (IPA) was introduced. This has been one of the single most important factors to spur the domestic pharmaceutical industry. Under the IPA (Refer Annexure 1), substances used in foods and pharmaceuticals could not be granted product patents. Only process patents were allowed for a period of 5 years from date of patent grant or 7 years from date of filing for patent, whichever was earlier. Process modifications to develop MNCs bulk drugs were far easier for the local players and there was an influx of domestic manufacturers, who first started making bulk drugs and then progressed to formulations. For local players a wide possible portfolio mix was possible while the MNCs were constrained to their parent company’s product range. With the IPA, cost of local manufacture reduced, so also, absence of royalty payments on reverse engineered drugs.
• The Indian Government also introduced drugs Price Control Order (DPCO) in 1970. The DPCO effectively put a ceiling on prices of certain mass-usage bulk drugs and their formulations so as to prevent any undue profiteering. This further deterred the MNCs as selling their products at much lower prices in India meant global repercussions and possible uproar in their home countries. So MNCs curtailed new product launches, giving further scope to Indian players.
• FERA (Late 70’s) : MNCs were compelled to reduce holding in their Indian ventures to 40%, else comply with export obligations to retain a maximum 51% stake. As a result some MNCs curtailed the scope of their operations. This further strengthened the position of the local pharmaceutical companies.
Present Scenario
Over 20,000 registered pharmaceutical manufacturers exist in the country. The market share of MNCs has fallen from 75% in 1971 to around 35% in the Indian pharmaceuticals market, while the share of Indian companies has increased from 20% in 1971 to nearly 65%. PSUs have almost lost out completely.
The sector has undergone several policy as well as attitudinal changes over the past two years. It was one of the major beneficiaries from the budget proposals. Some of the positive steps taken were:
• Pharmaceutical industry is recognized as knowledge based industry. The government has plans to increase the investment in research and development.
• Rationalization of excise duty and reduction in interest rates in export financing.
• Additional deductions under Income Tax laws for R&D expenses.
• Foreign direct investments permit up to 74% through automatic route.
• Setting up two high levels committees to review the drug policy for strengthening R&D capabilities and reducing the price control regime.
Besides, the Indian Parliament has enacted the required changes in the Indian Patent Act 1970 (IPR) regarding mailbox arrangement and exclusive marketing rights (EMR).
Emerging Trends:
• Increased focus on R&D : Major domestic players namely Ranbaxy, Dr Reddy’s Labs, Cipla, Nicholas Piramal and Wockhardt are aggressively investing in R&D. Dr Reddy’s Labs and Ranbaxy have already discovered one new chemical entity (NCE) and are in Phase II and Phase I of the clinical trail respectively. Wockhardt is expected to come out with in new molecule by F12/2000.
• Marketing tie-ups: Domestic players and MNCs have entered into marketing arrangements to increase market penetration and further strengthen positions in respective therapeutic segments. Ranbaxy has tied up with Cipla, Glaxo and Hoechst Marion for products in specific therapeutic segment. Similarly Hoechst Marion has tied up with Nicholas Piramal.
• Product rationalization/ brand acquisition/ company acquisition: Most of the top pharmaceutical companies are consolidating their position in the domestic market either through product rationalization brand acquisition or company acquisition. Hoechst, Glaxo, Wockhardt and Ranbaxy have cut down their product portfolio in order to be more focused. Similarly companies such as Sun Pharma, Nicholas Piramal and Dr Reddy’s Labs have opted for brand/ company acquisition to increase the therapeutic reach and market penetration.
The Global Pharmaceutical Industry
An insight
Pharmaceuticals industry is driven by a global need to conquer disease. Medicines are developed to treat new diseases or improve upon the existing treatment. An in-depth understanding of human physiology and disease mechanism is a pre-requisite to Parma R&D.
Pharmaceuticals are medicinally effective chemicals, which are converted to dosage forms suitable for patients to imbibe. In its basic chemical form, pharmaceuticals are called bulk drugs and the final dosage forms are known as formulations.
Usage of pharmaceuticals is governed by the underlying medical science. The four primary medical sciences are as under.
Allopathy or modern medicine has gained global popularity.
Ayurveda, an ancient Indian science, mainly uses herbal remedies.
Unani, having Chinese origin, is prevalent in South East Asia.
Homeopathy, founded by a German physician, was fairly popular in the early 19th century.
Global price variations...
Drug prices vary from country to country for a number of reasons including patent regulations, government controls, income differences, currency exchange fluctuations etc.
Patent regulation: Patents provide the innovator exclusivity of manufacture over the life of the patent. To maximize gains, pharmaceutical companies charge high premium on their under patent products. As patent laws are stringent only in the developed nations, accordingly formulation prices too are much higher in these markets.
Government control: Due to lax of patent laws in developing countries, local players are able to infringe upon the original patent holder’s rights without payment of royalty. Hence, the cost of manufacture of reverse engineered pharmaceuticals is significantly reduced.
To prevent undue profiteering by local pharmaceutical companies, the Governments in such countries often impose price controls on popularly used drugs and formulations. Even some major industrialized countries of Europe distort the market mechanism by imposing price controls. This in turn causes higher prices in free markets like USA, as companies try to enhance sales/ profits by charging what the traffic bears.
Income disparity: In developing nations with low per capita income and low standard of living, Parma MNCs are faced with the choice of either selling products at artificially low prices or denying patients the benefits of the drugs.
...Its impact
Due to fear of piracy and low product prices in third world countries, most MNCs are reluctant to introduce their top-of-the-line products in these places. So, patients in these countries compulsorily lose out on better treatment. Majority of the MNCs’ conduct research on those diseases that affect the population in developed nations while tropical diseases get low priority.
Wide variations in Parma prices between developed and developing nations have resulted in increasing resistance to runaway healthcare costs in the developed nations, especially USA. Within a therapeutic segment, generic substitutes to the under-patent drugs generally exist. Though often-lesser effective, they are able to reduce the cost of treatment significantly. This methodology has been gaining popularity in last few years. Managed Healthcare, as it is called, is akin to medical insurance and it usually follows the principle of encouraging generic substitutes to curtail medical expenses.
Developing nations that impose price controls reduce the competitiveness of Parma companies in these countries. Price & volume controls provide few incentives for innovation. While price controls lower drug prices, they do not necessarily reduce healthcare costs. A more expensive drug may mean faster recovery, possibly eliminating future hospitalization and hence, overall it may prove cost effective.
MNC’s vs. Local Players
Overall, the Parma MNCs are at a disadvantage compared to local players, due to :
• Limitation to parent company’s portfolio and lack of freedom to reverse engineer any other MNC’s products.
• Higher DPCO coverage due to a more mature product range.
• Parent company’s reluctance to launch new products due to absence of patent protection and threat of process piracy and compulsion to price the product lower in India compared to other countries.
• Lack of export opportunities due to parent’s global presence.
• Higher cost of manufacture due to parent company’s insistence on stricter compliance of GMP (Good manufacturing Practices).
Factors Affecting Profitability
The Indian pharmaceutical industry is highly regulated. The Government controls prices of a large number of bulk drugs and formulations. Profit margins of players vary widely in both domestic and export sales due to many factors, these are mentioned below:
In the domestic arena, profitability depends on:
• Presence in large, high growth therapeutic areas eg antibiotics, cardiac care, NSAIDs etc.
• Management foresight to select new high potential molecules for launch in India.
• Reverse engineering capability to pioneer new processes.
• DPCO coverage (new launches help reduce proportion of products under DPCO).
• Competition from other players.
• Backward integration into bulk drugs.
• Established track record of product quality.
• Franchise among doctors.
• Domestic sales force (Medical Representatives ie MRs) strength.
• Distribution network in India.
Export prospects are linked to :
• FDA, USA/ MCA, UK approval for plants.
• Marketing tie-up with overseas pharmaceuticals companies.
• Tapping the high potential US generics market.
• Development of products which have recently gone off patent or which are scheduled to go off patent in near future.
• Under-patent product exports to other developing/ third world countries without strict patent regulation.
• Franchise manufacturing of formulations for overseas Parma MNCs.
• Own marketing network in other countries
The Role of WTO
Due to pressure from the developed countries, across the world uniformity in patent laws is being implemented under WTO (World Trade Organization - earlier GATT i.e. General Agreement on Tariffs & Trade). Presently, different countries have different patent types and life period. WTO has decided upon a product patent life of 20 years in all countries. However, to ensure a smooth transition and provide local players in the developing countries, ample time for gearing themselves, a moratorium up to the year 2005/AD has been provided. So, new products i.e. drugs introduced after this date will have to be accorded product patent protection even in countries like India or Argentina. However, existing pharmaceuticals and new products that will be introduced in the interim period will all continue to be reverse engineered in nations which do not have product patent laws.
Future Prospects
As per WTO, from the year 2005/AD, India will grant product patent recognition to all new chemical entities (NCEs) ie bulk drugs developed then onwards. This leaves another 5 years of MNCs research output open to process piracy. But, long-term prospects for MNCs are good. The pre-WTO and post-WTO scenarios are expected to be as under:
Pre-WTO: The transition phase in preparation of WTO has commenced. Established local Parma majors will try to corner a larger part of the domestic formulations market prior to aggressive product launches by MNCs post-WTO. Towards this end, these players are expediting the launch of new products and also looking at brand acquisition opportunities from other relatively smaller players. The latter, unable to sustain the stiff local competition, will either close down or be taken over by larger companies. Overall, the currently fragmented industry will consolidate. The MNCs have started strengthening their ranks. Most have already restructured their operations and focused on the Parma business. Parent companies are re-assessing India’s market potential and have accordingly increased stakes in existing ventures or set up new subsidiaries.
Post WTO : MNCs will be able to freely introduce top of the line, new products ie those patented after 2005/AD in the domestic market. However, these are expected to be priced at a significant premium in line with the MNCs global policy of earning returns on their R&D investment. So, within a therapeutic segment, the masses will still continue to resort to the older, lesser efficient and cheaper medicines. Thus, new launches by MNCs will be high margin, but low volume products and these will be mostly imported from overseas bases and only marketed in India. MNCs, which do not have a base in India, will enter into tie-ups with local players to license their new products. Local players will continue to make and market, in India, the popular generics and also those pre-WTO products, which may still be under, patent overseas. They will take up franchise manufacturing and marketing for overseas MNCs. Local players may also enter into research tie-ups with MNCs to leverage on their relatively low-cost, efficient skill base of trained pharmacists and chemists.
Strategies Of Domestic Players
• Most of the domestic companies are expanding the therapeutic reach through new product launches in the high margin segment, thus enhancing the product portfolio (proper basket of products helps in convincing the medical fraternity) and increasing the critical mass. Increased focus on prescription sales and acceptance in the medical fraternity through increased awareness and visibility.
• Increasing the market penetration through enhanced distribution channel. This will both increase the geographical reach in the domestic market and will facilitate licensing of products from MNCs in the post product patent regime.
• Most of these companies have already upgraded the manufacturing facility and have approval or are in the process of getting approval from USFDA, UKMCA and other international agencies. This is the basic requirement for access to the high margin but highly regulated developed market of Europe and US.
• On the back of state of the art manufacturing facilities the companies are pursuing contract manufacturing / global sourcing base for supply of bulk drugs/ intermediates for multinational corporations. Getting a breakthrough in area of contract manufacturing will help in increasing global acceptance in terms of quality and credibility in the export market.
• The companies are setting up subsidiary abroad or strategic alliances to exploit the tremendous opportunity in the generics market arising out in the next 5 to 10 years. They have started applying for drug master file / product registration / abbreviated new drug application (ANDAs) worldwide.
• The medium term objective is to focus on process engineering of products going off patent in next 5-10 years, which will help in tapping the emerging generics market in the next 5-10 years. At the same time R&D would also facilitate in new product launches in the domestic market in order to have a stronger product portfolio.
• The long-term objective will be to enter into higher platform of biotechnology and drug delivery systems.
FUTURE OF THE PHARMACEUTICAL INDUSTRY IN THE NEW IPR REGIME
What the market will bear
Will drug prices rise dramatically? On the one hand, there are several checks and balances within the Indian drug market that could prevent this from happening, such as India’s low purchasing power, the government’s price control mechanism and competition in the drug market itself.
Whilst India comprises 16% of the world’s population, it accounts for a mere 1% of global healthcare spending. Its per capita consumption of drugs amounts to less than US$3 per annum, compared to US$191 in the US. India’s domestic healthcare system only covers 3.7% of its population of over 980m. Therefore 75% of expenditure on medicines is borne privately by patients. Given these circumstances and the low per capita incomes, prices have to be maintained at an affordable level. If they exceed the threshold of affordability, the government price control mechanism will keep prices in check.
In other words, “the self paying Indian pharmaceutical market will in effect be self-regulating in terms of drug pricing, without the need for government intervention”.
Moreover, competition amongst multiple producers of the same drug has resulted in lowering the price of drugs in India, to the extent that they are now amongst the cheapest in the world. Drugs outside the price control mechanism have experienced a particularly dramatic fall in prices, owing to competition.
“The antibacterial Ciprofloxacin created pharma history, by capturing a Rs 2.6bn market in less than five years after being introduced”, says Surendra Somani, managing director of Kopran Ltd, a major Indian drug manufacturer.
Fierce competition between manufacturers pushed prices down phenomenally. When it was launched in 1989, the bulk drug cost Rs 25,000 per kg. Today, it costs Rs 4,000 and prices of formulations have fallen from Rs 14 per tablet in 1990, to Rs 9 in 1993. Industrialists predict that competition between firms will continue to act as a safeguard against price escalations resulting from patent protection.
India has one of the most efficient pharmaceutical industries in the world.
Pharmaceutical firms grew mainly thanks to the absence of patent protection of medical drugs in the country. For instance, Indian companies are now producing their own AIDS drugs, which are available cheaply, compared to the original products from foreign countries.
But the imposition of the new WTO rules will begin to threaten India's achievements in the pharmaceutical field. The Indian Patents Act, introduced in 1970, boosted Indian Parma companies. The Act allowed them to develop and patent alternative processes for products discovered and patented elsewhere.
According to the Indian Drug Manufacturers' Association, self-sufficiency in Indian pharmaceutical sector is more than 70 per cent.
"Worldwide, India is a country of very low prices for high-quality medicines," points out the IDMA president Nishchal H Israni. But now the rules of the game in the pharmaceutical industry will change as India has committed to toe the WTO line on product patents. Product patent rules and Exclusive Marketing Rights (EMR) under the WTO could affect a paradigm shift in India's Parma majors.
As per the EMR provision, a product for which original patent was granted prior to 1995, is not fit for an EMR in the country. This has forced nine leading domestic Parma companies to form the Indian Pharmaceutical Alliance that has demanded a more transparent WTO regime for EMR grants. The Indian Parma-industry is a success story. Five hundred thousand people are employed in this sector, in roughly 20,000 firms. In the pre- and post-production sector, a further 2.5 million jobs are thought to be involved. Compared to the general price index, drug prices have risen much less in the last 15 years and remain far below average. 'Worldwide, India is a country of very low ... prices (for) high-quality medicines,' Nihchal H Israni, president of the Indian Drug Manufacturers' Association (IDMA), states proudly. Self-sufficiency with regard to pharmaceuticals is far above 70% - in spite of the policy of a more open economy pursued by India since 1991.
TRIPS (Trade Related aspects of Intellectual Property Rights)
It is an important aspect of phasing out of quantitative restrictions and latest international developments are likely to have a far reaching impact on the pharmaceutical industry. On July 2, 1996 the United States requested WTO dispute consultations with India regarding India's lack of compliance to TRIPS. A panel was formed and recently the panel concluded that India has not complied with its obligations for few important facts like failure to establish a mechanism that adequately preserves novelty and priority in respect of application for product patents in the field of pharmaceutical and agricultural chemical inventions As per TRIPs article 70.9, the transitional arrangements for developing countries, an exclusive marketing right had to be granted only for a maximum period of five years.
This five-year period corresponded to the five-year period by which developing country members might delay the application of the provisions on product patents in areas of technology not protect able on 1 January 1996, i.e. the period between 1st January 2000 and 1st January 2005. The purpose of article was thus to give inventors of pharmaceutical and agrochemical products the economic privilege of EMRs for the five year period preceding 1st January 2005,if their products were denied patent ability even beyond the normal five-year transitional period for developing countries.
Common sense and practical experience indicated that all these steps took a long time and normally the products in question would not get on the market in a developing country before the expiry of the ten-year transitional period. The provisions had been made for the grant of exclusive marketing rights of up to five years only to tide over the gap between the obtaining of marketing approval and the grant of patent protection for the product in question in a developing country benefiting from the ten-year transitional period.
The inventions that met the criteria for patent ability on or after the date of entry into force of the agreement would become eligible for protection in such countries by the time that protection became of commercial significance, either by the grant of a patent after the expiration of the ten year period or by an exclusive marketing right for products getting marketing approval before that time.
Although it was difficult to provide evidence or state with absolute certainty when products would start becoming eligible for exclusive marketing rights under article 70.9, a delay of ten or more years between the date of filing of application for patents and the grant of marketing approvals seemed likely. In India registration and approval of new drugs required submission of technical data on safety and efficacy as well as analytical specifications in relation to steps of manufacture, in process control and marketing status in other countries clinical trial data generated within the country and examination labels and package inserts. The technical data were examined in consultation with the experts. The final bulk drug was required to be tested at the central drug laboratory, Calcutta as per analytical specifications furnished. A new drug derived out of cell-line and recombinant DNA based products also needed approval from the ministry of science and technology and the ministry of environment.
IMPACT OF TRIPS ON THE INDUSTRY
India, too, became a WTO member in 1995 and will have to apply the new TRIPS rules for medical drugs in its national patent legislation by 1 January 2005 at the latest. First steps have already been taken in the patent law of 1999. But the US Parma-producers still call India a 'center of commercial piracy'. Israni of the IDMA considers the situation very bleak unless the Indian government makes a countermove: 'Indian producers are being pushed out of the market and multinational suppliers are going to dominate the market with far higher prices. Jobs will be lost and India's balance of trade in the area of pharmaceuticals will in future be in deficit - in brief, a situation similar to the one before the patent law of 1970.' Israni is appealing to the Indian government to exhaust fully those positive options that are still contained in the international TRIPS rules and especially to provide for effective enforced licenses.
The inclusion of Trade-Related Intellectual Property Rights (TRIPS) into the mainstream of the WTO system establishes new disciplines for many countries in copyright, trademarks, industrial designs and patents.
Two groups of issues dominate the debate on intellectual property in India —patents for pharmaceuticals and agricultural chemicals; and the implications of the WTO agreement on products based on local species. In India, there is one big paradox. The Indian drug industry has been protected from foreign competition for two decades. And yet it is one of the most competitive in the world. Indian drug exports grew by 35% annually over the past decade to reach $71m in 1994.
It has been said that India was violating its obligations on pharmaceutical and agricultural chemicals patents.
Broadly speaking, the issue was a technicality concerning the transition to full patent protection, although it does have serious implications. But behind it lies an intense debate within India, not least within the Indian drug industry itself.
The Governments Point of view While the government — along with foreign multinationals — is keen to implement the agreement, it has faced resistance from local drug manufacturers and consumers.
The Indian Drug Manufacturers Association (IDMA) protested in 1994 “prices of drugs shall go up by 5 to 20 times as a consequence of accepting the TRIPS [Trade-Related Aspects of Intellectual Property Rights] proposals”
However, the government claimed, “once the crutches of weak patent law are removed, we can successfully negotiate with research-based international companies ... to boost export earnings, create more employment ... and benefit from the transfer of technology” .The government had some reservations about the TRIPS Agreement. But it signed the deal, taking the view that the package of agreements in all areas of trade — the result of the 1986-94 Uruguay round of negotiations — was on balance in India’s interests.
“The crux of the matter is that when the world is moving in one direction, it makes no sense for India to move in the opposite direction. At best, India can seek amelioration, which it has done successfully”, said A.V. Ganesan, Indian commerce secretary, in 1993.
This is not happening overnight. As a developing country, India has a 10-year transitional period (until 2005) for giving full patent protection for pharmaceutical and agro-chemical products. It also has until 2000 to comply with other aspects of the TRIPS agreement. These provisions are designed to allow India and other developing countries time to adjust.
The fear: drug prices to rise dramatically?
In 1975, then Prime Minister Indira Gandhi, declared, “medical discoveries will be free of patents and there will be no profiteering from life and death”. Some Indians fear that costs of medicines will rise as a result of royalty payments and increased prices for products manufactured under license. Local companies could face foreign competition.
After India ratified the WTO agreements, the press accused the government of “selling out to rapacious multinationals” and “making Indian patients pay for the sell out”.
The EU and US have filed two separate cases against India in the WTO on the grounds that it has not fulfilled these obligations under the TRIPS Agreement. Cases are pending — rulings have been made, and the disputes are in the stage when India is required to take action to conform to its commitments under the TRIPS Agreement.
However, one result of the transitional clause is that patent protection will have limited impact on the Indian drug industry until the year 2005. Even then, the impact will be limited as India is starting from a point of virtually zero patent protection in the sector.
One recent estimate suggests that only 15% of the Indian drug market will be covered by patents after 2005 and be subjected to price premiums as a result. The remaining 85% of the market will continue to be exposed to “the full impacts of generic [i.e. non-brand name drugs] competition, to which patented products will themselves ultimately contribute when their patents expire”.
Moreover, as the TRIPS Agreement does not allow for backdating, drugs already in the market will be exempt from patenting.
MOREPEN LABORATORIES
K.B. Suri established Morepen Laboratories in the year 1984. It has sales outlet at Mumbai and USA. The head office is at New Delhi. Morepen basically deals in bulk drugs. It has trade relations with China, Honk Kong, and European countries. Morepen has an annual turnover of around 1000 crores.At present, Morepen is ranked 9th among the Indian Pharmaceutical industries. As the patent system will start prevailing in India from 2005, there will be a cut- throat competition between the Indian industries. At present, Morepen is not ready to cope up with those implications. The following are the key features.
1. Morepen has constructed a plant in Himachal Pradesh according to the WTO norms, which is currently the biggest strength of morepen. This is the first kid of a plant in Asia.
2. This will help Morepen to get exclusive patent rights from other country, which have registered their patent.
3. Also Morepen does not have many types of products.
4. Morepen is the second largest manufacturer of a drug called loratadine.
5. Morepen presently thrives on other companies for orders of drugs.
6. Its R&D department is not doing well. So Morepen is not presently spending more on its R&D department.