CONFÉRENCE DES NATIONS UNIES SUR

LE COMMERCE ET LE DÉVELOPPEMENT

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

Product Patents: Implications for Pharmaceutical Industry and Consumers

ADVANCED/UNEDITED DRAFT

DISCLAIMER

This study is prepared by UNCTAD India Programme under the UNCTAD-GOI-DFID project Strategies and Preparedness for Trade and Globalization in India. The views expressed in this paper do not necessarily reflect the views of UNCTAD or its member governments. Comments may be sent to: veenajha@unctadindia.org

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TABLE OF CONTENTS

INTRODUCTION ........................................................................................................................................ 6

ECONOMIC RATIONALE FOR PRODUCT PATENTS IN THE PHARMACEUTICAL SECTOR ........................................................................................................................................................ 8

DEVELOPMENT AND EVOLUTION OF INDIAN PHARMACEUTICAL INDUSTRY.............. 12

PRODUCT PATENTS: NEW LEGISLATIVE CHANGES AND VIEWS OF THE STAKEHOLDERS ..................................................................................................................................... 22

IMPACT OF PRODUCT PATENTS ON DRUG PRICES AND ACCESSIBILITY IN INDIA...... 29

RESEARCH AND DRUG DEVELOPMENT......................................................................................... 44

POST PRODUCT PATENT OPTIONS FOR ACCESS TO MEDICINES ........................................ 49

CONCLUDING REMARKS..................................................................................................................... 64

LIST OF TABLES

TABLE 1: COST- BENEFIT ANALYSIS OF PATENT PROTECTION ......................................................... 10 TABLE 2: PHARMACEUTICAL INDUSTRY: DISTRIBUTION OF DOMESTIC / FOREIGN COMPANIES ... 13 TABLE 3: GROWTH OF PHARMACEUTICAL INDUSTRY (RS. CRORES)................................................ 14 TABLE 4: GLOBAL GENERICS: KEY MARKETS.................................................................................... 16 TABLE 5: DMFS/ANDAS: A COMPARISON OF INDIA AND CHINA...................................................... 17 TABLE 6: STATUS OF EMR FILES IN INDIA........................................................................................... 29 TABLE 7: RESEARCH AND DEVELOPMENT EXPENDITURE OF MAJOR INDIAN PHARMACEUTICAL COMPANIES AS % TO TURNOVER........................................................................................................... 45 TABLE 8: OVERVIEW OF DRUG PRICE CONTROL IN DIFFERENT COUNTRIES................................... 54 TABLE 9: VARIATION IN PRICES OF PHARMACEUTICALS ACROSS SELECTED COUNTRIES ................ 60

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LIST OF FIGURES

FIGURE – 1: DEPICTION OF ECONOMIC CONSEQUENCES OF PATENT PROTECTION 10

FIGURE – 2: INDIAN PHARMACEUTICAL INDUSTRY – OVER THE YEARS........................ 12

FIGURE – 3: COST STRUCTURE OF GLOBAL R&D BASED PHARMACEUTICAL

COMPANY AND GENERIC PHARMACEUTICAL COMPANY..................................................... 18

FIGURE – 4: PHARMACEUTICAL INDUSTRY IN INDIA: COST STRUCTURE (2004) (AS

PERCENTAGE OF OPERATING INCOME)....................................................................................... 18

FIGURE – 5: PHARMACEUTICAL INDUSTRY IN INDIA: TREND IN MATERIAL COST

(FY1997-2004) (AS PERCENTAGE OF OPERATING INCOME)..................................................... 20

FIGURE – 6: PHARMACEUTICAL INDUSTRY IN INDIA: TREND IN MARKETING AND

SELLING EXPENSES (FY1997-2004) (AS PERCENTAGE OF OPERATING INCOME) ........... 20

FIGURE – 7: PHARMACEUTICAL INDUSTRY IN INDIA: TREND IN EMPLOYEE COST

(FY1997-2004) (AS PERCENTAGE OF OPERATING INCOME)..................................................... 21

FIGURE – 8: MOLECULES.................................................................................................................... 22

FIGURE – 9: R&D EXPENDITURE...................................................................................................... 44

FIGURE - 10: NMES LAUNCHED ONTO WORLD MARKET DURING 1990-2000. .................. 46

FIGURE – 11: RESEARCH ROUTE MAP ........................................................................................... 47

FIGURE – 12: EFFECT OF CONSOLIDATION IN THE PHARMACEUTICAL INDUSTRY... 62

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ABBREVIATIONS

AIDS Acquired Immuo Deficiency Syndrome AIIMS All-India Institute of Medical Sciences ANDA Abbreviated New Drug Application ARVs Antiretroviral drugs API Active Pharmaceutical Ingredient ASI Annual Survey of Industries BDMA Bulk Drug Manufacturers Association CAGR Compounded Annual Growth Rate CMOs Contract Manufacturing Organisations CCMB Centre for Cellular and Molecular Biology CDRI Central Drug Research Laboratory CMIE Centre for monitoring Indian Economy COS Certificate of Suitability CPMP Committee for Proprietary Medicinal Products CRO Contract Research Organization DCGI Drug Controller General of India DMARD Disease Modifying Anti-Rheumatic Drugs DMF Drug Master File DPCO Drug Price Control Order DSB Dispute Settlement Body EMRs Exclusive Marketing Rights EU European Union FDA Federal Drug Administration FY Financial Year GATT General Agreement on Trade and Tariffs GDP Gross Domestic Product GI Gastrointestinal GoI Government of India ICE Improved Chemical Entity ICRA Information and Credit Rating Agency IGIB Institute of Genomics and Integrative Biology INDA Investigational New Drug Application IPA Indian Patents Act IPA Indian Pharmaceutical Alliance IPR Intellectual Property Rights MAPE Maximum Allowable Post Manufacturing Expenses MC- Marginal Cost MNCs Multi-National Companies MSF- Medicine Sans Frontires NIPER National Institute for Pharmaceutical Education and Research NCE New Chemical Entities NDA New Drug Application NDDS Novel Drug Delivery System NIHCM National Institute for Health Care Management NPPA National Pharmaceutical Pricing Agency OTC Over the Counter OPPI Organization of Pharmaceutical Producers of India PhRMA Pharmaceutical Research and Manufacturers of America R&D Research and Development TNCs Trans National Corporations TRIPs Trade Related Intellectual Property Rights UNAIDS United Nations Programme on HIV/AIDS

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UNDP United Nations Development Program UNCTAD United Nations Conference on Trade and Development US$ United States Dollar USFDA United States Food and Drug Administration WHO World Health Organization WTO World Trade Organization.

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INTRODUCTION The signing of the Agreement on Trade-related Intellectual Property Rights as part of the joining of the WTO in 1994 was accompanied by unprecedented public debate in India. The WTO Agreement came into force in 1995 but India received a transitional period of ten years for the introduction of product patents on pharmaceuticals, chemical and agricultural products. Pharmaceuticals and chemical products will now be subject matter of patents by virtue of Patent (Amendment) Act, 2005 recently passed by the Indian Parliament. The new amendment to the Patent Act aims to fulfill India’s legal obligations under the WTO TRIPS Agreement within the stipulated time (January 1, 2005). It is worth noting that prior to January 1, 2005, only process patents were permissible whereby any person could make the final product by an alternative route. Under the WTO agreement, India was required to introduce several provisional measures, including the ‘mail box system’ or grant ‘Exclusive Marketing Rights’ (EMRs) during the transition period. Within India, the opinion on this new legislation to comply with the WTO TRIPS Agreement as it relates to the pharmaceutical industry is somewhat divided given the country’s prior experience with product patents. Other countries that have recently adopted product patents appear to experiencing similar problems. The evidence suggests that a country’s IPR level does impact many social and economic factors ranging from pricing and accessibility of drugs to the structure of pharmaceutical sector, R & D investment, technology transfer and public health and so on. The public perception that product patent regime would lead to soaring prices for pharmaceuticals with adverse consequences on the health and well-being of Indian citizens, is partly influenced by several press articles. This perception originates from the fact that in countries such as India where health insurance coverage is almost non-existent, most medical expenses are often paid by consumers and as a result, any change in prices could have significant impact on the accessibility and the poor. On the other hand, multinational companies (MNCs) being R&D intensive argue that they lose billions of dollars every year due to patent infringement by Indian firms, which have successfully copied their products in the past. The MNCs also claim that the protection of IPR is critical for them increase R&D investment in the development of new drugs. Historical evidence clearly suggests that countries have experienced different conditions when product-patents have been introduced in the respective economies. Although it is hard to draw any concrete conclusions, there is good support to assume that monopolies created by patents tend to increase the prices and in a product where the demand is inelastic thus accentuating the problem of affordability to the general populace. The pricing of consumer drugs depends on a variety of factors, including demand, availability, substitutes and other market factors. However, it is likely that the availability of ending patent substitutes somewhat alleviates price hikes. Despite the fact that there are potential long term economic and health benefits, it is important for India to design a policy framework that could provide reasonable legislative and safeguard assurances to the consumers in terms of long term drug prices. One of the biggest challenges for India is that small manufacturers are likely to disappear because of their inability to make huge R&D investments to be competitive in the new market place. It is very unlikely that the new business models such as outsourcing, contract manufacturing and other alternatives will be able to accommodate their survival.

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In general, pharmaceutical and biotechnology industry is highly R&D intensive (please see my paper). Having signed the WTO Agreement, India is forced to compete with developed countries where the R&D infrastructure is quite matured. That too, the advances in R&D and technology have further complicated the competition model and India having entered the product patent era, are left with very limited number of options other than to compete head on with developed countries. The R&D spending among the major Indian pharmaceutical companies appears to have focused on drugs that target non-communicable diseases, which are prevalent in developed countries. These diseases are increasingly becoming more prevalent in developing countries like India. When it comes to R&D, there is also an argument that there is not enough R&D spending on tropical diseases, which are still a major problem for India. This is one place where the private and public partnership might play a tremendous role on tackling the drug discovery process for tropical diseases. The central working theme of the paper is the impact of product patent regime on the Indian pharmaceutical sector. The paper attempts to examine the potential price hikes in certain drug segments using an econometric approach. In order to assess the impact, we have examined several variables, including the overall structure of the Pharma industry, drug pricing structure, market accessibility, and the preparedness of the country. With a group of drug molecules (quinolone segment), we have analyzed using a counterfactual simulation model as to how prices, profits and consumer welfare would have been in India had the molecules been under patent in India. The simulation model is based on certain assumptions on the availability of close therapeutic substitute drugs that are not covered by patents which can hold down drug prices thus somewhat benefiting consumers. In addition, for each drug, consumers have the choice among various brands that are chemically equivalent, but differ in prices and other promotional activities. The paper also examines some of the flexibilities provided in the new Indian Patent (Amendment) Act, 2005.

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ECONOMIC RATIONALE FOR PRODUCT PATENTS IN THE PHARMACEUTICAL SECTOR

Patents on inventions confer the right to exclude others from using a particular invention. Patents by giving their owners exclusive rights to the commercial exploitation of inventions, secure to these owners profits which are ultimately collected from consumers as part of the price paid for goods and services. The rationale behind patents is to strike a balance between two economic efficiency objectives – the static efficiency and the dynamic efficiency. To be statically efficient the resources should be allocated such that it maximizes total surplus. The producers profits (measured by the area between the price and marginal cost) and consumer gain (measured by the area between the demand curve and the price) constitutes the total surplus to the society. On the other hand upgradation of production technology over time via reinvestment of the monopoly profits would lead to dynamic efficiency. The need of the patents actually arises from the need of the innovator firm to recoup their sunk costs incurred for the research and development they have undertaken to develop the new pharmaceuticals. In the absence of patents generically equivalent “copy” products could enter freely and competition would force down prices to the level of marginal costs. Marginal Cost (MC) pricing would suffice to cover the expenses of imitated products that incur only production and distribution costs with negligible R&D or promotion expenses but such a pricing is not enough to generate sufficient revenue to cover sunk R&D costs of the innovator firms. The economic purpose of patents is therefore to prevent entry of copy products for the term of the patent to provide the innovator firm with an opportunity to price above MC. This will lead to increased producers surplus. The main objective to recover the R&D costs is to preserve incentive for the future R&D that will lead to better technological opportunities in the future. The consumer by way of increased prices might suffer welfare losses (deadweight loss) but stands to benefit in the long term. It is argued that an effective patent system is an important mechanism to encourage innovation in the pharmaceutical industry. The pharmaceutical industry, many feel, is unusual in the extent to which R&D and regulatory approval costs are a large part of the total production cost. Indeed the marginal cost of producing pharmaceuticals is often trivial after a drug has been developed and approved by the regulators. R&D and regulatory approval costs are incurred mainly by the company that develops a drug initially - subsequent producers of the same drug face much lower costs. According to this argument, without some period of restricted competition, the developers of new drugs will be unable to recoup R&D and regulatory approval costs, and the incentive to develop new drugs will diminish greatly. Studies that examine the rate of return on pharmaceutical research also underscore the importance of patent protection for recouping of R&D costs - they show how certain R&D expenditures fail to produce valuable new drugs, and how the funding of pharmaceutical research rests on substantial rents on the modest subset of products that prove particularly successful.1

1 See, e.g., Martin Belly, “Research and Development Costs and Returns: The U.S Pharmaceutical Industry”, 6 Journal of Political

Economics. 232 (1972); Henry Grabowski and John Vernon, Returns to R&D on New Drug Introductions in the 1980’s, 13

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Scherer 2 makes an analysis on the welfare implications fro the perspective of the LDCs. If the LDCs grant patents the pharmaceuticals will be sold at the profit maximizing monopoly prices. Under such a scenario, a producer’s surplus arises which is realized by the drug’s patent holder presumably an MNC and the consumer surplus is realized by the citizens of the LDCs. Without the patents being granted the drug is supplied to the citizens more or less competitively whereby the citizens of the LDCs can consume more at lower prices than possible for them under conditions of patent protection. The consumer surplus under such conditions is much higher than under patented monopolistic conditions created by patents. Scherer argues that the LDC is better off only if granting patents leads to an increase in the development and supply of comparable new drugs by at least three times. Figure 1 shows the effect of patent protection. The innovation reduces the cost of the manufacturing process from c0 to c1. Prior to the invention the quantity of goods produced q0 is sold at price p0=c0 assuming a perfectly competitive market, wherein the producer profit reduces to zero. Thus the total surplus is the consumer surplus equal to area of triangle I. When the patent is introduced, market is exclusively monopolized by the patent holder. So the inventor is charging monopoly price and selling monopoly quantity (i.e. higher prices than cost p0 > c1 and selling quantity less than perfect competition quantity – q0<q1).The quantity of goods produced is same as q0 and the price is p0. But the total surplus increases by the area of triangle II which represents the savings generated by innovation. This producers surplus is in fact appropriated by the inventor through license revenues set at L=c0-c1 per unit of output. Rest of the companies remain as the zero profit entrepreneurs (since they earn revenue of p0q0 from a cost of (c1 + L = c0) i.e.p0q0). The consumer surplus also remains the same. Hence with the patents the only gain comes to the innovator. As the patent expires (meaning thereby that firms no longer need to pay license fee to copy the innovation) the price falls to p1=c1 and the quantity produced increases to q1. The total surplus increases by the area of triangle III as new consumers have access to the good. Due to the fact that price falls from p0 to p1, the consumer surplus increases from area I to area (I+II+III) while the inventors profit falls to zero. Consumers are the only winners. Therefore to sum up: • without any invention the surplus was I i.e. only consumer benefits, producer surplus is

zero. • with inventions and patents being granted the surplus was I + II i.e. there exits both

consumer and producer surplus. • When patents expire, the surplus was I + II + III i.e. only consumer benefits with large

consumer surplus. The implication is that although society is better off in the event of invention compared to a situation of no invention at all, the benefit is maximum when the patents have expired. This is suggestive of the fact that the inventor makes public the invention and bypasses the protection phase.

Journal of Health Economics. 238 (1994); Frederic M. Scherer, “Pricing, Profits, and Technological Progress in the Pharmaceutical Industry”, 7 Journal of Economic Perspective. 86 (1993).

2 Scherer, F.M. Pricing, Profits, and Technological Progress in the Pharmaceutical Industry, 7 Journal of Economic Perspective. 86 (1993).

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However without the patents the invention will not occur since the inventor knows the market price will fall to p1 and he will be unable to recover his R&D expenses, and he has thereby no incentive to make the investment. Therefore though protection generates a deadweight loss to the society (area of triangle III), this is the sacrifice the society has to bear to encourage innovations.

Figure – 1: Depiction of Economic Consequences of Patent Protection

The effect of patents in a nutshell

Table 1: Cost- Benefit Analysis of Patent Protection Private Public Benefit Temporary monopoly Knowledge externalities Cost Investment in R&D Duplication of investment

Deadweight loss There is no evidence that strong patent protection necessarily increases the rate of innovation, and even if they did, that they are the most cost effective means of encouraging innovation. Studies by Lerner 3 on the nearly 150 years of patent protection in 60 countries including the United States and later by Sakakibara and Branstetter 4 on Japanese Patent Law reforms cast doubts on the hypotheses of the utility of patents. Cohen et al 5 surveyed 1,487 R&D laboratories in the US manufacturing sector in 1994 and found that of many mechanisms available to firms for protecting their profits from inventions, patents tend to be the least emphasized by firms. In this background although one could argue that pharmaceutical product patents are important for the purpose of innovation and new drug discovery and development, it does not necessarily imply that patent protection encouraged R&D spending. A few analyses have noted that global welfare is maximized by letting low-income nations free-ride on the patented inventions of first 3 Lerner,J. Patent Protection and Innovation Over 150 Years, NBER Working Papers 8977, National Bureau of Economic

Research, (2002) 4 Sakakibara, M. and Branstetter, L.Do Stronger Patents Induce More Innovation? Evidence from the 1988 Japanese Patent Law

Reforms, RAND Journal of Economics, 32, 1, pp. 77–100, (2001) 5 Cohen,W.M, Nelson,R.N, and Walsh,J.P. Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S.

Manufacturing Firms Patent ,NBER Working Paper No. 7552 (2000)

q0

q1

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world nations over a wide range of products including pharmaceuticals. In this backdrop, the Doha Declaration on TRIPs and Public Heath reiterated the role of the permitting countries to explore flexibilities including compulsory licensing, parallel imports, experimental use exception, which might help LDCs and developing countries to maintain access to the new drugs at prices consistent with their limited purchasing power.

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DEVELOPMENT AND EVOLUTION OF INDIAN PHARMACEUTICAL INDUSTRY

The pharmaceutical industry of India comprises over 20,000 manufacturing units and provides employment to approximately 3.3 million people. The pharmaceutical sector manufacturers both bulk drugs (about 350 bulk drugs) belonging to several therapeutic groups and a wide range of formulations. India also had a negative balance of trade in bulk drugs and drug formulation prevailed until the 1990s. The most rapid growth of the pharmaceutical industry, however, was noticed from 1990’s onwards.

Figure – 2: Indian Pharmaceutical Industry – over the years

One of the stated objectives of the Indian Patents Act of 1970 was the development of an independent and self reliant pharmaceutical industry. The Patent Act therefore excluded patent coverage for pharmaceutical products and only admitted process patents for a period of seven years. Even with respect to process patents, there were provisions which substantially limited the scope of protection. First, after three years from the date of sealing a pharmaceutical process patent, the ‘license of rights’ clause applied. Under these provisions, the patent holder was obliged to license the patented process to any interested party with a maximum royalty of 4 percent payable by license. Second, after three years from the date of sealing a pharmaceutical patent, the government was empowered to grant a compulsory license if the patented product is not available at ‘reasonable’ prices or other public interests are not satisfied. The terms of the compulsory license were set by the government, unless the patent owner and licensee had reached agreement between themselves.

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Between 1972- 2005, a period characterized by lack of product patent for pharmaceuticals, the Indian pharma established a firm footing in the domestic market. It is common knowledge that the Indian firms with developed chemical infrastructure and process required no time to imitate a newly developed chemical entity. Redwood 6 estimated that in the early 1990s, 20 percent of the brands marketed by the 15 leading Indian firms were based on chemical entities that were covered by pharmaceutical product patents in Europe and a further 37 percent were based on chemical entities of which the patent had expired elsewhere. Typically the Indian pharmaceutical industry has been able to introduce imitated products in the Indian markets within just four or five years after their first appearance in the world market.7 Currently, the domestic companies amongst themselves manufacture over 85% of the bulk product and almost 100% of the formulations. It is striking that this turn around happened at a time when TNCs’ share in the market rose sharply.8 In fact, India and Japan are the only two countries where the western TNCs do not dominate. The market share of TNCs has reduced consistently over the years: from 68% in 1970 to around 23% in 20039. Out of the 20 largest companies in India, 15 are Indian controlled and only 5 are TNCs. (See Table 2).

Table 2: Pharmaceutical Industry: Distribution of Domestic / Foreign Companies

Year 1971 1981 2001

Rank Company Origin Company Origin Company Origin

1. Sarabhai Dom Glaxo For Glaxo SKB For 2. Glaxo For Hoechst For Ranbaxy Dom 3. Pfizer For Pfizer For Cipla Dom 4. Alembic Dom Alembic Dom Nicholas Piramal Dom 5. Hoechst For Geoffrey Manner For Aventis For 6. Lederle For Burroughs Wellcome For Sun Dom 7. Ciba For Ranbaxy Dom Dr. Reddy’s Dom 8. May & Baker For Boots For Zydus Cadila Dom 9. Parke Davis For German Remedies For Knoll For 10 Abbott For Richardson Hindustan For Pfizer For 11 Sharp & Dome For Parke Davis For Wockhardt Dom 12 Sudrid Geigy For Warner-Hindustan For Alkem Dom 13 Unichem Dom Roche For Lupin Dom 14 East India Dom Merck, Sharp & Dome For Novartis For 15 Sandoz For Cynamid For Aristo Dom 16 Deys Dom Unichem Dom Pharma Marketing Dom 17 Boots For Cadilla Dom Torrent Dom 18 T.C.F. Dom Standard Dom Alembic Dom 19 Warner Hundustan For E.Merck For Cadila Pharmaceutical Dom 20 John Wyeth For East India Dom USV Dom

Year

1970 1981 1991 2000 Foreign subsidiaries’ share of domestic retail sales (%) 75-90 60-75 49-55 28-35 Amongst the total exports of India, the percentage share of Drugs, Pharmaceuticals and Fine Chemicals during April-October (2000-2001) was 4.1%.10 Capital investment in the pharmaceutical industry grew by a compounded annual growth rate of 35% over the previous 12 years11. India’s pharmaceutical industry is ranked eleventh in dollar terms of world

6 Redwood, H. New Horizons in India,(1994). 7 Lanjouw, J. O. Patent Protection in the Shadow of Infringement: Simulation Estimations of Patent Value, The Review of

Economic Studies. Vol. 65, pp. 671-710. (1998) 8 Redwood, H. New Horizons in India,(1994). 9 ORG-MARG 10 Available at http://www.indiaoppi.com/keystat.htm (Visited on June 9 2004). 11 See: Robert S. Tancer, “The Pharmaceutical Industry in India, Adapting to TRIPS,” The Journal of World Intellectual Property,

1999, p. 177.

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pharmaceutical production with a global market share of 1.2%. The number of pharmaceutical firms in India multiplied dramatically from 3,000 in 1974 to over 24,000 in 2004. India is also self sufficient in drugs and has become a major international supplier of drugs. On the whole, the lack of patents succeeded in ensuring import substitution and enabled a positive balance of payments in the sector. It also enabled pharmaceutical R&D capacity in India to create non-infringing process skills. The Indian pharma also acquired the skill of transforming the laboratory processes into plant scale in a short time for manufacturing drugs satisfying international quality standards12. These figures may present an upbeat picture, but one should be careful in drawing premature conclusions. In the background of the new patent amendment act, it becomes necessary to analyze the pharmaceutical market structure and judge its capacity to adjust with the new regime.

Table 3: Growth of Pharmaceutical Industry (Rs. Crores)

1965-66 1980-81 1997-1998 1998-1999 1999-2000

Capital investment

140 500 1840 2150 2500

Production of formulations

150

1200 12068 13878 15960

Production of bulk drugs

18 240 2623 3148 3777

Import 8.20 112.54 2868 3128 3441 Export 3.05 46.38 5353 5959 6631 R&D expenditure

3 14.75 220 260 320

Source: Prowess (year) Bulk Drugs and Formulations The process of drug manufacturing basically has two components namely bulk drug production13 and formulation production14. Bulk Drugs: The Indian pharmaceutical industry manufactures over 400 bulk drugs belonging to several therapeutic segments. The total production of bulk drugs in the country in 1999-2000 was 19,737 crores. Bulk drug production in India recorded a CAGR of 19.5% between 1994-2004, which is higher than the growth in the overall production of pharmaceuticals (CAGR of 15.8%). Rising exports have been the main driver of growth of the bulk drugs segment. Over 60 % of India‘s bulk drugs is exported. And this accounts for 29% of total pharmaceutical exports. Low manufacturing costs, established quality of products, approval of manufacturing facilities by international regulatory authorities, flexible manufacturing infrastructure that allows producers to change product mixing in response to changes in customer demand and expertise in scaling production from laboratory scale quantities to commercial production, have all contributed to increasing export orders of Indian bulk drugs.

12 Many of the Indian Production plants are approved by USFDA, Australian Authority and European Authorities. It is also stated

outside US, India is having the highest number of USFDA approved production plants. 13 Bulk Drug Production involves the production of Active ingredients present in the drug also called as API 14 Formulation production involves the processing of bulk drugs into finished dosage forms such as tablets, capsules, ointments,

etc.

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The balance is sold locally to other formulators. However, many of the MNCs affiliates/subsidiaries in India import bulk drugs from the parent company and formulate it for the local markets. Also local companies who export formulations avail duty free import of bulk drugs. Hence there is a significant quantum of bulk drug imports to the tune of Rs. 10 billion. The bulk drug market in India is a highly competitive one. The indigenous technology for the production of several bulk drugs was also developed during the growth phase15. The presence of large number of sellers in the market (for example, ciprofloxacin has 42 sellers, flucanzole has 37 sellers, paracetamol has 27 sellers, cetrizine has 30 sellers, ibuprofen has 22 sellers) in conjunction with the awareness of the buyers (mainly firms) of the prices charged by different seller firms has made the market for bulk drugs highly competitive. The outcome therefore is that the prices of bulk drugs have been the lowest when compared to other major markets.

Formulations: Formulation drugs occupy a major share in the total drug market in India. During1998-1999, out of the total pharmaceutical production of Rs.19737 crores, formulations accounted for Rs.15960 crores. More than 85% of the formulations production in the country is sold in the domestic market. Some life saving, new generation drugs under patent formulations continue to be imported especially by the MNCs, which then market them to India. Overall, the size of the domestic formulations market is around Rs.90bn and is growing at 15-16% pre annum. The formulation market could be broadly classified as follows: 1) The market where the entire price burden falls on the consumer. 2) The retail market where the consumer is reimbursed partially or fully by the health

insurer, private or public. 3) The institutional market where the buyers are institutions such as hospitals

In the first category, the demand is often quite insensitive to the prices as the consumer’s bargaining power vis-à-vis the insurer and the institutions is indeed low. However, the category has the largest number of sellers. For example, there are 16 sellers for carvedilol formulation, 29 sellers for nifedipine,for, 48 sellers for amlodopine formulations, 24 sellers for ramipiril etc.16 The trends in the market show that with intensifying of competition, a marked fall in the prices of formulation drugs are bound to take place. But such price falls are not commonly observed or likely to be observed in the new drug market. On analyzing the new drug price trends between 1995-2003, it is seen that only in 18 of the 72 NCEs launched in India did the prices show a negative trend with intensification of competition. Therefore it is difficult to say that competition has driven down the prices in the formulation market; nonetheless, it is one of the dynamic segments of the Indian pharmaceutical market. The exports of formulations from India increased at a CAGR of 19% during 1994-2004.Formulations account for over 50% of the total pharmaceutical exports from India. The growth in formulation exports during the 1990’s can be attributed to exports made to developing markets and the access gained by Indian players to the generics markets of developed countries.

Generic market: India's total drug exports, including those to the United States and Europe, grew from $1.8 billion in March 2001 to $2.5 billion in the 2003 fiscal year, according to the

15 These bulk drugs include antibiotics like Ampicillin, Amoxycillin, Erythromycin, Anti-infectives like Sulphamethaxazole and

Trimethoprim., anti-TB drugs like Ethambuto Cardio Vascular drugs like Methyl Dopa; Analgesics like Ibuprofen and Isopropyl antipyrine; anti - amoebics like Metronidazole and Tinidazole, anti-cancer drugs like Vinblastine, Vincristire and Cisplatin- source id. above

16 India Drug Review (2003)

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Organization of Pharmaceutical Producers of India (OPPI). Currently, India has 63 plants approved by the Food and Drug Administration, the highest number outside the United States.

The global generic market is estimated to be about US$ 36 billion by 2005. With an estimated 60 major pharmaceutical products with a sale in excess of $50 billion to go off-patent by 2009, the prospects of the Indian generic markets looks bright (especially with U.S importing over 70% of its generic drugs). The exports from India are fairly spread across regulated and unregulated markets. Despite the fact that there are regulatory barriers in the nature of registration and detailed inspection procedures by the drug authorities, the regulated markets account for about 38.5 percent of the total exports and almost 50 percent of the bulk drug exports. India could be a key player under such circumstances with companies such as Sun pharmaceuticals, Wockhardt and Dr.Reddy’s investing heavily in exploring the global generics market.

Table 4: Global Generics: Key Markets

Market Year 1997 2000 2005 01-05

CAGR (%)

U.S. 6.0 12.6 26.0 19.9

Germany 2.4 3.4 4.5 7.4

U.K. 1.2 1.6 2.1 7.2

France 0.4 0.6 2.1 39.2

Italy 0.1 0.1 0.1 3.9

Canada 0.6 0.9 1.2 9.0

Total 10.6 19.1 36.1 17.3

The U.S market is key to the success of Indian pharmaceutical industry. The exporting companies are required to file a drug Master File (DMF)17 with the U.S FDA. The US Food and Drug Control Administration provides for two types of applications: (i) New Drug Application (NDA) for seeking permission to market a new drug and (ii) Abbreviated New Drug Application (ANDA) for seeking to market a generic drug. Statistics indicate that India companies are far ahead of their competitors, particularly China, in the matter of filing DMFs and ANDAs. (see Table 6). However statistics indicate that only a few companies are equipped on their own to pursue DMF and ANDA applications. Only a few Indian companies have both DMF and ANDA in their own names. This list includes Ranbaxy, Dr Reddys, Wockhardt and Lupin. But a large number of Indian companies have DMFs with ANDAs in the names of their first marketing partners. It is also reported that there has been a fairly good competition amongst the Indian companies. Out of the 383 bulk drugs and intermediates for which Indian companies have filed DMFs, there is more than one exporter for 88 bulk drugs. Another lucrative market is the successful filing of para IV ANDA which could help a company to get the 180 day market exclusivity in the US. The success of Dr Reddy’s in obtaining the 180 exclusivity of marketing for fluxetine (Eli Lilly’s Prozac) and that of Ranbaxy for ibuprofen has signified the importance of this high value added segment of this market. However, the Indian companies will have to aggressively compete with US and other foreign generics companies to make para IV ANDAs a sustainable business strategy. 17 A company filing a DMF is required to submit detailed information on: kind of equipment, location of the plant, description of

production facility, impurity profile so on.

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Table 5: DMFs/ANDAs: A Comparison of India and China Year 2000 2001 2002 2003 2004

DMFs TOTAL 329 336 360 430 NA India 39 50 77 119 NA China 18 13 26 16 NA

ANDA’s TOTAL 283 300 306 350 500 India 15 36 49 73 161 Source: Crisil and Chemexcil The absence of intellectual property protection helped the Indian pharmaceutical industry to develop cost effective processes to manufacture bulk drugs and formulations at a competitive price. The Indian pharmaceutical companies have been able to break the entry barriers in most of the regulated and unregulated export markets. The past export growth has been impressive. But in fairness only a handful of Indian companies have been able to target the generic market in other countries on drugs whose patents are about to expire. But a large number of Indian drug manufacturers could focus on matured off-patented drugs. However the competition in this segment will be keen and the price realization low. To succeed in such a market, it is important to have specialized plants with sufficiently large capacity to reach economies of scale. In such a scenario the unregulated markets offer significant potential as well as challenges. Cost Advantage The Indian pharma industry is also one of the most cost effective manufacturers of generic drugs and will continue to thrive notwithstanding the product patent regime. Factors including the strong vertical integration within the industry, excellent chemical industry infrastructure, abundant scientific talent, and low cost structure helped the industry to remain price competitive. There are three important cost heads for a global pharmaceutical company: Cost of Sales, Selling, General and Administration Expenses; and R&D expenses. The ratio of cost of sales to revenue for select global pharmaceutical companies averages around 25% in 2003 with some companies such as Merck, Pifzer and GlaxoSmithKline having a ratio lower than the average. A low cost of sales to revenue ratio points to efficiency in the sourcing, procurement and manufacturing processes. Since the late 1990’s many global pharmaceutical companies have either relocated their manufacturing operations to low cost bases or resorted to out sourcing of manufacturing operations. However some players have also witnessed an increase in the ratio of cost to sales revenues partly on account of higher costs of complying standards such as the current good manufacturing practices in recent years. The selling, general and administrative overheads of pharmaceutical companies have been on the rise over the past few years, with increasing emphasis on advertising, higher new product launch expenses and higher expenditure on enhancing brand equity. The launch expenses are further increased on account of increased direct marketing by the major companies. A lot of expenditure is also undertaken due to increased focus on branding. While R&D expenses have increased in absolute terms, as percentage of revenue, it has been around 14% in the past few years. Faced with increasing R&D costs per molecule and declining R&D productivity, global majors are increasingly in –licensing molecules for mid-size or specialist companies. The cost structure of the generic pharmaceutical industry however is markedly different from that of a R&D based company and cost of sales is the largest expenditure with spending of R&D being very low. (7 % of revenue).

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Figure – 3: Cost Structure of Global R&D based pharmaceutical company and Generic pharmaceutical company

Global R&D based pharmaceutical company Global Generic pharmaceutical company

2003

Operating margin27%

R&D Expenses14%

Selling General & Administration cost

34%

Cost of Sales25%

2003

Operating margin25%

R&D Expenses7%

Selling General & Administration cost

17%

Cost of Sales49%

Other expenses2%

The cost structure of the Indian Pharmaceutical Industry is considerably different from that of the global industry as the following figure illustrates.

Figure – 4: Pharmaceutical Industry in India: Cost Structure (2004) (As percentage of operating income)

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,

Material Cost, 44

Employee Cost, 8.3

Other manufacturing Expenses, 5.5

General and Administration expenses, 8.6

Net Profit Margin, 15.1

Tax, 3.6

Profit before tax, 18.7

on-Operating extra ordinary iteams, 1.6

Depreciation, 2.8

Intrest cost, 1.3

Operating Profit Margin, 21.2Other expenses, 2.9

Marketing and selling expenses, 9.5,

In India material costs form the largest bulk of expenditure by pharmaceutical companies, with marketing and selling expenses comprising the second largest share. However in the past eight years material costs have has show a decline from 52.2% of operating income in 1997 to 44% in 2004.

20

Figure – 5: Pharmaceutical Industry in India: Trend in Material Cost (FY1997-2004) (as percentage of operating income)

0

10

20

30

40

50

60

70

FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004

Bulk Drug PlayersIndian FormulatorsIndian CompaniesMulti-NationalsICRA Sample

The marketing and selling costs comprise the second largest cost head for pharmaceutical companies in India. Between 1997 and 2004, the selling expenses of Indian companies, especially formulators and integrated players increased. Reasons for this include: increasing emphasis on sales of formulations; rapid introduction of new products and rising expenses due to increase in exports by Indian companies.

Figure – 6: Pharmaceutical Industry in India: Trend in Marketing and Selling Expenses (FY1997-2004) (as percentage of operating income)

0

2

4

6

8

10

12

FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004

Bulk Drug PlayersIndian FormulatorsIndian CompaniesMulti-NationalsICRA Sample

21

Employee costs account for a large part of the Indian pharmaceutical industry’s expenditure. The industry’s employee cost increased quite a bit during the 1990’s mainly because of the higher employment of qualified research personnel for R&D efforts, and of direct marketing personnel. In addition as companies enter new markets, certain personnel have to be employed abroad too, usually bin marketing and manufacturing capacities. This leads to an escalation of costs.

Figure – 7: Pharmaceutical Industry in India: Trend in Employee Cost (FY1997-2004) (as percentage of operating income)

0

2

4

6

8

10

12

14

FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004

Bulk Drug PlayersIndian FormulatorsIndian CompaniesMulti-NationalsICRA Sample

Relative cost comparison of Indian industry with global Pharma Globally the share of material cost (as percentage of operating income) is lower and the share of selling costs higher than the Indian industry average. In absolute terms material costs may be higher in the international markets, however higher sales realizations reduce the proportionate value. Selling costs in the international markets are considerably higher than in the Indian market because of high product launch expenses and expenses incurred at various stages of the products life cycle. Moreover R&D cost constitutes a higher proportion of total costs for global companies. With the introduction of the patents regime in January 2005, the Indian Pharmaceutical industry will face rising R&D expenditure. However given the comparative advantage in terms of employee cost, material cost and lower marketing expenditure, Indian industry still retains a competitive edge.

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4

PRODUCT PATENTS: NEW LEGISLATIVE CHANGES AND VIEWS OF THE STAKEHOLDERS

What is product patent? Pictorial and scientific explanation with illustrations In pharmaceutical industry, research and development mostly centers on the invention of new drugs, pro-drugs, and drug delivery systems. In scientific terms, a new drug is a new chemical molecule, almost always an organic molecule. A question arises as to what is a new molecule? In the chemical sense, a molecule which is even slightly different from an existing molecule is a new molecule. For instance, chemically A and B are different molecules, though they differ slightly in their structure. If a patent has been obtained for compound A, it does not cover compound B.

Figure – 8: Molecules

OH O H R1R2

R3

A B C To account for such possibilities, generally a very large number of compounds are covered in patent using Markush structures. The term Markush denotes a substance, substituent, agent, reactant, or other material that is described as being from the group consisting of certain specified materials. The specified materials can be an element, a chemical structure, a functional group, a class of chemical structure (such as alkyl or aryl), and a class of functional group (e.g., esters). The value of Markush structures in patents is that a number of different chemical compounds (sometimes millions of compounds) can be described in a single patent claim. Markush structures are allowed in patents to protect an invention of related compounds without requiring the inventor to prepare and test each and every possible compound. For instance, C is a Markush structure and R1, R2, and R3 are variables. These variables can be assigned a large number of values i.e., they may represent a number of different group attached at the respective points of the parent structure. In this way, patent rights are obtained in respect of many related compounds. Some of these compounds may even be prophetic compounds only. In a product-patent regime, a patentee has the absolute right about production of all compounds covered under the patent. Therefore, no other researcher has any incentive to improve upon the process of its manufacture or to find new use of these compounds. This may act as a disincentive to discover more economical process for the manufacture of the product or new therapeutic uses.

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Patent (Amendment) Act, 2005

The latest amendment to the 1970 Patent Act has been effected through a Patent (Amendment) Act 2005. With this amended legislation, the single most important change that has come into effect is that, “Product” patents can now be granted to food, drugs and pharmaceuticals that were earlier in the domain of only “Process” patents.

Tabular depiction of the sequence of important amendments to the Patent Act 1970

The Patents (Amendment) Act, 1999 • Establishment of a mail box system to file patents • Provision for exclusive marketing rights for 5 years

The Patents (Amendment) Act 2002

• Patent protection for 20 years from date of application • Publication of application after 18 months whether or not application is accepted • Appellate Board established • Person other than patent holder to obtain marketing approval from regulatory

authorities within 3 years before expiration of terms of patent • Provisions for protection of bio-diversities and of traditional knowledge • Procedural simplification – international application under Patents Cooperation

Treaty and also an application before Controller in India can be filed simultaneously

• Penalty for unauthorized claim of patent rights increased

The Patent (Amendment) Act, 2005

• Product patent protection extended to all fields of technology (i.e., drugs, food and chemicals)

• Deletion of the provisions relating to Exclusive Marketing Rights (EMRs), and introduction of a transitional provision for safeguarding EMRs already granted

• Provision for enabling grant of compulsory license for export of medicines to countries which have insufficient or no manufacturing capacity

• Modification to opposition procedures to streamline the system by having both Pre-grant and Post-grant opposition in the Patent Office

• Patent rights in respect of the mailbox to be available only from the date of grant of patent, and not retrospectively from the date of publication

• Provisions relating to patenting of software related inventions when they have technical application to industry or are in combination with hardware

• Reducing the processing time for patent applications • Enhanced Penalties • Resident in India cannot apply abroad for patents without permit of Controller

A Columbia University study conducted in 2003 estimated the effects of patent protection for drugs in developing countries using India as a case study. This was the first such paper based on empirical data on prices and market shares. The authors selected a specific class of antibiotics, fluroquinolones, to figure out the impact on consumers and domestic companies if just patented

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antibiotics remained in the market. Fluroquinolones account for over 20 percent of anti-biotics market in India (Antibiotics make up only 17 percent of the total retail drug sales). The author’s conclusion was that in the absence of compulsory licenses or any price control mechanisms, the total annual welfare losses to the Indian economy would be greater than the sales of all systemic (oral or injected) antibiotics in 2000. The study also found that while the prices of patented drugs would rise post 2005, the prices of cheaper off- patent drugs in the same class would increase when consumers opt for them. The Columbia study, amongst others, concluded that the availability of drugs would become an issue in a patent regime. Normally, consumers who cannot access a domestic brand of a drug substitute it with another brand. Therefore, if a domestic brand of a kind of fluroquinalone, say, norfloxacin, is not available they buy a domestic brand of, say ciprofloxacin, instead of the foreign brand of norfloxacin. This was on the premise that domestic drugs are more widely available than foreign ones and there are more Indian companies than foreign firms. Once a product patent regime is established, it was expected that there will no longer be any copies in the market. Innovators, in such a scenario would have to make up for this by widening the distribution reach of their drugs. This section will examine whether: (a) Product patent will lead to rise in pharmaceutical prices?; (b) Will the rise in prices affect accessibility? Since the impact of TRIPS cannot be predicted with certainty, it is essential to analyze different views and opinions that have been brought forward by Experts, Pharmaceutical firms, opponents of patents and NGOs (Non Government Organizations) before explaining the results of the simulation carried out in this study.

Views of Experts

Manufacturers of prescription drugs can be divided into ‘innovator’ and ‘generic’ drugs. Producers of innovator drugs invest heavily in R&D, hoping to recoup that investment in profits from future sales while a drug is under patent and they have a monopoly on its manufacture. Producers of generic drugs do not need to duplicate the research effort of the innovator firm or invest nearly as much in getting an approval for their drug. Since generic producers have neither patents nor a costly approval process, they quickly face competition from other companies producing identical drugs. That intense competition forces generic manufacturer to charge a much lower price than the innovator firm, which, even after its patent expiry, typically enjoys a market advantage based on its reputation for producing a high-quality product.

Several studies, using data on the US market show a significant and rapid price decrease with generic entry upon patent expiry. Watal18 has highlighted that the average generic/branded price ratio in the US was 0.59 after patent expiry for one generic manufacturer and 0.17 for twenty such manufacturers. Watal’s study demonstrates that because of the large number of producers with expertise in process capabilities, new products did not have the ‘first mover advantage’ or enjoyed it for a limited period of time. Therefore, price reduces after the entry of competition. It has been feared that this advantage would be lost with the adoption of product patents.19 Hudson20 has analyzed drug pricing dynamics and patent expiration for the US, UK, Germany, France, and Japan. A common finding of his papers has been that larger the numbers of competitors, the lower drug prices are, and that brand name products might even increase in price 18 Watal ,J. Access to essential medicines in developing countries: Does the WTO TRIPS Agreement HinderIt, (2000) 19 Keayla 1994, Sengupta 1998, Agrawal and Saibaba 2001 20 Hudson, J., Generic Tie-up in the Pharmaceutical Market Following Patent Expiry: A Multi-country Study, International

Review of Law and Economics, 20, pp. 205-221(2000)

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(in order to protect total revenues) after the introduction of generics. This is what Scherer (1993) named the “generic paradox.” In the US, Frank and Salkever 21 report a rapid reduction in the price of drugs after the expiration of the patent. Though more competition among generic drug producers results in substantial price reductions for those drugs, yet increased competition from generics does not result in aggressive response in price behavior by established brand name products. Danson and Chao 22 on the contrary observe that generic competition has a significant negative effect on the price of branded products in the US and other countries with relatively free pricing like UK, Germany and Canada, whereas for countries with strict price regulation like France, Italy and Japan the number of generic competitors has either no effect or a positive effect on prices of branded products. In the cases of Argentina and India, Challu 23, Fink 24 and Watal 25 obtain impacts of patents on average prices of a different order. Impacts of about 200% are obtained, using the assumptions that yield the highest impact; and of 26%26, or as low as 12%27, with the assumptions that yield the lowest impact. Other studies, like those of Maskus and Eby-Konan 28, and Subramanian 29 using less detailed data, obtain maximum price increases of up to 67% due to the introduction of pharmaceutical product patent rights.). Lanjouw 30 discusses more generally the socio-economic effects of the introduction of patents in India, and Lanjouw and Cockburn 31 study empirically the positive impact of patent protection on research on drugs that address the needs of patients in poor countries (a point raised formally by Diwan and Rodrik, 32)

Empirical Facts brought forward by Pharmaceutical MNCs Estimates of the total costs to Companies for the discovery, development and launch of a new product ranges from $800 million to $1billion and even after the drug enters the market, only 3 out of 10 pay back even the direct costs incurred for their discovery and development. Further, even the successful ones face the risk of rapid obsolescence, due to better and later generation drugs of the same or different class being discovered and reaching the market. Equally disheartening to the innovator Company is the reality that, in spite of extensive clinical trials in many Countries, after the drug reaches the market, unexpected and unpredictable adverse reactions, in rare cases, with fatal outcomes occurs.

Patents increase the rewards for innovation by giving companies a temporary monopoly over marketing their discoveries. Although that monopoly status rewards the company with high profits, consumers pay a higher price and get less output than would be the case under competition. However Pharmaceutical MNCs argue that a temporary monopoly status is essential in order to provide appropriate incentives to invent new products that will indeed benefit

21 Frank and Salkever. Economic Issues in Vaccine Purchase Arrangements, NBER Working Paper No. W5248 (1995) 22 Danson and Chao, Danzon, M. P. and Chao, W.`Does Regulation Drive Out Competition in Pharmaceutical Markets?, The

Journal of Law and Economics, 43(2), (2000) 23 Challu,"Repercussions del patentamiento monopolico en Italia", Revista del Derecho Industrial, Vol, 13, No. 39 (1991) 24 Fink, C.How Stronger Patent Protection in India might affect the Behavior of Transnational Pharmaceutical Industries, 2000.

Policy Research Working Paper N°2352, The World Bank Development Research Group, (2000) 25 Watal ,J. Access to essential medicines in developing countries: Does the WTO TRIPS Agreement HinderIt, (2000) 26 Watal ,J. Access to essential medicines in developing countries: Does the WTO TRIPS Agreement HinderIt, (2000) 27 Frank and Salkever. Economic Issues in Vaccine Purchase Arrangements, NBER Working Paper No. W5248 (1995) 28 Maskus,K.E and Eby-Konan, 1994, "Trade-Related Intellectual Property Rights: Issues and Exploratory Results", in A.V.

Deardorff and R.M. Stern (eds), "Analytical and Negotiating Issues in the Global Trading System" 29 Subramaniam, A, (1995a), ‘Putting some numbers on the TRIPs pharmaceutical debate’ International Journal of Technology

Management Vol 10, No 2/3 pp252-26 30 Lanjouw, J. O. Patent Protection in the Shadow of Infringement: Simulation Estimations of Patent Value, The Review of

Economic Studies. Vol. 65, pp. 671-710. (1998) 31 Lanjouw, J. O. and Cockburn,I. New Pills for Poor People?: Empirical Evidence After GATT, World Development. Vol. 29, no.

2, pp. 265-89. (2001) 32 Diwan,I and Rodrik,D.Patents, appropriate technology, and North-South trade, Journal of International Economics, Elsevier,

vol. 30(1), pages 27-47 (1991)

26

consumers. Without patents, many new drugs could be easily and quickly duplicated by other manufacturers, preventing them from obtaining enough reward to justify their investment.

Basant 33 has shown that although Pakistan has process patent regime, some of the new drugs that were introduced in Pakistan by the MNCs were not introduced in India. This is because MNCs competition from the counterfeit products in India, whereas in Pakistan MNCs are stronger than the domestic firms. According to the U.S industry, it loses nearly $1.4 billion annually from the sale of copied drugs in just four third world countries including India — which has a $0.92 billion share of the copying. Moreover, PhRMA (2002) claims that the patenting issue is not important for public health as almost all the drugs in the WHO list of essential drugs are off-patent. It also claims that the introduction of product patents will not result in an increase in prices because product patents will be applicable to only a small percentage of the market. Generic alternatives will continue to be available even after 2005 for all the existing drugs including almost all WHO essential drugs.

According to some industry watchers, in terms of the US Orange book there are currently only six drug molecules - Thalidomide, Arsenic Trioxide, Valdecoxib, Formoterol Fumarate, Tadalafil, Rosuvastatin Calcium - that may be affected by product patents in India. These drugs were patented after 1995 and have generic versions in the Indian market. Even then, they will impact generic versions only if they apply for and they get patent protection in India. There may also be other formulations which might be patented post-2005, but this will not dislodge any presentation of the basic molecule if it is patented prior to 1995. “In the Indian medicines market, where over 40,000 products already exist, the impact will not be significant even if multiple copies of the six molecules were to be withdrawn,” says S. Ramkrishna of Pfizer. He asserts that there are about 70 brands containing the six drug molecules, of which Valdecoxib has the maximum number of brands. What also needs to be understood is the fact that while the date is 2005, the effective date would be 2007-08 since it takes time for a product to get patented and come out in the market34.

Moreover, most firms claim that it takes anywhere between 10-15 years for a new drug to be granted registration by Drug Authorities of any country after which marketing permission is given. This registration period comes out of the overall patent life of medicines, which is now universally 20 years from the date of application. A discoverer thus enjoys at best only 5-10 years of Exclusive Marketing for recovering the cost of research. The number of new drugs registered worldwide each year is between 25 - 35. Presently, experts roughly estimate the total number of drugs patented since 1995, as around 15-20 per cent of the Indian market35.

Therefore, the following empirical facts emerge from the foregoing discussions:

• Within the transition period (1995-2004) allowed for India, not more than a handful of new drugs will actually qualify for any form of exclusivity.

• Even after India commences granting patents, by the time patented products become a significant proportion of those already available locally; it will be another 5-10 years i.e. 2010-2015.

• It is not correct to believe that MNCs have only one price for a product everywhere in the world and the price charged in India will be exorbitant. Most international manufacturers could base their pricing strategy for countries, like India, on "affordability criteria"36

33 Basant,R. Corporate Response to Economic Reforms, Economic and Political Weekly ,Vol 35,No 10 (2000) 34 Ajay Piramal, Chairman of Nicholas Piramal (http://in.biz.yahoo.com/041205/26/2bbzf.html. 35

http://www.manoramaonline.com/servlet/ContentServer?pagename=manorama/MmArticle/CommonFullStory&c=MmArticle&cid =1090519597381.

36 For instance, ‘Differential Pricing’

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Views of anti-patent activists On the contrary, critics argue whether the high R&D costs borne by TNCs alone can legitimize the introduction of a strong IPR regime. They claim that a large percentage of the current total costs of drug R&D are spent on promotional exercises and has no relation to costs of drug discovery and development. In a study by the Boston School of Public health 37, it is reported that in the US, drug makers employed 39% of their staff in marketing and 22% in R&D and the gap between expenditure in R&D versus marketing has been steadily widening. For example, drug makers employed 48,527 people in R&D in 2000, down from 49,409 in 1995, while employment in marketing increased from 55,348 to 87,810 during the same period. It is also claimed that most, if not all of the promotional costs involved are loaded to R&D costs. Using the Dorfman-Steiner theorem wherein, a profit maximizing firm sets the ratio of promotional activity to sales: (A/S) = e [(P - MC) / P] A = advertising, S = sales volume, (P – MC) / P = price cost margin, and e = advertising elasticity of demand In case of pharmaceuticals, the price-cost margin is high. As a result consumers are responsive to advertising and therefore substantial expenditure is devoted towards advertising. The US spends more on drug advertising than Africa does on drugs (NIHCM). Thus one may conclude that monopoly pricing, motivated primarily by product-patents, is a very expensive way to raise R&D finance. Lately, another concern has been the vast sums that have been spent on ‘lifestyle drugs’.

Anti-patent activists therefore claim that a strong IPR regime is more an attempt by western countries and their pharmaceutical corporations to consolidate the gains they have made in the last several decades. Just when Indian pharmaceutical companies are beginning to acquire strength under the process patent regime, they are being forced to concede the gains to transnational corporations.

Views of NGOs International NGOs such as Oxfam and MSF which have been involved in tackling the health crisis in poor countries believe that TRIPS will further worsen the health situation: product patents under TRIPS will result in an increase in drug prices, which in turn, will adversely affect accessibility. The argument is that a drug protected by product patent would be more expensive compared to a situation where others were also permitted to produce and sell the same drug. Oxfam 38 also argues that the claim made by PhRMA39 is not justified. The fact that a drug has not been included in the list does not mean that it is not essential. One criterion for inclusion in the list is ‘price’, and expensive drugs may not have been included. Moreover with the spread of drug resistance and the new and improved drugs appearing, the number of essential patented drugs will increase.

Oxfam argues that the product-patent regime, incorporated as part of the trade negotiations administered through the WTO , are the product of an intense lobbying exercise led by the world’s largest and most powerful pharmaceutical companies like Merck, Pfizer, Glaxo SmithKline Beecham and Eli Lilly. The financial power of these companies is enormous. Taken

37 Sagar,A & Socolar,D. Drug industry marketing staff soars while research staffing stagnates. Boston University School of Public

Health, December,(2001) 38 Patent Injustice: How World Trade Rules Threaten the Health of Poor People 39 Pharma claims that the patenting issue is not important for public health as almost all the drugs in the WHO list of essential drugs

are off-patent.

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collectively, the largest five drugs companies have a market capitalization greater than the economies of Mexico or India – and twice the GNP of sub-Saharan Africa.

Oxfam reports that industrialized countries account for about 97% of all patents in the world. Most patents provided in developing countries are for foreign companies. In the poorest companies, virtually no patent protection is provided to domestic residents. African citizens filed only 0.02% of the patent applications registered in 1998 by the African Regional Industrial Property Organization (ARIPO). Even in Mexico, only around 1% of patent applications are made by domestic residents. It follows that developing countries will absorb most of the costs associated with stricter patent protection under the WTO.

The problem with the current deal is that it does not address the restrictions placed by the 20-year patent period under TRIPS on the production of affordable generics. Increasingly, in future, the supply of generic versions of newly patented medicines will rely on countries issuing compulsory licenses. Unless this can be done in a routine and flexible way, or unless patent rules are relaxed in developing countries, it will become increasingly hard for generic companies to achieve the necessary markets and economies of scale to produce affordable, quality generic medicines. The loss of generic competition for new patented medicines reduce governments’ bargaining vis-à-vis the big companies and new medicines will remain priced out of reach for many of the world’s poor.

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5

IMPACT OF PRODUCT PATENTS ON DRUG PRICES AND ACCESSIBILITY IN INDIA

With India set to introduce a product patents from next year, both foreign firms and domestic firms have filed applications under the ‘mail-box’ scheme. Data from the commerce and industry ministry revealed that out of 8926 product patent filings received under the 'mail box' scheme, 4,792 related to the pharmaceuticals sector. A large number of these applications are regarding drugs that are locally produced and marketed. The filing has been done under what is called the 'mail box' scheme, wherein the applications will be kept pending till December 31, 2004 and will be eligible for grant of patent only when the product patent regime is notified.

An EMR applicant "shall be granted" EMR if he or she merely meets the following criteria: That patent application has been filed in respect of that product in another member-country of the WTO after January 1, 1995.

• That the other WTO member has granted the patent. • That the other member has approved the marketing of the product • That India has approved the marketing of the product. This therefore makes it amply clear that one should study the dates on which various patent applications got published or were put on sale in any part of the world prior to 1995 to identify the molecules that might still qualify for product patents in India after January 1, 2005. So far, a total of 14 applications have been filed for EMR. The following table provides an illustrative list of drugs on which EMRs have been granted or rejected pending as on the end of November 2004.

Table 6: Status of EMR files in India Name of Drug Name of Company Status of EMR Rosiglitazone GlaxoSmithkline Beechem Rejected Novel Compound GlaxoSmithkline Beechem Rejected Imantnib Mecylate Novartis Granted Nodifloxacin Woockhardt Granted Aablaquine Nicholas Piramal Pending Saquinavir Hoechst Rousse Rejected Giftinib Astrazeneca Pending Ximelagatran Astrazeneca Pending Tadalafil Elli Lilly Pending Benzoquinolizines Woockhardt Pending Schering Plough Biotech Pending Gatifloxacin BMS Pending Zoledronic Acid Novartis Pending Ciprofloxacin Controlled Release Ranbaxy Pending Tetracycline Deivatives Eli Lilly Pending

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Economic Impact In order to predict the impact of TRIPS on drug prices (in India) with a greater precision, we decided to carry out an Econometric study on the entire issue. We feel that an Econometric analysis will impart more weight on our empirical findings, and would infact help us arrive at a conclusion which is ‘quantitative’ as well as ‘qualitative’. Of the various models and econometric techniques given by a number of economists, we decided to follow the approach that has been followed by Chaudhuri, Goldberg and Jia (2003)40.

A) Conceptual Preliminaries Chaudhuri, Goldberg and Jia, by choosing a selective group of drug molecules, have carried out counterfactual simulations of what prices, profits and consumer welfare would have been in India, had the molecules (that they have chosen for their study) been under patent in India as they were in the US at that time41. This is further subject to the assumption that no additional policy restrictions are placed by the Indian government in the enjoyment of patents by the patent owners. The idea here is that had U.S. patents for, say, Ciprofloxacin, been recognized in India; all domestic products containing ciprofloxacin would have to be removed from the market. Their results show that the simultaneous withdrawal of all therapeutic substitutes from the market magnifies the price rise for the remaining patented drugs, because of the positive and highly significant cross-price elasticity between domestic products. In contrast, the welfare losses associated with the withdrawal of a single domestic product or a subset of domestic products are more modest. This is because if one of them is withdrawn, consumers switch to others, and this limits any welfare losses. For foreign (or patented) products that would remain in the market, they estimate price increases between 200% and 750%. Although their work is highly commendable and deserves adequate attention, we feel that their results cannot be regarded as entirely predictable in the Indian context42. We feel that these issues are extremely critical in case of India (and therefore deserve due importance), and may contribute towards a more realistic analysis of the behavior of drug prices, especially on the introduction of product patents in India with effect from Jan 1, 2005. A preliminary assessment43 of the Pharmaceutical market helped us to find out a list of drug molecules that have a probability of being granted a ‘product patent’. Out of these drug molecules, we have sampled those drug molecules for which appropriate data was available. The data that has been collected is from the retail pharmaceutical audits of ORG-MARG44 – the only research firm in India that carries out an extensive and comprehensive survey of the Pharmaceutical Sector. The survey covers about 260 of the largest domestic and foreign firms in India, representing roughly 90% of domestic retail sales of pharmaceuticals; along with a representative panel of thousands of retail chemists in over 400 cities and towns. We have taken a

40 The Effects of Extending Intellectual Property Rights Protection to Developing Countries: A Case Study of the Indian

Pharmaceutical Market, 2003 41 Within the family of Anti-bacterial drugs, they have considered the ‘Quinolones and Fluoroquinolones’ sub-segment 42 The drug molecules that they have chosen for their study were patented before Jan 1, 1995 and will not come under the purview

of product-patents in India by any chance. Therefore a more realistic analysis calls for considering those drugs that are more likely to come under the purview of product-patents post Jan 1, 2005.

43 We contacted a number of officials from the Ministry of Chemicals and Fertilizers (Government of India), National Pharmaceutical Pricing Authority of India (NPPA), United Nations Conference on Trade and Development (UNCTAD), Domestic Pharmaceutical Firms, doctors from All-India Institute of Medical Sciences (AIIMS) and Joint United Nations Programme on HIV/AIDS (UNAIDS)

44 The data provided by ORG-MARG is used by the Government of India in formulating pricing policy and other decisions. The data is highly confidential and can only be provided under special requests from ORG-MARG

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quarterly data on Market Share, Prices and Therapeutic Substitutes for a number of drug molecules for the period from Jan, 1999 till July, 2004.45 During this period, several drug molecules are still patented outside India, but products containing these molecules are being produced and distributed in India by both a number of domestic firms and a number of local subsidiaries of foreign multinationals.

Patent enforcement in the Indian pharmaceutical market will have the effect of eliminating domestic products whose active pharmaceutical ingredients are protected by patents. Thus, assessing the effects of patent enforcement is tantamount to assessing the effects of withdrawing domestic products from the market.46

In order to assess the effects of product withdrawal, we need to derive for each product withdrawn, its virtual price, which is the notional price that would set this product’s demand equal to zero. Estimation of this virtual price requires estimation of the demand function. Hence, the first step in the analysis is ‘demand estimation’. The demand parameters allow us to estimate the price elasticity of demand and substitution patterns across products in the drugs market, which are needed in the computation of virtual prices. The entire Quinolones category comprises of drug-molecules for which there are already many domestic producers in the market. Hence, in order to capture a wider picture of the market, one should also consider those drug molecules where foreign market share carries a significant proportion of the total market. They have covered a detailed product level data on monthly pharmaceutical prices and sales over a two year period from January, 1999 – December, 2000. However, the data from ORG-MARG shows that the market share and drug prices are (more or less) stable over the course of time and therefore the estimation can become more robust if the period of estimation can be extended. The own-price effect47 will help us in determining whether the Indian pharmaceutical market is price-sensitive, whereas the cross-price effect48 will help us in finding out the degree of substitution across drug molecules.

Even where no generic substitutes exist, the monopoly power of patented drugs is, in most instances, constrained by competition from other medicines that treat the same disease condition49.

Lu and Comanor 50 found that of the 148 new drugs introduced into the US market

between 1978 and 1987; only 13 had no close substitute in their therapeutic class. This, they discovered, affected pricing strategies. Drugs classified by the Federal Drug Administration (FDA) in category ‘A’, providing significant therapeutic gain, were launched at prices averaging 3.1 times the average price of existing substitute products, and those offering moderate gains, or ‘B’ drugs at 2.2 times, and those providing little or no therapeutic gain, the ‘C’ drugs, at about the same level. However, eight years after product launch, the inflation-adjusted prices of ‘A’ drugs averaged only 7 percent higher than their launch prices, ‘B’ drugs 32 percent higher, and ‘C’ drugs 62 percent higher than their price at launch. Therefore, how much more expensive a new patented medicine is depends not only upon how much of an improvement it offers over existing

45 See Appendix 46 Sounding this note of caution, the Indian Pharmaceutical Alliance (IPA) Chairman, Mr. Habil Khorakiwala, said: "This could

lead to a chaotic situation as several companies would be forced to withdraw their brands from the market and the innovator entity will be able to jack up prices, hurting patients."

47 The own-price effect is the percentage change in the demand of the product due to a change in its price 48 The own-price effect is the percentage change in the demand of product i due to a change in the price of product j 49 Ellison et al (1997) estimated demand elasticities for generic and therapeutic substitutes within the ‘Cephalosporins’ segment.

Their basic conclusion is that there is relatively high demand elasticity between generic substitutes and smaller, but nonetheless significant, demand elasticity between therapeutic substitutes in this group of drugs.

50 Lu, Z.J and Comanor, W.S. Strategic Pricing of New Pharmaceuticals, Review of Economics and Statistics, 80(1), 108-118.(1998)

32

medicines but on the marketing strategies pursued and patterns of substitute product entry over time. While with perfect competition, estimation of the demand function for a particular product is sufficient for assessing the effects of the product’s elimination from the market; imperfect competition requires modeling of the entire market, as removal of one product will affect the prices of other products, especially those that are close competitors. To evaluate the effects of a product’s withdrawal on other products’ prices, it is necessary to model the ‘supply side’, i.e. firms’ costs and strategic behavior. After finding out the demand and cost parameters, we derive: • virtual prices of products that are being withdrawn; and • patented prices of the products remaining in the market

B) Demand Estimation Instead of using Physical Sales Shares of firms in the demand equation, we use Revenue Shares (or Market Share). This is because our analysis includes various drug molecules that represent close therapeutic substitutes and they cannot be directly compared in terms of physical volumes51. The market share of a particular product i is computed as: Wi ≡ pi qi / Σ j pj qj For each product group i, we allow one γij parameter for all product groups j that have different molecules from product groups i and are produced by foreign firms, and one γij for product groups j with different molecules produced by domestic firms. To better illustrate the nature of the restrictions, let d (i, j) be an indicator of the degree of similarity between product group i and product group j, along the dimensions we are able to observe (molecule – M, domestic/foreign status – DF). For any two product groups, i and j, d (i, j) can take on one of the following three values: d (i, j) = (1,0) if Mi = Mj, DFi ≠ DFj (0,1) if Mi ≠ Mj, DFi = DFj (0,0) if Mi ≠ Mj, DFi ≠ DFj The final form of the equation we estimate becomes52: Wi = αi + γii ln pi + Σ j € D i

10 [γi,10 ln pj] + Σ j € D i 01[γi,01 ln pj]

+ Σ j €D i

00 [γi,00 ln pj] + βi ln(Xt / Pt) where: Eij |Xt = ∂ ln qi / ∂ ln pj = ∂ lnWi / ∂ ln pj and Eii |Xt = ∂ ln qi / ∂ ln pi = ∂ lnWi / ∂ ln pi Note that: • Wi captures the market share of product i • αi represents the constant term

51 For instance, 100 milligrams of ciprofloxacin is not directly comparable to 100 milligrams of norfloxacin 52 We ignore competition among firms with same domestic/ foreign status producing the same molecule. This is because the effect

of patent enforcement is to wipe out all domestic competition at once, while granting foreign firms monopoly power; hence, competition among firms for patented molecules becomes irrelevant.

33

• the parameter γii captures a product group’s own price effect • the parameter γi,10 captures the cross-price effects across product groups containing

products with the same molecule but produced by firms of different nationality • the parameter γi,01 captures the cross-price effects of product groups containing products

with different molecules but produced by firms with the same nationality • the parameter γi,00 captures the cross-price effects of product groups containing products

with different molecules produced by firms of different nationality • the parameter βi captures the revenue-share expenditure elasticities • the parameter Xt is the average share of therapeutic sub segment within the total segment • the parameter Pt captures the weighted average price of the therapeutic sub-segment • the parameter Eij captures the cross-price elasticity of demand • the parameter Eii captures the own-price elasticity of demand

In estimating the parameters, we first ‘regress’ prices on all instrumental variables, and then plug the predicted values for prices in the constrained ordinary-least-square (OLS) regression. In deriving prices of drug molecules, we have taken an ‘average’ price charged by different firms of domestic/foreign status. In order to take care of econometric endogeneity of prices, we have used a weighted average of foreign prices53. However, in case of domestic firms, we have used a ‘simple average’54.

C) Supply Side Counterfactual simulations concerning the effects of domestic product withdrawal require knowledge of the marginal costs of pharmaceutical firms operating in the Indian market. We assume constant marginal costs MCi, and model the industry as an oligopoly engaging in Bertrand competition with differentiated products. The usual procedure is then to assume that firms myopically maximize profits each period, and derive the firms’ first order conditions under the above assumptions about market structure and firm behavior. Using the first order conditions of profit maximization: Pi = MCi * (1 + 1/ Eii (pi, pj) )-1

where Pi denotes the average price and cost of the unconstrained product respectively, and Eii (pi, pj) the own-price elasticity of demand for product i, evaluated at the sample mean of the product’s own price – pi, and the sample means of all other products’ prices – pj, with i ≠ j

D) Computation of virtual prices and new equilibrium prices The first step in the counterfactual analysis is to derive the new equilibrium prices under patent enforcement55. In this context there are two sets of prices that are relevant. The first set consists of the virtual prices of those (domestic) products that will not be available once TRIPS is put in effect. To calculate these virtual prices we set the revenue shares (or alternatively the quantities) of the relevant products equal to zero. The second set of prices consists of the prices of those products that remain in the market. In deriving these prices we assume that firms re-optimize in response to the policy change, and set new prices, taking the prices of all other firms as given56. Of course, at the equilibrium all prices change in response to the fact that some domestic products are no longer present. The new equilibrium prices for products that remain in the market are thus

53 By taking ‘Market Share’ of foreign firms as weights 54 This is because there are many domestic firms producing the same drug molecule. (This is in contrast to foreign firms where

only one or two capture the entire market share of drug molecules) 55 However, these prices will only be observable once product patent is introduced 56 This is consistent with the assumption of Bertrand competition

34

computed by utilizing the first order conditions of profit maximizing firms, into which the virtual prices of the eliminated products are substituted. Hence, to compute the new equilibrium prices we solve an equation system of the following form: For products i that are withdrawn from the market: 0 = αi + γii ln pV

i + Σ j € Di10 [γi,10 ln p’j] + Σ j € Di

01 [γi,01 ln p’j] + Σ j € Di

00 [γi,00 ln p’j] + βi ln(X’t / P’t) • For products k that remain in the market: p’k = MCk ∗ (1 +1 / Ekk(p’k, p’j, pV

i ))−1 In the above equations pV

i denotes the virtual price of the product that is removed from the market, while p’j denotes the updated prices of all other products. Note that when solving for the virtual prices we account for the fact that both the price index for the entire therapeutic sub-segment Pt, and the expenditure allocated to this sub-segment Xt, need to be updated to reflect the fact that as a result of the price changes there may be substitution away from this sub-segment. In the above equation, MCk refers to the average (over the sample period) marginal cost for product k that we have obtained from the previous estimation stage (i.e. while modelling the supply side of the market). The term Ekk (p’k, p’j, pV

i ) refers to the unconditional own price-elasticity for product k, which is a function of the eliminated products’ virtual prices and the remaining products’ new equilibrium prices.

E) Results Using a product-level data set, we estimate own-price and cross-price elasticities as well as new equilibrium prices for the drug molecules belonging to the following segments of the Indian pharmaceutical market: A) Macrolides (sub-segment of the antibiotic segment): The therapeutic substitutes within

this segment are:

1. Azithromycin 2. Roxithromycin 3. Erithromycin 4. Clarithromycin

B) Antiinflammation: Therapeutic substitutes are:

1. Rofedocixicib 2. Ibuprofen 3. Pirodixicide 4. Nimesulide

C) Antacid: Therapeutic substitutes are:

1. Ranitidine 2. Omeprazole 3. Lansprazole

The drug molecules - Azithromycin (within the Macrolides sub-segment), Rofecoxicib (within the Antiinflammation segment) and Ranitidine (within the Antacid segment) are likely to be

35

granted patents in the post product-patent scenario. This implies that domestic versions of these drug molecules will have to be withdrawn from the market, thereby giving foreign firms a pure monopoly status.

1. Structure of Demand Following are the demand equations57 estimated for the three drug molecules: A) LAZIDQ = 12.2403 - 0.91129 LAZIDP - 0.24081 LAZIFP – 2.167 LROXDP -0.95114LROXFP (3.07) (-1.72) (-.889) (-2.60) (-1.97) +1.1687 LERIDP – 1.0861 LERIFP + 0.77814 LCLADP – 0.033629LCLAFP (1.24) (-3.14) (1.79) (-.054) 0.090240 LMACROL (-.306) 2R = .987 F ( 9, 13) = 117.74 B) LROFDQ = 10.4734 – 3.5436 LROFDP + 0.714 LROFRP – 0.34967 LIBUDP + 3.4727 LIBUFP (.992) (-2.87) (.002) (-.854) (2.29) + 0.30948 LPIRDP – 1.3020 LPIRFP + 0.96221 LNIMDP-0.90236LNIMFP – (.611) (-.772) (1.13) (-3.70) – 0.26782 LANTINF (-.251) 2R = .951 F ( 9, 5) = 10.78 C) LRANDQ = -7.4590 + 1.9211 LRANDP – 0.66027 LRANFP + 1.1318 LOMEDP

(-3.27) (4.45) (-2.74) (1.70) + 1.0911 LOMEFP + 0.30873 LANT

(1.60) (.741) 2R = .863 F ( 5, 11) = 13.88

L Logarithm to the base ‘e’ AZIDQ Azithromycin domestic quantity AZIDP Azithromycin domestic price AZIFP Azithromycin foreign price ROXDP Roxithromycin domestic price ROXFP Roxithromycin foreign price ERIDP Erithromycin domestic price ERIFP Erithromycin foreign price CLADP Clarithromycin domestic price CLAFP Clarithromycin foreign price MACROL Market Share of Macrolides segment/ Average price of

Macrolides ROFDQ Rofecoxicib domestic quantity ROFDP Rofecoxicib domestic price ROFFP Rofecoxicib foreign price IBUDP Ibuprofen domestic price IBUFP Ibuprofen foreign price PIRDP Pirodixicib domestic price PIRFP Pirodixicib foreign price

57 Results of these demand equations, along with market share of drug molecules are presented in the Appendix

36

NIMDP Nimesulide domestic price NIMFP Nimesulide foreign price ANTINF Market share of Antiinflamation / Average price of

Antiinflamation segment RANDQ Ranitidine domestic quantity RANDP Ranitidine domestic price RANFP Ranitidine foreign price OMEDP Omeprazole domestic price OMEFP Omeprazole foreign price LANT Market share of Antacid / Average price of Antacid segment

The coefficients of independent variables represent own-price and cross-price elasticity of demand. The own-price elasticities are negative and significant58 for Azithromycin and Rofecoxicib, which implies that these drug molecules are responsive to price changes. This may be because in case of India, health insurance coverage is much rarer (as in most developing economies) and bulk of households’ medical expenditure is met out of pocket. The one exception is Ranitidine, for which we estimate positive and significant own-price elasticity, but an inverse relationship with respect to foreign version of Ranitidine. We feel that this may be because the foreign share of Ranitidine carries a significant share in the overall market (unlike other drug molecules, where foreign share is far lower than the domestic versions). As a consequence, consumers may be more responsive to the foreign version of Ranitidine, and hence an inverse relationship. The significant cross-price elasticity in case of some drug molecules clearly represents the fact that domestic and foreign product groups containing different molecules are closer substitutes of each other. The fact that domestic products appear to be close substitutes for other domestic and foreign products that contain different molecules truly represents an ‘empirical’ finding59. This is because the same drug molecule can be used to cure different medical diseases and therefore different drug molecules within the same therapeutic segment are likely to be substitutes of each other. A higher value of R2 (Coefficient of Determination) in all regression results imply that most of the variation in the dependent variable is explained by the independent variables. Moreover, the significant value of the F-statistic implies that all the independent (or explanatory) variables are jointly significant in explaining the dependent variables – LAZIDQ, LROFDQ and LRANDQ. Not only this, the regression results pass all the diagnostic tests – Serial Correlation, Functional Form, Normality and Heteroscedasticity – thereby making our results ‘robust’ or ‘highly predictable’ in case of India.

2. New Equilibrium/Updated Prices: In our final analysis, we consider the impact on all drug prices when the domestic version of the drug (that is likely to be granted a product-patent) will be withdrawn from the market, but expenditures on various therapeutic segments (Macrolides, Anti-inflammation and Antacid) are held fixed. Following are the updated prices60 that we have arrived at:

58 Significance level is evaluated at a 10% level 59 This is because we do not impose it through any of our assumptions regarding the demand function 60 Denoted by *

37

A) MACROLIDES:

LERIFP LERIDP LAZIFP LAZIDP LROXFP LROXDP LCLAFP LCLADP 3.158701 3.215671 4.806395 4.166665 4.617 3.891412 5.245286 4.99944 3.142427 3.218876 4.806395 4.183881 4.617 3.902175 5.422524 4.998293 3.210844 3.243764 5.261446 4.264087 4.617 3.911823 5.422524 4.997212 3.192532 3.218876 5.261446 4.253483 4.617 3.904797 5.448804 4.970993 3.210844 3.251924 5.261446 4.28854 4.617 3.909821 5.448159 4.998293 3.182627 3.284289 5.261446 4.287029 4.617 3.946811 5.448159 4.998293 3.140698 3.293983 5.261446 4.414494 4.617 4.029273 5.425038 4.990433 3.228826 3.262701 5.261446 4.43367 4.617 4.033355 5.425038 4.993828 3.329701 3.249599 5.261446 4.464758 4.617 4.037421 5.425038 4.993828 3.21165 3.282789 5.261446 4.5486 4.735584 4.081259 5.425038 4.993828 3.239071 3.247269 5.261446 4.626149 4.735584 4.103304 5.425038 5.219004 3.307619 3.268808 5.261446 4.645736 4.735584 4.130998 5.425038 5.214936 3.458522 3.296947 5.261446 4.691898 4.617 4.227563 5.425038 5.212215 3.406185 3.327551 5.261446 4.707546 4.617 4.228293 5.425038 5.210851 3.357942 3.334345 5.261446 4.64708 4.617 4.270117 5.425038 5.204007 3.357245 3.369363 5.261446 4.64708 4.617 4.283173 5.425038 5.206202 3.507058 3.389462 5.261446 4.684443 4.617 4.293605 5.41996 5.217107 3.507058 3.378952 5.261446 4.652817 4.617 4.302442 5.425038 5.20675 3.466361 3.389799 5.261446 4.716264 4.617 4.287853 5.425038 5.225747 3.466361 3.367296 5.261446 4.775925 4.617 4.292786 5.425038 5.209486 3.466361 3.369707 5.261446 4.728891 4.617 4.329021 5.425038 5.20894 3.413126 3.359681 5.253581 4.752296 4.523852 4.351052 5.425038 5.207298 3.413126 3.370394 5.253581 4.77204 4.523852 4.354141 5.425038 5.20675

LERIVF* LERIVD* LAZIVF* LAZIVD* LROXVF* LROXVD* LCLAVF* LCLAVD* 2.810333 3.539418 3.235185 2.93923 4.2192 3.71681 -6.00581 5.48568 2.788134 3.548128 3.208469 2.936684 4.212436 3.724604 -6.01988 5.492801 2.870664 3.5599 3.72717 2.726127 4.228551 3.741325 -5.5641 5.472023 2.855622 3.531974 3.741918 2.705486 4.232285 3.735938 -5.43221 5.44124 2.872629 3.566234 3.736032 2.738989 4.230795 3.740307 -5.475 5.470361 2.833718 3.608538 3.687799 2.73891 4.218584 3.771938 -5.82038 5.485287 2.805119 3.605845 3.747918 2.58348 4.233804 3.86108 -5.41301 5.458822 2.899635 3.568626 3.77673 2.423906 4.241099 3.868365 -5.20669 5.453301 2.992797 3.562692 3.741941 2.286401 4.232291 3.868565 -5.45581 5.464067 2.871337 3.599049 3.72657 2.245711 4.346984 3.910695 -5.56588 5.468824 2.897075 3.565093 3.718981 2.309335 4.345062 3.931896 -5.62022 5.696348 2.96654 3.585781 3.723111 2.184841 4.346108 3.960049 -5.59064 5.691002 3.107791 3.62289 3.679578 1.944401 4.216502 4.051777 -5.90238 5.701753 3.052314 3.656411 3.665421 2.046869 4.212918 4.050933 -6.00375 5.704771 3.01646 3.651692 3.721296 1.993014 4.227064 4.098966 -5.60364 5.680635 3.017688 3.684921 3.729978 2.007287 4.229262 4.112987 -5.54148 5.680144 3.154056 3.717514 3.669341 1.855229 4.21391 4.116681 -5.98076 5.709814 3.153095 3.707898 3.665004 1.81285 4.212812 4.125036 -6.00674 5.700799 3.124749 3.707267 3.72071 1.911458 4.226916 4.116638 -5.60784 5.702556 3.127538 3.682172 3.733288 1.853661 4.2301 4.122967 -5.51777 5.682403 3.121972 3.689755 3.708186 1.776752 4.223745 4.156414 -5.69752 5.689625 3.06371 3.684401 3.677647 1.878843 4.124856 4.175925 -5.85989 5.695001 3.071817 3.68758 3.714213 1.875106 4.134114 4.183078 -5.59804 5.683136

38

PERCENTAGE CHANGE: (In order to compute the percentage change in prices, we simply subtract the updated prices from the old prices and multiply by 100).

ERIF(%Ch) ERID(%Ch) AZIF(%Ch) AZID(%Ch) ROXF(%Ch) ROXD(%Ch) CLAF(%Ch) CLAD(%Ch)

-34.8369 32.37469 -157.121 -122.744 -39.78 -17.4602 -1125.11 48.62403

-35.4292 32.92519 -159.793 -124.72 -40.4564 -17.7571 -1144.24 49.45083

-34.018 31.61368 -153.428 -153.796 -38.8449 -17.0498 -1098.66 47.48106

-33.691 31.30979 -151.953 -154.8 -38.4715 -16.8859 -1088.1 47.02464

-33.8215 31.43107 -152.541 -154.955 -38.6205 -16.9513 -1092.32 47.20679

-34.8909 32.4249 -157.365 -154.812 -39.8416 -17.4873 -1126.85 48.69944

-33.5579 31.18617 -151.353 -183.101 -38.3196 -16.8192 -1083.8 46.83896

-32.9191 30.59249 -148.472 -200.976 -37.5901 -16.4991 -1063.17 45.94732

-33.6904 31.30931 -151.95 -217.836 -38.4709 -16.8856 -1088.08 47.02392

-34.0313 31.62603 -153.488 -230.289 -38.86 -17.0565 -1099.09 47.49961

-34.1995 31.78242 -154.247 -231.681 -39.0522 -17.1408 -1104.53 47.73448

-34.1079 31.6973 -153.833 -246.089 -38.9476 -17.0949 -1101.57 47.60665

-35.0732 32.5943 -158.187 -274.75 -40.0498 -17.5787 -1132.74 48.95387

-35.3871 32.88601 -159.602 -266.068 -40.4082 -17.736 -1142.88 49.39198

-34.1482 31.7347 -154.015 -265.407 -38.9936 -17.1151 -1102.87 47.66282

-33.9557 31.55582 -153.147 -263.979 -38.7738 -17.0186 -1096.65 47.39416

-35.3001 32.80523 -159.21 -282.921 -40.309 -17.6924 -1140.07 49.27066

-35.3963 32.8946 -159.644 -283.997 -40.4188 -17.7406 -1143.18 49.40489

-34.1612 31.74677 -154.074 -280.481 -39.0084 -17.1216 -1103.29 47.68095

-33.8823 31.48761 -152.816 -292.226 -38.69 -16.9818 -1094.28 47.29171

-34.4389 32.00484 -155.326 -295.214 -39.3255 -17.2608 -1112.26 48.06854

-34.9416 32.47205 -157.593 -287.345 -39.8996 -17.5127 -1128.49 48.77025

-34.1309 31.7186 -153.937 -289.693 -38.9738 -17.1064 -1102.31 47.63863

B) ANTIINFLAMMATION:

LIBUDP LIBUFP LPIRDP LPIRFP LNIMDP LNIMFP LROFDP LROFFP 1.000632 0.955511 2.85532 3.280159 2.583998 3.430756 3.017494 3.105931 1.000632 0.955511 2.857045 3.250762 2.586259 3.430756 3.023834 3.152736 1.000632 0.993252 2.941804 3.250762 2.593013 3.430756 3.024806 3.248046 1.000632 1.004302 2.893146 3.250762 2.580217 3.430756 3.016515 3.267285 1.000632 1.004302 2.899772 3.250762 2.575661 3.43108 3.027715 3.248046 1.280934 1.000632 2.882004 3.250762 2.593761 3.060115 3.055886 3.183456 1.108563 1.000632 2.793004 3.250762 2.583243 3.061052 3.077312 3.231595 1.166271 1.000632 2.890372 3.21165 2.606387 3.061052 3.087399 3.230804 1.147402 1.000632 2.910719 3.21165 2.618855 3.054001 3.090588 3.230804 1.108563 1.000632 2.898671 3.21165 2.626117 2.963209 3.091042 3.230014 1.175573 1.000632 2.883123 3.21165 2.643334 3.036394 3.095578 3.037833 1.071584 1.000632 2.877512 3.21165 2.686486 3.15487 3.146735 3.037833 1.050822 1.000632 2.837908 3.163363 2.695303 3.030134 3.200304 3.037833 1.105257 1.029619 2.839078 3.163363 2.623218 3.155297 3.216874 3.037833 1.088562 1.029619 2.766319 3.163363 2.706048 3.155297 3.218076 3.037833

39

LIBUVD*

LIBUVF*

LPIRVD* LPIRVF*

LNIMVD*

LNIMVF*

LROFVD*

LROFVF*

0.279039 1.028169 3.670621 3.086365 2.846227 3.151134 3.362438 3.45932 0.281517 1.02792 3.669546 3.057634 2.847588 3.152095 3.38319 3.504911 0.241013 1.069739 3.800069 3.046756 2.869061 3.136399 3.452613 3.620057 0.287619 1.076096 3.698753 3.059273 2.839328 3.154459 3.454995 3.616472 0.253997 1.079481 3.743367 3.050243 2.84699 3.141754 3.453695 3.613699 0.558685 1.073356 3.698046 3.056792 2.856229 2.780239 3.504847 3.537166 0.393125 1.07267 3.601351 3.058621 2.843235 2.783815 3.520015 3.581969 0.449981 1.072756 3.699681 3.01928 2.866688 2.783485 3.543405 3.581596 0.436676 1.072196 3.713743 3.020774 2.877135 2.77859 3.551675 3.578871 0.41008 1.070963 3.68786 3.024063 2.879947 2.692543 3.57818 3.572084

0.467462 1.071932 3.683193 3.021477 2.900664 2.761997 3.518476 3.38462 0.369747 1.071301 3.670491 3.023162 2.941536 2.882904 3.509176 3.381547 0.350411 1.071157 3.629276 2.975258 2.949834 2.75872 3.559525 3.380848 0.422808 1.098336 3.610152 2.980082 2.871222 2.890844 3.529445 3.372052 0.382015 1.100762 3.56462 2.97361 2.962809 2.881506 3.549607 3.383853

PERCENTAGE CHANGE:

IBUD(%) IBUF(%) PIRD(%) PIRF(%) NIMD(%) NIM(%) ROFD(%) ROFF(%) -72.1593 7.265801 81.53014 -19.3794 26.22291 -27.9622 34.49445 35.33886 -71.9115 7.240846 81.25012 -19.3128 26.13285 -27.8661 35.93567 35.21749 -75.9618 7.648682 85.82648 -20.4006 27.60476 -29.4357 42.78073 37.20109 -71.3013 7.179409 80.56073 -19.149 25.91112 -27.6297 43.84801 34.91868 -74.6635 7.517951 84.35953 -20.0519 27.13294 -28.9326 42.59801 36.56525 -72.2249 7.272407 81.60426 -19.397 26.24675 -27.9876 44.89605 35.37099 -71.5438 7.203822 80.83467 -19.2141 25.99922 -27.7237 44.27032 35.03741 -71.6289 7.212398 80.9309 -19.2369 26.03017 -27.7567 45.60051 35.07912 -71.0727 7.156388 80.3024 -19.0875 25.82803 -27.5411 46.10877 34.80671 -69.8482 7.033095 78.91893 -18.7587 25.38306 -27.0666 48.71374 34.20704 -70.8112 7.130055 80.00693 -19.0173 25.73299 -27.4398 42.28987 34.67863 -70.1837 7.066875 79.29797 -18.8488 25.50497 -27.1966 36.24412 34.37134 -70.041 7.052509 79.13678 -18.8105 25.45312 -27.1413 35.92203 34.30147 -68.2449 6.871651 77.10735 -18.3281 24.80039 -26.4453 31.25712 33.42182 -70.6547 7.114296 79.83009 -18.9753 25.67612 -27.3791 33.15316 34.60198

C) ANTACID:

LRANDP LRANFP LOMEDP LOMEFP 1.745716 1.499623 3.216072 2.225704 1.754404 1.499623 3.22605 2.327278 1.803359 1.757858 3.236716 2.327278 1.829376 1.757858 3.292126 2.327278 1.832581 1.757858 3.285412 2.327278 1.832581 1.757858 3.273364 2.327278 1.835776 1.757858 3.247269 2.327278 1.842136 1.757858 3.321793 2.327278 1.893112 1.874874 3.333989 2.327278 1.899118 1.757858 3.310543 2.327278 1.902108 1.757858 3.251149 2.327278

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1.938742 1.757858 3.289893 2.327278 1.958685 1.880991 3.297687 2.327278 1.928619 1.880991 3.313458 2.345645 1.972691 1.880991 3.298426 2.351375 1.971299 1.880991 3.295837 2.351375 1.954445 1.745716 3.290266 2.351375

LRANVD

* LRANVF* LOMEVD* LOMEVF* 1.404587 1.980655 2.935447 1.934611 1.343239 1.987115 2.941657 2.032276 1.431935 2.263465 2.941755 2.021314 1.403172 2.274759 2.990576 2.014479 1.406116 2.271815 2.98558 2.016261 1.413495 2.272632 2.973055 2.015767 1.437793 2.298598 2.931812 2.000053 1.404817 2.330398 2.987785 1.98081 1.437207 2.445543 3.001071 1.981942 1.403171 2.306324 2.990579 1.995378 1.436782 2.302309 2.933527 1.997807 1.431789 2.354193 2.942003 1.966411 1.4612 2.453128 2.963913 1.981054

1.437653 2.442001 2.986176 2.006154 1.452699 2.46948 2.955113 1.995256 1.451122 2.460454 2.95779 2.000718 1.396234 2.291205 2.972038 2.021277

PERCENTAGE CHANGE:

RAND(%Ch) RANF(%Ch) OMED(%Ch) OMEF(%Ch) -34.1129 48.10324 -28.0625 -29.1093 -41.1165 48.74919 -28.4393 -29.5002 -37.1424 50.56067 -29.4961 -30.5964 -42.6204 51.69011 -30.155 -31.2798 -42.6466 51.3957 -29.9832 -31.1017 -41.9087 51.47736 -30.0309 -31.1511 -39.7984 54.07403 -31.5457 -32.7224 -43.7319 57.25397 -33.4008 -34.6468 -45.5905 57.0669 -33.2917 -34.5336 -49.5947 54.8466 -31.9964 -33.19 -46.5325 54.44516 -31.7622 -32.947 -50.6953 59.6335 -34.789 -36.0867 -49.7485 57.2137 -33.3774 -34.6224 -49.0966 56.10101 -32.7282 -33.9491 -51.9993 58.84891 -34.3313 -35.6119 -52.0178 57.9463 -33.8047 -35.0657 -55.8211 54.54893 -31.8228 -33.0098

Within Macrolides, we find that there is a possibility of a rise in average price in case of Domestic Erithromycin (32%) and Domestic Clarithromycin (48%), whereas a possibility of a

41

fall in average price in case of Foreign Erithromycin (-35%), Foreign Azithroymcin (-157%), Foreign Roxithromycin (-40%) etc. Similarly, in case of Antiinflammation and Antacid, we find that some drug molecules experience a price rise, whereas others witness a price fall. Our results clearly highlight the fact that for those drug molecules which have negative coefficient values, the price appears to fall; whereas for those drug molecules which have positive coefficient values, the price appears to rise. This is because if the drug molecule has a positive cross-price elasticity of demand with respect to the patentable drug implying that it is a close substitute of the patentable drug, withdrawing that (patentable) drug will result in an increase in demand for the therapeutic substitute. And since we are assuming that the market share of the total therapeutic segment remains fixed, an obvious outcome is an increase in prices. This is because if we assume that the market for potential substitutes is an imperfectly competitive market (or monopoly), the increase in price in the original patentable market will lead to corresponding upward price adjustments in the related markets as producers of substitute products re-optimize in the face of increased demand for their products. The magnitude of any upward adjustment varies with the degree of competition in related markets, and with the strength of the cross-price effects. Thus we see that own-price and cross-price effects are the primary determinants in explaining the price behavior across drug molecules. However, one exception to this outcome is Ranitidine; where an opposite impact is observed. After looking closely at the data, we observe that Ranitidine is the only drug molecule, where the foreign share carries a much significant share of the overall Ranitidine market. Thus a withdrawal of the domestic version of Ranitidine contributes to a rise in prices (inspite of a negative coefficient value of the foreign version). The rise in demand of foreign Ranitidine (due to a situation of a near monopoly of the foreign manufacturer) results in a price escalation. Not only this, consumers switch to Foreign Ranitidine which contributes to a fall in prices of the therapeutic substitutes.

Impact on Consumer Welfare Pharmaceutical MNCs frequently assert that the stance of the Indian government is motivated less by concerns about consumer welfare than it is by a desire to protect the domestic pharmaceutical industry. Whether or not that is the case, the estimates we have arrived at clearly indicate that the loss in consumer welfare in the post-patent scenario appears to be significant. Infact, Chaudhuri, Goldberg and Jia also estimate that out of the total loss estimated for the Indian economy, only a small proportion accounts for the foregone profits of domestic (Indian) pharmaceutical firms61. Hence they do not find much support for the claim that TRIPS would have detrimental effects on the Indian pharmaceutical industry. In fact, under some scenarios, they find that the profits of domestic firms may even increase. This might happen because, when certain domestic products become unavailable as a result of patent enforcement, consumers substitute towards other domestic products containing the same molecule. This differential effect of TRIPS on domestic firms’ profits may partly explain the divided position of the Indian pharmaceutical industry regarding TRIPS. Thus, our Econometric analysis shows that the most significant effect of the TRIPS regime pertain to the domestic Indian population, for whom there appears to be substantial welfare losses. This welfare loss is not only in terms of higher (or lower) drug prices, but also in terms of less product variety in the near future.

61 Chaudhuri, Goldberg and Jia have estimated that in the quinolone sub-segment of the systemaic anti-bacterials segment alone,

patent enforcement would result in a total annual welfare loss of $713 million for the Indian economy. Of this amount, only 7% account for the foregone profits of Indian pharmaceutical firms.

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Impact of product patents in other countries In a study quoted by the International Federation of Pharmaceutical Manufacturers Association, Rozek and Berkowitz 62 analyzed the prices of existing drugs in four countries (South Africa, Mexico, Hungary, and Taiwan) 18 months before and 18 months after a new patent law and found no significant price change. However, as Watal63 has pointed out, the study only demonstrates that the relevant countries did not have greater price increases with respect to existing products, or to an unspecified mix of existing and new products, 18 months after instituting protection. This does not answer the essential question on the relationship between patents and price levels. Rozek and Berkowitz did another study of prices in six therapeutic categories in nine countries, which demonstrated that strengthening IPR did not have a measurable impact on real or nominal price of existing drugs.64 They argue that movements in the prices of branded pharmaceutical products are largely unaffected by the institution of IP protection, attributing this to four factors: patent protection only applies to future products and does not retroactively cover existing drugs, substitutes are available within therapeutic classes, government purchasing (monophony buyers) limits price increases, and price control regulations constrain pharmaceutical prices. Given the difficulties in estimating the effects of national policy changes of introducing pharmaceutical product patents, economists have attempted to simulate the likely price and welfare effects. Three studies using detailed market data predict upper-bound mean price increases with the introduction of product patents; Challu65 in the case of Italy and, Fink 66 and Watal.67 with reference to India. The numbers generated by these models are sensitive to the assumptions on which they are based. However real world trends too seem to suggest a relationship between increasing prices and patent protection. An empirical survey by Challu 68 which compared new drug prices in Italy before and after the 1978 patent law and also found a significant price rise. Using US prices as a reference, new drug prices after 1978 were 163 per cent higher than new drug prices before 1978. There is extensive evidence from nations with product patent protection that average pharmaceutical product prices fall sharply when generic entry occurs following the expiration of the patents, as predicted by economic theory. Therefore once patent laws are put in place, many of the generic drugs currently available will be taken off the market and this in turn could lead to

62 ozek,R.P and Berkowitz,R. The Effects of Patent Protection on the Prices of Pharmaceutical Products: Is Intellectual Property

Protection Raising the Drug Bill in Developing Countries? The Journal of World Intellectual Property, vol.1, pp.179-243 (1998) 63 Watal,J , Access to essential medicines in developing countries: Does the WTO TRIPS Agreement Hinder It?, Institute for

International Economics (2000) 64 Rozek and Berkowitz examine the link between movements in pharmaceutical prices and changes in intellectual property

protection in nine developing countries. The study employs IMS data on pharmaceutical prices and sales for six therapeutic classes of drugs between 1985 and 1996, a period during which several countries first enacted intellectual property laws. Of the nine countries in the sample, five countries had intellectual property protection in place (Korea, Mexico, Taiwan, Hungary, and Brazil), while the remaining four were without (Argentina, Egypt, Jordan, and Turkey). Methodologically, the analysis examines price movements for three distinct samples of products to answer three particular questions: 1. a set of the same drugs across all countries to examine whether countries with IP protection in place have higher

pharmaceutical prices than those who do not, 2. a sample of the existing "original" pharmaceuticals (branded products) in each of the nine countries to shed light on how

the price changes of a market basket of products compared to inflation, and, 3. a sample of all products in each country, identifying those introduced before and after changes in IP protection, to examine

possible price variation associated with the change 65 Challu,"Repercussions del patentamiento monopolico en Italia", Revista del Derecho Industrial, Vol, 13, No. 39 (1991) 66 Fink, C.How Stronger Patent Protection in India might affect the Behavior of Transnational Pharmaceutical Industries, 2000.

Policy Research Working Paper N°2352, The World Bank Development Research Group, (2000) 67 Watal,J , Access to essential medicines in developing countries: Does the WTO TRIPS Agreement Hinder It?, Institute for

International Economics (2000) 68 Challu, Pablo (1995), "Effects of the monopolistic patenting of medicine in Italy since 1978", International Journal of

Technology Management, Vol. 10, No. 2/3

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a rise in prices. Brazil and South Africa are often held up as examples of how stricter IPR could lead to increasing prices. In both these countries, the respective governments had to finally threaten the use of compulsory licensing in order to negotiate lower drug prices. At the same time however, it must be noted that there are other factors which have to be taken into account. More often than not there are other drugs in the same therapeutic segment which may compete with the patented drug. In addition drug companies cannot afford to price their products without taking into account the buying power of local consumers. It has often been argued that since developed countries account for the bulk of pharmaceutical sales anyway, the R&D costs can be recovered from sales there, where as in the developing countries just marginal cost need to be covered. Aoki and Tomoko69, in a study of the impact of product patents on the Japanese pharmaceutical industry demonstrate that link between patents and price is complicated. The prices of drugs covered by national insurance, as well as the price of over the counter drugs showed a decline in the years following the introduction of patent laws in 1976. However in the few years before introduction of patents laws too, there was a steady decline in the prices of OTC drugs. In addition there was a surge in the number of products after 1976 and this may have contributed to the decrease in prices. This increase in the number of products is surprising since one concern about the introduction of stronger patent protection is that it will lead to a reduction in the number of products. Surprisingly in Japan there was an increase in both domestically produced and imported pharmaceutical products. The report also points out that the number of pharmaceutical firms in Japan decreased after 1976. Stronger patent protection means that firms which cannot obtain patents will be forced to go out of business. In Japan,a mild reorganization of the industry did take place and the very largest firms increased their market share. The Japanese pharmaceutical industry had obtained a certain level of production and research capabilities prior to the introduction of patent laws, but not to the levels of the western companies. In this regard the authors go so far as to note that the Indian Industry today may be more advanced than it was in Japan when patents were introduced there. However following the introduction of patent laws, Japanese pharmaceutical companies become much more innovative. The percentage of total investment in R&D showed a massive rise and there was an increase in the number of new products. This in turn led to increased competitiveness in the international market with Japanese firms being counted among the top pharmaceutical companies in the world. India cannot be directly compared with most other countries given the unique nature of its pharmaceutical industry. However the experience of Japan’s Pharmaceutical industry with the introduction of a strong patents regime may provide an example to its Indian counterpart, given the similarities they share. India and Japan are the only two countries where the western MNC’s do not dominate. The market share of MNC’s in the Indian pharmaceutical market has reduced consistently over the years; from 68% in 1970 to around 23% in 2003.70 The existence of a buoyant domestic industry may be determining factor as to how India will be affected by a stricter patents protection regime. On the whole Japan seems to have managed the transition period extremely well. While the issue is too complicated to draw a straight comparison, Japan’s experience should provide some relief to those worried about the future of India’s pharmaceutical sector post January 2005.

69 Reiko Akoi and Tomoka Saiki, Implications of Product Patents-Lessons from Japan , February 2005 70 ORG-MARG, 2002

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6

RESEARCH AND DRUG DEVELOPMENT The cost of drug development is estimated as around $ 880 million or nearly Rs. 4,000 crores at present for the drug. The development time for a drug is also relatively high in the region of 10-14 years and it is estimated that historically only 30 percent of the drugs have recouped the development costs. In the above context the R&D spending by the Indian pharma remains inadequate with the current annual R&D spending of the entire Indian pharma at around Rs. 6.6 billion. The CAGR of R&D spent during the last five years is around 19 percent. However, the R&D spent by large companies shows significant improvement with the CAGR for the last five years at 35 percent. It is reported that most R&D activity by Indian firms have concentrated on the nature of process engineering of bulk drugs and in discovering new delivery systems for formulations. Thus the increasing Rand D allocation of the Indian pharmaceutical companies can be explained by increased spending on development of non-infringing processes for drugs that are expected to go off patent in the regulated markets and expenditure of development of NDDS and NCE’s. However in spite of the rise in R&D expenditure, the investment in research still is just a small fraction of the amount spent on pharmaceutical R&D by the developed country firms. While R&D expenditure budgets for the 15 leading global pharmaceutical companies is in the region of 15-16 percent of their sales, in India the estimated R&D is about 2.5 percent of the total annual sales 71. To use another criterion, while R&D expenditure by Indian pharma is about 18 million the global R&D expenditure was about $ 50 billion in 2003. In this backdrop, some experts point out that with the current R&D costs in India it is impossible to conduct either new drug discovery research and novel drug delivery even at competitive rates.

Figure – 9: R&D Expenditure

Expenditure (RS crores)

050

100150200250300350

1976

-77

1979

-80

1983

-84

1986

-87

1994

-95

1996

-97

1998

-99

Expenditure (RScrores)

Source:OPPI Pharmaceutical R&D can be broadly classified into three categories: (i) new chemical entities (NCEs); (ii) modification of existing NCEs (new chemical derivatives, new formulations, and

71 CMR International, “Profile of Pharmaceutical Investment and Output (2004)”, R&D Briefing.

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new combinations) and (iii) new processes for manufacturing drugs. Until recently, the R&D activities in India focused on the third category, namely, new process of manufacturing of drugs. R&D on analogues, i.e. modified versions of the original molecules, have been an area of intensive activity by the Indian companies. The private sector initiative in R&D activities is worth mentioning. It is reported that the bulk of the R&D is spent by companies such as Ranbaxy and Dr. Reddy’s Laboratories followed by Cipla, Lupin, Wockhardt, NP. In fact Dr. Reddys’ Laboratories alone was credited with discovery of 11 molecules followed by Ranbaxy and Lupin with 4 each. However the lack of experience in conducting clinical trails across the globe and in interacting with international regulatory authorities , besides the high costs involved in clinical trails , have prompted companies such as Ranbaxy and Dr Reddy’s to out license the molecules to global majors. Despite an initial success in out licensing, Dr Reddy’s suffered a setback as clinical trails on two of its out licensed molecules (DRF 2725 and DRF 4158 ) were discontinued by its international partners. However this set back has not deterred further investment in R&D by other Indian companies.

Table 7: Research and Development Expenditure of Major Indian Pharmaceutical Companies as % to turnover

(Rs crore) R&D Exp. % to turnover 2003-04 2003-04

Ranbaxy Laboratories 72 276.12 7.3 USV 73 17.9 5 Dr. Reddy's Lab 74 199.2 10 Nicholas Piramal 75 55.86 3.9 Aurobindo Pharma 76 48.68 3.6 Lupin 77 45.99 3.9 Cadila Healthcare 88.2 7.5 Sun Pharma 78 107 11.5 Wockhardt 79 60.41 7.9 Orchid Chem & Pharma80 39.65 5.6 Cipla 81 60 3 Torrent 82 ------ 8.9 Source: UNCTAD India calculation The introduction of new products in the domestic market would be the key for growth once product patent are recognized in India. Already quite a few Indian companies have made

72 In relative terms i.e. as a percentage of sales, Dr Reddy’s Laboratories recorded R&D expenditure at 11 per cent of its gross

turnover and Ranbaxy Laboratories at 7.3 per cent of its total turnover.72- ICICI Feature: Pharma: IPR dose, (http://content.icicidirect.com/ULFiles/UploadFile_20052814289.asp)

73 5% of sales revenue each year is invested in research- completed 2004 financial year in March registering sales of Rs. 5,407 million (USD 125 million ) (http://www.usvindia.com/ShowContent.asp?SectionID=1)

74 Page 2, Annual Report , 2003-2004, Dr Reddys 75 Page 63, Annual Report , 2003-2004, Nicholas Piramal, http://www.nicholaspiramal.com/docs/NPIL_Annual_Report_2004.pdf ) 76 Page 32, Annual Report , 2003-2004, Aurobindo Pharma, (http://www.aurobindo.com/docs/ar2004/Aurobindo_book.pdf ) 77 Page 41, Annual Report , 2003-2004 Lupin Ltd http://www.lupinworld.com/newsroom/2003-04/lupin%20AR%202003-04.pdf 78 http://www.sunpharma.com/whats_new.html 79 http://www.wockhardtin.com/Highlights_of_Year_2003.pdf 80 Page 23, Annual Report 2003-2004, Orchid Chemicals and Pharmaceuticals Ltd.,

http://www.orchidpharma.com/downloads/Orchid_AR_2004.pdf 81 “We spend over 3 percent of sales turnover in R&D and in quantum terms it amounts to over Rs.60 crores annually. Our efforts

are concentrated on accountable and result-oriented projects”- Sixty-Eighth Annual General Meeting – Tuesday, 7 September 2004, Address by Dr. Y. K. Hamied, Chairman and Managing Director.

82 Page 12 Torrent Pharmaceuticals Ltd, 31st Annual Report 2003-2004 , (http://www.torrentpharma.com/tpl_ar_0304.pdf)

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significant progress towards discovery of NCEs. Some of them have successfully discovered molecules and conducted preclinical research at the fraction of the international costs. The NCEs developed by Dr. Reddy’s for diabetes treatment, Ranabaxy’s NCE for the treatment of prostatic hyperplasmia (BPH) and Wockhardt’s NCE in the anti-infective segments are a few such examples.83 The available information on R&D spending reveals that the large Indian pharmaceutical companies are focusing on treating diseases prevalent in developed country diseases since sizeable proportion of their revenue comes from the US and European markets. Ranbaxy has mainly undertaken drug discovery and development in therapeutic areas like metabolic disorders (diabetes, dyslipidemia, obesity and associated disorders) cancers, urology and inflammations. They plan to take new initiatives at new molecule research in the coming years especially with the new product patent regime being implemented. Dr. Reddy’s laboratories have also identified drug discovery research as one of its long-term strategy. Their research focus has also been mainly on the therapeutic areas of metabolic disorder, cancer, heart diseases. The companies’ total expense on R&D in 1999-2000 was 17.9 crores which increased to 980.3 million in 2001-2002. The same was the case with Nihcolas Piramal India Ltd. It had an R&D budget of 5.7% of the turnover which came down to 2% of the turnover in 2001-2002. Its main therapeutic thrust has also been on diseases like cancer.

Figure - 10: NMEs Launched onto World Market during 1990-2000.

Source: CMR International Although the forays made by Indian companies in discovering new chemical entities are a promising sign, it does not necessarily reflect the outlook of the Indian pharmaceutical industry as a whole. A large number of companies still spent sizeable R&D on working on molecules discovered by the innovating companies following the expiry of patent on the original molecule. It is instructive to examine the scale of discovery of NMEs over a period of time which incidentally includes the first five years of the coming into force of the TRIPS Agreement. Surprisingly, the discovery of NMEs has not been commensurate with the rising R&D expenditure of global pharma. Discovery of NMEs remain the exclusive domain of the United States, Japan and the European Union. Only a few other countries have been successful in launching new NMEs. The trend in the first few years of this decade is not encouraging either. For instance in the year 2003, only 26 NMEs are launched in the world market.

83 Available at http://www.biospectrumindia.com/content/movers/104041291.asp

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The above outlined facts point to the underlying realities. Getting a drug to the market is a long and tedious process when potential candidates are filtered out at every step. The drug development stages include target identification, rational design of the new compounds, rational drug approach, empirical design approach, patent search, pre-clinical pharmacology and toxicology testing. Even at the discovery stage thousands of compounds are synthesized and analyzed for efficacy against potential therapeutic targets. The leads that are generated are characterized and validated using various assays before they progress to the pre-clinical or development stage. The preclinical testing stages take from three to seven years. And at the clinical testing stage, it remains uncertain what fraction of a target audience will respond favorably to a drug’s use. Several drug candidates are abandoned or fail at various steps in the pipeline and even successful ones take up to 12 and 17 years to progress from test tube to the market84(see Figure 11). It is also noticed that in spite of extensive clinical trials in many countries, after the drug reaches the market, unexpected and unpredictable adverse reactions, in rare cases, with fatal outcomes occurs. In this backdrop, it may not be an exaggeration to say that only a few Indian pharmaceutical companies are capable of a start- finish model on new chemical entity (NCE) research. At the same time the availability of technically skilled manpower along with low cost of research provides and advantage for conducting R&D for an NCE in India. The share of R&D in the Indian cost structure is quite low, although R&D expenses are growing for some of the research based Indian pharmaceutical companies. However while on a global scale, R&D costs are rising and human resources constitute a majority of R&D cost, India retains an advantage. The largest proportion of R&D cost is incurred on scientific professionals, who constitute a majority of the work force. In this area, a country such as India, with its vast pool of well qualified and experienced professionals who are available at relatively lower costs has a distinct advantage.

Figure – 11: Research Route Map

Notwithstanding the inadequate spending on R&D for new drug development in India, a few drugs have been developed by virtue of public funding. The role of public research institutions are relevant more than ever before under a regime characterized by product patent protection for pharmaceuticals. A rough rule of thumb in the industry is that a$250 million annual market is needed to motivate substantial research and this is beyond economic possibility without

84 Hillisch, A& Hilgenfield, R: “Modern Methods of Drug Discovery”, 2003.

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government assistance. 85In India certain public organizations like the Central Drug Research Laboratory (CDRI), Lucknow, Centre for Cellular and Molecular Biology(CCMB), Hyderabad, National Institute for Pharmaceutical Education and Research(NIPER) ,Chandigarh and Institute of Genomics and Integrative Biology(IGIB),Delhi have been involved in the development of new drugs but they have not been of blockbuster-quality. In addition it is worth noting that most public funded laboratories with R&D focus on drugs and pharmaceuticals are primarily engaged with development of processes for manufacturing drugs. However these publicly funded institutions hold the key in promoting new innovation in the pharmaceutical sector. The relevance of public funding in promoting research and development in drug development needs to be hardly over-emphasized. The government’s funding is key in promoting research and development in diseases which may not otherwise attract private investment. The Indian government is backing growth in the biotech and pharmaceutical industries with the announcement of a 24 per cent increase in science funding in its 2005-06 budget. In his budget speech, the finance minister allocated an additional US$34.9 million to a R&D fund for the pharmaceutical sector, with extra support for drug development. Although the budgetary allocation looks hardly impressive, it could still be a step in the right direction As outlined above the process of drug development is time consuming and costly. As various reports indicate, none of the Indian companies is engaged in the entire process of drug development. The model that the Indian companies have adopted was to develop new molecules and license out the molecules to the MNCs in the early phase of clinical development. This was considered to be an effective business strategy. But it seems unlikely that this could be an ideal strategy for the future. However, it is reported that Indian companies have a competitive edge in the development of NDDS, API, NDDR, etc. For instance, the NDDS world market is growing at 16 Percent, and Indian companies with strong chemical synthesis skills have excellent potential for growth. Products such as Cefaclor (BID), Cephalex AF (BID) developed by Indian companies such as Ranbaxy, Kaizem CD developed by Wockhardt, etc point to the increasing potential of such new R&D portfolio.

85 Michael Kremer, Creating Markets for New Vaccines, Part I and II, in A.B Jaffe. J Lerner, and S. Stren, eds., Innovation Policy

and the Economy (Cambridge:MIT Press) 2001.

49

7

POST PRODUCT PATENT OPTIONS FOR ACCESS TO MEDICINES

Introduction of product patent on pharmaceuticals has universally been associated with an increase in price. In India it has been debated for long whether the introduction of product patent would shake up the pharmaceutical industry structure and adversely affect consumer welfare through higher drug prices. The theoretical and empirical analysis undertaken in the previous sections of the study has established the possibility that product patents could affect drug prices, although it may not have any bearing on the structure of the industry. This view is further supported by the fact that in countries such as India where health insurance coverage is so rare and where almost all medical expenses are met out-of-pocket, any change in the demand structure could have significant impact on the poor. It is also axiomatic that the introduction of product patents could potentially curb the ability of the thriving generic pharmaceutical industry to copy patented drugs developed in other countries. However as for other developing countries that relied upon countries such as India for generic version of patented drugs, the introduction of product patent could be a matter of concern. The importance of flexible options in a product patent era is hence relevant than ever before. It must be noted that even under the TRIPS regime, patents are to be granted only on applications received from 1995 onwards for new, patentable pharmaceutical inventions. Thus, prices of existing drugs already in the market, or even those covered by patent applications prior to 1994 anywhere in the world, may not be affected by TRIPS, as these markets could continue to be as contestable as before. Moreover, the ability of the patent owner to price the product above his marginal cost is largely governed by the availability of close substitutes; the higher the number of effective substitutes, the lower is the ability of the patentee to raise price without losing revenues and profits. Quite often a successful patented medicine gives rise to a spurt of ‘me-too’ products that invent around it86. Although the situation of the pharmaceutical industry in India is sui generis, it is possible to take a few lessons from other countries that have established product patent for pharmaceutical products for long. Specifically, some studies conducted in a few developed countries have examined drug pricing dynamics and patent expiration. Hudson 87 has analyzed drug pricing dynamics and patent expiration for the US, UK, Germany, France, and Japan. A common finding of his papers has been that larger the numbers of competitors, the lower drug prices are, and that brand name products might even increase in price (in order to protect total revenues) after the introduction of generics. Several other studies, using data on the US market also show a significant and rapid price decrease with generic entry upon patent expiry. Watal 88 has highlighted that the average generic/branded price ratio in the US was 0.59 after patent expiry for one generic manufacturer

86 Jayashree Watal, Access to Essential Medicines in Developing Countries: Does the WTO TRIPS Agreement Hinder It, (2000) 87 Hudson, J., Generic Tie-up in the Pharmaceutical Market Following Patent Expiry: A Multi-country Study, International Review

of Law and Economics, 20, pp. 205-221(2000) 88 Jayashree Watal, Access to Essential Medicines in Developing Countries: Does the WTO TRIPS Agreement Hinder It, (2000)

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and 0.17 for twenty such manufacturers. In the case of India, Watal projects an average price increase of at least 26%, but an increase of 200-300% for new patented medicines. Despite the above projections, the pharmaceutical industry in particular counters such an assumption. PhRMA 89 claims that the patenting issue is not important for public health as almost all the drugs in the WHO list of essential drugs are off-patent. It also claims that the introduction of product patents will not result in an increase in prices because product patents will be applicable to only a small percentage of the market. Generic alternatives will continue to be available even after 2005 for all the existing drugs including almost all WHO essential drugs. PhRMA argues that the Pharmaceutical Industry is fully aware of its obligations to society to keep the prices of drugs to the lowest possible levels, but they need to recoup the investments made in R&D on new drugs, which is essential for the progress of medicine and therapeutics. Without these investments, there will be no new drugs discovered in the first place and like any other investment, they deserve adequate returns. In view of the differing perception on this possibility of rise in price in the product patent era, a number of post product patent options have been discussed. The main flexibilities include: compulsory licensing, parallel importation, provisions relating to patentable subject matter, provisions relating to exceptions to patent rights, provisions relating to data protection and provisions relating to abuse of rights including competition and the control of anti-competitive practices. A number of the above outlined exceptions are permitted under Article 30 and 31 of TRIPS Agreement and recently incorporated in the amended Indian Patent Legislation. The overriding condition under TRIPS is that the exception so provided should not ‘unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties’. Other than this qualification, TRIPs does not state what type of exceptions may be employed, nor does it elucidate what is the meaning of many terms like ‘limited exceptions’, ‘normal exploitation’, and ‘legitimate interests’. Generally, Research and Experimental use exceptions are found in the many of the national patent laws.90 Even though such deviations are permissible for any country within the boundaries drawn by TRIPs, the lack of any clear cut guidelines regarding these may results in disputes between countries regarding the implementation of TRIPs, which has to be taken care of. The following section examines the options available to India should access to medicine becomes an issue of critical importance Options Available to India post 1st January, 2005

COMPULSORY LICENSING The provision on compulsory license is a crucial element in a health sensitive patent law. Compulsory licensing can be generally defined as granting of license by a government to a third party to use a patent without an authorization of the patent holder and the patentee receives a royalty fees. In the pharmaceutical context, compulsory licensing is used by the governments to license a patented drug to a generic manufacturer without the patent holder’s consent. Mainly this is done in situations where the patented product has not been worked or it helps serve national interest. The compulsory license is invoked subject to the payment of reasonable compensation. A number of countries have taken recourse to the measure. Although compulsory licensing is not permitted under U.S patent law, it is available under a special legislation to remedy

89 Annual Report of Pharmaceutical Research and Manufacturer's Association (2002) 90 See, Correa 2000(a), Chapter VII; UNCTAD-ICTSD 2004, p. 95.

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anticompetitive practices and for government use. It is reported that compulsory license was invoked on products such as antibiotic product Griseofulvin, Cytokine biopharmaceutical product patents owned by Novartis and Chiron, the 9-AC cancer drug patent rights assembled under the merger of Pharmacia AB with Upjohn. Of course such instances of compulsory licenses were opposed by pharmaceutical companies on the ground that compulsory licenses have undermined the patent holder’s right and had sought to create a disincentive on research and development spending.91 Compulsory licenses specifically related to medicines have been provided in other countries as well. One of the notable instances is the grant of a license to manufacture and sell Polyferon for treatment of chronic polyarthritis against a license fee of 8 percent. Compulsory licenses were not, of course, a creation of TRIPs Agreement. Over a century before the TRIPS Agreement, it was recognized that a remedy was required for the perceived abuses from the large proportion of unused patents. The origin of compulsory license can be traced back to the provisions in Paris Convention of 1885. These provisions, due to their controversial nature were placed in the Convention after a detailed deliberation. The Convention provides each country a right to give compulsory license to prevent the patent abuse on any grounds like ‘failure to work’.92 The non-use of the invention by the patent holder can be taken as a breach resulting in the loss of the exclusive right conferred under the contract. A compulsory license forces the patentee to license the patented invention to a complaining party who can show that either the patented invention is not available to the public at a reasonable price or that the "reasonable requirements" of the public with respect to the patented invention have not been met.93 If the patentee has not worked the invention even after three years from the date of issuance of a compulsory license, any person or the Indian government may apply for revocation of the patent. Over and above the issue of possible non-working of a patent, there are possibilities of other misuses. Bodenhausen in 1967 has authoritatively summarized a large body of state practice in implementing these norms over time as follows:

Examples of such abuses may exist in cases where the owner of the patent, although working the patent in the country concerned, refuses to grant licenses on reasonable terms and thereby hampers industrial development, or does not supply the national market with sufficient quantities of the patented product, or demands excessive prices, for such products. 94

It is a notable development that the compulsory license provisions of the amended Patent Act have sought to address these possible abuses. The new patent ordinance also ensures that the benefits of the patented invention could be made available at affordable prices to the public. The provisions regarding compulsory licenses have been retained as such in the new Act. However, an addition in the form of Section 92A has been inserted facilitating export of patented pharmaceutical to any country having insufficient or no manufacturing capacity in the pharmaceutical sector for the concerned product, to address public health problems of that country. However, there is a view that compulsory license provisions are too bureaucratic and too slow. Many feel that compulsory licensing is an extraordinary remedy that has the potential to alienate 91 The drug research is costly and time consuming and involves a high degree of economic risk as all the molecules developed

through research may not be commercially viable. So pharmaceutical companies rely on sales of some blockbuster molecules to recoup their losses from futile R&D efforts and plow them back in future R&D. For further details see generally Carroll, Compulsory Licensing of Essential Medical Technologies, available at http://www.lists.essential.org/1999/info-policy-notes/msg00010.html (Visited on May 28 2004), Pharmaceutical Research and Manufactures of America, Why do Medicines Cost So Much, available at http://www.phrma.org/publications/brochure/questions/whycostmuch.phtml (Visited on may 28 2004).

92 Article 4 and 5, Paris Convention, 1967. 93 Reasonable requirements may include: (1) not prejudicing existing or new trades or industries; (2) meeting the demand for the

patented article in India at an adequate quantity and a reasonable price; (3) developing or supplying the export market for the patented invention; and (4) not prejudicing the establishment or development of commercial activities in India.

94 G. H. C. BODENHAUSEN, GUIDE TO THE APPLICATION OF THE PARIS CONVENTION FOR THE PROTECTION OF INDUSTRIAL PROPERTY AS REVISED AT STOCKHOLM IN 1967 70-71 (1968) (Emphasis Supplied).

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and offend many developed countries and large multinational companies.95 Generally speaking, a patent owning company in a free market has the economic incentive to assign production rights to the most efficient manufacturer.96 Therefore intuitively in an increasingly freer world, compelling reasons such as major national health emergency or gross violation of patent rights may be required to invoke a compulsory license. Necessarily, the public interest which underlies the mechanism of compulsory licensing must be weighted against to right to exclusive rights guaranteed by patents. Viewed in this context, compulsory licensing could only be sparingly used. Prof. Jean Lanjouw has noted, “Compulsory license only functions when there are drugs to license”.97 Arguably compulsory licensing or stringent price control regimes that limit the returns to discovering new products specifically designed to treat poor country health problems would prevent any beneficial redirection of research and lead to a string of litigations. Further and most importantly, only one country (Canada) has ever issued a compulsory license for pharmaceuticals since the TRIPs entered into force which demonstrates how limited its use could be.

Compulsory License and the TRIPs Agreement The ministerial interpretation of the TRIPs Agreement in the form of a “Declaration on the TRIPS Agreement and Public Health” made during the WTO fourth Ministerial Conference in Doha, Qatar, acknowledged the gravity of public health problems afflicting many developing and least developed countries, especially those resulting from HIV/AIDS, tuberculosis, malaria and other epidemics. The Doha Declaration stated that the TRIPS Agreement can and should be interpreted and implemented in a manner supportive of WTO Members’ right to protect public health and, in particular, to promote access to medicines for all. Amongst the various measures suggested to ensure access to affordable drugs, no single measure has been suggested as frequently as compulsory licensing. A “compulsory license” is a license to manufacture the patented product that is granted over the objection of the patent holder. The TRIPs Agreement has also mentioned compulsory licensing as permissible under Article 31 subject to meeting a number of conditions. Among other things, compulsory licensing must be preceded by an effort over a “reasonable period of time” to negotiate the license from the patent holder on “reasonable commercial terms”. This limitation must be waived by a Member in the event of a “national emergency”. [Article 31 (b)]. In addition, any such use must be “predominantly for the supply of the domestic market.” [Article 31 (f)]. Further the patent holder shall be paid adequate compensation…taking into account the economic value of the authorization” [Article 31(h)]. For anyone who had any doubt about the application of compulsory licensing for public health needs, the Doha Declaration laid to rest any such misgivings. It provided, “each Member has the right to grant compulsory licenses and the freedom to determine the grounds upon which the licenses are granted.” It is worth noting that the developing countries sought a language in the Ministerial Declaration that “nothing in the TRIPs Agreement prevents Members from granting compulsory licenses for foreign suppliers to provide medicines in the domestic market” and “nothing in the TRIPs Agreement will prevent Members to grant compulsory licenses to supply foreign markets”. The Doha Declaration therefore reinforced the understanding that the provisions of the TRIPs Agreement regulating compulsory licensing and exception must be understood not to inhibit their use for the export of generic medicines to Members that need them. One issue remained outstanding from Doha (2001): the difficulties faced by WTO Members with insufficient or no manufacturing capacities in the pharmaceutical sector, particularly in using compulsory licensing to over-ride patents. This issue was deferred for resolution and only on August 30, 2003 did the WTO General Council reach a decision on this issue. The August 30 decision (implementation of para.6 of Doha Declaration) provides a waiver of the obligations of developing countries under Article 31 (f) and (h) of the TRIPs Agreement.

95 Amir Attaran, The Doha Declaration on the TRIPS Agreement and Public Health, Access to Pharmaceuticals, and Options

under WTO Law, 12 Fordham Intellectual Property, Media and Entertainment Law Journal, 859, 869, and (2002). 96 Robert Bork, The Antitrust Paradox: A Policy at War with Itself, 376( New York: Basic Books) , 1978 97 Jean O. Lanjouw, A Patent Policy Proposal for Global Diseases, Section 8, Brooking Institution: Washington, D.C, 2001.

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As to the mechanism for implementation of para. 6 resolution, the August 30 Decision required an importing country, unless it is an LDC, to make a notification to the TRIPs Council to take advantage of this flexibility. The para. 6 resolution also required the exporting countries to notify the TRIPs Council of the grant of compulsory license under the system including the conditions attached to it. It is noticed that legislative changes to date have been made by a few countries for effective implementation of Para. 6. The two countries which have taken steps to implement the decision are India and Canada. The quest for a final solution is currently underway. Source: UNCTAD India

Notwithstanding the above concerns a reasonable means of using compulsory license provisions have been widely suggested as a triumph of the Doha Declaration on Public Health. It is only apposite to mention that the Indian Patent Act has incorporated a viable mechanism for invoking compulsory licenses. However, in the course of actual implementation it will be instructive to bear in mind the useful features of a viable compulsory licensing mechanism as suggested in the 2001 Un Development Report for creating a legal structure suited to developing countries on compulsory license. The five recommended features are:

1. Administrative approach: Any system that is overly legalistic, expensive to administer or easily manipulated is of little use; the best option is an administrative approach hat can be streamlined and procedural.

2. Strong government use provisions: The TRIPS agreement gives governments broad powers to authorize the use of patents for public non-commercial use, and this authorization can be fast-tracked, without the usual negotiations. No developing country should have public use provisions weaker than German, Irish, UK or US laws on such practices.

3. Allow production for export: Legislation should permit production for export when the lack of competition in a class of drugs has given the producer global market power that impedes access for alternative drugs, or when the legitimate interests of the patent owner are protected in the export market - as when that market provides reasonable compensation.

4. Reliable rules on compensation: Compensation needs to be predictable and easy to administer; royalty guidelines reduce uncertainty and speed decisions. Germany as used rates from 2-10%, while in Canada the government used to pay royalties of 4%. Developing countries could award an extra 1-2% for products of particular therapeutic value and 1-2% less when research and development as been partly covered by public funds.

5. Dispute demand disclosure: The onus should fall on the patent holder to back up claims that the royalty rate is inadequate. This will help promote transparency and discourage intimidating but unjustified claims."

Drug Price Control The pricing of pharmaceutical product is regulated in a number of countries, with the regulations being either direct or indirect in nature.98 The healthcare care system of a particular country is a determinative factor in the price control regime. In developed countries, where a large proportion of the population is covered by health insurance, the government and private health insurers influence the prices of drugs indirectly. The public or private organizations re-imburse the expenditure or pay for prescription drugs on behalf of their patients in those countries. Health insurers often receive rebates and discounts on pharmaceutical products from manufacturers who

98 ICRA, The Indian Pharmaceutical Industry, Industry Watch Series, 2004.

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desire to get their drugs covered in the list of drugs eligible for re-imbursement. Government health insurers also limit the reimbursement levels payable to patients. In some countries the government determines the prices of products which are eligible for reimbursement through negotiation.

Table 8: Overview of Drug Price Control in Different Countries Source: Based on Pharma Pricing Preview Report (2001) Even developed countries like Australia, Canada, New Zealand, Japan and some of the European countries also employ direct price control systems to obtain cheaper medicines. All these systems are not uniform in nature, they vary in structure but a common feature is the compromise arrived after taking into consideration the consumers’ ability to purchase and the manufacturer’s expected profit

margin.(see Table 9). Some scholars suggest99 that direct price control systems, if linked with national health care systems, as exists in some of the European countries, will not only result in lower ‘out-of-pocket’ drug costs but also shift to truly innovative products rather than ‘me-too’ products flooding the markets. The Government of India introduced a price regulatory policy-- precisely the Drug Price Control Order (DPCO)—in 1970 with the objective of protecting the interests of the consumers and ensuring a restricted but reasonable return to producers. The DPCO has undergone changes thrice with the latest one being in 1995. The DPCO regulates the domestic prices of ascertained major bulk drugs and their formulations.100 In order to bring a drug under the purview of price control order, three benchmarks were considered: turnover, market monopoly, and market competition. The Government also introduced a single MAPE (Maximum Allowable Post Manufacturing Expenses). On the whole, the norms to bring a drug under price control were made relatively transparent. To start off with, a single list of 76 bulk drugs was brought under the purview of price control. The existing price control regime in India has the mandate to put a cap on the price of the drugs in the Indian market in a controlled, and license regulated environment101. The Indian situation is 99 Refer Griffin 100 The drugs are divided into four categories, namely life saving, essential, less essential and non essential. As of now the first three

categories have price ceilings of the retail prices of the drugs. 101 The existing Price Control Order was formulated on the basis of Hathi Committee Report in 1975.

Country Control of prices at launch

Control Reimbursement Prices

Reference Pricing

Profit Controls

Positive/ Negative Listings

Drug Budgets for Doctors

Other

Austria Belgium Finland France Germany Greece India Ireland Italy Japan Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom

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made more complicated by the fact that, there is no national health system or any one body which can negotiate prices in bulk with the drug companies. In India just 17.8 % of general expenditure on health is government funded and most of private health expenditure is out of pocket expenditure, with the exception of a limited amount of private insurance schemes.102 Thus the emphasis was on reducing prices at the level of everyday over the counter transactions. In order to efficiently administer the Drug Price Control Order the National Pharmaceutical Pricing Authority (NPPA) was set up as an independent body of experts. The NPPA is not only responsible for regulating the price control but also to monitor the availability of drugs, identify the shortage and take remedial steps.103 The NPPA should now involve in creating an environment conducive to chanelize new investment into pharmaceutical industry through cost effective production methods and to strengthen the system of quality control over protection.

Drug Price Control and TRIPS Agreement Are drug price controls directly governed by the TRIPS Agreement? If a WTO Member recognizes pharmaceutical patents, but imposes regulations that limit the price at which the patent holder may sell their products, could it be argued that the patent holders were deprived of benefits they expected when entering into the TRIPS Agreement? The TRIPS agreement is silent about this and admittedly there is no violation of any TRIPS or other WTO provisions. However since its outset the GATT dispute settlement has included a less typical kind of action based on an allegation that the defending Member, although not in violation of any specific provision of WTO, has acted in a way that deprives the complaining Member of benefits it expected to obtain when it signed the Agreement. These kinds of complaints are called “non- violation” complaints. The predominant view is that “non-violation” complaints, if ever made applicable to the TRIPS Agreement, would be unsuccessful since many governments imposed price controls when the TRIPS Agreement was negotiated. If at all the Members desired to regulate price controls it should have been expressly negotiated in the TRIPS Agreement. In other words, no Member could reasonably have expected that price controls would not be used in respect of patented pharmaceuticals. Source: UNCTAD India

In view of the introduction of product patents for pharmaceuticals , the Indian drug price control mechanism may require an overhaul.There is a view that determining the “cost” of 74 bulk drugs and hundreds of their formulation and fixing ceiling prices is outdated. It is often alleged that the cost plus formula for fixing prices leads to inefficiency and may not be suited in the case of patented drugs. This feeling is partly supported by some recent research findings from twenty five major markets that in areas where the government links the price of a new drug to an off patent medicine through reference pricing, the pharmaceuticals companies tend to delay the launching of the new product.104 There is also the concern that the effect of price control and other equivalent regulations is to reduce expected return on investment in R&D.105 Furthermore, research and development costs are not included in the pricing formula currently used for bulk drugs and formulations. Pharmaceutical companies argue that their investment is ongoing and it would be difficult to specify the amount invested in a particular product. It seems equally difficult to

102 WHO, India Statistics http://www3.who.int/whosis/country/indicators.cfm?country=ind&language=en#economic 103 It is also involved in collecting and maintaining data on production, exports and imports, market share of individual companies,

profitability of the company and to undertake relevant studies on pricing of drugs. On account of the above knowledge, it is also empowered to render advice and assistance to the Central Government on changes and revision in the drug policy.

104 Patricia M. Danzon, Richard Wang and Liang Wang, The Impact of Price Regulation on the Launch Delay of New Drugs- Evidence from Twenty Five major markets in the 1990s, NBER, July 2003.

105 John E. Calfee, Free Markets Vs Canadian Drug Importation, American Enterprise Institute, July 9, 2003.

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quantify the total expenditure spent on drug development, regulatory approval and other promotional activities. Therefore, any effort to factor in R&D expenditure in a “cost” based formula should be carefully thought about. It seems that price ceilings set in key developed countries such as United States, Canada and France are increasingly tied to reference indexes106 of prices in other markets. A number of studies 107 have been done undertaken on the appropriateness of a reference index. It appears to be a good approach in regard to prescription drugs. It may also be a useful approach in the case of developing countries such as India since the pharmaceutical companies themselves pronounce that pharmaceutical pricing is linked to income levels. Some countries such as Australia, Canada, the Netherlands and Portugal have often used cost-utility evaluation method where drug prices are based on therapeutic outcome. Japan has taken an approach to approve the mark up in the reimbursable price of new drugs on the basis of their “innovation”.108 These approaches are however highly complex and require highly sophisticated scientific data, which in many cases is impossible to obtain. International Aid A successful strategy to give people in developing countries access to effective medicines has to involve four components. These strategies are available outside the TRIPS agreement and require a considerable amount of political support. First, the cost of giving patients access to existing drugs has to be separated from the incentives for pharmaceutical companies to improve and develop new drugs. Second, the financial incentives to invent new drugs for the world’s least developed countries must be subsidized by the industrialized countries. Third, a coordinated strategy should be jointly financed by the developed countries and implemented by an established international organization within the limits of international treaties. Fourth, the strategy should be focused on the least-developed countries and price spillovers should be limited by restrictions on parallel exports109.

The principal structure of the strategy should be an international fund managed by UNAIDS or WHO. With contribution from the developed - and possibly some middle-income developing countries - the fund would buy licenses to produce and sell patented essential drugs in those least-developed nations that choose to be part of the program. Contributions to the fund should be in the form of cash to finance current expenditure. Equally important would be binding commitments to pay for future drugs, in particular vaccines for HIV, TB and malaria. Payments to patent holders should be in the form of a fixed, yearly, lump-sum transfer that would feature three characteristics. First, it should guarantee successful drug and vaccine developers a net present value over the life of the program that should equal expected R&D costs. Second, it should be positively related to the social value (associated with reduced mortality, morbidity, and spillovers) of the drug in the licensed areas in order to tie R&D incentives to underlying needs. Third, given that there may be broader markets for the new drugs and vaccines, it should be positively related to the global share of patients in the licensed areas.

In addition to paying patent holders for licenses, the Fund could provide subsidies to purchase and distribute essential drugs in countries where a large fraction of the population is infected or production cost of the drug is too high in relation to the average income. For available life-extending treatments – such as the existing AIDS therapies – a possible policy would be to 106 Reference pricing is a system of fixed reimbursement for pharmaceuticals in which government or other third party players

establish a level they are willing to reimburse “interchangeable products”. It uses local or international price comparisons of drugs classified in the same therapeutic group to determine a single price. The therapeutic class of drugs can encompass old and new drugs including brand name or generic drugs.

107 See DiMasi ,Hansen , and Grabowski (2002), Hansen (1979) 108 Page 8, Pharmaceutical Administration and Regulation in Japan. 109 Mattias Ganslandt, Keith E. Maskus and Eina V. Wong, Developing and Distributing Essential Medicines to Poor Countries:

The Defend Proposal.

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subsidize purchases so that a specific treatment does not cost more than a pre-defined share (e.g. forty percent) of the average GNP per capita in a particular country (the remainder would have to be financed by the local government, NGOs, donors or the patients as a form of co-payment). For vaccines these purchases could be subsidized to a larger degree (up to 100 percent) as widespread access to vaccines has positive externalities both in the local and global community. Such a proposal110 would work within the existing international legal structure but significantly would raise the returns to R&D in critical medicines and expand distribution programs. A public international organization would purchase the license rights for designated areas and distribute the drugs at low cost with a required co-payment from local governments. Furthermore, governments would restrict parallel trade to support desirable price discrimination. Costs would be funded largely by increased foreign assistance from the developed nations, but these costs would be low in relation to current aid budgets. While these studies are based on simulations and are therefore not yet observed, we can obtain a rough idea about their plausibility by comparing the predicted prices to the prices of the same products observed in countries ‘similar’ to India, which have had stricter patent laws in the past. The similarity between their predictions and empirical evidence from Pakistan is striking. For the drug ciprofloxacin, for example, they predict that the price of the patented (foreign) products in India would be approximately 8 times higher than it is now (i.e. when its generic substitute will not be available). This matches exactly the numbers reported by Lanjouw 111 for patented ciprofloxacin in Pakistan.

The Bolar Exceptions Patent protection historically implies that any use of the patented product including experimental use or clinical testing is prohibited. This would imply that further research and development related to the patented product may be delayed until the patent expires. Explained differently, generic drug manufacturers must wait until the patent expiration to perform regulatory testing. Such a straitjacket approach has the effect of extending the duration of the patent and could potentially harm consumers by delaying marketing of lower priced generics and development of related drugs and new uses of the patented drug until after patent expiration. Countries including the United States, Europe and Japan have taken different approaches to balancing the interests of consumers through the implementation of experimental use exceptions to patent infringement. Such an exception is called, ‘bolar’ exceptions or ‘early working exceptions.’ The ‘bolar’ exceptions have its origin the landmark case of Roche Products Inc v Bolar Pharmaceutical Co112. decided in the United States. At that time the experimental use exception was extremely limited and did not cover commercial activities. In this case, the Federal Circuit expressly held that clinical testing constitutes prohibited use of a patented product. Essentially, the Drug Price Competition and Patent Term Restoration Act, popularly called the Hatch-Waxman Act was a repeal of Roche v Bolar decision in as much as it provided a safe harbour from infringement liability for generic manufacturers using a patented drug for approval testing.113 Under this legislation, it is not an act of infringement to make, use, and offer to sell, as long as it is solely for uses reasonably related to the development and submission of information under a federal law which regulates the manufacture, use, and sale of drugs or veterinary biological products. The Hatch-Waxman Act was explicitly designed to balance the opposing

110 Referred as DEFEND ("Developing Economies' Fund for Essential New Drugs"): Mattias Ganslandt, Keith E. Maskus & Eina

V. Wong (2001) 111 Lanjouw, J. O. Patent Protection in the Shadow of Infringement: Simulation Estimations of Patent Value, The Review of

Economic Studies. Vol. 65, pp. 671-710. (1998) 112 733 F.2d 858 (Federal circuit, 1984). 113 In 1984, FTC estimations stated that for about 150 off-patent drugs, there were no generic equivalents. It was also reasoned that

it is due to the combined effect of lengthy FDA approval process and provisions in the patent law. Drug Price Competition and patent Term Restoration Act of 1984, Pub. L. No.98-417, 98 Stat. 1585 (codified at 15 U.S.C. § § 68b-68c, 70b (1994)

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interests of the pioneer drug developers and generic manufacturers to encourage new drug development and early availability of generic substitutes. Although the amended Patent closely mirrors the provision of the U.S law or some other European countries, the scope of ‘bolar’ exceptions would considerably affected by judicial interpretation to follow in future. For instance, the German Courts have interpreted that tests that were done not merely to confirm data already known but which sought new information were also permissible. Accordingly, clinical trials on a patented product to obtain further knowledge about the properties of the active ingredient fell within the exception.114 The ‘bolar’ provision has been used by countries to allow manufacturers of generic drugs to apply for marketing and safety approval without the patent owner’s permission and before the patent expires. This regulatory exception has been permitted by a WTO panel ruling and has been incorporated in the new Indian Patent Act. A subsequent Amendment in 1996 to the Hatch-Waxman Act further simplified the generic drug application filing procedure by providing a generic applicant a choice to submit the clinical studies to prove the efficacy and safety of the product of the innovators’ company. If the generic applicant has to exercise this choice he has to simply show that the generic drug has the same active ingredient, dosage and is bioequivalent to the relevant brand name product.115 Therefore, these Bolar provisions in any patent Act is important from the point of view of affordability of medicines as it allows the generic entry just after the patent expires. In the absence of such a provision, the generic companies have to wait until the patent expires to do necessary laboratory tests and trials for regulatory compliance which may take several years. During this period, the market will still be monopolized by the patented drug, leading to undue advantage of the patent holder and unjust exploitation of consumers. The Canadian government, when making its laws TRIPs compliant, has introduced these bolar type provisions in its patent law, which was held by the WTO DSB to be a permissible exception under Article 30 of TRIPs.116 A similar provision was introduced through the Third Patent Amendment Act, 2002 in Section 107A (a), which provides exceptions stating that certain acts are not to be considered as infringements. The act of making, constructing, using or selling a patented invention solely for uses reasonably related to the development and submission of information for drug approval processes. However this provision seems to be inadequate because it does’nt specify any time limit for the procedure of approval to be started within the patented period for getting a generic approval. It also does not specify the liability if any of the person who is using the patented drug for the purpose of generic approval but not able to submit the findings to the authority.

Parallel Imports

The international system for the protection of IPRs that has evolved over the past several centuries acts to assure that IPRs holders receive remuneration in countries other than those where their creative activity may have taken place, and to assure that information concerning the origin of goods is not obscured as the goods cross national/ regional borders.117 The international IPRs system aims at global rights of exploitation and remuneration. In this context, rules

114 Klinische Versuche II (BGH, 17 April 1997). 115 For further details, see Annexure 1. 116 It is interesting to note here that Canada introduced two provisions in its Patent Act as an exception to the infringement of Patent

rights. The first provision is in the nature of bolar exception and the second was stockpiling exception (to manufacture and store the patented product after obtaining the approval during the period of patent. But on receiving the complaint from EU, DSB has upheld the use of bolar provision but struck down the stockpile exception. Fro further information see Report of the Panel: Canada-Patent Protection of Pharmaceutical Products, WTO Document No. WT/DS114/R dated 17 March 2000 (accessible at www.wto.org ).

117 Frederick M. Abbott, First Report (Final) to the Committee on International Trade Law of the International Law Association on the Subject of Parallel Importation, Journal of International Economic Law (1998), 607-636.

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restricting parallel importation (PI) take advantage of the territorial nature of international IPRs system which aims at segregating markets and enhancing the potential remuneration of IP owners.

Parallel imports take place when goods produced genuinely under IP protection are placed into circulation in one market and then imported into the second market without the authorization of the local owner of the intellectual property right. The ability of an IPR holder to exclude PI legally from a particular market depends on the importing nation’s treatment of exhaustion of intellectual property rights. Under international exhaustion, rights to control distribution expire upon first sale anywhere and parallel imports are permitted. Under national exhaustion, first sale within a nation exhausts internal distribution rights but IPR holders may legally exclude parallel imports or exports. Interestingly, a third category of exhaustion, namely regional exhaustion, applies to regional groupings such as the EU, where parallel trade is permitted within a group of countries but not from outside the region.

The rationale for parallel trade comes from expected price differences between source and destination countries. These price differences should be higher than any anticipated or un-anticipated costs from performing parallel trade, thereby allowing parallel traders to profit out of this activity. Assuming that costs for facilitating parallel trade, which may include among others transport and transaction costs, market authorization and other hedging costs against exchange rate differentials are significantly low the potential for parallel trade is high. . Parallel trade arises in markets with heterogeneous regulation and consequently may not lead to price equalization. This is because different markets differ considerably in their structure, composition of players and regulatory conditions resulting in variation in the prices of the same good in different markets

There is also a view that allowing PI helps entrepreneurs to purchase the product in the high-elasticity low price market and sell it in low-elasticity high-price market, which leads to the monopolist charging a uniform price and thus arbitraging away price discrimination. Some commentators argue that countries including India could naturally benefit from differential pricing given the purchasing power of the consumers and this option would be rendered non-feasible under a regime permitting PI.118 But this concern arises from the assumption that the potential for parallel imports is unlimited. However, empirical evidence suggests that price convergence is difficult to accomplish in the pharmaceutical sector and that the incentives for price discrimination will not be entirely eliminated. Studies indicate that the peculiarities of the pharmaceutical sector never allow the arbitrage to lead to uniform pricing which could ultimately strike, at the rationale for PI. In other words the studies indicate how the manufacturers accommodate PI by reacting to the level of imports chosen by the firms engaging in parallel trade. The flip side of such controlled parallel trade could be that its benefits are marginal, although it could still be welfare improving. The other concerns about the safety and efficacy of such imported drugs could always be addressed at the domestic level.

More specifically, the price of products subject to potential arbitrage is expected to drop relative to the prices of products that are not subject to potential parallel imports in the home market. In an empirical study conducted by Ganslandt and Kieth Maskus 119 on parallel imports of pharmaceuticals products in Sweden (from other European Community Members), it was found that the prices of goods subject to import competition, including parallel traded products themselves, fell approximately 4 percent in the import market relative to the prices of products not subject to parallel trade. Approximately, three quarters of this reduction resulted from parallel trade itself while the remaining effect was attributable to the change in the manufacturing firm’s prices.

118 Scheree and Watal, Post TRIPS options for acess to Patented Medicines in Developing Nations, 2002 119 Ganslandt,M, Maskus,K.E and Wong,E.V, Developing and Distributing Essential Medicines to Poor Countries: The Defend

Proposal. Papers 552, Industrial Institute for Economic and Social Research. (2001)

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Table 9: Variation in prices of Pharmaceuticals across selected countries

Notvgsc Liptor Pulmocort Sandmumm Neotal Qpro Piendl Imovane

Country 5 mg Tabs

10 mg Tabs

200Y P or A

100 mg Caps

100 mg Caps

500 mg

Tabs

5 mg Tabs

7.5 mg Tabs

USA 0.97 1.46 0.43 5.03 4.47 2.04 0.72 na Canada 0.79 1.04 0.19 Na 3.50 1.16 0.42 0.40 Mexico 0.71 1.17 Na 5.90 7.32 1.70 0.64 0.28 Brazil 0.80 0.89 Na 4.57 4.47 3.76 0.65 0.38 UK 0.61 0.99 0.27 3.69 3.60 2.06 0.43 0.23

Sweden 0.57 0.94 0.34 Na Na 3.29 0.53 0.22 Italy 0.58 0.89 0.17 3.04 3.12 1.82 0.3 0.26 Spain 0.42 0.83 0.14 Na 2.61 1.79 0.33 0.13 Czech Rep

0.42 0.83 0.16 Na 2.56 1.70 0.23 0.13

Japan 0.66 na Na Na Na Na 0.31 Na Korea 0.40 na 0.13 3 4.28 1.46 0.63 0.16

Thailand 0.43 na 0.10 1.10 3.14 1.27 0.27 Na India 0.09 na Na Na Na 0.14 0.07 Na South Africa

0.34 na 0.08 4.19 4.45 1.36 0.53 0.35

Correlations

0.56, 0.63

0.99, 0.45

0.88, 0.82

0.16, 0.18

-0.24, -0.29

0.47, 0.36

0.16, 0.22

-0.08, -0.19

Source: Keith Maskus (2001)

It is evident from Table 10 that price variations are considerable across countries, thus setting up potential for parallel trade. Since countries including India did not provide patent protection for the drugs included and generic competition was keen, thus the prices appears to be extremely low. But this need not be the situation post introduction of product patent. What is striking is that the prices in some low income countries, say Mexico appears to be higher than in some developed countries. In this context, PI offers an attractive proposition for lowering of prices.

Parallel imports exert pressure on governments to assure that domestic manufacturers can produce and distribute at competitive prices vis-à-vis other countries. Furthermore, a rule of international exhaustion in the field of patents may have the effect of transferring wealth from developed countries to developing countries. If industrialized country patent licensors cannot restrict parallel imports, and if substantial secondary or resale markets develop for drugs produced under license in developing countries, developing country licenses may benefit from patent licenses at the expense of industrialized country licensors. The new amendment to the Indian Patent Act, in this context, has to be viewed as a positive development.

Limitation of the Patentability Criteria: Tackling the Problem of Evergreening Evergreening, in common parlance, occurs when the brand name manufacturer literally stockpiles” patent protection by obtaining patent protection by obtaining separate 20 year patents on multiple attributes of a single product. It is possible for a pharmaceutical company to file several patent applications on the same product over the period of patent protection, thereby

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extending the patent on the medicine each time. Manufacturers can produce essentially the same drug, but make small changes in the way it is manufactured, for example, by changing the dosage, formulations or manufacturing processes. The changes introduced in the new patent amendment Act addressed this concern. Specifically Section 3(d) of the Patent Act states “The following are not inventions within the meaning of this Act – The mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of the substance or he mere discovery of any new property or a new use for a known substance or of the mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant.” This change is supposed to encourage the generic industry to enter the market as soon as the patent expires and is widely considered to be in the interest of consumer groups.

Future Options for India: The increasing Role of Outsourcing and Contract Manufacturing Outsourcing: The pharmaceutical companies faced with pressure to fill the pipeline with block buster drugs, rising development costs and a slowdown in sales are considering outsourcing as an overall business strategy. Pharmaceutical companies have even in the past outsourced work. More often than not, such outsourcing was project-by-project outsourcing and was not considered as a strategic policy. However, outsourcing is currently considered as a tactical policy which could help a company to access capabilities which are not available internally. The recent alliances between multinational pharmaceutical companies such as Roche Group and Pantheon, Hoechest Marion Roussel HMR and Quintiles mark this shift towards strategic outsourcing. Such a business strategy could benefit the pharmaceutical companies to allocate assets to areas that generate the greatest value and drive down costs and improve organizational efficiencies. Statistics indicate that of the 65 new chemical entities, or NCEs, introduced between 19994-98, bulk requirements for 35 molecules were outsourced, averaging $60 billion dollars per year. According to recent estimates, there are over 500 NCEs at various stages of development. It is reported that in at least 250 of such NCEs, there is a good possibility of outsourcing. An increasing number of western chemical vendors and pharmaceutical companies are attracted by China and India. It is reported that all pharma majors are actively investigating how best to leverage China and India to increase their competitiveness. Companies including Abbot, Lily and Merck are already sourcing small scale synthesis services. Outsourcing is also an interesting proposition for companies which purchase low cost materials, building blocks as well as some commodity APIs where cost is key. The market for outsourced services from the healthcare industry alone is estimated to be worth $ 24 billion in 2008 when compared to the market worth of $ 3.6 billion in 2004. Co-marketing alliances: In order to increase market penetration and increases their presence in select therapeutic segments, both domestic and multinational companies have entered into product specific marketing arrangements. For instance Ranbaxy entered into marketing alliances with Cipla for Carvedilol. Post 2005 they can step up such alliances and carve niche for themselves in the industry. Some positive steps taken by the Indian government in recent years include recognition of the pharmaceutical industry as a knowledge-based industry, reduction in interest rates for export financing, additional tax deductions for R&D expenses and reduction in the price control of pharmaceuticals120. Indian pharmaceutical industry seeking to take full advantage of benefits offered by the government, has been allocating money to R&D, when compared to the earlier years show phenomenal increase, which is represented in the table below.

120 For example, the import duty surcharge of 3.5% on vaccines and life-savings drugs has been removed. A 10% surcharge on

custom duty has also been scuttled.

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Other strategies: In the pharmaceutical sector, there is a drive for mergers and alliances with a view to cutting down costs. An analysis of the recent mergers and acquisitions (M&As) demonstrate that such strategic moves have helped the pharmaceutical companies to consolidate their position in the market and enhance their revenues.

Figure – 12: Effect of Consolidation in the Pharmaceutical Industry

What new strategy Indian Industry is likely to adapt In face of challenges posted by the new patent regime of 2005, the Indian Pharmaceutical industry will have to strategise their game plan especially to compete with the global giants. One of the strategies is the structural adjustments that the industry can make by forming conglomerations through horizontal or vertical mergers, acquisitions and take-over, or other appropriate strategic alliances. The other important strategy is in terms of standardisation norms meeting stringent international quality norms such as USFDA. The stricter the regulations, higher are the entry barriers and accordingly higher are the price realisation. USA which has the toughest regulatory requirements has emerged as India’s largest export partner in pharmaceuticals. Further the Indian companies also started targeting higher end generics market in US which may also entail long legal battles. Outsourcing is another area that is becoming increasingly relevant to India, more so in the product patent regime. India is an attractive low cost manufacturing base in pharmaceuticals. The Mckinsey report has estimated that it costs half or one-third for producing bulk drugs and intermediates for NCEs in India as compared to the U.S. the enormous losses due to delays, even if for a single day (losses can be to the extent of 0.5-1million), as well as certain technical complexities (Amprenavir, GSK’s anti-viral compound, has to undergo 14-step synthesis during manufacturing. The increasing complexities of chiral molecules121 have seen the emergence of one more dimension to outsourcing contract research for developing manufacturing processes for newer drugs) has led to the swing towards outsourcing. Thus the MNCs may decide to outsource production of that drug to another country instead of creating a manufacturing base from scratch for that particular drug. With India no longer being able to make and sell products patented by others, post 2005, contract manufacturing does seem a viable alternative. In fact in a study conducted by the ICRA in 2000, the prediction was that a considerable number of the existing players in the segment industry are likely to convert themselves into Contract Manufacturing

121 Chiral molecules are very complex to synthesize, as it involves a complicated synthetic steps as well as separation. Their stereo

chemical resolution is very difficult and the order of difficulty increases as the number of chiral centres increases. For further reading refer, Kalsi on Stereochemistry.

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Organisations (CMOs) for their larger counterparts. Some are also likely to turn themselves into Contract Research Organisations (CROs) for international companies. This scenario is likely because of the availability of research skills in India and the comparatively low cost of hiring research staff here. Thus, tie-ups are likely in which the foreign partner of a joint venture, outsource a part of the research work to its India counterpart122.

In the medium term, the Indian pharmaceutical industry is unlikely to be impacted much by product patent norms. The rate of new product introduction (a function of process research skills) and brand management efficiency are likely to remain the success parameters in the medium term. However, a shift is likely in the nature of products that will be introduced. It is expected that the shift will be in favour of high-value-high margin lifestyle related segments, like cardiovascular and neurological. In the long term, the overwhelming majority of Indian companies are expected to move towards off-patent, high-end segments, and the over-the-counter market.

122 http://www.pharmabiz.com/article/detnews.asp?articleid=18977&sectionid=50

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8

CONCLUDING REMARKS The present study was an attempt to analyse the possible effects of the imposition of the product patent on the pharmaceutical sector in India. To gauge the impact of such impositions, a comprehensive examination of the market structure of the pharmaceuticals, market accessibility and prices of the drugs as well the preparedness of the country to face such product patent regime has been focused upon. It may be noted that the econometric simulation is subject to the assumption that no additional policy restrictions are placed by the Indian government in the enjoyment of patents by the patent owners.123 Our results clearly highlight the fact that if the drug molecule has a positive cross-price elasticity of demand with respect to the patentable drug implying that it is a close substitute of the patentable drug, withdrawing that (patentable) drug will result in an increase in demand for the therapeutic substitute. We see that own-price and cross-price effects are the primary determinants in explaining the price behaviour across drug molecules. Accordingly, within Macrolides, we find that there is a possibility of a rise in average price in case of Domestic Erithromycin (32%) and Domestic Clarithromycin (48%), whereas a possibility of a fall in average price in case of Foreign Erithromycin (-35%), Foreign Azithroymcin (-157%), Foreign Roxithromycin (-40%) etc. Similarly, in case of Antiinflammation and Antacid, we find that some drug molecules experience a price rise, whereas others witness a price fall. Therefore we can say no clear trend of prise rise is observed. However, one exception to this outcome is Ranitidine; where an opposite impact is observed. After looking closely at the data, we observe that Ranitidine is the only drug molecule, where the foreign share carries a much significant share of the overall Ranitidine market. Thus a withdrawal of the domestic version of Ranitidine contributes to a rise in prices (inspite of a negative coefficient value of the foreign version). The rise in demand of foreign Ranitidine (due to a situation of a near monopoly of the foreign manufacturer) results in a price escalation. Not only this, consumers switch to foreign Ranitidine which contributes to a fall in prices of the therapeutic substitutes. The estimates we have arrived at point out loss in consumer welfare in the post-patent scenario. To a large degree this can be explained by the fact that a majority of spending on drugs in India is out of pocket, due to absence of widespread health insurance unlike most developed countries. But the Indian pharmaceutical industry appears on the whole to be unaffected. Our study does not find any major detrimental effects on the Indian pharmaceutical industry. In fact, under some scenarios, it is estimated that the profits of domestic firms may even increase. This might happen because, when certain domestic products become unavailable as a result of patent enforcement, consumers substitute towards other domestic products containing the same molecule. In addition given India’s advantages in the field of R&D, the introduction of patents regime may contribute to more research being outsourced to Indian companies and increased inflow of FDI. Thus, our econometric analysis shows that the TRIPS regime affects the Indian consumers to an extent, since there appears to be certain welfare losses for them. This welfare loss is not only in

123 Refer to § S. 11 A (7) of the new Patent Act (as amended) which refers to the royalty to be paid to patent holder for applications

that are in the mail box.

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terms of higher (or lower) drug prices, but also in terms of less product variety in the near future. However, this concern to a considerable extent has been allayed by a provision incorporated in the new patent Act, i.e., Section 11 A (7). This provision makes it clear that companies which have been manufacturing pharmaceutical products for which applications are in the mail box could continue to manufacture without the risk of infringement subject to the payment of reasonable royalty. Although one could argue that the introduction of the product patent could affect prices in a range of pharmaceutical products, adequate flexibilities adopted by the government will ensure that the adverse effects are minimized.

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Hudson (1992 and 2000) Keayla, B. K. Final Dunkel Act, New patent regime: myth and reality, Frontline, May 6, 1994, pp 14-16.(1994) Kremer.M, Creating Markets for New Vaccines, Part I and II, in A.B Jaffe. J Lerner, and S. Stren, eds., Innovation Policy and the Economy (Cambridge:MIT Press) (2001). Lanjouw, J. O. Patent Protection in the Shadow of Infringement: Simulation Estimations of Patent Value, The Review of Economic Studies. Vol. 65, pp. 671-710. (1998) Lanjouw,J.O, A Patent Policy Proposal for Global Diseases, Section 8, Brooking Institution: Washington, D.C, 2001. Lanjouw, J. O. and Cockburn,I. New Pills for Poor People?: Empirical Evidence After GATT, World Development. Vol. 29, no. 2, pp. 265-89. (2001) Lerner,J. Patent Protection and Innovation Over 150 Years, NBER Working Papers 8977, National Bureau of Economic Research, (2002) Lu, Z.J and Comanor, W.S. Strategic Pricing of New Pharmaceuticals, Review of Economics and Statistics, 80(1), 108-118.(1998) Maskus,K.E and Eby-Konan, 1994, "Trade-Related Intellectual Property Rights: Issues and Exploratory Results", in A.V. Deardorff and R.M. Stern (eds), "Analytical and Negotiating Issues in the Global Trading System", Subramanian (1995) Redwood, H. New Horizons in India,(1994). Rozek,R.P and Berkowitz,R. The Effects of Patent Protection on the Prices of Pharmaceutical Products: Is Intellectual Property Protection Raising the Drug Bill in Developing Countries? The Journal of World Intellectual Property, vol.1, pp.179-243 (1998 Sakakibara, M. and Branstetter, L.Do Stronger Patents Induce More Innovation? Evidence from the 1988 Japanese Patent Law Reforms, RAND Journal of Economics, 32, 1, pp. 77–100, (2001) Sagar,A & Socolar,D. Drug industry marketing staff soars while research staffing stagnates. Boston University School of Public Health, December,(2001) Sengupta,A. Indian Pharmaceutical Industry: Effects of Proposed Product patent Regime, Social Action, 48(4), P: 406-431.(1998) Scherer,F.M. Pricing, Profits, and Technological Progress in the Pharmaceutical Industry, 7 Journal of Economic Perspective. 86 (1993). Scherer,F.M. and Watal, J. Post –TRIPS options for acesss to Patented Medicines in Developing Nations, Journal of International Economic Law pages 913-939 (2002) Watal,J. Access to essential medicines in developing countries: Does the WTO TRIPS Agreement Hinder It?, Institute for International Economics (2000) Werth,B. The Billion-Dollar Molecule: One Company's Quest for the Perfect Drug. (1994)

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APPENDIX

Market Share Of Drugs / Drug Molecules ( A )

Drugs/ Drug Molecules Jul,04 Apr,04 Jan,04 Oct,03 Jul,03 Apr,03 Jan,03 Oct,02 Antibiotic/Antibacterial System 15.88 14.87 15.77 17.64 18.07 15.79 16.21 18.58

Tetracyl. & Comb./ Doxycyl. 0.5 0.52 0.56 0.59 0.59 0.64 0.67 0.72

Tetra Oral Solids 0.22 0.24 0.23 0.26 0.26 0.28 0.28 0.3 Tetra IM Injectables 0.02 0.02 0.02 0.03 0.02 0.02 0.02 0.03 Macroliders & Similar 1.49 1.39 1.65 1.68 1.69 1.5 1.79 1.94 Erithromycin Oral Solids 0.33 0.29 0.35 0.4 0.4 0.36 0.42 0.47 Azithromycin Oral Solids 0.31 0.35 0.41 0.44 0.44 0.39 0.51 0.55 Clarithromycin Oral Solids 0.1 0.1 0.14 0.1 0.12 0.12 0.15 0.14 Roxithromycine Oral Solids 0.36 0.35 0.41 0.44 0.44 0.39 0.51 0.55

Quinolones 3.55 3.27 3.15 3.86 4.34 3.92 3.51 4.14 Ciprofloxacin Oral Solids 1.28 1.06 1.11 1.31 1.53 1.43 1.53 1.69 Sparfloxacin Oral Solids 0.22 0.24 0.28 0.35 0.34 0.36 0.38 0.47 Ofloxacin Oral Solids 0.84 0.71 0.67 0.95 1.03 0.76 0.67 0.87 Levofloxacin 0.3 0.27 0.29 0.3 0.3 0.25 0.23 0.22 Gaifloxacin 0.33 0.35 0.38 0.42 0.49 0.43 0.4 0.29 Anti Inflammation, Anti Rheum. 5.72 5.53 5.39 5.49 5.35 5.59 5.53 5.46

Diclofenac Oral Solids 0.41 0.44 0.46 0.41 0.39 0.44 0.49 0.46 Ibuprofen Oral Solids 0.15 0.15 0.14 0.17 0.16 0.17 0.17 0.18 Piroxicam Oral Solids 0.18 0.19 0.2 0.18 0.17 0.21 0.21 0.19 Nimesulide Oral Solids 0.63 0.65 0.66 0.79 0.75 0.79 0.8 0.96 Roxithromycine Oral Solids 0.4 0.43 0.49 0.51 0.49 0.57 0.58 0.56

Ibupro Comb Oral Solids 0.6 0.58 0.59 0.65 0.63 0.62 0.6 0.63 Valexocib Oral Solids 0.45 0.48 0.46 0.4 0.41 0.43 0.34 Antacid, Antiflautul 4.58 4.58 4.62 4.62 4.69 4.73 4.55 4.35 Ranitidine Oral Solids 0.59 0.63 0.73 0.75 0.75 0.8 0.79 0.78 Omeprazole Oral Solids 0.66 0.7 0.72 0.73 0.72 0.77 0.8 0.76 Lansoprazole 0.18 0.21 0.22 0.23 0.23 0.28 0.3 0.33

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( B )

Drugs/Drug Molecules Jul,02 Apr,02 Jan,02 Oct,01 Jul,01 Apr,01 Jan,01 Oct,00 Antibiotic/Antibacterial System 17.24 16.71 17.66 19.03 17.92 16.51 18.23 20

Tetracyl. & Comb. / Doxycyl. 0.69 0.69 0.71 0.73 0.76 0.81 0.84 0.99

Tetra Oral Solids 0.28 0.3 0.31 0.31 0.36 0.39 0.39 0.47 Tetra IM Injectables 0.03 0.02 0.02 0.03 0.03 0.02 0.03 0.04 Macroliders & Similar 1.77 1.72 2 2.03 1.85 1.78 2.08 2.14 Erithromycin Oral Solids 0.46 0.43 0.49 0.52 0.5 0.46 0.51 0.58 Azithromycin Oral Solids 0.22 0.21 0.26 0.21 0.17 0.18 0.22 0.21 Roxithromycine Oral Solids 0.49 0.5 0.6 0.63 0.62 0.58 0.74 0.75

Clarithromycin Oral Solids 0.13 0.13 0.16 0.12 0.11 0.13 0.17 0.14 Quinolones 3.9 3.75 3.64 4.02 3.97 3.55 3.6 4.11 Ciprofloxacin Oral Solids 1.63 1.57 1.6 1.91 1.93 1.66 1.74 2.22 Sparfloxacin Oral Solids 0.45 0.46 0.54 0.58 0.58 0.52 0.65 0.54 Ofloxacin Oral Solids 0.75 0.71 0.66 0.78 0.64 0.53 Levofloxacin Gaifloxacin Anti Inflammation, Anti Rheum. 5.66 5.76 5.54 5.62 5.66 5.64 5.5 5.45

Diclofenac Oral Solids 0.5 0.52 0.49 0.46 0.47 0.58 0.52 0.48 Ibuprofen Oral Solids 0.19 0.2 0.17 0.2 0.22 0.24 0.25 0.23 Piroxicam Oral Solids 0.24 0.25 0.24 0.23 0.25 0.27 0.27 0.26 Nimesulide Oral Solids 0.97 0.99 0.94 1.03 0.94 0.95 0.97 1.01 Rofecoxib Oral Solids 0.65 0.65 0.61 0.53 0.53 0.46 0.4 Ibupro Comb Oral Solids 0.6 0.66 0.65 0.74 0.78 0.7 0.71 0.84 Valexocib Oral Solids Antacid, Antiflautul 4.59 4.59 4.54 4.32 4.55 4.67 4.37 4.36 Ranitidine Oral Solids 0.82 0.88 0.93 0.84 0.97 0.98 0.96 0.96 Omeprazole Oral Solids 0.81 0.82 0.89 0.86 0.9 8.91 0.89 0.89 Lansoprazole 0.37 0.37 0.42 0.43 0.4 0.43 0.41 0.4

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( C )

Drugs/Drug Molecules July,00 Apr,00 Jan,00 Oct,99 Jul,99 Apr,99 Jan,99 Antibiotic/Antibacterial System 14.42 14.75 15.76 16.44 15.55 15.03 16.25

Tetracyl. & Comb. / Doxycyl. 0.96 0.95 1.04 10.5 10.3 1 1.22

Tetra Oral Solids 0.46 0.46 0.49 0.53 0.49 0.49 0.58 Tetra IM Injectables 0.03 0.03 0.03 0.03 0.05 0.03 0.04 Macroliders & Similar 1.84 1.81 2.12 2.17 205 1.95 2.14 Erithromycin Oral Solids 0.54 0.57 0.6 0.68 0.66 0.66 0.71 Azithromycin Oral Solids 0.16 0.15 0.22 0.18 0.15 0.17 0.18 Roxithromycine Oral Solids 0.64 0.6 0.77 0.74 0.69 0.6 0.69

Clarithromycin Oral Solids 0.11 0.11 0.13 0.11 0.13 0.1 0.13 Quinolones 3.95 3.84 3.88 4.17 4.62 4.32 3.87 Ciprofloxacin Oral Solids 2.1 2.16 2.23 2.53 2.83 2.53 2.34 Sparfloxacin Oral Solids 0.42 0.41 0.48 0.41 0.41 0.4 0.41 Ofloxacin Oral Solids Levofloxacin Gaifloxacin Anti Inflammation, Anti Rheum. 5.52 5.4 5.26 5.14 5.2 5.21 5.04

Diclofenac Oral Solids 0.54 0.56 0.54 0.56 0.48 0.59 0.59 Ibuprofen Oral Solids 0.24 0.3 0.29 0.28 0.33 0.32 0.33 Piroxicam Oral Solids 0.35 0.3 0.36 0.34 0.35 0.41 0.42 Nimesulide Oral Solids 1.06 1.05 0.99 0.97 0.97 0.81 0.87 Rofecoxib Oral Solids Ibupro Comb Oral Solids 0.75 0.79 0.82 0.92 0.92 0.91 0.88 Valexocib Oral Solids Antacid, Antiflautul 4.45 4.46 4.5 4.13 4.24 4.21 4.11 Ranitidine Oral Solids 0.94 0.97 0.96 0.86 0.92 0.95 0.93 Omeprazole Oral Solids 0.88 0.87 0.89 0.84 0.86 0.86 0.83 Lansoprazole 0.4 0.36 0.42 0.34 0.33 0.3 0.31

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Market Share (MS)/ Foreign Share (FS)/ Domestic Share Of Macrolides

( A )

Month-Year ERIMS ERIFS ERIDS AZIMS AZIFS AZIDS Jul-04 21.98 2.25 19.73 20.14 0.2 20.54 Apr-04 20.53 2.25 18.28 21.69 0.09 21.6 Jan-04 21.28 2.2 19.08 19.59 0.13 19.46 Oct-03 23.63 2.55 21.08 16.81 0.03 16.78 Jul-03 25.36 2.99 22.37 16.93 0.12 16.81 Apr-03 23.73 3.08 20.65 16.19 0.03 16.16 Jan-03 23.38 3.87 19.51 26 0.01 15.99 Oct-02 24.2 3.7 20.5 13.3 0.01 13.29 Jul-02 26.2 3.3 22.9 12.3 0.01 12.29 Apr-02 25.2 3.9 21.3 12 0.05 11.95 Jan-02 24.6 3.8 20.8 13 0.1 12.9 Oct-01 25.5 4.25 21.25 10.2 0.1 10.1 Jul-01 26.7 4.2 22.5 9.4 0.3 9.1 Apr-01 26 4.55 21.45 10 0.1 9.9 Jan-01 24.8 5.45 19.35 10.7 0.7 10 Oct-00 27.1 5.5 21.6 9.6 0.2 9.4 Jul-00 29.6 5.8 23.8 8.9 0.2 8.7 Apr-00 21.7 5.4 26.3 8.2 0.5 7.7 Jan-00 28.1 6.1 22 10.4 0.8 9.6 Oct-99 31.4 6.2 25.2 8.5 0.6 7.9 Jul-99 32 7 25 7.1 0.4 6.7 Apr-99 34 7 27 8.6 0.1 8.5 Jan-99 33 7.4 25.6 8.4 0.2 8.2

72

( B )

Month-Year ROXMS ROXFS ROXDS CLAMS CLAFS CLADS Jul-04 23.96 0.05 23.91 6.39 2.3 4.09 Apr-04 25.07 0.05 25.05 7.53 2.38 5.15 Jan-04 25.1 0.1 25 8.3 2.91 5.39 Oct-03 26 0.06 25.94 6.88 2.32 4.56 Jul-03 25.47 0.1 25.37 6.21 2.07 4.14 Apr-03 26.2 0.1 25.92 8.14 2.71 5.43 Jan-03 28.4 0.1 28.3 8.34 3.03 5.31 Oct-02 28.25 0.1 28.15 7.8 2.88 4.92 Jul-02 27.8 0.1 27.7 7.4 2.2 5.2 Apr-02 29.1 0.4 28.7 7.7 2.4 5.3 Jan-02 30.1 0.75 29.35 8.1 2.5 5.6 Oct-01 30.9 1.55 29.35 6 2 4 Jul-01 33.6 1.9 31.7 6.1 2.5 3.6 Apr-01 32.6 2 30.6 7.4 2.6 4.8 Jan-01 35.6 2.285 32.75 8.3 3.1 5.2 Oct-00 34.9 2.65 32.25 6.3 2.3 4 Jul-00 34.5 3 31.5 6 2.6 3.4 Apr-00 33.2 3.1 30.1 6.3 2.5 3.8 Jan-00 36.4 3.2 33.2 6.3 3.2 3.1 Oct-99 34.4 3.9 30.5 5.2 2.8 2.4 Jul-99 33.8 4.2 29.6 6.2 3.7 2.5 Apr-99 31 3.5 27.5 5.5 2.9 2.3 Jan-99 32.4 3.9 28.5 5.9 2.9 3

73

MS/ FS/ DS of Antiinflammation (A)

Month-Year

DICMS DICFS DICDS IBUMS IBUFS IBUDS PIRMS PIRFS PIRDS

Jul-04 7.54 5.84 1.7 2.86 2.44 0.42 3.3 2.25 1.05 Apr-04 8.47 6.63 1.84 2.94 2.55 0.39 3.6 2.27 1.33 Jan-04 9.06 7.07 7.99 2.86 2.42 0.44 3.85 2.39 1.46 Oct-03 7.74 5.94 1.8 3.18 2.72 0.46 3.32 2.04 1.28 Jul-03 7.77 6.05 1.72 2.85 2.47 0.38 3.32 2.11 1.21 Apr-03 8.28 6.29 1.99 3.19 2.79 0.4 3.96 2.53 1.43 Jan-03 9.39 7.27 2.12 3.37 2.9 0.47 4.06 2.42 .164 Oct-02 9.04 7.17 1.87 3.6 3.16 0.44 3.8 2.13 1.67 Jul-02 9.3 7.35 7.95 3.6 3 0.6 4.5 2.5 2 Apr-02 9.6 7.55 2.05 3.7 3.15 0.55 4.7 2.8 1.9 Jan-02 9.5 7.3 2.2 3.4 3 0.4 4.7 2.7 2 Oct-01 8.7 6.9 1.8 3.7 3.05 0.65 4.3 2.65 1.65 Jul-01 8.9 6.9 2 4.1 3.4 0.7 4.7 2.7 2 Apr-01 11.1 8.85 2.25 4.5 4.8 0.3 5.2 3.05 2.15 Jan-01 10.2 8.05 2.15 5 4.4 0.6 5.4 3.25 2.15

( B )

Month-Year NIMMS NIMFS NIMDS ROFMS ROFFS ROFDS Jul-04 11.73 0.12 11.61 7.4 0.17 7.23 Apr-04 12.46 0.12 12.34 8.2 0.18 8.02 Jan-04 13.08 0.18 12.9 9.75 0.19 9.56 Oct-03 14.95 0.17 14.78 9.69 0.21 9.48 Jul-03 14.82 0.13 14.69 8.98 0.17 8.81 Apr-03 15.02 0.13 14.89 10.81 0.25 10.56 Jan-03 15.42 0.2 15.22 11.14 0.3 10.84 Oct-02 18.62 0.21 18.41 10.97 0.34 10.63 Jul-02 18.3 0.25 18.05 12.2 0.4 11.8 Apr-02 18.3 0.25 18.05 12.1 0.3 11.8 Jan-02 18.2 0.25 17.95 11.8 0.2 11.6 Oct-01 19.4 0.1 19.3 10 0.2 9.8 Jul-01 17.8 0.25 17.55 10.1 0.2 9.9 Apr-01 18.1 0.15 17.95 8.8 0.1 8.7 Jan-01 19 0.1 18.9 9.25 0.1 9.15

74

MS/ FS/ DS of Antacid

Month-Year

Rant MS

Rant FS

Rant DS

Omep MS

Omep FS

Omep DS

Lans MS

Lans FS

Lans DS

Jul-04 18 7.04 10.96 20.04 0.1 19.94 5.16 0.16 5.45 Apr-04 19.38 7.21 12.17 12.46 0.08 21.38 6.47 0.2 6.27 Jan-04 21.93 9.62 12.31 21.5 0.08 21.42 6.63 0.16 6.47 Oct-03 22.62 8.89 13.73 21.67 0.1 21.57 7.06 0.22 6.84 Jul-03 22.84 9.13 13.71 21.97 0.14 21.83 7.44 0.28 7.16 Apr-03 24.35 9.84 14.51 23.5 0.1 23.4 8.5 0.36 8.14 Jan-03 24.53 10.9 13.63 24.83 1.2 23.63 9.18 0.36 8.82 Oct-02 25.87 10 15.87 25.2 0.05 25.15 11 0.39 10.61 Jul-02 26.1 10.84 15.26 25.9 1.4 24.5 11.8 0.3 11.5 Apr-02 28.8 11.5 17.3 26.9 0.1 26.8 12.1 0.5 11.6 Jan-02 29.8 11.9 17.9 28.5 0.05 28.45 13.4 0.5 12.9 Oct-01 29.1 11.25 17.85 29.7 0.05 29.65 15 0.7 14.3 Jul-01 32.6 14.2 18.4 30.3 0.05 30.25 13.4 0.5 12.9 Apr-01 33.3 15 18.3 31 0.05 30.95 14.8 0.35 14.45 Jan-01 33.6 15.5 18.1 31.1 0.05 31.05 14.4 0.35 14.05 Oct-00 34.2 15.1 19.1 31.5 0.05 31.45 14.2 0.05 14.15 Jul-00 34.4 12.9 21.5 31.09 0.05 31.04 14.6 0.1 14.5