TRIPS compliance: dealing with the consequences of drug patents in India.

• Author: Gupta, Rishi
• Position: Agreement on Trade-Related Aspects of Intellectual Property Rights

1. INTRODUCTION II. RESPONDING TO THE THREAT OF INCREASED DRUG PRICES A. Will Drug Prices Actually Rise? B. Drug Price Controls C. Governmental Purchasing Power D. Compulsory Licenses E. Lax Enforcement of Patent Rights F. Public-Sector Drug Development G. Summary III. RESPONDING TO THE THREAT TO INDIAN INDUSTRY A. India Possesses Local Capacity B. Presence of a Skilled Scientific Workforce C. Anticipatory Behavior of Indian Pharmaceutical Firms D. Alignment of Regulatory Regimes E. Development of a Venture Capital Industry F. Summary IV. CONCLUSION I. INTRODUCTION

   "The idea of a better-ordered world is one in which medical discoveries will be free of patents and there will be no profiteering from life and death." (1)

   The sentiment expressed by Indira Gandhi some twenty years ago has come to the fore of the public consciousness in recent months. Skyrocketing healthcare costs in the United States have been attributed to the rising prices of prescription drugs. (2) Stories of senior citizens who must make daily choices between food and life-saving medicines are commonly reported in the media, (3) and the debate about the legality of drug reimportation from Canada continues to rage. (4) The high costs of HIV/AIDS drugs in countries of sub-Saharan Africa--some of which have HIV infection rates that approach or exceed twenty--five percent among their adult populations--mean that people are suffering and dying despite the fact that medicines have been developed against this modern scourge. (5) The villains in all of these stories are the firms that produce drugs--pharmaceutical and biotechnology companies--and the system of intellectual property rights (in particular, patent rights) that enables the companies to charge what some consider to be exorbitant prices for their products for an extended period of time.

   A patent, as embodied in American law, is a government-issued grant that confers upon the patent owner "the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States" for a period of twenty years beginning from the filing date of the patent application. (6) A patent effectively grants the patent owner a limited monopoly on the patented invention. (7) While the inventor can collect monopoly rents on sales of her product until the time of patent expiration, this inefficiency is justified on utilitarian or consequentialist grounds--that is, without patent protection, inventors would not invent, or would invent only to a level that would be considered sub-optimal. This concern is particularly salient in the world of medicines, where a substantial capital investment is required to bring products to market. (8) Significant funds are needed for drug research for two reasons: first, new drugs are exposed to extensive regulatory scrutiny and must be tested in expensive clinical trials in order to prove their safety and efficacy; and second, medical research is inherently uncertain and risky in nature, with a number of failures typically preceding any valuable breakthroughs. (9) Without the prospect of a limited monopoly, it appears unlikely that many investors would be willing to place tens or even hundreds of millions of dollars at risk on early-stage biomedical research.

   The trade-off with drug patents, then, involves weighing the creation of incentives for research and development against the temporary high costs for consumers and the associated economic inefficiency that result. The granting of patents, to be sure, comes at a price. The central question is: When does that price become too high? The Indian government decided some thirty years ago that the price is always too high. The 1970 Patent Act simply prohibited the granting of patents on pharmaceutical products (in other words, on drug compounds themselves). (10) However, patents on manufacturing processes are permitted and indeed enforced. (11) The upshot of this is that Indian pharmaceutical firms undertake little original research and development. Rather, a large and fragmented generic pharmaceuticals industry has developed in India, with some sixteen thousand firms. (12) These firms have become quite adept over time at starting with a drug compound that has been approved in a foreign market and reverse-engineering it--that is, determining how the compound is made and devising a novel manufacturing process for producing it in great quantities. (13) As a result of this expertise, and because reverse-engineering entails minimal research costs that need to be recouped, drugs are often available in India at a fraction of their price in the United States and Europe. (14)

   However, India has begun to pass legislation that will over time turn this relative pricing advantage and the robustness of the Indian generics industry into distant memories. As a result of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and India's membership in the World Trade Organization (WTO), India is required to make significant changes to its drug patent laws by 2005. (15) In particular, to comply with Trade Related Aspects of Intellectual Property Rights (TRIPS) (16) agreements, India, along with many other developing countries, must adopt an intellectual property regime that mimics the system of much of the developed world, complete with twenty-year patent rights on pharmaceutical products. (17) Such a system, it is believed, will have many positive effects in the long run, including the stimulation of risky and expensive research and development activity. Specifically, patents in developing countries such as India are likely to fuel research into diseases such as malaria and tuberculosis that are specific to those areas and that have not previously drawn much attention from industry because of the unavailability of patent protection. (18)

   Despite the potential benefits, however, critics have rightly pointed to two major difficulties of compliance with TRIPS. First, product patents will mean that generic companies will no longer be able to market a drug simply by developing a new manufacturing method. As such, there will be no competitive pressures on a drug until its patent expires; drug prices are therefore almost certain to increase. This is objectionable in a country like India, where only a small percentage of the population can afford prescription drugs even at currently depressed prices. (19) Second, there is a strong argument to be made that the new laws in 2005 will benefit multinational pharmaceutical companies at the expense of Indian industry and jobs. (20) The multinational corporations (MNCs) have been conducting drug discovery programs for many years, and are therefore likely to benefit significantly from the ability to patent their promising drug candidates in India. Indian generic manufacturers, on the other hand, have very little experience discovering and developing their own drugs; as noted above, they are in the business of imitating already-approved drugs that can then be sold cheaply. Thus, it seems possible that Indian generic firms may be driven out of business unless they can find a way to compete effectively in drug discovery with MNCs. If they are unable to do so, Indian pharmaceutical workers will no doubt lose jobs, and they will not necessarily be absorbed by MNCs, who can set up their manufacturing operations anywhere in the world and are unlikely to open new facilities in India because of relatively poor infrastructure. (21) Moreover, large amounts of wealth that previously remained within India to be re-invested domestically will likely leave the country via the MNCs.

   These criticisms are legitimate and suggest results that are quite problematic for a country like India. How, then, can the nation live with the consequences of TRIPS compliance? I argue here that there are many factors already in place and several relatively straightforward policy choices that the Indian government can make that will mitigate the drawbacks of granting pharmaceutical product patents. In Part II, I address the real possibility that patents will result in increased prices of essential medicines. While this possibility is likely to materialize, it is apt to occur only gradually, and the Indian government can make use of price controls, its bargaining power as a large purchaser, and compulsory licenses in the meantime to ensure that the process does not proceed more quickly than is desirable. However, such strategies should only be undertaken when absolutely necessary; resorting to them too liberally would only serve to undermine the very incentives that drug patents are intended to create. Part III of this Article takes up the concern that Indian pharmaceutical firms will suffer and that Indian jobs will be lost in the post-2005 world. This fear is by no means far-fetched, but there are reasons to believe that Indian industry will be able to compete with global players. Among these are an educated, well-trained scientific workforce and evidence of successful drug development in the past. Moreover, by passing reforms that will encourage the development of venture capital, India's government can make certain that funding will be available for the country's nascent biotechnology industry, an industry that holds the promise of making significant contributions to India's economic growth and public health needs. Part IV concludes with some thoughts about the importance of experimentation and context-specificity with regard to the strengthening of intellectual property rights in the developing world, and with a word of caution about an over-reliance on patents to solve the difficult problems of drug research and economic development.

2. RESPONDING TO THE THREAT OF INCREASED DRUG PRICES

   1. Will Drug Prices Actually Rise?

      As described earlier, patents give the patent holder the right to exclude others from making, using or selling the...