Indian pharma: Treasure at the bottom of the pyramid

India is perceived as the boiler room of the world’s technology engine. This perception has reached its pinnacle as a stereotype in the form of the “Indian techie.” Almost all the technology companies, whether global champions or contenders, have significant operations in India which continue to grow even while there are cut-backs elsewhere. What is perhaps not so widely known is that India is also the world’s pharmacy. The common man in the West would probably not realize that most of the medication that he is taking has been made in India. The Indian pharmaceutical industry, while being much older than its tech cousin made a significant impact on the world at the same time as its more visible cousin, in the early part of this century. As an example, more than 95 percent of drugs to treat HIV/AIDS are manufactured by Indian companies just as there is Indian code in virtually every computer program anywhere in the world.

All this progress was visible only in this century and it is now hard to imagine India in the last century fumbling through a Soviet-style planned economy with deep and extensive government control. With liberalization of the economy, many of the government monopolies no longer exist. There is however one monopoly that all governments, irrespective of their economic leanings, confer on private parties – patents. A patent is an exclusive right to produce goods or exclusive use of a process to produce goods. While patent legislation has always been national, i.e., countries have their own procedures, the World Trade Organization’s Agreement on Trade Related Intellectual Property Rights (TRIPS) set a global minimum standard. Many countries, including India, had to amend their IPR (Intellectual Property Rights) laws to comply with their TRIPS obligations despite opposition from civil rights groups who believed that the developing world was opening itself up to dominance by the developed world, which would use IPR as a weapon to monopolize knowledge and deny it to the developing word.

One of the major risks of a free market economy advocated by the World Trade Organization (WTO) is abuse of dominance and market power. Every country has reserved to itself the power to reign in entities that abuse their dominance to undermine market efficiency. We in India, and the Europeans, refer to this as competition law, the Americans as anti-trust law but the underlying objectives and principles are universal, based on sound economic theory that transcends national borders. India’s Competition Act is quite recent and took a very long time to be implemented. As a result, competition law jurisprudence is still at a very nascent stage of evolution in India. However, thanks to TRIPS, the protection against abuse of the monopolies granted by IPR exists in each of the IPR legislation themselves and relief from abuse of IPR monopolies is therefore not entirely dependent on competition law.

How unhappy some multinational corporations are about India’s IPR regime is frequently in the news, usually, in the form of reports by “industry groups,” funded primarily by multinational pharma companies, that have been very critical of India’s IPR law. The time taken in examining patent applications and the lack of efficient online search for patents granted and patent applications are issues that India, like any developing country with history, legacy and poor infrastructure confronts and this affects both Indian and international entities seeking protection for IPR in a non-discriminatory manner.

pillsThe decision of the Indian Supreme Court refusing to allow Novartis to extend the life of a patent for Imatinib1 by “evergreening” an old patent and the compulsory license for Sorofenib, are two instances that are frequently quoted to support the position that India’s IPR regime does not conform to global norms. To be fair, there are others like Boeing and Raytheon who have been supportive of India’s IPR regime and the technology giants who have not been able to patent all their software in India2 don’t seem to be complaining. There have been murmurs that issuing compulsory licenses amounts to illegal expropriation of property which is prohibited by international law. This seems more posturing and sabre rattling than a real threat since no country has raised a dispute at the WTO regarding any violation by India of its TRIPS obligations or sued under any of the investment protection treaties. In fact, there are several instances of the United States of America issuing compulsory licenses and for products like memory chips, automobile transmission systems and software programs, all less important than life saving drugs.

The first case of compulsory licensing3 that hit the headlines was Nexavar. Sorofenib, a cancer drug available in India since 2009 under the brand name Nexavar was imported and sold by Bayer for 280,000 rupees (approx. US$ 4,300) per patient per month, many years after the patent was granted. It is estimated that less than 1 percent of the cancer patients who needed the drug could get it in India. Natco, an Indian generic manufacturer, sought a license from Bayer so that it could make the drug widely available in India for an affordable price4. Bayer refused to grant Natco a license and as a result, Natco applied for a compulsory license which was granted by the Controller of Patents. The Intellectual Property Appellate Board, the Bombay High Court and finally, the Supreme Court confirmed the compulsory license allowing Natco to manufacture and sell orofenib at 8,800 rupees (approx. US$130) per patient making it affordable and more accessible to patients.

One easily forgets, since it is rarely mentioned, that the objective of granting patents was for society to benefit from the knowledge of the patent holder. A patent is therefore a method of transfer of knowledge to society by an inventor with the incentive of the limited monopoly granted by the patent. There has been universal acknowledgement, at least since the time of Adam Smith5, that monopolies distort the market price of goods. It is for this reason that whenever monopolies are granted, there are regulations protecting market price – airport charges, electricity tariffs and telecom interconnection and termination charges are good examples of regulatory checks on monopolies.

The Indian Patent Act has provisions requiring the patent holder to ensure that (i) the patented product is widely available at a reasonable price, (ii) government can have the patented product manufactured for non-commercial use and (iii) the patent can be revoked in public interest. Until the instances of Novartis and Nexavar, these provisions have rarely been enforced in India and as a result, patent holders had no fear of punishment for any abuse of monopoly.

Since these two decisions, patent holders seem to have realized not only that legislation will be enforced but there is also the opportunity to enjoy the economic benefits of selling to the bottom of the pyramid, which in the case of India is greater than the population of several European countries. Take the case of Nexavar which has had increasing sales despite little investment in the Indian market once Natco and Cipla launched “competing” products at a fraction of the price. In addition to the profits from the increased sales of Nexavar, Bayer also earns royalties from Natco, under the compulsory license, without expending any additional effort or cost – good money for old rope. Despite there being significantly cheaper alternatives, the prices of neither Nexavar nor Gleevec have been reduced but sales, on the other hand, have increased. The only conclusion one can draw is that with widespread availability of the drugs, thanks to Indian manufacturers, the overall markets for the two drugs have been growing significantly and there has been a segmentation of the market by price. The myth in circulation that introduction of competition will cause a drastic reduction in price of the protected monopoly as alleged by patent holders has been busted by the sales data for both Nexavar and Gleevec.

This realization of the risk of punishment for abuse of monopoly and the opportunity to make profits without any additional expense is perhaps the basis for a number of licensing deals concluded recently by patent holders. In addition to the HIV/AIDS drugs freely available for non-exclusive license through the Medicines Patent Pool, the announcement last year by Gilead to license Sofosbuvir, the “$1,000 pill” to seven Indian generic manufacturers is a significant acknowledgement that the government will implement the law to come down heavily on monopolies but also that there is an opportunity to make profits for no additional effort or cost by segmenting the market by price. As a result of this licensing model, Sofosbuvir is available in India for US$14 a pill, and its combination with Ledipasvir (sold by Gilead as Harvoni in the U.S.), is also available in India at a fraction of the international price. In January 2016, Bristol Myers announced that it was contributing Daclatasvir to the Medicines Patent Pool for non-exclusive licensing. The combination of Daclatasvir and Sofosbuvir is widely believed to be the standard treatment for Hepatitis C. This is an excellent example of multinational drug companies realising that there is a lot of money to be made “at the bottom of the pyramid “but that it requires a different business model – of cooperation with Indian generic manufacturers who are able to produce high quality drugs at the lowest price and also have the distribution network to get it to various parts of India and the rest of the developing world that the multinational pharma companies cannot hope to reach.

With a billion mobile phone users and a rapidly growing market for mobile phones, it is not difficult to see how well technology companies have exploited the opportunity to offer a variety of phones at prices that range from as low as $15 to exclusive phones that cost thousands of U.S. dollars.

While the tech and pharma sectors find themselves on opposite sides in the patent battles in the U.S., both industries seem to be developing in a similar way – a segmentation of various stages of discovery/innovation by start-ups or specialist smaller players, commercialization by the multinationals, with localized sales and manufacturing. Like the technology sector, large pharma companies are realising that their own R&D efforts are inefficient and new drugs that are being brought to market were really discovered in niche labs6, much like the innovation that we have seen in the technology industry.

We could argue about whether the compulsory licensing of Nexavar and the decision of the Indian Supreme Court in the Gleevec case caused Gilead to adopt the business model that it did to mitigate against the risk of losing the market for the only cure for Hepatitis C or if Gilead did it in the interest of poor patients in the developing world. But it would be hard to ignore the new business model that Gilead, with an insignificant presence in India, may have pioneered for multinational pharma companies in developing markets. While India has a long way to go in fixing its bureaucracy and one hears that the U.S. IPR system is in desperate need of reform, implementing the law to direct economic activity for social good has to be a desirable objective of the Indian government and an example for others to follow. While this may seem like a return to India’s socialist past, there will be few complaints when there is a lot of money to be made not just for the most modern drugs but also for old rope7.

ENDNOTES

  1. A drug to treat cancer which costs about US$90,000 in the United States but sold in India for Rupees 108,000 (US$1635). As a result of the decision of the Supreme Court of India, Indian equivalents are available for Rupees 8000 (US$120).
  2. India offers very limited patent protection for software.
  3. The government forcing a patent holder to license the patented drug and thereby forfeit the monopoly granted by a patent.
  4. Affordability is an issue in India since the vast majority of Indians (estimated to be about 82%) do not have health insurance and health insurance policies only pay for “in-patient” costs, not the cost of drugs.
  5. Wealth of Nations (1776).
  6. Sofosbuvir was not invented by Gilead but was a key asset in the US$ 11 billion acquisition of Pharmasset, a US based drug discovery company.
  7. For a report on the failure of the regulatory mechanism to prevent pharma companies from increasing prices for old drugs significantly in the United States, see, http://www.forbes.com/sites/matthewherper/2016/01/20/solving-pharmas-shkreli-problem/