On December 27, 2004, the Government of India promulgated an ordinance for introducing a product patent regime for pharmaceuticals from January 1, 2005. The Indian pharmaceutical industry has rapidly grown in the recent years at double-digit growth rates. Now with the introduction of product patents will this trend continue?

In this article we try and explore the challenges faced by the Indian pharmaceutical companies in this new world order.

From process patents to product patents

The Indian Patent Act (1970) helped the pharmaceutical industry achieve rapid growth rates. Only process patents were granted for medicines and this helped the Indian pharmaceutical industry to reverse engineer patented drug molecules.

• Patent law: What the fine print says
• Product patent regime comes in force

This made medicines available to India's largely poor population at very low prices. It also helped homegrown pharmaceutical companies get a major market share by displacing the multinational pharmaceutical companies from the top slots.

India signed the Trade Related Intellectual Property Rights (TRIPS) Agreement in 1994 and thus committed to adopt the product patent regime from January 1, 2005 when TRIPS came into force.

India had agreed to award product patents on 'new chemical entities' that had patents in any of the patent co-operation countries on or before January 1, 2005. As a result generics of drugs, which have been granted product patents since 1995, will not be available in the Indian market without the prior permission of the company, which has the patent.

Furthermore, the product patent would be granted for a period of twenty years instead of the earlier process patent, which was granted for five to seven years. Another major change is the fact that earlier the patent owner had to prove that the patent had been violated, now the onus of proving the non-violation of the patent lies with the accused.

The ordinance also allows for pre-grant opposition to the patent but is vague about the same.

The Indian pharmaceutical industry has progressed over the years because of its reverse engineering skills. With the shift from process patents to product patents the future is for companies that are discovery based.

The patent regime created by the Indian Patents Act (1970) led to a situation wherein efforts were directed towards the development of alternative processes for drugs, which had been already invented and patented in various countries.

Very little effort went into developing new drugs. This has negatively impacted the development of expertise required for developing new drugs. Moreover, a reverse engineering company cannot become a drug discoverer overnight.

The development and commercialisation of a new drug is a time consuming and costly process. The development of a new drug can take 10-12 years, right from inception to the marketing stage and cost around $500-600 million. Not many Indian pharmaceutical companies can afford to spend this kind of money.

Also the development of a new drug happens in various stages and at each stage there is a chance that the development of the drug may have to be stopped and the expenditure incurred till then, written off. This is the biggest challenge facing the Indian pharmaceutical companies as of now.

And whether the Indian pharmaceutical companies have it in them to deal with this scenario remains to be seen. Before the ordinance was promulgated the top bosses of some of the Indian pharmaceutical companies had gone on record criticizing the government's decision agreeing to adopt TRIPS from 2005.

The Mailbox provision

Under TRIPS, countries that did not have a product patent regime in place as on January 1, 1995, had to provide for a mailbox. Mailbox was essentially a mechanism for accepting patent applications till a product patent regime was actually put in place.

Pharma firms interested in getting a twenty-year patent on the sale of there medicines were asked to mail in their applications and these applications are opened. Both multinational and Indian pharma companies have already filed for patents on their products.

The fate of these companies will be decided once the mailbox is opened by the government and its starts processing the applications. It could lead to a situation wherein after the mailbox is opened a drug could be granted patent protection for twenty years in India, despite the fact the patent having expired in the original country of filing.

Another point bothering the Indian pharma companies is the lack of clarity on the final number of filings for product patents in the mailbox. If an increasing number of drugs are granted patent protection this leaves lesser drugs free to be genericised.

For instance, Eli Lilly's Cialis (a medicine which cures erectile dysfunction) competes with more than ten branded generics. Once Eli Lilly gets the patent other players will have to withdraw their branded generics from the market.

On the other hand MNC pharma firms are worried because delays in getting product patent protection for their drugs could lead to substantial loss of revenue for them.

Generic drugs cannot be prevented from entering the market till product patents are granted. Furthermore, the patents will be granted with prospective effect leading to the innovator firm not being able to claim damages with retrospective effect.

This point helps the Indian pharma companies to continue producing their generics for the time being.

MNC pharma firms in India are listed on various stock exchanges and a good part of their shareholding is publicly owned. In a product patent regime where in the patented drug will generate high revenues, the MNC pharma companies may not want to share it with their listed entities.

They might decide to launch their patented drugs through wholly owned subsidiaries, leading to the listed MNC pharma companies getting only a marketing commission for distributing the drugs.

Spurious drugs

Estimates suggest that spurious drugs constitute nearly 15 per cent to 25 per cent of the Indian pharmaceutical market. Efforts have been unsuccessfully made in the past to counter this menace.

With product patents coming in, chances are that drugs, during their patent period, would become more expensive. This might lead to more and more spurious drugs coming into the market given the higher margins that would be available during the patent period of the drug.

The spurious drugs could eat into the monopoly profits of the product during its patent period. This can act a major disincentive for companies to do research and bring out new drugs.

Also, multinational pharma companies may not want to introduce their latest drugs into the Indian pharma market.

The Generics game

Generic drugs are the chemical and therapeutic equivalents of 'reference brand drugs' typically sold under the chemical names at prices below their branded drug equivalents.

Generic drugs from markets outside India, particularly the United States, contribute significantly to the revenues of the top Indian pharma companies.

Generic drug manufacturers can wait for a drug to go off patent and then start selling the generic version or make a Para IV filing under the Hatch Waxman Act, in the United States, to challenge an existing patent holder. Generic drug manufacturers are increasingly resorting to Para IV filings.

In case of Para IV filings, patents are validly circumvented. In order to work their way around the patent the pharma companies carry out a significant amount of research.

Litigation is an inevitable part of making a Para IV filing against an existing patent holder (on the basis of loopholes the firm finds in the patents which are listed out in 'Approved Drug Products with Therapeutic Equivalence Evaluation,' popularly known as the Orange Book.

This may allow the company to launch a generic in the new drug dosage form or a different drug delivery platform).

Litigations on a single Para IV filing can cost the company between $15-18 million. A successful Para IV filing gives the generic drug company Exclusive Marketing right for 180 days. Otherwise the entire amount goes waste. It's a high-risk high return strategy.

Para IV filings cannot be depended on always to bring in the revenue. Indian companies have made successful Para IV filings in the past.

For instance, Ranbaxy Laboratories [Get Quote] successfully challenged GlaxoSmithKline [Get Quote] over the patent for Ceftin. The company launched the generic version of the drug, Cefuroxime Axetil, in the US market in March 2002. The generic version generated annual revenues of around $115 million in the first year of launch.

Similarly, Dr Reddy's Laboratories' Fluxotene, a 40 mg generic version of Eli Lilly's blockbuster drug Prozac, made $70 million during the exclusivity period.

Cheap manufacturing and market access are two factors, which mainly influence the generics business. The manufacturing advantage can be easily lost with the bigger generic players setting up their manufacturing operations in India or other developing countries.

At the same time the Indian pharma companies may not be able to replicate the market access of the bigger companies, which can make the placement of their generic drugs in overseas markets increasingly difficult.

Also multinational pharmaceutical companies are resorting to new ways to beat the Indian pharmaceutical companies at the generic game. They have been resorting to "evergreening' -- making variations of the same drug through the use of different salts and thus extending the period of the patent beyond twenty years.

This delays the entry of the Indian pharmaceutical companies into market, with their generics. What makes this issue more dangerous is the fact that in some of the cases profits generated from the generics business are being used to fund the drug discovery process, which has not started making money as yet.

Off patent drugs

The new generic drug launches depend on blockbuster drugs going off patent. The scenario here is somewhat bleak with most of the blockbuster drugs going off patent only till 2008.

The pipeline of new drugs from the bigger pharma companies is drying up. This means that after 2008 there won't be many drugs to be genericised. With Indian pharmaceutical companies actively involved in the generics game in the US and Europe, this factor can significantly impact their balance sheets in the days to come.

In closing

There have been fears that the shift to product patent regime will lead to an increase in the prices of drugs. The fears are largely uncalled for as more than 90 per cent of the drugs in the Indian market are off patent.

In the coming years the percentage of off patent drugs is expected to be more than 70 per cent. However, at the consumer level, even this 10-30 per cent makes a huge difference to those who need these medicines.

These consumers might have to pay higher prices for the patented drugs in the days to come. To add to this, the ordinance does not provide compulsory licensing which is permissible under TRIPS. This may make matters worse for the Indian consumer.

Commerce and Industry Minister Kamal Nath has said that the ordinance has 'adequate steps for the introduction of a provision for enabling grant of compulsory license' which is as vague as it can get.

Given the fact that quite a few drugs are going off patent in US till 2008 and that the ordinance (though vague in certain areas) is not going to effect the Indian pharma companies very negatively, both Indian pharma companies and their MNC counterparts are likely to continue their healthy growth rates.

However, in the next few years Indian pharma companies have to transmogrify into discovery-based companies in order to survive and continue the same growth rates. Else they would either be swallowed by MNC giants or fade away into oblivion.

Those still left might have to follow the path of becoming sole selling agents.