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Running head: THE INDIAN PHARMACEUTICAL INDUSTRY 0

The Globalization of the Indian Pharmaceutical Industry and Future Accessibility to New Medications

NAME

University of Manitoba

GMGT 1010 (A09) – Business and Society

March 28th, 2018

Part One

The Indian pharmaceutical industry is comprised of many small domestic producers that have long relied on lenient patent laws. The lack of large multinational corporations (MNCs) in the industry has resulted in a highly fragmented market, which causes concern for the future as new patent laws make it harder to share the medical knowledge that domestic producers have long relied on to produce low-cost generics (Greenhalgh, 2016). The harmonization of global intellectual property rights (IPRs) and patent laws forced a shift in the Indian pharmaceutical industry from replicating medications, to innovating new ones. According to Mondal (2017), “the most important aspect of the pharmaceutical industry is that it affects every human’s life and wellbeing, and therefore ensuring access to end users is of critical importance” (p. 61). The issue is complex given the numerous changes made to IPRs and patent laws during the process, which are crucial to understanding how the governments current approach to healthcare causes great concern for the future accessibility of new medications in India.

Effects of Globalization

Changes to intellectual property rights. Major changes to Indian IPRs and patent laws began to take effect when the WTO commenced operations in 1995, introducing Trade Related Intellectual Property Rights (TRIPs). Compliance with its provisions was a precondition of joining the WTO, with the purpose being to remove barriers that exist in differences of standards in IPRs, freeing up the flow of trade, investment, and information (Sandhya, 2014). The new IPRs and patent laws with process patent protection closely resembled those used for years in the United States (US). This would have a major impact on the industry due to prior IPRs that had a limited range of coverage, which provided only product patents to pharmaceuticals (as established by Section 5 of the Indian Patent Act of 1970 (Greenhalgh, 2013)). This restricted medications to the limited protection of product patents, which prevented the formation of monopolies in the industry. This gave domestic Indian pharmaceutical producers the ability to use a process known as “reverse engineering”1. This is what caused the Indian pharmaceutical market to become extremely fragmented, where the top producers often only had about 5% of market share (Halliburton, 2017). Domestic producers have played an extremely important role in keeping generic medications accessible to end users. According to Halliburton (2017):

Indian companies could reverse engineer and produce antiretroviral drugs that were under patent in other countries, since Indian law at the time allowed this. Thus, India… produced inexpensive versions of AIDS drugs, greatly bringing down the price of antiretroviral therapy (p. 34).

Future innovation. The idea behind the 1970 restriction was medications can save lives and cure diseases, which made them essential to be easily accessible to as many users as possible. The highly competitive generics market kept prices low, making many life-saving medications easier to access for those not covered by healthcare. The ideology had clearly worked thus far, but the adoption of a globalized IPR and patent regime would be essential if India wanted to become a global competitor in an industry where constant research and development (R&D) efforts, aided by technology transfers2 are required for new innovations. Developing new medical innovations is extremely important in the pharmaceutical industry, so it was hoped that the introduction of process patents would encourage domestic firms to engage in more R&D activities. However, this has not been the case (Mondal, 2017). The lenient pre-existing IPRs and patent laws discussed above, that favoured domestic replication of low cost generics, shifted to favour MNCs innovative capabilities which were protected by process patents. Due to this prior regime, India was considered a least-developed country and given the full 10-year transition period. So, it was not until 2005 when provisions made to the Indian Patent Act finally met the requirements of the WTO.

Concern for the future. The globalization of the Indian pharmaceutical industry threatens the future accessibility of new medications to many end-users in India. According to Mondal (2017), India is one of the major global players, “both in terms of volume of consumption and value of production” (p. 75). Most domestic producers that have long relied on reverse engineering, must now innovate new medications, or engage in licensing agreements with MNCs. This shift causes concern for the future as the overall level of impoverishment is rising, which is reducing the accessibility of medications as more end users are pushed below the poverty line from out-of-pocket (OOP) health expenses. According to Singh (2017), due to medical expenditure, the overall impoverishment level increased by 1.61 percent/year in India. The government is providing the facade of coverage, by increasing public healthcare expenditure, even knowing India is currently one of the largest private healthcare systems in the world. Furthermore, only 12.4 percent of Indians come under the purview of any health insurance scheme (Singh, 2017).

Diverse Stakeholders

The issue of future accessibility to new medications can largely be attributed to changes in IPRs and patent laws, which began when India joined the WTO, and form a complex issue among government, regulators, producers, MNCs, hospitals/clinics, practitioners, non-government organizations (NGOs), taxpayers, and consumers. Majority of Indian households are not covered by healthcare because of prior IPRs and patent laws which allowed many medications to maintain a low price, so it was not necessary. However, the numerous changes made to IPRs have shifted future medical expenses to be met through borrowing, selling assets, or obtained from friends (Singh, 2017).

Stakeholder relations. The transition period prior to joining the WTO allowed consumers threatened by the reduced accessibility of new medications to implement section 3(d), which prevents MNCs from patenting “me-too” drugs3 and enjoying exclusivity over them. According to Halliburton, (2017):

This story of heroism is not well known, most likely because it involves legal technicalities that seem complicated and obscure, but basically, small activist groups in India, such as an organization of HIV-positive people assisted by a handful of activist lawyers, have been able to defeat patent applications (p. 13).

The influence of these stakeholders, along with the action of Indian government was crucial to the provision made in 2005. The 20 years of exclusivity provided by patents on “me-too” drugs are contributing to skyrocketing medication prices from reduced competition caused by the formation of monopolies in the US. This was crucial for end users because it is known that where a corporation is a monopoly, or where there is a lack of competition in the market, consumers can be taken for granted (Sexty, 2016).

The government also implemented a grandfather clause, which exempted all currently used antiretroviral drugs from the provisions of the new patent act. According to Halliburton (2017), “the cost of antiretroviral therapy for HIV/AIDS using grandfathered drugs… has dropped from $795 to $23 per person per month” (p.51). Not to mention, according to Sampat (2012), “patent applications dating from 1995 onward were received but were not examined until 2005” (p. 414). During this time many MNCs were granted patent protection for their medications outside of India, but similar generic versions continued to thrive domestically, due to these conditions that prevented an abrupt shift to innovation. Still, new innovations would require domestic producers to increase R&D efforts or come to licensing agreements with MNCs soon, if they want to develop new medications that will be accessible to the increasing number of end users being pushed below the poverty line.

Stakeholder miscommunications. The price of medications has not increased, but as poverty levels do, the accessibility of medications will continue to drop in unison with the lack of funds. Those in poverty have limited or no access to medications, which is being accelerated by unneeded healthcare expenditure on the few actually covered. According to Gupta (2017), practitioners see several patients every day who have been treated at government and private hospitals. Many are offered so called free investigations (i.e. lipid profiling, measurement of vitamin concentrations, abdominal ultrasonography, and computed tomography), which are very costly and come directly out of the taxpayer’s pocket. Gupta (2017) also states, “both underuse of appropriate care and overuse of wasteful care are rife and are not in the government's plan” (p. 1).

Part Two

According to Sexty (2016), the complexity of business is often due to changing relationships between a corporation and its stakeholders. Influence to join the WTO resulted in the globalization of the pharmaceutical industry, which has impacted the relationships among all stakeholders surrounding this issue.

Short-Term/Long-Term Behaviours

Producers. It is unfortunate most Indian producers have stagnated in R&D. According to Mondal (2017), only a handful spend more than 10 percent on R&D, “with a possible reason being uncertainty surrounding the intellectual property regime” (p. 63). Stagnated innovation in an industry that heavily relies on R&D for long-term innovations, especially when they have the ability to save lives, should be addressed by the government.

Another reason domestic producers are struggling to engage in R&D stems directly from debts caused by capping producers margins (Nair, 2014). According to PharmaBiz (2017), the Indian government fixes prices on 530 of 680 medications listed under the National List of Essential Medicines (NLEM). Government regulations mandated by the National Pharmaceutical Pricing Authority (NPPA) failed to consider how producers would respond to changes in IPRs with short-termism. According to NBS Canada (2015), “short-term tactics help a firm deal quickly with crisis or rapid change” (p. 4). The changes to IPRs rapidly shifted the Indian pharmaceutical industry. I would hope that surrounding pharmaceuticals, investment into new infrastructure for R&D would be the primary long-term goal, rather than resorting to continuing replication of grandfathered drugs long into the future. Although, R&D investments have large expected returns, it is slower and harder to estimate, which has stagnated investment due to rapid changes made in IPRs and patent laws. According to NBS Canada (2015):

Both long- and short-term thinking are essential to firm success. In times of crisis and rapid change, short-term thinking can help your firm survive. But to prosper over the long term, the transformational impact of long-term action is also necessary (p. 17).

Obviously, more diseases will need to be cured in the unforeseeable future, and without short-term incentives from government there will be no new medications developed by domestic Indian producers.

Government. The idea of public healthcare for all impoverished has good intentions. The Indian government has been working towards the long-term objective of setting up a system of Universal Health Coverage (Gupta, 2017). However, with such a small portion currently covered, the implementation of such a scheme is not well justified. The government must curb the misuse of taxpayer’s money being wasted on public health, often being used on unnecessary procedures, caused by miscommunication between key stakeholders (i.e. government, producers, hospitals/clinics, and practitioners). This can only be done through educating all stakeholders surrounding the issue, asserting that long-term solutions can only be achieved with proper execution of short-term goals. Reducing poverty and increasing the accessibility of medications in the long-run, by increasing healthcare expenditure in the short-run, is simply not feasible given the current conditions. According to Singh (2017), 87.6 percent of Indians do not come under the scope of any healthcare scheme, creating a unique situation where long-term goals will not be met if new short-term goals are not developed around the fact that India’s healthcare system is not accessible to those in need of medications most – end-users being pushed below the poverty line from OOP health expenses.

Stakeholder Approach

The relationship between influential stakeholders has become complex from the globalization of IPRs and patent laws. The lack of stakeholder management by government has forced Indian pharmaceutical producers to overlook the primary stakeholder surrounding this issue – the end-user who is not covered. The limited political commitment after 2005 for the improvement of healthcare availability has led to a gap between policy commitments and the goals of stakeholders (Singh, 2017). When it comes to high priority social concerns like those surrounding health and safety, regulations are put on business to protect the interests of society (i.e. capping margins). However, when the short-term implications of these regulations are not considered with great concern, the opposite of that can happen (i.e. increased impoverishment and reduced accessibility to medications), which in turn hurts all stakeholders. The collective goal of stakeholders should aim to alleviate rising poverty levels, while also increasing the accessibility of medications by keeping prices low and maintaining persistent R&D efforts.

According to Singh (2017), the government has failed to invest generously in health, causing an inadequate number of doctors and a poor network of public hospitals. This, coupled with bureaucratic bungling, makes India struggle when trying to spend its allocated budgets in the proper areas (p. 760). It is clear how a balance of goals would benefit most stakeholders surrounding this issue, but the question of accountability is raised. After all, according to Sexty (2016), “meeting the expectations of all stakeholders is an impossible challenge. There is no clear statement of stakeholder expectations except for shareholders” (p. 59).

End-users that depend on life saving medications and their accessibility from OOP expenses should be put ahead of all other stakeholders. However, this expectation cannot be met given the nature of globalization shifting to favour MNCs. The interests of society have not been addressed by the government who have failed to implement long-term solutions that would incentivise domestic producers to invest in R&D endeavors. The allocation of health funds must be done in a way that maximizes their value for all stakeholders. The diverse needs presented by the stakeholders surrounding this issue, results in many concerns being left out because they are not in the best interests of both government, producers, and hospitals/clinics. This highlights the lack of a true stakeholder approach still currently rife in our society, which should not be present in the pharmaceutical industry as many lives depend on access to medications. Therefore, a true stakeholder approach must place accountability on the most influential stakeholders (i.e. government, producers, hospitals/clinics, and practitioners), while ensuring there are no “easy outs”. For this to happen, the Indian government must take the lead and hold producers accountable to consumers by requiring them to engage in R&D. This cannot be done without the government holding themselves accountable to the consumers first, by stopping the wastage of healthcare expenditure attributing to this issue.

The role of stakeholders. The role government plays in the globalization of the Indian pharmaceutical industry has become quite clear given the fragmented market, which has been greatly impacted by the changes to IPRs and patent laws. The governments communication with organizations such as NLEM and NPPA must be coordinated in a way so that long-term R&D investments can be achieved by Indian producers in the future. They play a crucial role in the future accessibility of new medications because their decisions directly influence the bottom-line of producers (i.e. margin caps). Sure, government still addresses many future concerns by implementing the grandfather clause, which has proved to lower prices, increasing accessibility. However, they must also play a role to incentivise R&D investment given the shift in the pharmaceutical industry.

Some NGOs involvement in response to this issue, such as the activist group mentioned above in stakeholder relations, which helped implement section 3(d), also play a crucial role in the future direction of the industry. They have prevented a handful of drugs that otherwise received patent protection in countries outside of India, from being sold at exorbitant prices (Halliburton, 2017). Another NGO, The Health Impact Fund, is aiding the shift away from replication. They reward innovators based on their health impact, rather than the sales of products. They have offered novel proposals to cope with problems of incentivizing innovation in the industry (Greenhalgh, 2016).

Industry Response

It was already mentioned how changes in IPRs and patent laws caused inevitable short-termism given the rapid shift in industry, which can be attributed to the miscommunication between key influential stakeholders. Domestic producers have long relied on lenient patent laws allowing them to reverse engineer generic medications, but R&D would be mandatory for future innovations. Aside from those exempt by the grandfather clause and section 3(d) (which has rejected 16 patent applications (Greenhalgh, 2016)), new medical discoveries would require compulsory license (CL) agreements if they were to be sold in India. This would require legal agreements between domestic producers and MNCs, which could be difficult considering India’s history. According to Rathod (2017), “the CL measure has been used very sparingly… over the last 50 years and that too with extreme care and diligence” (p. 112).

According to Srivastava (2018), the lack of R&D productivity, expiring patents, and generic competition, along with the implication of the provisions above are driving merger and acquisition activities. However, instead of addressing the issue of future accessibility to new medications, they have followed character of smaller domestic producers thus far. According to Mondal (2017), the largest R&D invested in 2015 was about 300 million USD by the Sun Pharmaceuticals (that merged with Ranbaxy Laboratories), “which falls far short of the annual expenditure by global new drug developing companies” (p. 66). This further exemplifies the short-termism shown by domestic Indian producers and how it threatens the future accessibility to new medications.

Part Three

Future Innovation

The government must make changes to alleviate rising poverty levels, with the goal of preventing the reduced accessibility of new medications, which is partly due to OOP health expenses that are pushing more end-users below the poverty line. The misallocation of healthcare expenditure should be relocated to incentivise new innovations. This should be the primary concern surrounding the issue because the rapid changes in IPRs have placed the generics industry in a pivotal transition period where the issue of future accessibility must be addressed before R&D begins to decline. Incentivizing innovation would prevent rising drug prices by covering R&D expenses, allowing prices to be calculated from the cost of production from raw materials. This would keep prices of new medications at their lowest, because majority of sunk R&D expenses are made back during periods of exclusivity where exorbitant prices are charged (Halliburton, 2017). The higher price does seem justified given the initial sunk expenses, however in a unique situation like India’s, where only an increasingly small percentage can afford OOP health expenses, creates an unfavourable situation that is not in the interest of any stakeholder, especially the end user who is not covered.

Considering the pharmaceutical industry affects every human’s life and wellbeing, the government must ensure future access to end users is of critical importance (Mondal, 2017). Ensuring future accessibility to new medications can only be done through incentivizing innovation now. To do this, the government must rethink their healthcare and pharmaceutical strategy for the future, which has been greatly influenced by the globalization of IPRs. Funding a public healthcare system like those found in many other WTO countries would not be beneficial given India’s current limited access to both private and public systems. When care is being utilized, the governments miscommunication with hospitals/clinics and the practitioners working in them has resulted in major wastage. Tax funds should be reallocated to help increase the future accessibility of new medications by subsidizing R&D investments. The communication between the key stakeholders (i.e. government, NGOs, producers, hospitals/clinics, and practitioners) plays a crucial role in the issue. The role of the government must be to create value among all stakeholders surrounding the issue, otherwise there will always be an “easy out” if accountability is not placed on producers to invest in the future.

Future constraints. It is clear there have been no incentives for domestic Indian producers to engage in R&D. This is mainly because of uncertainty surrounding the expected return on long-term investments (like R&D), resulting in “easy outs”, where no stakeholder has been held accountable to the issue. According to Mondal (2017), it is estimated that of 10,000 molecules that receive a product patent, only about one is successfully marketed” (p. 64), so this makes for high fixed-costs in the industry, which will continue to be a major constraint on future accessibility. This exemplifies the large risk involved when innovating new medications, which is the primary constraint attributing to this issue.

This constraint can be combatted through pooling R&D expenses between firms. Given the highly fragmented market and constraints on future innovation this could be a powerful incentive. According to Mondal (2017), encouraging pooled R&D across various firms so that the risk is sufficiently diversified, might be another way through which innovation can be fostered while keeping drug prices relatively low” (p. 71), an ideal scenario given India’s current conditions.

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1Reverse engineering is defined as the reproduction of another manufacturer's product following detailed examination of its construction or composition.

2Technology transfer is defined as the transfer of new technology from the originator to a secondary user, especially from developed to less developed countries in an attempt to boost their economies.

3“Me-too” drugs are where small modifications are made to existing drugs and other strategies are used to obtain new patents, even knowing they are not new innovations (also known as “evergreening”)