THE IMPACT OF TRIPS ON INDIAS PHARMACEUTICAL SECTOR

-Aman Deep Borthakur

Introduction
India is a founding member of the WTO and a signatory to the Agreement on Trade Related
Aspects of Intellectual Property Rights (hereinafter TRIPS). The Intellectual Property
Agenda at the Uruguay Round of negotiations must be viewed in the wider context of the
objectives behind the WTO regime.1 The need for TRIPS arose from the goal of harmonising
patent regimes and increasing IP protection in developing countries. A conscious aspect of that
goal was the opening up developing countries for trade in IP by offering the same level of
protection as in developed countries.2 This paper evaluates the impact of the TRIPS Agreement
on the Indian pharmaceutical sector. It is argued that Indias assimilation in the TRIPS regime
as it stands today has had deleterious consequences for the countrys pharmaceutical industry.
In doing so, this paper undertakes a critical evaluation of the structural changes that India had
to bring about in its IP framework. The focus has been on the impact this has had on the
competitiveness of its domestic firms vis--vis foreign companies especially in the case of
generic manufacturers. The paper is divided into three broad sections. The first deals with the
pre-TRIPS regime; the second with the legislative changes that were enacted as a result of the
Agreement and the final section looks at the impact it has had on the domestic pharmaceutical
industry.

Pre-TRIPS Framework

Indias patent law regime had for years been flexible in order to allow its domestic firms to
operate competitively in relation to foreign pharmaceutical companies. The durations of patent
protections were so short that they were exceeded by the products development cycle. The
royalty ceiling for compulsory licensing was kept artificially low. According to the Drug Policy
of 1978, which was revised in 1986, MNCs were not allowed to import drug formulations
unless the bulk drugs were produced by them in a specified ratio.3 Process patents were
available only for limited durations and compulsory licences were enforced through licence

1
G. G. Nair, Impact of TRIPS on Indian Pharmaceutical Industry, 13 JOURNAL OF INTELLECTUAL PROPERTY
RIGHTS, pp. 432-441 (September 2008).
2
B. Binkert, Why the Current Global Intellectual Property Framework under TRIPS Is Not Working, 10
INTELLECTUAL PROPERTY LAW BULLETIN 143, 162 (2006).
3
B. Dhar and K. Gopakumar, Effect of Product Patents on the Indian Pharmaceutical Industry, available at
http://wtocentre.iift.ac.in/Papers/3.pdf (last visited on August 8, 2017).
of right provisions. Safe harbour provisions and exceptions to patent rights were carved out in
spite of global opposition to such provisions which would give rise to reverse engineering.

The justification for such protection stems from the fact that in the years preceding the
enactment of the Act, foreign patent applications exceeded those of Indians by more than
340%. The share of Indian companies in the domestic market was a lowly 10-25%. Therefore,
the concept of a product patent for pharmaceuticals was absent in the Patents Act of 1970.4

The legalisation of reverse engineering allowed domestic manufacturers to sell their generic
drugs in the domestic market and in other countries with similar laws. The share of domestic
firms grew as MNCs withdrew citing the insufficiency of patent protection. For instance, the
Sterling-Winthrop Co. sold its shares to its Indian partner Deys Medical after an unsuccessful
phase in the Indian market.5 Thus, the old regime, being protectionist in its approach,
successfully shielded domestic firms from foreign competition in the absence of patent
protection for pharmaceutical products which is known to create restrictive monopolies. Such
a protectionist stance was necessitated by the precarious state of the Indian patent industry.

These statutory mechanisms led to the emergence of a thriving generic pharmaceutical industry
in India and the introduction of essential life-saving medicines based on patented New
Chemical Entities (NCEs). Pharmaceutical industries invested in bio-equivalence studies
which resulted in the creation and marketing of generic equivalents therapeutically equivalent
to the starting product. Copying original preparations of other manufacturers allowed Indian
firms to be cost-effective by not being exposed to the financial risks of drug research. Between
1970 and 1995, the share of the pharmaceutical sector in Indias GDP rose from 15-18%,
making it largely self-sufficient and the 3rd largest exporter of pharmaceuticals by volume.6
Thus, Indias Patent Act helped it achieve a positive trade balance in the pharmaceuticals
market. By keeping prices low through the production of generic drugs, it could also export to
other countries with weaker intellectual property laws.7

Assimilation in the TRIPS Regime

4
Nair, supra note 1, at 433.
5
Nair, supra note 1, at 435.
6
N. Shukla and T. Sangal, Generic Drug Industry in India: The Counterfeit Spin, 14 (3) JOURNAL OF
INTELLECTUAL PROPERTY RIGHTS, pp. 236-240 (2009).
7
P. Malhotra, The Impact of TRIPS on Innovation and Exports: A Case Study of the Pharmaceutical Industry in
India, 5 (2) INDIAN JOURNAL OF MEDICAL ETHICS, 63 (2008).
The TRIPS Agreement lays down minimum standards of protection for IPR which members
are required to comply with. Through the TRIPS Agreement, two major changes were brought
about in the Indian IP framework through amendments to the Patents Act, 1970. The first was
the reintroduction of the product patent regime and the second the deletion of licence of rights
provisions from the Act.8

Article 27 explicitly provides for the inclusion of both products and processes within the scope
of patentable inventions. To ensure compliance with Article 27, product patents have been
made available for all categories of inventions including pharmaceuticals under the Patents
Act. A major concern with product patents is that the same drug product cannot be produced
by an alternate process during the period of protection.9 A process patent in pharmaceuticals,
on the other hand, allows the production of a therapeutic equivalent through a different method.

In other cases, compliance with the TRIPS was ensured through more confrontational means.
After the introduction of Exclusive Marketing Rights (EMR) provisions as per Articles 65 and
70 failed to receive Parliamentary sanction, these were eventually granted after the US and EU
successfully filed grievances at the WTO Dispute Settlement Board to enforce the introduction
of EMR in India. As the EMR provisions became retrospectively linked to patent applications,
thousands of patent applications could be filed to block newer patents filed after 1995. 10
According to the arrangement prescribed in the TRIPS, pharmaceutical products which had
received patents in TRIPS compliant jurisdictions would be processed for a five-year period
before the 1999 amendment. This provided another route for foreign pharmaceutical companies
to file patent applications retrospectively.11 These rights make any unauthorised third parties
violating the exclusive patent liable for infringement. The retrospective application of the
amendment leaves a developing country like India no transition period to develop domestic
capacity to file patent applications. This problem is compounded by the fact that MNCs control
90% of the registered patents in the world and exercise significant monopoly power over
patents registered in other jurisdictions.

The TRIPS brought in other significant changes as well. The minimum patent term was
extended from five to twenty years. Compulsory licensing was limited to special circumstances

8
N. Sreenivasulu, IMPACT OF TRIPS ON INTELLECTUAL PROPERTY LAWS IN INDIA: A POST TRIPS SCENARIO, 237
(Regal Publication).
9
V. Mehta, TRIPS and Pharmaceuticals: The Impact of Extended Protection in India, Master of Drug
Regulatory Affairs, 15 (Bonn 2004).
10
Nair, supra note 1, at 437.
11
N. Lalitha, Indian Pharmaceutical Industry in WTO Regime: A SWOT Analysis, 37 (34) ECONOMIC AND
POLITICAL WEEKLY, pp. 35423555 (2002).
such as non-commercial use and the burden of proof in patent infringement suits was reversed
to lie on the defendant.12

The 3rd Patent Amendment Act also introduced compulsory licenses for pharmaceuticals in
2005 through Section 92 (A) to ensure the export of generic Indian drugs to LDCs that do not
have adequate domestic manufacturing capacity. However, like other TRIPS flexibilities, the
compulsory licensing of drugs has rarely been enforced in practice due to pressure from
developed countries and the exceptionally high standard for invoking it.13

Impact of the TRIPS: State of the Pharmaceutical Sector

The TRIPS deals with all forms of IPR that have a bearing on the development, manufacturing
or marketing of drugs. The common practice of copying product inserts of an innovator has
been exposed to copyright infringement suits in the aftermath of the TRIPS. In the case of
trademarks, Section 13 of the Trademarks Act, 1999 introduced in accordance with the TRIPS,
bans the registration of a generic drug containing an NCE once a WIPO approved name has
been assigned to that NCE. For instance, Torrent Pharmas registration of a generic drug
containing dopamine was successfully challenged since Dopamine is an International Non-
Proprietary Name already allotted by WHO. In this manner, TRIPS has hindered the growth of
the Indian generic drug industry by stipulating additional controls over and above Indian law
on these aspects of IPR.14

Data exclusivity is another key issue dealt with under the TRIPS framework. Article 39 (3) of
the Agreement specifically bars the regulatory documents including clinical test data of an
originator from being disclosed for the registration of a generic equivalent.15 The Satwant
Reddy Committee, which was constituted in February 2004 to review data protection under
this Article of the TRIPS recommended against keeping the data submitted by pharmaceutical
companies during the process of drug registration as exclusive. This recommendation becomes
particularly relevant in light of the lobbying done by MNCs backed by the US and EU which
labelled the Indian practice as unfair commercial use.16 Enforcement of data exclusivity under

12
N. Lalitha, Indian Pharmaceutical Industry in WTO Regime: A SWOT Analysis, 37 (34) ECONOMIC AND
POLITICAL WEEKLY, pp. 35423555 (2002).
13
Id.
14
Dhar, supra note 3.
15
Government of India, Report on Steps to be taken by Government of India in the context of Data Protection
Provisions of Article 39.3 of TRIPS Agreement, Department of Chemicals & Petrochemicals, (May 31, 2007).
16
Data Exclusivity in International Trade Agreements: What Consequences for Access to Medicines?, MSF
Technical Brief (May 2004) available at https://www.citizen.org/sites/default/files/dataexclusivitymay04.pdf
(last accessed on August 8, 2017).
Article 39 (3) would have allowed foreign pharma companies to avoid competition and make
additional profits on unpatented drugs or those with expiring patents.

Pharmaceutical product patents have the effect of facilitating monopoly pricing by keeping
generic manufacturers out of the competition in a given market.17 While pricing concerns post-
TRIPS have been alleviated due to price regulation by the CDSCO, the heavy regulation of
prices under periodic Drug Policy Control Orders has often resulted in depressing supply
incentives often causing a shortage of essential drugs. Moreover, price regulation becomes
increasingly difficult due to the oligopolistic nature of global pharmaceutical business and the
practice of transfer pricing by pharma majors which has the effect of pushing up prices.18
Additionally, allowing product patents makes it more difficult to enforce these price controls
by giving MNCs greater latitude to block them on grounds of having conducted long clinical
trials and recouping R&D costs. Koshy, in his paper on the subject, argues that the low
spending power of the Indian population will itself act as a regulation of the market.19 However,
with physicians today prescribing more expensive branded drugs with the same active
ingredients due to aggressive drug detailing, that prediction unfortunately does not hold true.

Most Indian pharmaceutical companies do not have the capacity to set up research facilities or
Innovative Research and Drug Discovery Programmes. They lack capital and institutional
mechanisms to develop drugs from scratch and launch new drugs successfully into the
market.20 By some estimates, it takes about twelve years and between 200 and 300 million
dollars for an American firm to develop a new drug and introduce it into the market. The
domestic drug industry does not possess the R&D capability that foreign firms have the
potential to exploit and file for patents.21

Simultaneously, the share of imported drugs in the Indian market has increased. Out of the
8000 product patent applications filed after 2005, only a few have been subjected to pre-grant
opposition. Furthermore, it is common among foreign pharmaceutical companies, especially in
the USA, to patent metabolites produced by a drug, thus blocking any generic equivalents of

17
P. Agrawal and P. Saibaba, TRIPS and India's Pharmaceuticals Industry, 36 (39) ECONOMIC AND POLITICAL
WEEKLY, pp. 37873790 (2001).
18
S. Khanna, TRIPS, Pharmaceutical Patents and Healthcare for the Poor in India, ILI LAW REVIEW (Summer
2016).
19
S. Koshy, The Effect of TRIPS on Indian Patent Law: A Pharmaceutical Industry Perspective, 1 BOSTON
UNIVERSITY JOURNAL OF SCIENCE AND TECHNOLOGY LAW, 4 (May 1995).
20
H. Redwood, NEW HORIZONS IN INDIA, THE CONSEQUENCES OF PHARMACEUTICAL PATENT PROTECTION, 45
(Oldwicks Press 1994).
21
FICCI, Competitiveness of the Indian Pharmaceutical Industry in the New Product Patent Regime, FICCI
Report for National Manufacturing Competitiveness Council (2005).
the drug from being patented and extending the life of an expiring patent; a practice commonly
referred to as evergreening.22

A stated objective of the TRIPS was to incentivise firms to invest in R&D and help build
indigenous capacity in research. However, foreign pharmaceutical companies have been
reluctant to set up R&D centres or aid drug discovery research in the country. In Prof. Sudip
Chaudharis landmark study conducted in 2012, it was found that MNCs have been marketing
drugs for life-saving diseases such as Cancer at exorbitant prices. Instead of contributing to
technological progress by increasing local R&D activity, they have been aggressively seeking
patent protection to prevent generic competition.23 This assertion of patent rights has taken the
form of dragging generic manufacturers to court, as in the Novartis case, and in the process,
exposing them to huge legal costs through protracted litigation.

Under the TRIPS, product patents are to be granted without discrimination as to the place of
invention. Thus, foreign firms, with the vast financial resources and technical know-how at
their disposal, have the ability to conduct research offshore and file patents in India. Majority
of the patent filings in the world (59%) are done in just three countries- USA, China and
Japan.24 This is undesirable on three counts. Firstly, it tilts the playing field heavily in favour
of established players who can invest in R&D to apply for pharmaceutical product patents;
secondly, it does not contribute to indigenous drug research since most MNCs import the
formulations of bulk drugs on R&D conducted abroad, and thirdly, the increased market share
of foreign firms in the Indian market affects the delivery of drugs to meet indigenous demand
since the profit motives of foreign firms create little incentive to cater to unprofitable markets.

It may be argued that TRIPS is precisely what is necessary to incentivise the Indian
pharmaceutical industry to invest in innovative drug research. This argument fails to consider
that in addition to the lack of research funding in Indian pharmaceutical companies, there are
other impediments to such research. The effect of TRIPS is most likely to be on increasing the
production of patented products and not necessarily on the levels of inventive activity in
domestic firms.25 This is substantiated by studies which report that while R&D spending has

22
Khanna, supra note 18.
23
S. Chaudhuri, TRIPS Agreement and Amendment of Patents Act in India, 37 (32) ECONOMIC AND POLITICAL
WEEKLY, (Aug 10-16, 2002).
24
S. Chaudhuri, Multinationals and Monopolies Pharmaceutical Industry in India after TRIPS, Working Paper
Series (2011).
25
P. Malhotra, The Impact of TRIPS on Innovation and Exports: A Case Study of the Pharmaceutical Industry
in India, 5 (2) INDIAN JOURNAL OF MEDICAL ETHICS, 63 (2008).
increased, the bulk of the research is focused on improving generic drugs or developing new
drug delivery systems instead of inventing new drugs.26

Inclusion in TRIPS helped achieve an important goal by allowing the Indian pharmaceutical
industry to integrate into the global IP market. However, such integration forced the Indian
industry to comply with global IP practices to its detriment. It is therefore argued that the
TRIPS in its present form is heavily in favour of MNCs in developed countries. Several
medium and small Indian pharma companies, being unable to compete, have been forced to
shut shop and larger ones acquired by foreign pharmaceutical corporations. As a consequence,
several top Indian pharmaceuticals ranging from Ranbaxy and Elder Pharma are today
subsidiaries of foreign MNCs like Daiichi Sankyo and Torrent Pharma respectively.27 Between
1995 and 2010, the import of formulations has been rising at an increasing rate. While the
developed countries have made concessions by including public health emergencies as a
ground for compulsory licensing, most prominently at the Doha Declaration of 2001,28 the
threshold for considering the interests of developing countries has been set so low as to consider
their interest in the case of a public health emergency and not in a scenario where the economic
competitiveness of its domestic industry has been threatened.29

Such a scenario necessitates that alternatives to such a patent protection framework be

26
Dr. V. Manickavasagam, Intellectual Property Rights and Impact of TRIPS Agreement with Reference to
Indian Patent Law, submitted to Planning Commission (December 2007).
27
B. K. Baker, Risky Medicine: Why FDI in Indias Generic Drugs Industry could be a Bad Idea (July 20,
2016).
28
WTO, Declaration on the TRIPS Agreement and Public Health, WT/MIN(01)/DEC/2 (adopted on 14
November 2001).
29
A. Kapczynski, Harmonization and Its Discontents: A Case Study of TRIPS Implementation in India's
Pharmaceutical Sector, 97 (6) CALIFORNIA LAW REVIEW, pp. 15711649 (2009).
30
Chaudhuri, supra note 24.
Conclusion

Compliance with TRIPS changed the landscape of the Indian pharmaceutical industry. In the
pre-TRIPS era, India was a jurisdiction with weak patent protection which led to the emergence
of a vibrant domestic generic drug industry. After the enhancement of patent protection through
TRIPS compliance, the role of foreign pharmaceutical firms in the domestic market has
substantially increased. It has been argued that the introduction of product patents has given
foreign firms the capacity to seek undue patent protection and exploit monopoly power in
Indias domestic market utilising the vast capital and R&D resources that global
pharmaceutical majors have at their disposal. On the aspect of research, the lack of proper
infrastructure has failed to incentivise Indian firms to invest in innovative drug research while
foreign firms have not contributed to domestic research output either by importing expensive
drug formulations. While Indias domestic pharmaceutical firms are still the most important
players in the market, the increasing share of expensive patented formulations at the cost of
generic competition is a major cause of concern.

The claim being made is not that product patents be done away with. However, there is a need
to move beyond TRIPS compliance and set fresh standards of patent protection for the
pharmaceutical industry.31 One possibility is lobbying for a renegotiation of TRIPS for
standards more suited to a developing country model of growth based on the manufacturing of
generic equivalents. The second is better use of the flexibilities inherent in the TRIPS model
such as compulsory licensing to sustain the growth of the countrys generic drug industry.

31
J. Watal, Implementing the TRIPS Agreement: Policy Options Open to India, 32 (39) ECONOMIC AND
POLITICAL WEEKLY, pp. 24612468 (1997).