Issues and trends in the Indian pharma industry

There is a dire need for carefully balancing the requirements of the public and the industry, opine Bhavik Narsana, Partner, Khaitan & Co and Arijeet Mukherjee, Associate, Khaitan & Co as they examine the legacy and new issues facing this industry

The Indian pharmaceutical industry is one of the most attractive investment destinations in the world. With ever increasing returns, lowering risks and anticipated multifold growth, investors are more interested in this industry than ever before. Since 2000, the drugs and pharma sector has attracted one of the highest foreign direct investment (FDI) inflows of approximately $12,689 million (April 2000 to September 2014).1

From its nascent stages in the 1970s, the Indian pharma industry has become a mature industry. While, the industry was previously known for manufacturing generic drugs, the industry dynamics have now undergone a sea of change. Presently, the Indian pharma industry stands diversified into various spheres of activities including research and development (R&D), manufacturing of branded, generic and branded generic drugs, manufacturing APIs, laboratory testing and clinical research. The Indian pharma industry ranks fourth in terms of volume and 13th in terms of value globally.2

India has become a prime destination for manufacture of branded, generic and branded generic medicines with a strong export element. It is estimated that around 40 per cent of the generic drugs in the US come from India and with Obamacare being introduced this figure is set to rise further.3 The spending pattern of an erstwhile manufacturing-oriented industry has also changed with the industry spending around 18 per cent of revenue on R&D activities.4

Unlike many other countries, the involvement of the Indian government in the pharma industry has been deep and often controversial. The government has made numerous efforts to stimulate organised growth of the industry. In the pursuit of achieving global leadership in the manufacture of end-to-end drugs, the government unveiled its Pharma Vision 2020, which inter alia, provides for reduction in approval time for new facilities to boost investments. Further, robust mechanisms such as the Drug (Prices Control) Orders and the National Pharmaceutical Pricing Authority (NPPA) have been implemented to address the issue of affordability and availability of medicines.5

The growth story of the Indian pharma industry into a mammoth industry is an impressive one marked with numerous important turning points. These turning points have typically stemmed from the issues faced by the industry and have changed the nature and mechanisms of the industry, and to a large extent have sculpted the trends in the industry. In this article we aim to explore a few issues that have affected the Indian pharma industry and how the scenario is changing.

IPR: A changing face

Intellectual property rights (IPR) in the pharma sphere have been a contentious issue globally. Previously, the IPR debates were typically between the branded pharma companies and generic pharma companies. India was no exception to this IPR tussle and in view of the large poor population in need of basic healthcare, the Indian authorities were initially not keen on granting substantial IPR protection. However, over a period of time, the Indian authorities have become more sensitised to the need and importance of IPR protection for the long-term good of industry.

Better patent protection

The (Indian) Patents Act was enacted in 1970 and inter alia contains provisions relating to pharmaceutical patents. A major change in the patent laws in India was the enactment of the Patent (Amendment) Act, 2005, which made patent laws in India compliant with the TRIPS.

Prior to the 2005 amendment, only processes were patentable and not the end product itself. Therefore, if a company chose to manufacture the same product but used a different process, it could do so without violating Indian patent laws. This regime naturally caused concerns to various companies, especially branded manufacturers, as it did not protect their inventions fully and allowed others to manufacture the same drug, which would have otherwise enjoyed patent protection in other jurisdictions. With the 2005 amendment being enacted, product patents and process patents have been permitted for a period of 20 years and special provisions have been introduced to prevent ever-greening of patents.

The 2005 amendment is viewed as a milestone which substantially changed the protection regime in India. However, patent disputes have regularly arisen in India, recently in the context of compulsory licensing.

Locking horns on compulsory licensing

Though there was an overall improvement in patent protection in India, recent issues such as granting of compulsory licenses (CLs) have been contentious. Under Indian patent law CLs can be awarded inter alia if:

• The reasonable requirements of the public with respect to the patented invention have not been satisfied; or
• The patented invention is not available to the public at a reasonably affordable price; or
• The patented invention is not worked in the territory of India.6

In the pharma context, the conditions for grant of a CL are aimed at preventing a situation where the public health is prejudiced by the exclusivity granted to the patented product. Recently, the Supreme Court of India dismissed a Special Leave Petition for reversing the CL awarded to Natco Pharma.7 The Natco-Bayer case was the first case on CL, wherein Natco had been granted a CL for Bayer’s patented drug Nexavar, since all the grounds for granting a CL under the (Indian) Patents Act, 1970 had been met.

While CLs have been viewed in the developing world as a necessary evil, they have also caused grave concerns in the industry due to the revenue loss that CLs tend to cause. In a recent order by the Controller of Patents, it has been held that granting a CL should be the last resort and efforts for obtaining a voluntary license should be made first.8 This order provides some comfort to the industry, as it clarifies the legal position that so long as the patentee’s does not meet the conditions for grant of CLs under the Patents Act, 1970, its patent rights would not be interfered with.

Though there is a lure for short-term decisions which bring relief to the public, but such decisions should not prejudicially affect the pharma industry on the whole. There is a dire need for carefully balancing the requirements of the public and the industry.

Stricter trademark enforcement

Another observable trend in the IPR sphere is the stricter enforcement of trademark contraventions in India. In the pharma sphere this trend is comforting as trademark contraventions may lead to use of wrong drugs.

The Indian courts have, through various judgments, taken a very strict view on issues of passing off by using deceptively similar marks and even formulating criteria to examine competing claims. A case in example is of Cadila Health Care Cadila Pharmaceutical Ltd,9 wherein it was held that in an action for passing off on the basis of unregistered trade mark, for deciding the question of deceptive similarity inter alia the following factors have to be considered:

• The degree of resemblance between the marks, phonetically similar and hence similar in idea;
• The similarity in the nature, character and performance of the goods of the rival traders; and
• The class of purchasers who are likely to buy the goods bearing the marks they require, on their education and intelligence and a degree of care they are likely to exercise in purchasing and/ or using the goods.

Though trademark disputes are common in India, decisions such as the Cadila judgement have helped in bringing clarity to the legal scenario in India.

Anti-trust: Changing the old workings ways

The archaic Monopolies and Restrictive Trade Practices Act, 1969 was replaced by the Competition Act in 2002, which established the Competition Commission of India (CCI). Since its inception, the CCI has passed various orders on prevalent working practices of the Indian pharma industry.

The pharma market in India was dominated by a number of national and state level chemist and druggist associations. Whenever a pharma company wanted to appoint stockists, wholesalers or distributors, it had to obtain a NOC/ letter of consent from such associations as pre-condition to such appointment. The CCI has been closely examining this issue and in numerous orders had held such practices as anti-competitive.10

Many pharma companies, who were often reluctant participants in such working mechanisms, have breathed a sigh of relief. Previously, the pharma companies had to participate in certain ‘informal’ arrangements due to a lack of alternatives; these orders of the CCI have paved a way for greater transparency.

Such orders of the CCI have impacted the root market mechanics of drug distribution in India. Now, stakeholders are wary of entering into such arrangements or other “informal” arrangements which may have anti-competitive effects and the industry can look forward to more transparent domestic drug distribution system.

M&A in Indian pharma sphere General outlook towards foreign investments

India has a large population with a limited access to affordable healthcare. In this regard, some of the primary concerns in allowing foreign investment in the Indian pharma industry included ensuring (i) continuous availability and supply of drugs, (ii) non-discontinuance of essential medicines, and (iii) an increased supply of drugs over a period of time. Therefore, the policy allowing foreign investment into the Indian pharma sector has to play a balancing act between meeting the needs of the people and the capital needs of the industry.

Presently, FDI up to 100 per cent is permitted in brownfield investments, with prior approval of the Foreign Investment Promotion Board (FIPB) and for greenfield investments, FDI up to 100 per cent is permitted with no requirement of prior FIPB approval.

The drugs and pharma sector has attracted one of the highest FDI inflows in India. It has been a matter of debate whether such investments have indeed benefitted the Indian pharma industry or not. Recently, there have been demands from certain quarters of the government for banning brownfield foreign investments altogether. While increased access to capital is necessary for growth of any industry, in the pharma context such increased investments should be accompanied with technology sharing, increased production and increased employment generation. FDI coupled with such accompaniments can achieve long-term sustained growth and could ensure world class facilities in India.

It is necessary that FDI fuelled growth should not be artificial in nature and should act as a catalyst in developing a world class pharma industry which takes care of the needs of the vast populace of the country.

Non-competes in M&A

An issue typically faced in foreign investment transactions in the Indian pharma industry is that of non-compete clauses which restrain the selling promoters from engaging in similar business. Non-compete clauses have been a constant demand of acquirers/ purchasers.

The rationale and effect of non-compete clauses has been contentious and due to the nature of the pharma industry, the effects of non-compete can be positive as well as negative. The CCI frowned upon long periods of non-compete, and in the past contracting parties have modified their transactional documents to reduce the duration of non-compete.11

Since then, the position regarding non-compete clauses has been clarified to a certain degree by the FIPB, now non-compete clauses are not permitted except in special circumstances.12

Presently, there is no clear guidance as to what constitutes ‘special circumstances’ and there remain many grey areas surrounding its interpretation e.g. non-compete clauses in transaction structures such as stock transfers where the selling promoter is still employed by the company, or non-compete clauses for a selling shareholder who does not sell his shareholding completely and remains a party to the shareholding agreement. It would be interesting to see how non-compete clauses in such structures and other complex structures are treated by the FIPB in the near future.

Pricing: An age old conflict

Unlike the pharma sector in countries such as the US, Indian pharma market is a price controlled one. Pricing remains a contentious issue and more often than not, the pharma industry and the regulators lock horns on pricing issues.

The pricing conflict has been raging in India since the 1970s, where for the first time the government had restricted the profitability of pharma companies through Drug (Prices Control) Order (DPCO). Since then a number of DPCOs have been brought in for controlling drug prices.

In 1997, through a resolution of the Ministry of Chemicals and Fertilisers, an independent body of experts was established called the NPPA.13 One of the primary objectives of the NPPA was to fix /revise the prices of controlled bulk drugs and formulations and to enforce prices and availability of the medicines in India.14 In addition to the National List of Essential Medicines, NPPA’s mandate extends to monitoring the prices of decontrolled drugs in order to keep them at reasonable levels.

Recently, the NPPA has been flexing its muscles and has issued orders for price control of various drugs and some of these decisions have been challenged in the courts of law. This trend of a more active NPPA has been welcomed by the general populace as it prevents patients from being priced out of affordable healthcare. At the same time, price control is seen as a major setback for many pharma companies as consequential revenue losses may make the production of price controlled drugs commercial unviable.

In view of the recent spike in the drug prices in the US, the question of decontrolling the Indian pharma industry has been laid to rest and many believe that price control mechanisms are here to stay. It is expected that with an ever more vigilant regulator and a growing industry, pricing of drugs is to remain a contentious issue.

India: The next R&D destination

The privatisation and globalisation policy of the government of India in the mid-1990s provided incentives to R&D in the pharma sphere. Innovative products were given exemption from price control, a number of financial schemes were made available to firms for undertaking R&D, technology collaborations were brought under the automatic approval route, and patent rights were granted for a period of 20 years for products as well as processes.15

This incentivisation created a seismic shift from the practice of only manufacturing to a practice of innovation. India was previously known as the generic capital of the world owing to the wide spread reverse engineering industry, this is now changing and companies in India have started to develop and innovate drugs.

More than 870 multinational companies have set up their R&D operations in India since 1985, the first one being Texas Instruments.16 The prime reasons why R&D in India is viewed as beneficial are:

• Cost effectiveness: The cost of setting up world class R&D facilities in India cost a fraction of what they do in the west. The overall R&D costs are about one-eighth and clinical trial expenses around one-tenth of western levels;17
• Skill: A large pool of English speaking technical skill power is available at a low cost with highly developed R&D oriented skill sets;
• Established R&D centres: Pre-established state of the art R&D centers offer logistic convenience and cost effectiveness;
• Growing biotechnology industry: Indian biotechnology industry has grown by leaps and bounds and has some world class players;
• Market access: India is one of the fastest growing markets in the world. R&D in India allows companies to gain a foothold in this new and growing market;
• Rising household incomes: The growing middle class in India is an attractive market for drugs. With increasing disposable incomes, the market for non-essential drugs, is set to grow rapidly;
• Governmental incentives: Post the liberalisation era, the Indian government has offered numerous incentives to R&D in India; and
• Biodiversity: Some drugs aimed at the Indian market require certain gene specific R&D and clinical trials. India’s rich genetic bio diversity offers a perfect destination for such R&D and clinical trials.

Pharma R&D in India is expected to witness exponential growth in the near future, and with the growth of the economy and pharma industry in India, innovation assumes new economic importance in the Indian pharma industry.

Future of Indian pharma

The Indian pharma industry has come a long way and made significant progress in infrastructure development and technical and R&D capabilities. With the integration of the Indian pharma market with the global market, new issues are being faced and tackled by the industry. Some old challenges such as IPR and pricing continue to be contentious issues in the market. The trends of increased foreign interest in the markets and increased investments in R&D are expected to stay.

With numerous strengths and a growing consumer class, the pharma industry in India may face certain legacy and new issues, but it is expected to grow multifold and continue to be an attractive investment destination.

References:

1. FDI statistics, Department of Industrial Policy and Promotions, Ministry of Commerce and Industry, Government of India. Available at (http://dipp.nic.in/English/Publications/FDI_Statistics/2014/india_FDI_September2014.pdf)
2. “Indian Pharmaceutical Industry”, available at (http://www.indianmirror.com/indian-industries/pharmaceutical.html)
3. “Obamacare Has Hidden Benefits – For India”. Available at (http://www.bbc.com/news/world-us-canada-24407452)
4. Available at (http://www.investindia.gov.in/pharmaceuticals-sector/)Available at
5. http://www.ibef.org/industry/pharmaceutical-india.aspx)
6. Section 84 of the (Indian) Patents Act, 1970
7. Order of the Hon’ble Supreme Court of India dated 12 December 2014 in Special Leave Petition (C) NO(S). 30145/2014
8. CLA 1 of 2013, BDR Pharmaceuticals International Private Limited v. Bristol Myers Squibb Company, order dated 29 October 2013.
9. Cadila Health Care v. Cadila Pharmaceutical Ltd [(2001) PTC (SC) 561]
10. In Re: Bengal Chemists and Druggists Association (Suo motu – Case no. 02/2012) and Reference Case No 01/2013 filed under section 19(1) (b) of the Competition Act, 2002 by Dr Chintamoni Ghosh, Director, Directorate of Drugs; M/s Arora Medical Hall, Ferozepur vs Chemists and Druggists Association, Ferozepur and Ors (Case No 60/2012); M/s Santuka Associates Pvt Ltd vs All India Organisation of Chemists and Druggists and Ors (Case No 20/2011); M/s Sandhya Drug Agency vs Assam Drug Dealers Association and Ors (Case no. 41/2011); and M/s Peeveear Medical Agencies, Kerala vs All India Organization of Chemists and Druggists and Ors (Case no. 30/2011).
11. Please see Order of CCI dated 21 December 2012 in Combination registration No C-2012/09/79. Available at (http://www.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/C-2012-09-79.pdf)
12. “Foreign Direct Investment in Pharmaceuticals sector – clarification”. Available at (http://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIR124NT0414.pdf)
13. Available at (http://www.nppaindia.nic.in/resolu1.htm)
14. Available at (http://www.nppaindia.nic.in/AboutNppa.htm)
15. Reji K Joseph, “The R&D Scenario in Indian Pharmaceutical Industry”, available at (http://www.ris.org.in/images/RIS_images/pdf/dp176_pap.pdf)
16. “Global R&D Summit 2013-Destination India”, report available at (http://www.ficci.com/spdocument/20284/FICCI-Battelle-Knowledge-Paper-Global-R&D-Summit-2013[1].pdf)
17. “Biotechnology and Pharmaceutical Opportunities in India”, Sector Briefing, UK Trade & Investment, available at (http://www. clustercollaboration.eu/ documents/10147/101938/Biotechnology+and+Pharmaceutical+Opportunities+in+India.pdf)