The ‘new’ patent law, policy and strategy

Anand Nandkumar

The recent Supreme Court decision in the case of Novartis’s Glivec brings several important trends to focus. This case is just only one of the many pharmaceutical patents cases heard by the Indian Patent Office or courts in the recent past and is symptomatic of India’s arrival to the big league. Patent litigations are typically concentrated in markets with large consumer bases and in technologically advanced nations. More often than not they take place between two or more technologically-proficient firms. Even in developed countries patent litigations are more prevalent in markets in which technology is a significant source of competitive advantage. While the fact that India is a large pharma market has never been in question, the recent spate of patent litigations is another pointer to the growing technological proficiency of the domestic industry.

Prior to 1972, when India’s patent law was a continuation of the British Patents and Design Act 1911 and in many ways similar to the current law, there were very few IP law suits. The number of IP law suits heard by Intellectual Property Appellate Board, High Courts or the Supreme Court of India between 2005 and 2010 is about 2.5 orders of magnitude the number of IP litigations between 1911 and 1972. In the case of Glivec, both the plaintiff and the defendants were technologically sophisticated firms that were prolific inventors themselves. Also, in another recent case involving Merck and Glenmark, the defendant Glenmark, an Indian company, is another prolific inventor. These numbers once again point to the growing stature of the Indian pharma industry.

Many have rightly hailed the Supreme Court’s decision as timely and something that will likely protect the interests of an average consumer. However, very little has been written or spoken about what the long-term implications might be. Economists point out that, the tradeoff implicit in patents is that while stronger patents result in short-term losses by providing temporary monopoly to inventors which increases prices, it also will likely result in long-term gains, by providing inventors long-run incentives for innovation.

The fact that big pharma companies rely on blockbusters has often been misconstrued as these companies make big profits on every drug. Since very few drugs succeed, the question is whether big pharma companies make super normal profits on average – average calculated across both successful and unsuccessful drugs. It is worth noting at this point that the return on assets between discovery-based big pharma companies and generic firms do not look vastly different. This suggests that the big discovery led pharma firms, do not on average make big profits and even the super-normal profits on blockbuster drugs is necessary for them to recover the huge upfront R&D investments on both successful and unsuccessful drugs that often exceed $1 billion as a target proceeds from the bench to the bedside.

Policy makers need to take into account whether weaker patents might harm the long-term medical needs of developing countries such as India. After all, very few companies that are in the business of generic medicines indulge in drug discovery themselves and what is critical is whether decisions such as that of Glivec would likely slow down or even abort R&D, which addresses the needs of patients suffering from diseases that are idiosyncratic to developing countries such as India. And even if that does not happen, since generics cannot exist without original drugs, muting the incentives for drug discovery should surely decrease the number of varieties of generics that an average consumer would have access to in the long run. It is worthwhile for governments to think about whether the long-run solution is to mandate big pharma companies to decrease prices even if that implies that their incentives to enter India or do India related R&D diminishes or subsidise medicines and make them accessible to the poor. With many countries like Australia, keen on replicating India’s patent provisions concerning ever greening, it is important for the policy makers to really think hard about the implications of such provisions in the long run and whether such a policy can be counter balanced with subsidies for medicines to the poor.

In the shadow of the recent decisions, foreign companies that seek to operate in India would have to explore a variety of India specific strategies to be successful. Given that countries like India and China offer significant growth opportunities to foreign companies despite its weaknesses, giving up these opportunities may not augur well for them in the long term. For one, they would have to figure out how to optimally protect their innovations when salts or other derivatives of a free form cannot be patented in India. Second, they may have to explore ‘co-operative’ strategies such as voluntary licensing to domestic firms and hope that such a strategy will likely enable them patent challenges and ward off compulsory licensing. In fact, a recent phenomenon that has received sparse attention thus far is the growing use of voluntary licensing, as a strategy to participate in Indian markets, especially between foreign and domestic companies. Among the top 10 domestic firms (firms that had the largest revenues in 2012), in-licensing activity grew from about 0.2 deals per firm in 1994 to about 4.4 deals per firm in 2008. With top 10 foreign firms out-licensing deals were virtually non-existent in 1994, whereas in 2008 the number of out-licensing deals was about 1.5 deals per firm. Equally significant, is the fact that some voluntary licensing transactions have occurred even when the licensor did not have a patent in India such as in the case of Gilead’s tenofovir disoproxil fumarate.

This ‘co-operative’ strategy is perhaps one of the reasons for the continued dominance of Indian pharma companies even after India opened up the industry to foreign competition through increased FDI and the new patent law. In 1994 before the first set of Trade Related Aspects of the Intellectual Property Rights (TRIPs)-based reforms to the Indian patent law was passed, only 13 of the top 20 firms in the Indian pharma industry were Indian firms whereas in 2008, four years after the final set of patent reforms were ushered in, 15 of the top 20 firms in the Indian pharma industry were Indian firms. While innovative activity around new pharma products among Indian entities increased moderately between 1994 and 2008, the relatively larger increases in process patenting among domestic entities was perhaps to facilitate assimilation of in licensed foreign technology. Also, the relatively larger surges in patenting especially by newer foreign entities were in part due to the intent to license rather than to enter product markets. As a result, the relative dominance of domestic firms remained intact even after India opened up its shores to foreign firms.

Interestingly, this is quite contrary to how the Indian pharma industry was structured prior to 1972, the last time when India had a ‘liberal’ patent law. In 1971, only six of the top 20 Indian pharma firms were domestic companies while the rest were of foreign origin (ordering based on revenues) and this was also when prices of drugs were generally high because a lot of the chemical ingredients were imported making several important drugs inaccessible to many. But given that the current patent law is similar in many ways to the law that existed before 1972, why hasn’t history repeated itself? One reason is that back then, the domestic industry was relatively under developed and offered very limited possibilities for licensing. When capabilities are fragmented such that only a few firms can produce proprietary technology of their own, or only a sub-set of firms have market access, domestic firms in our context, licensing may just be a better strategy. Voluntary licensing may not only enable foreign companies to deal with the looming threat of compulsory licensing even if multinational companies successfully get a patent in India, but just as importantly they may enable them to avoid large upfront investments in manufacturing and distribution. Voluntary licensing thus may in fact not only be a safe bet but also a very efficient strategy to operate profitably in India.

That said, the jury is still out on whether or not such a strategy is sustainable especially when the new patent law is yet to be fully tested in the Indian courts. With a few exceptions, most licensors may not out-license in the absence of a patent and it is yet unclear whether patents truly confer property rights to the patent holder in India which is likely to affect the attractiveness of licensing as a strategy. However, what is clear is that, that countries like India and China offer significant growth opportunities to foreign companies and despite their weaknesses, these markets may be too valuable to give up, just yet. The new imperative for foreign companies will be to also innovative on business models to compete in such markets.

(The author is the assistant professor of strategy at Indian School of Business, and researches the implications of patents on innovation, entrepreneurship and industry structure)