TROUBLE WITH INDIAN PHARMA - HAS INDIAN PHARMA LOST ITS PATH?
For over four decades, the Indian pharmaceutical industry has played a critical role in making life-saving drugs accessible to the poorest of the poor, not only in the developing and the least-developed, but also in the developed world. Every time it has faced any serious crisis, the entire world has prayed for and worked towards lending it a helping hand. However, lately, it is going through its worst slowdown. What factors have caused this? Are they the same structural factors that had almost derailed the sector a decade back? Or is it something of its own doing? More importantly, are these impediments reversible?
It was March, 2005. The eyes of the entire world were on the Indian Parliament. Not because of the madhouse that it frequently becomes, but because it was debating a piece of legislation, which had the potential to make or mar millions of lives around the world. The legislation – amendments to India’s The Patents Act, 1970, to make it TRIPS (The Agreement on Trade-Related Aspects of Intellectual Property Rights) compliant – had become necessary because three months ago (December 2004), the government had hurriedly brought in an ordinance to meet WTO’s January 1, 2005, deadline. Now, it was time to discuss, debate and bring-in the final law, particularly since the ordinance was to lapse on the 31st of March, 2005.
The messiah
The stakes were high. Just imagine this. Few days before the ordinance was promulgated, Dr. Jim Yong Kim, Director, Department of HIV/AIDS, WHO, had written a letter to India’s Minister of Health and Family Welfare Dr. Ambumani Ramadoss. Among other things, the letter read, “As India is the leader in the global supply of affordable antiretroviral drugs and other essential medicines, we hope that the Indian government will take the necessary steps to continue to account for the needs of the poorest nations that urgently need access to antiretrovirals (ARVs), without adopting unnecessary restrictions that are not required under the TRIPS Agreement and that would impede access to medicines.”
Similarly, about a month before the Parliament was to debate the legislation, Achmat Dangor, Director of Advocacy, Communication and Leadership, UNAIDS, had written a letter to India’s Minister of Commerce and Industry Kamal Nath. A part of the letter read thus: “Affordable HIV medications from India have so far saved thousands of lives, yet more than 8,000 people around the world continue to die every day because they have no access to treatment. Despite concerted efforts across the world, only about one in ten people in urgent need of HIV antiretroviral treatment in low and middle-income countries has access to existing medicines. Current legislative proposals intended to take the 1970 Indian Patents Act beyond the commitments agreed in the World Trade Organisation’s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) threaten to undermine India’s leadership in providing affordable medicines.” What were these TRIPS proposals that the entire world wanted India not to adhere to? And why was India such a big cog in the wheel?
In 2005, Dr. Jim Yong Kim, the then Director of Department of HIV/AIDS, WHO, had urged India to keep the interests of HIV affected patients in mind while amending its patent law
Main cog
Until joining the WTO, one of the main features of India’s patent law was the non-recognition of product patents. In other words, Indian law allowed others to produce something that you had invented as long as they were not using the process that you had used to produce it. For example, if you had invented a new drug to cure a certain type of cancer, the Indian government would have protected your rights on how you produced it. But it wouldn’t have stopped someone else from manufacturing the same drug by a different process. This had allowed Indian pharmaceutical companies to reverse-engineer newly invented drugs in the developed world and manufacture them without spending a penny on R&D. While some claimed this feature of the Indian law was against the interests of researchers and innovators, others believed that it had been a lifeline for millions of people, not only in India but around the world, who would have otherwise never been able to afford new life-saving drugs.
India joining the WTO and agreeing to the TRIPS Agreement, however, was to end this forever. For, TRIPS mandated not only the recognition of process but also product patents and, hence, was a death-knell for Indian pharmaceutical companies’ reverse engineering capabilities. That is why people like Dr. Kim and Dangor were urging Indian lawmakers to utilise all possible flexibilities in the TRIPS Agreement to curb the scope of patent protection in the country.
On an average, Indian pharmaceutical companies spend 10 percentage points (as a percentage of sales) less on R&D as compared to MNCs
The lifeline
After frantic debates and arguments, the Indian Parliament passed the bill to amend The Patents Act, 1970, on March 23, 2005, to make it WTO-compliant, but made enough provisions to limit the scope of patent protection in the country. So, while on one hand, the amended law now defines an invention as, in Section 2 (j), “a new product or process involving an inventive step and capable of industrial application”, thereby recognising product patents, on the other hand, it limits their scope by defining ‘inventive step’ as, in Section 2 (ja), “a feature of an invention that involves technical advance as compared to the existing knowledge or having economic significance or both and that makes the invention not obvious to a person skilled in the art”.
Similarly, to clip the wings of product patentees, the law, under ‘what are not inventions’ reads, in Section 3 (d), “the mere discovery of a new form of a known substance, which does not result in the enhancement of the known efficacy of that substance, or the mere discovery of any new property or new use for a known substance or of the mere use of a known process, machine or apparatus, unless such known process results in a new product or employs at least one new reactant.”
USFDA regularly inspects drug manufacturing plants in India to ensure their adherence to safety standards laid down by it
Litmus test
The amendments to The Patents Act, 1970, while making India WTO-compliant by recognising product patents, also kept the window for reverse-engineering open, thereby making all stakeholders reasonably happy. But it was about to go through a much sterner test. On May 17, 2005, US awarded a patent on the beta crystalline form of imatinib mesylate to Swiss MNC giant Novartis AG. By then, the composition – a game changer for chronic myeloid leukaemia patients – was already being marketed by Novartis under the brand name Gleevec. A few months after Novartis had launched Gleevec, Hyderabad-based Natco Pharma had launched a generic version of it under the brand name Veenat. Armed with a US patent and amended patent laws in India, Novartis dragged Natco to the judiciary for patent violation.
After a long-drawn out seven-year battle, the Supreme Court of India, on April 1, 2013, citing the above mentioned provisions of the amended The Patents Act, 1970, dismissed Novartis’ patent claim on imatinib. “In view of the findings that the patent product, the beta crystalline form of imatinib mesylate, fails in both the tests of invention and patentability as provided under clauses (j), (ja) of section 2 (1) and section 3 (d) respectively, the appeals filed by Novartis AG fail and are dismissed with cost,” the Supreme Court verdict reads. While always anticipated to be ruled against it, thanks to a similar verdict by Madras High Court earlier, the rejection of Novartis’ claims on imatinib can be termed as a massive victory for those of the view that excessive patent protection leads to monopolies, many times, at the cost of the larger good of the society.
The imatinib case is considered to be a landmark, not only because it virtually made the point clear that India will not protect patents at the cost of patients, but also because it prolonged the lives of millions of leukaemia patients around the world. “When we take the case of imatinib mesylate, the original drug’s cost was out of bounds for the middle class. It ranged around Rs.2-3 lakh for a month’s dose, but after Natco Pharma brought in the generic version of it, the same drug’s cost was cut down to Rs.8,000-10,000, thus succeeding in increasing the accessibility of the drug for most people,” answers Dr. Hari Menon, Professor, Medical Oncology, Tata Memorial Centre. The obvious question that then comes to mind is, "Can something so much cheaper be equally good?"
Responding to our question on whether generic drugs are in any way inferior to branded drugs, Dr. Menon says, “We cannot say generics are inferior, but yes, we face problems with certain generic drugs, particularly when compared with branded drugs. When we prescribe a generic drug, we basically prefer companies, which have a good track record. Producing a drug first involves research, then the process of analysing the salt, and then testing them. Unfortunately, nowadays, we don’t do this. Studies that have been done on a few generic drugs are very disturbing. The only way to ensure proper drugs is to have strict regulations.” And this ‘regulation’ that Dr. Menon refers to is what the pharmaceutical industry is all about, other than patent laws of course.
As good as they come
While ideally, the market for pharmaceutical drugs should just be a function of population, even in their case, economics has the upper hand. Hence, despite accounting for less than 5% of the global population, US is, by far, the biggest market for pharmaceutical drugs. In fact, despite being home to some of the top pharmaceutical companies, US is also the biggest drug importer in the world. Given this fact, its regulator – US Food and Drug Administration (USFDA) – wields enormous clout in the pharmaceutical world, since not a single drug can be marketed in US without its seal of approval. Is this clout the reason for a lot of friction between it and Indian drug manufacturers and exporters? Trying to remove such misconceptions, Howard Sklamberg, Deputy Commissioner for Global Regulatory Operations and Policy, USFDA, says, “The FDA does not treat manufacturing plants in India any different than those in US or in other countries. The agency’s mission is to protect public health, and this requires holding all firms to the same high standards.”
Explaining his point further, Sklamberg says that through a variety of methods, including scientific reviews, inspections of facilities and post-market surveillance, FDA strives to ensure that regulated product manufacturers, wherever they may be located, comply with standards and regulations for their products provided to US consumers. And that FDA seeks to ensure that Indian manufacturing facilities exporting pharmaceutical products to US understand the risks associated with their product’s processes and ensure they remain compliant to FDA’s regulations. Understandably, USFDA officials are of the view that Indian drug manufacturers are as good as those from any other country when it comes to complying with the agency and meeting its set parameters and regulations. “The problems encountered by FDA investigators in India are similar to those seen around the world in manufacturing,” he tells The Dollar Business.
Similarly, USFDA’s counterpart in European Union – European Medicines Agency (EMA) – also thinks that Indian pharmaceutical companies’ adherence to standards, regulations and guidelines laid down by it is at par with the best in the world. “EU authorities carry out about 150 inspections every year in India of both active pharmaceutical ingredient (API) and finished product manufacturing sites. To date, only small percentages of these sites are found to be non-compliant with EU Good Manufacturing Practice (GMP). This rate is consistent with rates found for total GMP inspections carried out every year,” experts at EMA tell The Dollar Business.
The Thin line
According to USFDA, “A generic drug is identical or bioequivalent to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use. Although generic drugs are chemically identical to their branded counterparts, they are typically sold at substantial discounts from the branded price.” Similarly, the World Health Organisation (WHO) defines a generic drug as “a pharmaceutical product, usually intended to be interchangeable with an innovator product that is manufactured without a licence from the innovator company and marketed after the expiry date of the patent or other exclusive rights.” In simpler words, a drug is called a generic drug if it has been manufactured by an entity other than the holder of its patent, but only after the patent has expired. And since the new entity manufactures it via reverse-engineering, without spending anything on R&D, it (the new entity) is able to sell it at just a fraction of the original drug. And herein lies a big conundrum.
If companies don’t spend on R&D and invent new drugs, mankind will inevitably lose the fight against diseases. But if the patient is forced to bear even the R&D spend on a drug, as is the case with branded drugs, most of them, at least in the developing and least-developed world will, anyway, not be able to afford it. In fact, as discussed above, generic drugs manufactured by Indian pharmaceutical companies have long been the only ray of hope for millions of patients worldwide.
Validating this further, a senior official with the Office of the US Global AIDS Coordinator and Health Diplomacy, says, “Indian manufacturers are a major source of antiretroviral drug (used for treatment against HIV) procurement for The United States President’s Emergency Plan for AIDS Relief (PEPFAR) based on cost and quality.” When asked what PEPFAR thinks about the quality of ARVs it procures from Indian manufacturers, the official says, “No product failures have been reported in the past nine years. The willingness of Indian pharmaceuticals to seek and obtain USFDA approval or tentative approval for generic ARVs has been essential to PEPFAR’s ability to procure generic ARVs, provide treatment to many while ensuring that patients receive high quality ARVs.” But while these statements can be music to the ears of those backing generics, research and innovation cannot be written off altogether, can they? S. V. Veerramani, President, Indian Drug Manufacturers’ Association (IDMA), has clear views on the issue. “A branded drug or patented drug is the result of research and innovation and a generic drug is only a continuance of the same at a lower price. Hence, encouragement should always be given to branded or patented drugs to foster research and innovation. While a generic drug can be useful for the present, a patented drug is important for the future,” he tells The Dollar Business. So, do Indian pharmaceutical companies spend enough on R&D? Of course not!
European Medicines Agency claims that it has found only a small percentage of manufacturing units in India non-compliant to its GMP
Copy cats
A detailed The Dollar Business Intelligence Unit study reveals that on an average, Indian pharmaceutical companies spend 10 percentage points less on R&D than their global peers. For example, while the World No.1 in terms of revenue – Novartis AG – spent 17.1% of its sales on R&D in FY2014, India’s top pharmaceutical company by sales – Sun Pharmaceuticals – spent just 6.3% of its sales on R&D in FY2014. What’s worse? Even these small amounts that Indian pharmaceutical companies are spending on R&D are mostly aimed towards discovering new processes to manufacture generics, rather than discovering/inventing new products. “Our R&D is not very strong, neither is it fast growing, particularly in the drug discovery sector. But R&D is happening and is very much in place in the areas of formulation development and new dosage forms and process development for a known active pharmaceuticals ingredient (API),” Dr. P. V. Appaji, Director General, Pharmaceuticals Export Promotion Council of India (Pharmexcil), tells The Dollar Business, confirming what many speculate. Even Dr. Menon is not happy with the state of affairs. “The evolution of the Indian pharmaceutical industry has more been on the lines of generic drugs. It needs to pump more money into R&D, so that new drugs can be manufactured,” he tells The Dollar Business.
While recognising product patents, Indian law has enough provisions to discourage excessive patent protection. These made the SC rule against Novartis' claim on imatinib
Vainglorious?
Despite repeated criticism for not investing enough in R&D, the success of the Indian pharmaceutical industry is stunning. For example, the senior official with the Office of the US Global AIDS Coordinator and Health Diplomacy, says, “Since 2011, Indian pharmaceuticals have represented over 90% of all antiretrovirals (ARVs) procured by PEPFAR.” Similarly, Sklamberg says, “Generic drugs now account for 80% of US prescriptions, and India is the second-largest exporter of drugs to US.” But the best appreciation of the Indian pharmaceutical industry comes from Dr. Arun Bhadra Thapa, Acting WHO Representative to India. “More than 65-70% of medicines in the WHO Prequalified List of Medicinal Products belong to Indian manufacturers in the segments of HIV/AIDS, Tuberculosis, Malaria and Reproductive Health. India is also a major vaccine producer and has 18 major vaccine manufacturing facilities. These vaccines are supplied to the national and international markets (150 countries), which make India a major vaccine supplier across the globe. For example, more than 70% of all measles vaccines used globally are produced in India. Recently, 100% of meningitis conjugate meningococcal vaccine produced in India has been successfully introduced and used in the West African meningitis belt, which has prevented major meningitis epidemics in the sub-Saharan Africa,” Dr. Thapa tells The Dollar Business.
Not a birth right
If everything is so hunky-dory about the Indian pharmaceutical industry, why haven't export volumes grown gloriously in recent years? Why was the volume of medicines exported from India in FY2015 16.4% lower than that in FY2012? The answer to these questions is simple – competition. The generic drugs market is getting commoditised. Since it isn’t based on innovation and R&D, the entry barriers are pretty low. In fact, increasing competition and making generic drugs as cheap as possible seems to be one of the main goals of policymakers. “The most effective way to continue to keep prescription drugs affordable for patients is to increase competition. Millions of patients and the entire healthcare system would benefit from streamlining and expediting the approval process so that more generics can reach the market sooner,” Ralph Neas, President & CEO, Generic Pharmaceutical Association (GPhA), USA’s leading trade association of manufacturers and distributors of generic drugs, tells The Dollar Business. But where is this competition coming from?
The answer to this question is simple. The increased competition for Indian pharmaceutical companies is coming from two stalwarts in manufacturing – China and Mexico. Validating this, Dr. Appaji says, “Active Pharmaceutical Ingredient [API] is the major segment in which China is a competitor to India. It is becoming a competitor even in formulations. Even countries like Bangladesh, Vietnam and Ukraine are becoming competitors.” An analysis by The Dollar Business Intelligence Unit reveals that in the last four years, China and Mexico have overtaken India when it comes to export volume growth of pharmaceutical drugs (corresponding to base 1 in CY2005). And this makes absolute sense, given that generics is getting commoditised and is today mostly a function of manufacturing capabilities. Hence, if Indian pharmaceutical companies want to maintain their leadership role when it comes to generics, they have to reinvent themselves. But how?
Let’s again take the case of India’s top pharmaceutical company by sales – Sun Pharmaceuticals. In FY2014, on a consolidated revenue of Rs.16,080.4 crore, it had an EBITDA of Rs.7,703.9 crore, or 46.3%, and a net profit of Rs.3,141.5, or 19.5%. On the other hand, when it comes to the world’s top pharmaceutical company by sales – Novartis – in FY2014, on a consolidated sales of $58 billion, it had an operating income of $10.7 billion, or 18.5%, and a net profit of 15.8%. Why should a company, which spent 17.1% of its sales on R&D last year (Novartis), profit so much lower than a company that spent just 6.3% of its sales on R&D (Sun Pharmaceuticals)? The answer is, it shouldn’t. Assuming Sun Pharmaceuticals is a proxy for the Indian pharmaceutical industry (in FY2014, it had earned 95% of its revenue from generics – 60% from US generics, 23% from Indian branded generics and 12% from international generics), it’s pretty clear where the problem is. Indian pharmaceutical companies can’t expect to remain as profitable as they have been. They should just thank their stars for earning 138.4% more dollars for exporting 9.6% less volume of drugs between FY2010 and FY2015 [see chart titled: India's medicament mixtures (in dosage) exports]. Such pricing power can’t stay with them forever. Hence, in order to remain competitive in the international market and resume export volume growth, Indian pharmaceutical companies have to cut down prices and learn to operate at lower margins. That in FY2015, Sun Pharmaceuticals EBITDA margins collapsed over 10% and net margins almost halved as compared to that in FY2014, proves that Indian companies are starting to wake up to the new reality.
Even the little money Indian pharamaceutical companies spend on R&D is intended more towards process, rather than product development
Wake up call
The Indian pharmaceutical industry has a simple choice to make if it wants to get out of the current slowdown. Either it has to spend on R&D and develop new drugs, thereby reducing its overdependence on generics, or, what is more probable, it has to cut down on margins and concentrate on volume. Reminding how important the next 2-3 years is for the industry, Minister of Health and Family Welfare J. P. Nadda, while speaking at a FICCI event recently, said, “The window period of 2015-18 is very critical when the patent tenure of many biopharmaceuticals and innovative molecules will expire.” On the other hand, speaking at the same event, Dr. Jyotsna Suri, President, FICCI, said the sector is under pressure, both in terms of pricing and margins, and hence, needs government support. “The sector looks to the government for support,” she said. But should it?
Government of India provides lucrative incentives to pharmaceutical drug exporters – 3% under MEIS and over 2% duty drawback. Thanks to such government support, India’s 2nd largest pharmaceutical company by market capitalisation – Lupin – had earned Rs.119.9 crore from export incentives in FY2014, which represented 5.2% of its standalone profit of Rs.2,397.4 crore. [Sun Pharmaceuticals doesn’t reveal the amount it earns from export incentives]. But as they say, the more the merrier. Seconding Dr. Suri’s plea for more government support, IDMA’s Veerramani says, “The export incentive of 3% under MEIS is not adequate. If given the right encouragement, exports can grow manytimes over.”
It’s actually puzzling that an industry, which earns a lion’s share of its revenue from overseas markets, wants more government support! It’s also unfortunate that an industry, which has always been protected by the legislature and the judiciary because of the social role it plays, seems to be forgetting the society itself. It seems the massive amounts of profit Indian pharmaceutical companies are earning is making them want only more. But if it does some introspection and earnestly tries to ascertain the reasons for the slowdown it is facing, it can easily turn a corner. For, all it needs to do is remember the face of those poor patients, who had ensured it was always protected, and ask itself a simple question – is it doing enough to make life-saving drugs available to the poorest of the poor?
A famous French historian and philosopher once said, "Men who are occupied in the restoration of health to other men, by the joint exertion of skill and humanity, are above all the great of the earth. They even partake of divinity, since to preserve and renew is almost as noble as to create." Voltaire, as he is known, was probably referring to the clan of doctors. We can say much the same about drug-makers, can't we? Someone (knowing India, ideally someone "popular") needs to drop reminder letters at the doors of Indian drug giants, we reckon.