• Part I: Just what is a Patent?

With India embracing the World Trade Organisation's guidelines on various trade-related matters, the patents issue has come under the spotlight.

Will the prices of live-saving and other drugs rise in this new regime? How will Indian pharmaceutical companies be affected by the new rules?

rediff.com looks at all these issues in a special series. In this second part of the series, we find out how the new patents era will affect the India pharma industry.

A government mandates a patent right for the inventor of the product or process. Since a patent right is trade-related, India, being a member of the World Trade Organisation is mandated to make its patent-related laws (the Patent Act 1970) and other trade-related IPR laws (like those related to copyright, geographical indications, etc.) conform to the Trade Related Aspects of Intellectual Property Rights (known as TRIPS) norms.

The much-discussed and controversial Patents (Amendment) Bill will bring India's patent regime in line with the WTO agreement.

The previous Indian Patents Act (1970) recognised patents on pharmaceutical 'processes', but not on 'products', allowing domestic pharmaceutical companies to produce cheap copies of patented drugs made by foreign companies using alternative production methods.

India's controversial new patent law is now set to make the country a global research base as multinational companies in the coming years would take advantage of its strong base of scientists, research skills and low-cost labour.

Neutral impact at this stage

Pharmaceutical analysts say that moving to a product patent regime will have a neutral impact for the Indian industry at this stage of development.

Multinationals will be selective in determining what kind of expensive or innovative patented product will be of use in India.

The real impact will be seen only over the next 2-3 years in the field of innovative drug discoveries: estimated to be only 3 per cent of the global formulations market.

MNCs thus may not be able to provide innovative drugs to India immediately. This is because only those drugs invented post January 1, 1995, will be eligible for product patents in India.

Foreign brokerage Refco Global Research commenting on the new product patent regime says, "The average developing time for such drugs is 10-12 years, so the earliest drugs are not likely to come through until 2006-07."

"The passing of the Bill is a positive for the multinationals, but they had asked for a stricter legal system which would ensure validity of the IPR," said Shahina Mukadam, analyst with HDFC [Get Quote] Securities. Over the longer term, unique therapeutic patented products could find their way into the market, she said.

This does not mean that Indian companies stand to lose out. There are other opportunities that will be wide open for the Indian industry to grow and make an impact in the global arena.

First, the market for off-patented generic drugs prior to 1995 is open to be exploited. Second, Indian companies will look for stable export markets.

Thus over the years it would help create a domestic market dominated by multinationals and Indian companies, but also offering Indian companies to tap off-patented generic export markets.

"Indian companies are seeking to expand their markets further into the United States and the United Kingdom and African countries," Shahina added.

A change in the market dynamics

Over the past decade, several drugs (with features similar to patent protected drugs overseas) have been launched in the Indian markets but very few path breaking new molecules have been developed. In India most patients pay for medicines through their own funding and is not backed by medical insurance schemes.

Currently Indian doctors (and patients) have always compared costs and benefit of new therapy to an older therapy.

However in coming years, medical experts and analysts feel that as the markets grow the dichotomy will be that two segments will emerge in the Indian markets:

• 1. The one that offers expensive therapeutic drugs (which specific medical insurance schemes are linked to).
• 2. The second that offers cheaper alternatives for retail users.

"Where the markets will change is that there will medical insurance schemes which will seek to offer highly priced products to the Indian markets," Rohit Bhat, analyst with Batlivala & Karani brokerage.

Foreign companies will look to bring their innovative products through existing subsidiaries or set up 100 per cent owned firms in the country.

The industry will see further change in the form of foreign companies joining hands with Indian firms which have a strong distribution network, Bhat added.

This again would aid both foreign and Indian firms.

"India will be a research base for new drug discoveries and a hub for clinical trials. In the long term extensive research and clinical trials for new drugs will be conducted for new drugs, considering the large population," Habil Khorakiwala, Managing Director, Wockhardt.

The new regime will also help the Indian industry meet its ambitious target of acquiring one-third of the global generic market.

The fast growing global generics market offers India hope to have exports to the tune of Rs 90,000 crore (Rs 900 billion) by 2010 against the current level of Rs 15,000 crore (Rs 150 billion).

The Patent Mailbox

The US-based Pfizer [Get Quote] has emerged as the biggest pharma patent applicant in India as the Patents Office opened the mailbox of patent pleas for pharma and agrochem inventions for 1995-2005.

Mailbox applications are meant to recognise inventions and are temporary holding cells for patent applications in the fields of pharmaceuticals and agricultural chemicals, with India switching to a product patent regime.

According to information available over 8,900 patent pleas have been placed in the mailbox, a majority of nearly 7,500 belong to foreign entities, while the balance 1,400 are Indian applications.

Johnson & Johnson has emerged as the second largest applicant. Among Indian companies, Dr Reddy's Labs with 205 mailbox submissions has been the most aggressive patent seeker.

Rival Ranbaxy Laboratories [Get Quote] has been a less aggressive user of the mailbox with just 38 filings.

Among domestic firms, Delhi-based company Panacea Biotech put 75 applications, followed by bigger firms like Dabur India [Get Quote] (56), Sun Pharma [Get Quote] (46), Cipla (45).

Most of the new launches are expected to come from R&D innovation like line extensions, combination drugs and improved dosage forms of drugs.

Legal experts however believe that the once the mailboxes are opened there could be problems in terms of litigations or issuing compulsory licences. There could be debates over pricing patented products and this could slow down the process.

Domestic companies may have to withdraw patented products, after the patent right is granted to the innovator. Further, companies which are able to in-license patented drugs from MNCs would be able to address new product launch issues and thus augment its pipeline in the new regime.

Indian firms not worried of new regime

Even so, given the maturity and growth achieved by the pharma industry over the past decade and the successes of leading firms such as Ranbaxy, Dr Reddy's Laboratories, Nicholas Piramal [Get Quote] and Wockhardt globally, the Indian industry today is not unduly worried by the challenges of the new regime.

"We are not just going to be a leader among the developing nations," said Swati Piramal, director of Nicholas Piramal, which focuses on research. "We want to be a leader in the knowledge economy among developed nations and India could become a leader in the new-drug discovery market over the next five years."

Currently, the global output of the pharmaceutical industry ranks fourth in terms of volume and 13th in terms of value and it is all set to move up the value chain by overhauling its strategies to suit the new regime. The total size of the industry is estimated at $ 7 billion with exports accounting for $ 2.5 billion.

Over the next decade, it has the potential to grow five-fold to $ 35 billion because of the synergy in the fields of IT, bio-technology, medicine and pharmaceutical sciences.

. . . but some hurdles remain

As with any new administrative or legal system, any transition to a new regime will not be smooth.

The government-run patent office will come under pressure for the first time in several years to streamline the entire process.

Domestic stock brokerage firm Batlivala & Karani says that over the longer term however the product patents regime will work in favour of the pharma industry as it will breed research and innovation among the Indian companies.

Prospects for some key players

Cipla: With more than 140 products being developed on an exclusive basis by Cipla for its US partners viz. Ivax, Watson, Eon Labs, Morton Grove and Pentech, Cipla's earnings growth could be sustained at 20 per cent plus for the next 2-3 years. With a much lower R&D budget, Cipla's model continues to build up an attractive generic pipeline.

Dr. Reddy's Labs: With a weak December 2004 quarterly earnings performance, will continue to face a lean period where there is an imbalance between revenues and expenses. The company has built up its generic and speciality drug pipeline for its main markets and a strong R & D for new drug discoveries. But valuations may appear stretched at this stage.

Nicholas Piramal: Nicholas Piramal is positioning itself as a key research-based outsourcing company for large multinationals. The company has signed three outsourcing contracts.

Ranbaxy: Ranbaxy, like Dr Reddy's lab, has a strong pipeline of generic products for the US markets. The valuations may however appear stretched at this stage with earnings forecast expected to slow down over the next two quarters.

Torrent [Get Quote] Pharma: A weak performance in the December 2004 quarter is an overhang, but Torrent Pharma will see stronger performance from the overseas markets and exports. The long-term prospects are good.

• Part III: Are medicine prices set to zoom?