The year 2005 is likely to be a turning point for India Inc. in general, and the pharma industry in particular. This is in light of the fact that the new patent regime instituted by the WTO will come into force from January 1, 2005. Process patents, which are recognized in India and many other developing countries at present, will have to make way for product patents. Let us understand what would be the likely impact of this new patent regime on the Indian pharmaceutical industry.
Before we analyse this aspect, let us first understand the differences between process patents and product patents. According to the process patent regime, a patented product can be made with a different process and can be sold in the market. Here, the process, and not the product, is patented. Considering the fact that chemistry allows one to synthesize a product in several ways, Indian companies, through their reverse engineering skills, have made replicas of various otherwise patented drugs & sold them in Indian markets. This cannot be done once product patents are recognized. This means that the companies, which were surviving on their reverse engineering skills, would die or have to look at other streams of revenues.
The regime came into effect in developed nations in the year 1995, but the developing countries like India were given a grace period till the year 2005. The product patent has been instituted mainly in order to protect the intellectual property rights of companies that have initially developed the drug. The product patent regime will also help the original innovator to recover high costs of developing the drug. We must also understand that this new regime would significantly expand the market for original innovator companies. Earlier these companies shied away from developing markets due to the lack of adequate patent protection. Most developing countries had a process patent regime in place, and this has made the entry of original innovator companies unviable.
Do Indian companies have what it takes to fight global majors?
The answer lies in the market in which they are operating. Indian companies dominate the domestic market after government brought the 1970 Patents Act, in order to encourage the domestic industry. The share of Indian companies has increased from 20% in 1980 to 75% of the market in the year 2003. From net importer of pharma products, we became a net exporter. Pharma companies grew very fast and, as of today, there are as many as 20,000 licensed pharma companies in the country. But these figures might change after the introduction of new patent regime. The smaller companies may not survive. It is expected that the market share of patented drugs after 2005 will be 15% of the total pharma industry in the country.
Considering the fact that most of the patented drugs in the country would be brought here by the multinationals, the market share of the companies and most importantly profitability will increase. While Indian companies would continue to sell the drugs that have been patented pre-1995, MNC's, with their new and patented drugs, may capture a larger share of the market going forward, and that too among different therapeutic segments. However, pricing of drugs post the patent regime may be a key factor to the growth of MNC pharma companies in the country.
For Indian companies, there would arise a need to find areas where they have a sizeable opportunity to grow apart from the domestic market. Reverse engineered pharma products have their own life and may not be enough to sustain Indian companies over the long-term. Indian companies recognizing this challenge are exploring various options, for example the area of new chemical entities (in simple terms, a new drug altogether). Though Indian companies are gearing themselves for this challenge it will take a while for them to make any impact in the patented drugs field. Companies like Ranbaxy Laboratories, Dr. Reddy's Labs, Wockhardt, Cipla, and Nicholas Piramal have invested money in research. However, the returns on these investments will take some time to be realized. These companies have started the primary research in synthesizing new chemical entities (NCE), but clinical trials are still the largest roadblock for India as it is a time consuming, cumbersome and a costly exercise. However, over the long-term, this option is likely to yield the best results for Indian pharma companies.
The other option available for Indian companies is contract research. With strong analytical skills that Indians possess and their proven chemistry capabilities, contract research can be a viable option for Indian companies. Also these companies, which have good bulk manufacturing facilities, can benefit by manufacturing the same drug once it comes out of clinical trials into the market as it would be easy for them to get a contract for bulk orders since they will be associated with the project since inception.
Marketing is another critical factor that is likely to play a big role in the success of pharma companies. While bulk drugs represent a huge opportunity, the aim of leading Indian companies is to move up the value chain towards finished dosage forms and into formulations where margins are better and companies like Ranbaxy and Dr Reddy's have already taken a lead in this field. They, over the last several years, have painstakingly built their own marketing infrastructure in the US. Ranbaxy has created a good brand name amongst in the prescription drugs market in US. Apart from this, both these companies are highest spenders in R&D in the country and are also big players in the domestic formulations markets.
Thus, with the new patent regime impending, the focus on the exports market can save Indian companies from any unlikely event post 2005. But as cited earlier, R&D and building their own presence through strong marketing network is critical to the success in pharma industry after the year 2005.