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WTO agreement: The fine print

Sep 2, 2003

Indian pharma stocks are having a dream run on the bourses in the past few weeks. Many companies like Cipla, Ranbaxy, Nicholas Piramal, Wockhardt, Aurobindo Pharma and Kopran are trading at their 52-week high levels. One of the major reasons for this upswing that is doing the rounds is the fact that the WTO members have finally agreed on a draft resolution regarding the licensing of life-saving drugs to least developed countries and its possible upside for the Indian companies. In this article, we shall study the impact of the WTO draft agreement on the Indian companies and thus find out how justified the above reason is. A brief history...
WTO resolution on TRIPS provides that a product patents regime will have to be implemented in a phased manner in 2005 in developing countries and from 2015 in the least developed countries. Thus, companies will not be allowed to make generics version of the patented drugs and market the same. The patent holder will be provided with complete patent protection and will launch its patented drugs in the developing markets. However, the drug prices will increase manifolds resulting in it being inaccessible to most in the poor countries. Hence, there was a need to amend the regulation and insert a clause, which could allow the poorer nations to breach the patent regulation during an emergency.

In the Doha round, all the WTO members had drawn up a draft agreement that allowed least developed countries, in case of national emergencies, to waive the patent on the drugs required enabling it to import the drug from generics manufacturers. This would have ensured the availability of drugs at low prices. However, the powerful US pharma lobby ensured that US blocked the draft agreement.

US concerns...
The primary concern that US had was a blanket waiver on patents might result in the generics companies getting a right to manufacture non-essential drugs (like Viagra) as well. Moreover, they also feared that the generics drugs thus manufactured might get exported to the developed markets thereby affecting the revenues of the patent holder. Consequently there was a need to hold further discussions before the Cancun round began.

Deadlock broken...
Just before the Cancun ministerial conference, representatives from USA, India, Brazil, South Africa and Kenya finally succeeded in breaking the ice. According to the new draft agreement, if there is a health emergency arising in a country with inadequate drug manufacturing facility, they can license a company from another country to manufacture a generics version of the patented drug required to satisfy the health requirements. The poorer nations will thus be better equipped to face a health catastrophe.

Impact on Indian companies...
The new draft resolution, although a positive for mankind as a whole, is not all smiles for the Indian companies. First the positives.

The agreement gives the Indian companies a legitimate right to sell generics version of patented drugs in poor countries. India being one of the most cost effective manufacturers of drugs will be the favored supplier of the drugs for these countries. The fact that India has US FDA approved manufacturing facilities is an added advantage. Thus companies like Cipla, Aurobindo Pharma, Lupin and some of the other mid-cap companies with good manufacturing facilities might find these opportunities as a growth driver.

Now for the downside. Although the agreement does give the Indian companies a right to sell the drugs to these developing countries, it is going to be a low margin business. This is primarily because the drugs are required to be provided at a very low price. Moreover, the new draft agreement requires that the drug supplied under this provision should be clearly identifiable and have a different packing, colour or shape as compared to the patented drug. This could push the costs up and put further pressure on the margins thereby making the supply unviable. Moreover, there are many procedural constraints, which make the export cumbersome. The company will also have to negotiate the royalty payable to the patent holder on behalf of the importing country. Further, there is little protection to the supplying company in case the patent holder files any patent infringement suit. Finally, the license will be issued only for killer diseases like AIDS, malaria and tuberculosis thereby restricting the segments open to the Indian companies.

In a nutshell...
Although the Indian companies are to gain from the WTO agreement, the gain is miniscule. Since the margins are expected to be very low, the profits generated might not be high enough to change the fortunes of large companies like Cipla, Ranbaxy, Dr Reddy's, etc. Indian companies have more remunerative opportunities in the post 2005 era, which would decide the fate of the companies in the long run. Thus, although the WTO agreement is a big break through for humanity, Indian companies as such are not likely to benefit from the same in a big way. Thus, though a stock market upswing in the pharma sector is justified in view of the tremendous growth potential that Indian pharma companies hold, a surge in the prices on the back of the WTO agreement does raise doubts. So, be careful while investing.

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