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WTO agreement: Is it a positive? - Views on News from Equitymaster
 
 
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  • Sep 8, 2003

    WTO agreement: Is it a positive?

    In the past fortnight, WTO members have finally reached an agreement regarding licensing of life-saving drugs to least developed countries. India, being one of the major manufacturers of generics has the requisite expertise and facilities to reengineer patented drugs at a low cost and hence could be a beneficiary from the same. However, it is felt by many that the covenants inserted into the agreement by the developed countries could act as a deterrent for Indian companies from exporting drugs to such countries. In this backdrop, we had asked our audience whether they saw the Indian companies benefiting from the WTO agreement.

    The results of the poll were very much in line with the market sentiments regarding the same. A very high 73% of the respondents were of the opinion that the WTO agreement could be beneficial for Indian pharma companies, while a mere 24% held a contrarian view. To get a better understanding of the issue, let us first go back in history and see the root cause of the whole fiasco.

    The 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 post this period will not be allowed to make generic versions 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 circumvent the patent regulation during an emergency.

    At the Doha round, all 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 in case of emergencies enabling them to import the drug from generic drug 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.

    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.

    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 generic version of the patented drug required to satisfy the health requirements. Poorer nations would thus be better equipped to face a health catastrophe.

    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 Indian companies a legitimate right to sell generic versions of patented drugs in poor countries post 2005. The diseases for which the license can be granted is spreading very rapidly in these countries and although the margins are expected to be very low, the volumes will be high enough to ensure huge revenues for the Indian companies. India being one of the most cost efficient manufacturers of generic drugs will be the favored supplier of the same to 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 other smaller players with good manufacturing facilities might find this opportunity as a growth driver.

    Now for the negatives. Although the agreement does give Indian companies a right to sell drugs to least developed countries, some of the provisions inserted in the agreement might act as a deterrent for small companies from manufacturing drugs under the above agreement. 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 up costs and squeeze margins further thereby making the supply unviable.

    Moreover, there are many procedural constraints, which could 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 Indian companies that do not have competencies in these diseases. Another major disadvantage is that the license will be issued for a fixed period and every subsequent renewal will have to be approved by the WTO. Thus, smaller pharma companies that would have built additional capacities for meeting this export requirement would be left with idle capacities if the license agreement is not renewed. The risk of the above happening could act as a major deterrent for smaller Indian pharma companies from taking advantage of the WTO agreement.

    Thus, while large Indian companies like Ranbaxy might not be very keen to take advantage of this opportunity in view of their focus on the US and other developed markets, smaller companies could find it increasingly unviable in view of the restrictions imposed by the agreement. The medium sized companies however will be best suited to take advantage of this agreement. The medium sized Indian companies could utilize the revenues generated from exports arising from this agreement for funding their research and development activities. Indian companies should hence view the above agreement as a stepping-stone in Indian Pharma Company’s pursuit of becoming a global discovery based Pharma Company.

     

     

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