This article was downloaded by: [Sunil Sahu] On: 16 March 2015, At: 20:33 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK Click for updates Asian Affairs: An American Review Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/vasa20 Globalization, WTO, and the Indian Pharmaceutical Industry Sunil K. Sahu Published online: 12 Dec 2014. To cite this article: Sunil K. Sahu (2014) Globalization, WTO, and the Indian Pharmaceutical Industry, Asian Affairs: An American Review, 41:4, 172-202, DOI: 10.1080/00927678.2014.970930 To link to this article: http://dx.doi.org/10.1080/00927678.2014.970930 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages,
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This article was downloaded by: [Sunil Sahu]On: 16 March 2015, At: 20:33Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH,UK
Click for updates
Asian Affairs: An AmericanReviewPublication details, including instructions forauthors and subscription information:http://www.tandfonline.com/loi/vasa20
Globalization, WTO, and theIndian Pharmaceutical IndustrySunil K. SahuPublished online: 12 Dec 2014.
To cite this article: Sunil K. Sahu (2014) Globalization, WTO, and the IndianPharmaceutical Industry, Asian Affairs: An American Review, 41:4, 172-202, DOI:10.1080/00927678.2014.970930
To link to this article: http://dx.doi.org/10.1080/00927678.2014.970930
PLEASE SCROLL DOWN FOR ARTICLE
Taylor & Francis makes every effort to ensure the accuracy of all theinformation (the “Content”) contained in the publications on our platform.However, Taylor & Francis, our agents, and our licensors make norepresentations or warranties whatsoever as to the accuracy, completeness,or suitability for any purpose of the Content. Any opinions and viewsexpressed in this publication are the opinions and views of the authors, andare not the views of or endorsed by Taylor & Francis. The accuracy of theContent should not be relied upon and should be independently verified withprimary sources of information. Taylor and Francis shall not be liable for anylosses, actions, claims, proceedings, demands, costs, expenses, damages,
and other liabilities whatsoever or howsoever caused arising directly orindirectly in connection with, in relation to or arising out of the use of theContent.
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Globalization, WTO, and the IndianPharmaceutical Industry
SUNIL K. SAHU
Abstract: The paper analyzes the effect of India’s membership in the World TradeOrganization (WTO) and its signing of the TRIPs agreement on the pharmaceuticalindustry in general and the Indian sector in particular. First, it examines the effectof the implementation of the provisions of TRIPs on the growth of the national andmultinational sectors of the industry. Second, it analyzes whether the new WTOrules will necessarily benefit pharmaceutical companies from the West, especiallythe United States and Switzerland, and whether there is evidence to support theassertion made by industry insiders that by 2015 multinational corporations willreestablish their monopoly of the industry by controlling at least 60% of the In-dian market. Third, it investigates whether the multinational monopoly of the drugindustry has had—or will have—a negative consequence for Indian consumers.Finally, the article examines the ways in which Indian companies are respondingto the challenges of globalization and analyzes their new strategies, such as (1)outsourcing deals with multinationals to produce generic and patented drugs, (2)increasing R&D activities to enable them to make a transition from being drug“imitators” to drug “innovators,” (3) undertaking contract research, including out-sourced clinical trials, (4) collaborating in joint R&D and product and processdevelopment to synergize their knowledge-base and effectively exploit availablehuman resources and infrastructure (Ranbaxy’s alliance with GlaxoSmithKline),
Address correspondence to Sunil K. Sahu, Department of Political Science, DePauwUniversity, Greencastle, IN 46135. E-mail: [email protected]
Color versions of one or more of the figures in the article can be found online atwww.tandfonline.com/vasa.
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and (5) undergoing a consolidation phase through indigenous mergers and acqui-sitions and strategic alliances.
Keywords: World Trade Organization, trade related intellectual property rights,Indian pharmaceutical industry, Indian patent law (1973), global pharmaceuticalindustry, drug price control order, contract research and manufacturing services,abbreviated new drug application, post-TRIPs era
Introduction
India’s membership in the World Trade Organization (WTO) has been contro-versial from the beginning. On January 1, 1995, when India joined the organiza-tion, the opponents of the treaty charged the then-Congress government of PrimeMinister Rao, which had liberalized the economy beginning in 1991, with abjectsellout and surrender of the country’s sovereignty. In particular, the criticism hascentered around WTO’s intellectual property accord, formally referred to as thetrade-related intellectual property rights (TRIPs), which extended minimum stan-dards for intellectual property (IP) protection globally. India amended its 1970Patent Law three times—in 1999, 2002, and 2005—in order to comply with theWTO treaty obligations.
The issue of the impact of the strengthened IPR regime on the Indian pharma-ceutical industry has been a subject of debate and controversy in India, both beforeand after the signing of the General Agreement on Tariffs and Trade (GATT) ac-cord. The critics view TRIPs, especially its provision of a product patent, whichwent into effect on January 1, 2005, to be a zero-sum game, as they believe that itwill inevitably allow the multinational companies to weaken the national sector’sdominance, which owes its phenomenal growth since the 1970s to the Patent Actof 1970. The granting of product patents, the critics maintain, would mean thatthe Indian pharmaceutical companies could no longer produce, through their ownnovel processes, the drugs still under patent in other countries. They also arguethat the TRIPs regime will lead to higher consumer prices for drugs, especiallythe price of patented drugs that may rise nearly to the level in the United States;disappearance of the generic drug makers who would be priced out of the marketby multinational companies; larger foreign exchange outflow due to large imports;and small employment generation in the medium and small sectors of the industrydue to lower domestic production.
On the other hand, the supporters of the treaty, the government, and drugmultinationals and their industry association–the Organization of PharmaceuticalProducers of India (OPPI)—maintain that the critics’ apprehension of a rise inprice is unfounded, as the government can still clamp on price controls in theevent of unreasonable price rises. They argue that a large number of drugs willgo off patent by 2015, leaving by then not more than 10% of the Indian marketcovered by patents. According to one estimate, the share of patented products may
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not exceed 25% of the total market in the year 2025. Moreover, it is argued thatthe compulsory licensing provision of TRIPs, which was clarified and given someflexibility and freedom in the 2002 Doha Declaration on TRIPs Agreement andPublic Health, allows the Indian government to protect the public interest.
It has been a decade since the new intellectual property rights (IPR) regime wentinto effect, and the pharmaceutical industry has gone through significant changesduring this period. This paper is an effort to analyze and evaluate the effect ofIndia’s compliance with TRIPs provisions1 of the WTO on (1) the industry’sstructure and growth, (2) social welfare consequences of the 2005 Patent Act, and(3) the emerging trends in the industry.
Pre-TRIPs Patent Regime and the Pharmaceutical Industry in India
Patent protection in most developed countries prior to TRIPs was for a periodof 16 to 20 years—16 years in Great Britain and 20 years in the United States. Inthe pharmaceutical field, however, a distinction is made between process patentsand product patents; whereas product patent is for a newly invented end product, aprocess patent protects a new method of manufacturing an existing product. Whilethe United States and Great Britain permitted both, France did not allow productpatents until 1966, Germany, until 1967, and Switzerland and Canada, until 1995.Italy, from 1939 until 1978, permitted no pharmaceutical product or process patentat all. It is important to note that in most countries with strong patent systems,the law either omits compulsory licensing, as in the United States, or provides forlicensing only under extreme conditions.
Patent laws in the Third World underwent significant changes in the 1960sand 1970s. The drug industry is considered vital in maintaining the health of thenation, but there has been a virtual monopoly of multinationals over this industry.In order to remedy this situation, many Third World countries—notably Brazil,Mexico, Colombia, and India—sought to revise their patent laws in the 1960s and1970s. Consequently, patent protection in these countries was very weak until thepassage of the Uruguay Round.
The Indian Patent Act, drawn by a joint committee of the two houses of theIndian parliament in 1970, was an important step taken by the government tobreak the monopoly of the drug multinationals. The Act, which replaced the oldIndian Patents and Design Act of 1911, lowered the period of validity of patentsin general from 16 to 14 years (and of patents in the field of food, drugs, andmedicines to a period of seven years) and raised the scales of fees payable forrenewing the patents. An important feature of the 1970 law was the provision thatgranted patent protection only to processes and not products. The rationale wasthat product patents allowed companies to gain a monopoly market by combiningdrugs and chemicals in different formulations. Indeed, the legislation, inspiredby the reports of various enquiry committees, diluted patent rights in an effortto promote local development work, process research, and manufacture. The act
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broadened considerably the grounds for the issue of compulsory licensing, gavethe controller wide powers in determining the terms of settlement, and allowed theunrestricted use of patented inventions by the government for its own purposes.In addition, the law made mandatory a worldwide search of patent literature toestablish the novelty of a product or process; in the past, patents had been grantedfor processes outdated elsewhere. The 1970 law therefore provided a very weakpatent protection in India.
The West, particularly the Untied States, expressed its displeasure with theIndian law from the time it was enacted. During the Reagan and elder Bushadministrations, the United States demanded that the Indian government strengthenits patent protection laws. In May 1989, the Bush administration retaliated byexcluding India from the trade “priority countries” listed under the Super 301provision of the 1988 Omnibus Trade and Competitive Act. In the 1980s, thegovernment of India took the stand, in periodic policy statements, that it did notwant to revise the 1970 patent law. However, the government policy changed underPrime Minister Rao, who adopted the policy of economic liberalization in 1991and later signed, despite popular opposition, the GATT accord in 1994.
That India’s new Patent Act contributed significantly to the growth of thenational sector is a widely accepted view among policy makers, industry analystsand scholars.2 Indeed, the decade following the implementation of the Patent Actin 1972–1973 witnessed unprecedented progress and development of bulk drugmanufacture by both the private (Indian) and public sector drug companies. Asdiscussed below, the growth of the national sector was further accelerated by thesectoral reservation in the new drug policy announced in 1978.
Changing Regimes in Intellectual Property Rights
The debate on intellectual property rights (IPRs) in the Third World has changedover the last three decades. A survey of the literature on IPRs would suggest thatuntil the 1970s most experts and policy-makers took the view that developing na-tions should be exempt from any international patent arrangement, as they gainednothing from granting foreign patents since they themselves did little patentingabroad and received nothing for the price they paid for the use of foreign inven-tions.3 As negative attitudes toward IPRs grew stronger in developing countries inthe 1970s, they sought to establish, in the context of the North-South debate on theNew International Economic Order (NIEO), a Code of Conduct on the Transferof Technology. Though unsuccessful in their efforts, mainly because of the oppo-sition of the United States,4 many developing countries, including India, enactedtheir own technology transfer and patent protection legislations in the 1970s.
By the mid-1980s, however, developing nations moderated their stand on tech-nology transfer and intellectual property issues in response to the changing in-ternational environment—the shift in the pattern of world trade in the 1980s and1990s (with the exception of African countries, exports of North and South largely
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consisting of similar goods), and the resulting adjustment challenges; the recogni-tion of the importance of knowledge-based, high technology industry for develop-ing countries; and the fear of the use of trade laws by developed nations, in partic-ular, the Super 301 provision of the US 1988 Trade Acts. Furthermore, developednations, especially the United States, made trade concessions dependent on intel-lectual property protection. Many developing nations responded by bringing abouta significant change in their intellectual property law after the mid-1980s. Mexico,for example, enacted new regulations in January 1990 that weakened its previouslegislations (of 1972 and 1982) on technology transfer, trademarks, and patents.5
By the late 1980s, leading industrial nations began to view intellectual propertyas a new basis of comparative advantage as they recognized that there had been agradual erosion in their traditional areas of production, especially in the manufac-turing industry in the newly industrializing countries (NICs). The large multina-tional firms in the developed countries—for example, U.S. corporations such asIBM, Pfizer, and Microsoft, which had large intellectual property portfolios—weresuccessful in convincing their lawmakers and political leaders that with the growthof intangible goods in international trade, intellectual property, which can becopied and transmitted across national boundaries with relative ease, will increasethe trade-distorting effects of counterfeit products. This coincided with the viewsexpressed by many conservative economists. They argued that the presence ofsuch products, estimated to cost firms from industrialized countries about $60billion annually, was a potential obstacle to further trade liberalization.6
This concern was reinforced by the growing awareness of the loss of commercialopportunities in many industries in developed nations—computer software andmicroelectronics, entertainment, chemicals, pharmaceuticals, and biotechnology,for example. Such concerns led industrial nations, especially the United States, toinsist on the inclusion of IPR protection in the Uruguay Round trade negotiations.Though intellectual property featured almost as a footnote on a crowded agendaat the start of the Uruguay Round in December 1986, eight years later TRIPsemerged as one of the major breakthroughs of the GATT negotiations. Becauseof the substantive and procedural protection given under the treaty, the TRIPSagreement, which sets intellectual property standards in the areas of copyrights,geographic indications, industrial designs, layouts of integrated circuits, tradesecrets, and patents, is the most important international agreement on intellectualproperty in the 20th century.
The TRIPs agreement integrated the existing systems of IPR protection asprovided under the Berne Convention, the Paris Convention, and the InternationalConvention for the Protection of Performances, Producers of Phonograms, andBroadcasting Organizations and complements them in those areas where therewas no international consensus. Among other things, the treaty
• grants all intellectual privileges that exist for nationals to foreignmembers—the concept of national treatment or reciprocity (Art. 3);
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applies the concept of “most favored nation” to the area of intellectualproperty rights (Art. 4);
• prevents discrimination in the international transfer of technology (Art. 8);requires that the signatory countries make “fair and equitable” enforcementprocedures under their national law.
These and other provisions of TRIPS are designed to set the minimum sub-stantive standards to which every member country is required to adhere regardingcopyrights, trademarks, geographical indications7, industrial designs, and inte-grated circuits. TRIPs have thus brought about a fundamental shift in the inter-national intellectual property regime “away from the country-based approach tothe multilateral approach.”8 This norm-creating aspect of the TRIPs agreementis fundamentally different from the then-existing objective of the internationalregime on intellectual property. Therefore, developing nations were opposed tothe accord, but they grudgingly accepted it due to the fear that the consequences ofrefraining from acceding to the new GATT treaty would be far worse. In particularthey feared the U.S. trade relations invoking the Special 301 provision of the 1988Trade Act against countries refusing to obey the GATT codes on IPR. It was also,in part, a response to the perceived fear that the United States would suspendthe Generalized System of Preferences (GSP) privileges—an important consid-eration for many developing nations. For example, about 14% of India’s trade tothe United States had been accorded GSP status in the 1990s. It is not surprisingtherefore, that developed nations succeeded in extracting many concessions fromthe developing nations leading to the signing of the Final Act of GATT’s UruguayRound.
Structure of the Global and Indian Pharmaceutical Industry
The modern pharmaceutical industry is relatively young compared to otherindustries; it has grown globally since aspirin was introduced in 1899. The drugindustry was stimulated by the advent of the new “wonder drugs,” the sulfadrugs in the 1930s and penicillin in the mid-1940s. By the end of the 1950s thepharmaceutical industry transformed itself into an R&D and advertising-intensivebusiness.
The pharmaceutical industry in India is the largest and the most developedamong the developing countries. Starting with repackaging and formulations fromimported bulk drugs, the Indian pharmaceutical industry has progressed to theintegrated production of complex synthetic drugs and antibiotics involving hightechnology. The industry produces a complete range of formulations and 350bulk drugs (active ingredients), which meets around 70% of the country’s demandfor bulk drugs, drug intermediates, and pharmaceutical formulations–chemicals,tablets, capsules, orals and injectables.
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TABLE 1. India’s Top 10 Pharmaceutical Companies
Company Rank 2012 Turnover in Rs Billion
Dr. Reddy’s Lab 1 837.40Cipla 2 820.42Lupin 3 712.42Ranbaxy Labs 4 630.54Aurobindo Pharma 5 542.10Cadila Health 6 315.20Torrent Pharma 7 276.23Jubilant Life 8 264.07GlaxoSmithKline 9 263.30Sun Pharma 10 256.16
Source: Based on data at http://www.moneycontrol.com/stocks/top-companies-in-india/net-sales-bse/pharmaceuticals.html
The industry consists of about 250 large pharmaceutical companies in theorganized sector, including 5 in the public sector, and about 8,000 small-scaleunits; together they form the core of the industry. The leading 250 companiescontrol 70% of the market with the market leader holding about 7% of the marketshare. Indian-owned companies currently account for 77% of the domestic market,a significant growth in domestic capacity since 1970 when it accounted for 20%of the domestic market. The sales of the top 10 companies constitute a 30%turnover in the industry. In 2012, nine of the top 10 companies were Indian-owned, compared to four in 1994 (see Table 1). A number of leading Indiancompanies have also established marketing and manufacturing activities in theUnited States, the European Union, and other nations.9 Though the industry hasgrown drastically in the last two decades, it is extremely fragmented, with severeprice competition and government price control.
India is an emerging leader in pharmaceuticals and is considered to have agrowth potential similar to that of the information technology (IT) industry in thelast decade. India ranks among top 20 pharmaceutical exporters in the world withthe largest number of US FDA-inspected plants (119) outside the United States(see Table 4). Various other agencies—such as MHRA of U.K., MCA of SouthAfrica, TGA of Australia, and HPB of Canada—have approved a large number ofpharmaceutical manufacturing plants in India.)10 It exports a variety of pharma-ceutical products including intermediates, APIs, Finished Dosage Combinations(FDCs), biopharmaceuticals, vaccines, and clinical services. India accounts for30% of the approved ANDAs (abbreviated new drug approval) in the UnitedStates (see Table 2) and in patent challenges, at 21%, it ranks next only to the
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TABLE 2. Final Abbreviated New Drug Application (ANDA) Approvals byCountry (2007) (Figs in Nos.)
Country Numbers
USA 169India 132Israel 40Germany 25Canada 24Switzerland 19Iceland 14Jordan 11Other 25
Source: Report of the Taskforce: Strategy for Increasing Exports of Pharmaceutical Products(Government of India, Ministry of Commerce and Industry, Department of Commerce, 2008):18.
United States (see Table 3); the filing of ANDA applications shows the global pres-ence of the Indian pharmaceutical companies. In 2013, Indian companies secured39% of total 400 ANDA approvals as against 37% of total 476 ANDA approvalsin 2012.11 India’s health tourism market, estimated at $333 million in 2004, hassince grown at the rate of about 30% annually and is expected to become a $2billion-a-year business by 2015.12
TABLE 3. Country-wise Number of Patent Challenges (As of March 2008)
Country Number
USA 200India 113Israel 89Canada 43Switzerland 34Iceland 17Germany 10Other 32
Source: Same as Table 2.
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TABLE 4. U.S. FDA Approved Indian API Facilities
Year Annual Cumulative
1985 0 01990 1 11995 10 112000 33 442005 75 119
Source: Same as Table 2
Growth of the Indian Pharmaceutical Industry: Why and How
The Indian pharmaceutical industry, a research-intensive industry, was insignif-icant in 1970s, but it grew rapidly in the last three decades: from $36.5 millionindustry in 1980 to $19 billion in 2008 and is projected to grow to $55 billion by2020.13 The industry ranks third largest globally in terms of volume of production(10% of global share) and fourteenth by value (1.5%). (India’s lower ranking invalue is due to its drug prices which are among the lowest in the world.)
The Indian pharmaceutical industry has emerged as the largest and most devel-oped in the developing world. With an annual growth rate of 14% in recent years,domestic drug sales of $12 billion in 2007 and exports worth $14.6 billion in FY2012–2013, the pharmaceutical industry is one of the fastest growing segmentsof the Indian economy. The industry is projected to grow at a compound annualgrowth rate of 14–17% between 2012–2016.14 Indian pharmaceutical companiessupply nearly all the domestic demand for formulations and about 70% of thedemand for bulk drugs (active ingredients).
The major driver of this growth is the growth in export of pharmaceuticalproducts in the last decade. India’s export of generic drugs to North America,Europe, and other markets is expected to accelerate in the next decade and hascaptured a significant portion–by some estimates about 30%–of the $116 billionin drugs that went off-patent globally between 2007 and 2011. In 2006, Indiaproduced 20% of the world’s generic drugs and exported drugs valued at $2 bil-lion, $1.5 billion of which was exported to U.S. and European markets. SinceIndian drug companies possess the technological expertise and production-costcompetitiveness (estimated at 70% less than the West) and since it has nearly119 U.S. Food and Drug Administration-approved pharmaceutical manufactur-ing facilities, the largest number of facilities outside the United States, India’sgeneric drug producers—notably Cipla, Ranbaxy (Daichi-Sankyo of Japan tookover Ranbaxy in 2008), Dr Reddy’s Laboratories, Nicholas Piramal India Ltd.,
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TABLE 5. Value of Patented Products at Risk (figs. in $ billions)
Source: IMS Health Market Prognosis, September 2007
and Sun Pharmaceuticals–are considered to be well-positioned to take advantageof the anticipated boom in the global generic drug market in the next decade.
From Dependence to Dominance: How Indian Companies BecameDominant Players in the Industry (1950–1995)
The pharmaceutical industry in India has gone through four distinct phasesbetween 1950 and 1995, and it is only in the last phase that the national sector ofthe industry acquired the capability to compete with the multinationals and thatthe country achieved a degree of self-reliance not found in the Third World.15
Phase I (1948–1968): Toward the Multinational Monopoly of the Industry
Most of the leading transnational drug companies established their trading andmanufacturing operations in India in the 1950s. The monopoly of the new drugtechnology by a handful of transnational firms led to their entry into India eitheras subsidiary companies or as collaborators with Indian entrepreneurs. Althoughthese firms began by importing the finished drugs and simply marketing them, theyslowly moved, under the government’s pressure, to the importation of formulationsin bulk drugs and started processing them into tablets, capsules, and syrups.
Until the 1980s, the pharmaceutical industry in India was broadly planned bythe government, which had rigid control over every stage of licensing, import,collaboration, and extension. Because the drug market was expanding, and the na-tional sector was almost nonexistent, the government encouraged the trading andmanufacturing activities of the foreign firms in the beginning. To meet the growing
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demand for drugs, the government granted “permission letters”/no-objection let-ters/registration certificates to 15 leading transnational firms, which allowed themto manufacture 364 items (360 formulations16 and 4 bulk drugs) in the country.These permission letters were in the nature of “blanket orders which allowed theunit to manufacture drugs and pharmaceuticals. In many cases neither the capaci-ties nor the drugs that a unit can produce were mentioned.”17 Such a liberal policyled to a substantial growth of the foreign firms. Though the initial investmentof most of these firms was small compared to their turnover, they succeeded inbuilding up large reserves and assets within the country. Glaxo Labs, for example,with an original equity of Rs.150,000, had a turnover of Rs. 120 million by 1973,and its reserves stood at Rs. 48 million.
The liberalization of licensing policy and of the economy in the mid-1960s,although short-lived, gave further impetus to the growth of the foreign sector.In 1966, the government, responding to the prevailing shortages of the variouscommodities, permitted drug manufacturers to diversify into the manufacture of“new articles.” The following year, it also allowed them to expand production oflicensed or registered capacities up to 25% without any amendment to the licensesunder the Industrial Development and Regulations Act (IDRA).
The structural imbalance that was taking place in the industry was emphasizedby the government during the drafting of the Second Five Year Plan. It was foundthat the industry was formulating medicines solely from imported bulk drugs andthere was no in-country production of new drugs such as antibiotics, antidiabeticsand most vitamins. The Pharmaceutical Enquiry Committee was appointed in1953 to examine the structural imbalance in the industry and to suggest remedialmeasures. The committee, which submitted its report in 1954, highlighted theimportance of producing bulk drugs from basic stages and recommended that nolicenses should be granted unless the production of basic drugs formed part of thelicense. This recommendation, along with those related to foreign collaboration,foreign capital participation, distribution, and prices, led to a rapid and diversifiedgrowth of the industry in the ensuing decades.
One of the government’s suggestions to the industry, based on the recommen-dation of the committee, was that the production of basic drugs could be phasedout through penultimate stages to a total integration in a period of five years. For-eign firms, however, did not comply. The government was becoming increasinglyaware of the reluctance of foreign firms to start manufacturing bulk drugs frombasic stages in India, and it recognized the inability of the Indian private sector toundertake the manufacture of such drugs because of the Patent Law and for wantof the requisite know-how.
The government therefore decided to establish a basic drug industry in thepublic sector. Although the Industrial Policy Resolution of 1956 grouped thepharmaceutical industry under the category (B) where both state and private in-dustry could operate, it was the state that was to establish new undertakings in
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“Antibiotics and other essential drugs” with a view to accelerating their futuredevelopment. The new industrial strategy adopted in the Second Five Year Planfurther emphasized the important role that the public sector was to play in theindustrial development of the country. In the Nehru-Mahalanobis strategy of in-dustrialization, investment in basic and heavy industry was given the top priority.With a view to making the country self-reliant in antibiotics and other essentialdrugs, two public sector firms were established: the Hindustan Antibiotics Limited(HAL) in 1954 and the Indian Drug and Pharmaceutical Limited (IDPL) in 1961,with a total investment outlay of Rs. 56 crores.
Hindustan Antibiotics Limited, set up with the technical assistance of WHOand the financial assistance of UNICEF, started production in 1955 and wasthe first company to manufacture a number of lifesaving antibiotics from basicstages: penicillin, streptomycin, Sulfhate, ampicillin, anhydrous, gentamicin. Theother public sector firm, IDPL (which was the largest in the Third World, withtotal turnover of Rs. 117 crores in 1973), was set up with Soviet technical andfinancial assistance. The IDPL antibiotic plant, equipped to produce eight differentantibiotics and with an initial installed capacity of 290 tons per year, was one ofthe largest in Asia in 1980s. The synthetic drug plant at Hyderabad, having aninitial installed capacity of 851 tons of sulfa drugs and other synthetic drugs, wasagain one of the largest of its kind in Asia. The company met about 40 percent ofIndia’s requirement for essential bulk drugs.18
The establishment of the two public sector firms for the production of antibioticsand bulk synthetic drugs marked the beginning of India’s move toward self-reliancein basic drugs. It had the effect of reducing the country’s technological dependenceon foreign firms in the long run. The industrial strategy of the Second Five YearPlan was thus crucial for India’s self-reliance in drug and pharmaceuticals industry.This, along with the policy of sectoral reservation announced by the governmentin the Drug Policy of 1978, made the Indian pharmaceutical industry much moreself-reliant than that of any other country in the Third World.
Phase II (1969–1978): Effort to Curb the Monopoly of Drug Transnationals
As discussed earlier, the transnational firms had an extremely favorable climatein India, and they attained a position of dominance in the drug industry in thefirst two decades of independence. Their success could be attributed partly to theantibiotics and synthetic drugs that they introduced in the Indian market. However,the patent law concerning drugs prevented the Indian firms from entering intosynthetic drugs. One finds, therefore, that by 1970, there were not more than twoIndian private companies—Standard Pharma and Alembic Chemical Works—thathad taken the initiative in the production of penicillin and other antibiotics. The RBIsurvey covering the period 1960–1970 also shows that foreign subsidiaries wereparticularly important in the pharmaceutical industry.19 Thus, the government’s
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effort in the second phase was to curb the monopolistic position of the foreignfirms by enacting legislations.
In 1970, the government withdrew the concessions it had granted to foreignfirms in 1966 permitting them to diversify. Such diversification as had alreadytaken place between 1966 and 1970 was required to be regularized by specificapplications for “carrying-on-business” licenses (COB licenses). The Hathi Com-mittee Report (1975) found that 12 foreign companies and five Indian companieshad obtained COB licenses covering 215 formulations and 20 bulk drugs. Moreimportant, some of the most profitable drugs, such as Librium and Valium, thetwo largest-selling tranquilizers in the world at the time, were marketed in Indiaunder COB licenses. In January 1972, Indian firms were permitted to increase theirlicensed capacities on the basis of maximum utilization of plant and machineryand to diversify up to 100 percent. Furthermore, the government, by enacting an-timonopoly legislation, subjected the expansion of foreign and large Indian firmsto the new set of laws.
There was a sudden shift in the government policy following Indira Gandhi’ssplit of the Congress Party and her massive electoral victory in 1971. In order tobolster Gandhi’s leftist image, her government moved quickly to curb the growthand monopoly power of big business and industrial houses in general and theforeign firms in particular, by emphasizing the need to develop self-reliance anda strong national sector over economic considerations such as economies of scaleand efficient utilization of scarce resources.20
In the late 1960s, following the Report of the Monopolies Inquiry Commission(1964) and the Reports of Hazari (1966) and the Industrial Licensing PolicyEnquiry Committee (1969), which reviewed the industrial licensing system, thegovernment came to the conclusion that the existing licensing apparatus was noteffective in controlling the monopoly and concentration of economic power in afew hands. As a result, the Monopoly and Restrictive Trade Practices Act (MRTPAct) was passed in 1969. This act sought to check the expansion of large industrialhouses with gross assets exceeding Rs. 20 crores in interlinked undertakings orof dominant undertaking with assets of more than Rs. one crore (the definition ofdominance being a market share exceeding 33 percent until 1982 and exceeding25 percent until it was abolished in 1990s).
The enactment of the Foreign Exchange Regulation Act (FERA) in 1973 putfurther restrictions on foreign equity holdings, which had to be diluted to a maxi-mum of 40 percent of the total holdings except in the case of core sector industries(as listed in Appendix I of the 1973 policy statement). The Industrial LicensingPolicy, however, included drugs and pharmaceuticals in the list of core industries,which allowed both MRTP and FERA companies to participate in the growth ofthe industry. Once again pragmatism prevailed over ideological considerations.The projection made by the planning commission that there would be a large ex-pansion in the production of pharmaceuticals during the Fifth Five Year Plan—a
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100% increase in the production of formulations and a 400% increase in the pro-duction of bulk drugs–underlined the importance of the active participation of allthe sectors allowed by the government at this stage.
The pharmaceutical industry had become highly visible by the early 1970s.A few instances of overpricing by drug multinationals, reported in the press andjournal articles,21 led to an intense debate in Parliament between 1971 and 1973.Recalling the investigations made by the Kefauver Committee in the United Statesand the Salisbury Committee in the United Kingdom into the workings of thepharmaceutical industry, including the question of drug prices, suggestions weremade that the questions of the transnational firms’ stronghold in this industry, theperformance of the public sector units, and the prices of locally produced drugsshould be examined by an expert committee.
In response, a Committee on Drugs and Pharmaceutical Industry (popularlyknown as the Hathi Committee) was set up under the chairmanship of JaisukhlalHathi in February 1974. Although the committee had 14 members including threeinfluential Congress members of parliament–Yashpal Kapur, Vasant Sathe, and C.M. Stepan—it did not include any representatives from the industry. The commit-tee’s report, submitted in April 1975, is the most comprehensive document on theIndian pharmaceutical industry. It recommended a policy of sectoral reservation inorder to provide a leadership role to the public sector and to foster and encouragethe growth of the Indian sector.
Despite such regulatory measures, the growth of the industry was spectacularin the 1970s. There was between 13–22% turnover annually and the foreign firmscontinued to dominate the industry.
Phase III (1978–1985): The Emergence of a Strong National Sector
The third phase witnessed a dramatic decline in the foreign sector’s share ofthe industry and a rapid growth of the Indian private sector. The policy of sectoralreservation adopted in the New Drug Policy of 1978 gave the necessary protectionthat the latter needed in order to grow and to compete technologically with theforeign sector. The developments during this period must also be viewed againstthe achievements India had made in science and technology during 25 years ofindependence.
India had made sustained efforts in building a fairly elaborate institutional andinfrastructural base in science and technology and had acquired indigenous capac-ity, which enabled the government to strive for a greater degree of self-reliance.For example, whereas India had a corps of roughly 375,000 scientists and en-gineers in 1956, the number had increased to a million by 1979 out of which140,000 scientists and engineers were engaged in organized R&D.22 Moreover,it had established a network of laboratories which allowed Indian scientists toundertake innovative and adaptive process and product research in a large number
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of disciplines (metallurgy, chemistry, electronics, medicines, etc.). In the pharma-ceutical industry, private industry, not the CSIR labs, had already demonstratedthat it had the capacity to develop process technology through in-house R & D ifthe proper environment were created by the government (e.g., by drastic revisionsin the Patent Law). The government responded favorably and gave the Indiansector the necessary protection, which accelerated the growth and development ofthis sector.
The Indian Patent Act, drawn up by a joint committee of the two Houses ofIndian Parliament in 1970, was an important step taken by the government to breakthe monopoly drug multinationals. The act, which replaced the old Indian Patentsand Designs Act of 1911, lowered the period of validity of patents in general from16 to 14 years, and of patents in the field of food, drugs, and medicines to a periodof seven years, and raised the scales of fees payable for renewing the patent. Animportant feature of the new law is the provision that grants patent protection onlyto processes and not products.23 Indeed, the legislation, inspired by the reports ofvarious enquiry committees,24 diluted patent rights in an effort to promote localdevelopment work, process research, and manufacture. The provisions of the actwere far-reaching and reflected the thinking of policymakers in the late 1960s,particularly Prime Minister Indira Gandhi.
It is a widely accepted view that the enactment of the Patent Act has contributedsignificantly to the growth of the national sector in the Indian pharmaceutical in-dustry. Indeed, the decade following the implementation of the Patent Act in1972–73 witnessed unprecedented progress and development of bulk drug man-ufacture by both the private (Indian) and public sector drug companies. Usingindigenously developed technology, the national sector of the industry began toproduce a number of bulk drugs and their formulations such as ampicillin, amoxy-cillin, erythromycin, ethambutol, metronidazole, propranolol and trimethoprim.25
By 1984, the contribution of the national sector of the industry had reached 65% ofthe drug formulations and 83% of the bulk drug production in the country, and thissector also contributed to over 65% of the exports of drugs and pharmaceuticalsfrom India.26
The growth of the national sector was further accelerated by the New Drug Pol-icy (NDP) announced by the Janata government in March 1978. The NDP, whichwas based primarily on the recommendations of the Hathi Committee Report,divided drugs into three groups for purposes of reserving items for production byvarious sectors. Whereas the production of 17 essential drugs was reserved for thepublic sector and production of 27 items was reserved for the Indian sector, publicand private, 64 items were open for licensing to all sectors, including the foreignsector.
By imposing restrictions on the growth and expansion of the FERA companiesthe NDP achieved at least one of its major objectives, namely, the growth ofthe national sector. In the post-1978 period, there has been an enormous growth
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of wholly-owned Indian companies. The Operational Research Group (ORG)Survey of retail sales between 1980 and 1986 consistently ranked five Indiancompanies among the top ten, with Sarabhai Chemicals ranking first or second.Other Indian firms such as CIPLA, Cadilla, Lupin, and Ranbaxy have emerged asmajor pharmaceutical manufacturers since 1979–1980. There was, for example, athree-fold increase in the sales turnover of CIPLA between 1979 and 1985.
The government’s introduction of the system of “drug canalization,” the impor-tation of bulk drugs through the use of a government agency, the state Chemicaland Pharmaceutical Corporation (CPC), in order to prevent transfer pricing andto ensure a reliable supply of raw materials to indigenous manufacturers at fairprices,27 further curtailed one of the worst abuses that multinationals have beenaccused of practicing in most Third World countries. The CPC started importingessential raw materials on a bulk purchase basis, pooled them with the same rawmaterials produced domestically by the public sector company (IDPL), and dis-tributed the pooled stock to domestic manufacturers at a pooled (fair) price. Thesystem, which worked well according to most industry analysts, was designed tocounter the transfer pricing methods used by drug multinationals importing activeingredients and drug intermediates from parent companies. These constraints im-posed by the government on the behavior of drug multinationals in India hardlyresembled the situation found in most Third World countries in the 1980s. Casestudies of the multinational drug firms in the Third World have shown weakergovernment regulations in a number of African and Latin American countries.28
An early 1980s study of Mexico’s steroid industry suggested that foreign controlof the industry had wider implications for the country; it “restrict[ed] the choiceamong local development options.”29
Phase IV (1985–1995): The Growing Competitiveness in the Industry
The above discussion suggests that by the mid-1980s the pharmaceutical in-dustry in India had grown into a vertically integrated manufacturing enterpriseproducing almost all essential drugs and meeting the country’s requirements offormulations in full and of bulk drugs very substantially. Moreover, the Indianpharmaceutical industry was no longer dominated by multinationals, which wasunquestionably due to the New Drug Policy and the Patent Law. However, it wouldbe a mistake to conclude that India fully succeeded in overcoming its dependenceon drug multinationals. The inadequate production of drugs in India in the 1990swhich led to the liberalization in price increases, delicensing (of 94 bulk drugs andrelated formulations in 1984) and broad-banding30 to encourage market economycoupled with India’s signing of the Uruguay Round with its controversial TRIPSprovisions, suggest that in the Third World there is a definite limit to state inter-vention and control of an industry that is highly research-intensive and in whichthere is a high level of product obsolescence.
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It would, however, be a mistake to conclude that there was no effective controlof the industry by the government. Based on a survey conducted by ORG31 in 1987,it was estimated that 72.8% of the formulations market was under price controls,a reduction of just 3.2% from the old DPCO. It is a testimony to the effectivenessof the pressure exerted by consumer groups, intellectuals, and many experts inthe field of community health and social medicine who wanted to maintain theeffective control of the government over the industry.
Drug Price Control in India
Government regulation of the pharmaceutical industry in both developed anddeveloping countries includes price control. A number of OECD countries rou-tinely impose profit controls–limiting the amount of profit a company may earnper product or within a specified period of time–on pharmaceutical manufacturers.The UK, for example, places limits on profit that a company can gain from sales tothe U.K. National Health Service.32 The government of India has made a sustainedeffort since the early 1960s to fix the price of formulations and bulk drugs. Thesystem of price control in India, which is highly complex and pervasive, has beena subject of controversy. In the 1970s, especially after the enactment of the NewDrug Policy in 1978, there were strong supporters of the government policy, bothin India and outside. Since the 1980s, however, there has been much criticismof the system of licensing, which was since been abolished. However, the debateover price controls and other regulatory measures continues.
The Drug Price Control Order (DPCO) was first legislated in 1963 under the Es-sential Commodities Act of 1955. It was amended in 1979 to control drug pricesand to ensure availability of essential drugs to the public at affordable prices.DPCO has since been amended twice—in 1986 and 1995. While the first DPCOcovered all bulk drugs and their formulations, the 1979 Act reduced the numberof drugs under price control to 347 bulk drugs, of which about 225 were domes-tically produced. It divided the price-controlled formulations into four categories.Categories I and II consisted of essential drugs, and the markups–which includeddistribution cost, promotional expenses, trade commission, and the manufacturer’smargin–were fixed at 40% and 55%, respectively.Category III formulations, con-sidered less essential, carried a markup of up to 100%, and category IV formu-lations were outside price control. It is estimated that by the late 1980s “4,000formulations, marketed in 25,000-odd packs” were brought under the control ofthe 1979 DPCO.”33 The supporters of the drug price control have argued that theimplementation of DPCO by the government is the main reason why drug pricesin India are the lowest in the world, even compared to other developing nationssuch as Bangladesh, Philippines and Sri Lanka. As Table 6 suggests, the prices oftop-selling branded drugs in the United States are 4 to 86 times more expensivecompared to their generic versions in India.
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TABLE 6. Blockbuster Drugs Price Comparison of Selected Drugs in the USand India
Brand Generic US Price ($) Indian Price (US $Name Name Dosage Per tablet equiv. per Tablet
Source: Xuan Li, The Impact of Higher Standards in Patent Protection for PharmaceuticalIndustries Under the TRIPS Agreement—A Comparative Study of China and India,” TheWorld economy, Vol. 38, No. 10, 2008, p. 1374
Though the implementation of the 1979 DPCO may have made drug priceslow in India, it hampered the growth of the industry as many companies, espe-cially multinationals, chose not to produce category I and II drugs resulting inthe shortage of a number of essential drugs. At the same time, the industry–bothnational and multinational sectors–made a concerted effort to lobby the govern-ment to change its pricing policy. The sustained lobbying by OPPI and IDMA, theindustry associations, resulted in the government decision to reduce the numberof drugs listed under DPCO from 347 in 1979 to 142 in 1986 to 74 in 1995. Underthe 1995 DPCO, prices of 74 bulk drugs and their formulations, which covered40% of the market, were fixed by the government, as per a specified formula, thatallowed 100% margin on factory cost. Besides, “price changes” of the remainingdrugs were monitored by the government. In 1997, the government set up theNational Pharmaceutical Pricing Authority (NPPA) as an office attached to theDepartment of Chemicals and Petrochemicals with explicit power to implementand enforce the provisions of the DPCO.
The progressive reduction in the number of drugs under price control was thegovernment’s recognition that the system of price control of large numbers ofdrugs was “impractical at its best and counterproductive and detrimental to allstakeholders at its worst.” It was also a reflection that market forces and com-petitions are perhaps better alternatives to administered prices. Moreover, severalanalysts and government committees and bureaus–notably the Sandhu Committee,the Mashelkar Committee, the Pranob Sen Committee, the National Manufactur-ing Competitiveness Council and the National Commission on Macroeconomicsand Health–have found that the low drug prices in India are a result not of the pricecontrol regime but of competition in the industry which following the implemen-tation of the 1970 Patent Act that allowed companies to produce patented drugsthrough different processes. Therefore, the committees generally recommended
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that the government should approach the availability of life-saving drugs to themasses through all measures, including administered prices.34
The Pharmaceutical Policy of 2002 reduced the span of government control,in accordance with the broad policy of economic liberalization, and proposedto progressively reduce the number of drugs in the basket of price control andultimately remove the price control system altogether, making the role of thegovernment change from “a control regime to a monitoring regime.” The 2002policy, however, was stillborn as it was challenged by public interest groups in theKarnataka High Court claiming that the proposed policy was anti-people; the courtwithheld the implementation of the policy.35 Although the High Court decision wasreversed by the Supreme Court in March 2003,36 the Supreme Court stipulated that“the petitioner (the Central Government) shall consider and formulate appropriatecriteria for ensuring that essential life-saving drugs not fall out of price control.”
The government made another effort in December 2005 when it circulated theDraft National Pharmaceuticals Policy 2006. Though the draft document did notcontain specific proposals for price control, the Minister of Chemical and Fertil-izer, Ram Vilas Paswan, recommended to the Cabinet that the government shouldconsider imposing price control on 354 drugs on the National Essential MedicineList 2003, in addition to the existing 74 drugs and their formulations. Paswanjustified his recommendation as a necessary step in abiding by the Supreme Courtdirective to make essential drugs affordable to the public. The Draft Policy, how-ever, came under severe criticism not only from the industry but also from Paswan’sown government—i.e., other ministries and bureaus—Health and Family Welfare,Commerce, Industry and Finance Ministries and the Department of ConsumerAffairs and Planning Commission. The critics generally argued that drug pricesin India are about one-tenth that of other countries not because of price controlmeasures taken by the government but because of the intense competition in theindustry following the Patent Act of 1970. Since earlier price control measuresin the 1970s and early 1980s had resulted in shortages of essential drugs, it wasnot surprising that the government appointed, in August 2006 a new committee toredraft the policy, which suggests that the pro-market and industries lobbies withinand outside the government had more influence than those favoring tighter govern-ment control and regulation of the industry. Finally, the government announced inMay 2013, following lengthy negotiations between various departments, the newDrug Price Control Order which authorized the National Pharmaceutical PricingAuthority (NPPA) to regulate prices of drugs on India’s National List of EssentialMedicines (NLEM) 2011. The new DPCO, which went into effect on July 29,2013, imposes a price ceiling on 348 essential drugs determined by an arithmeticmean—taking the average price of brands having one percent or more of marketshare and adding 16% as retail margin; the 1995 DPCO took the cost of man-ufacturing and added a certain percentage as mark-up to determine the price ofcontrolled drugs. It is estimated that drugs under new price control will comprise
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TABLE 7. Prices of Formulation Packs
2008–09 Total since(till January inception of NPPA
i. Price Increased. 131 78 168 1103ii. Price Decreased 340 422 86 2846iii. Price Fixed for the
First Time522 1429 996 4037
iv. No Change in Prices 27 83 42 245
Source: National Pharmaceutical Pricing Authority
30% of all drugs sold in India valued at $13 billion. An intense debate ensued theannouncement of the new DPCO. While the industry groups have argued that thenew pricing policy will drag down the growth of the industry (they point to the9.8% growth in fiscal 2012–2013 compared to 16.6% in the previous year) theconsumer advocates point out that the essential medicine list leaves out severaldrugs crucial for treating many common conditions. In particular, they are criticalof the exclusion of all combinations drugs from price control and have arguedthat price-controlled medicines constitute but a small percentage of the essentialdrugs—18% of anti-diabetics, 19% of anti-TB medicines and 6% of respiratorydrugs. While the debate on the effect of the new DPCO on public health willcontinue, the 2013 DPOCO does seem to have a pro-market and pro-growth bias.
Nevertheless, the prices of drugs and pharmaceuticals have remained low andstable in India, especially drugs which are under price control. Based on ORG-IMS data, NPPA recently reported that, as of January 2009, prices of over 95% of56,471 medicines (packs) under price control remained unchanged while pricesof 2.41% packs declined and 2.44% packs increased (see Table 7 and Figure 1Moreover, the government can use the compulsory licensing provision of TRIPs(Article 31) in public health interest.
Emerging Trends in the Post-TRIPs Regime
When India signed the GATT Agreement in 1994, the prognosis for the pharma-ceutical industry in India was grim. Analysts, public interest advocates, industryinsiders, and policy makers expected a sharp increase in the prices of essentialdrugs and the reemergence of foreign multinationals as dominant players in thepharmaceutical industry. The record of the industry in the last 15 years belies the
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FIGURE 1. Source: Government of India, Department of Pharmaceuticals,Second Round Up of Developments in the Pharmaceutical Sector, March 2009at http://www.pharmaceuticals.gov.in/RoundUp-130509.pdf
negative outlook of the mid-1990s. The prices of essential drugs have remainedlow, and multinationals did not displace Indian companies from their dominantposition. The picture that emerged is a complex one. I discern three new trends.
(1) Merger, Acquisition and Strategic Tie-up
The post-TRIPs era has witnessed a significant rise in the number of con-solidations, mergers and acquisitions, and other kinds of alliances and tie-ins inthe Indian pharmaceutical industry. In the last decade, large Indian companieshave acquired a number of small Indian pharmaceutical companies. For example,Nicholas Piramal acquired the business of Roche (1993), Sumitra Pharma, a bulkdrug business (1995), Boehringer (1996), Rhone Poulanc (2000) and ICI Pharma(2002);37 Wockhardt bought Tatas Merind Ltd. and its subsidiary Tata Pharma(1998);38 and Ranbaxy took over Crosland Research Lab. (1997).39
The major Indian pharmaceutical firms acquired foreign firms as part of theirmarket expansion strategy—31 foreign companies between 1997 and 2005. Themajor Indian firms such as Ranbaxy, Dr. Reddy’s Labs, Nicholas Piramal, SunPharmaceutical, and Jubilant Organosys acquired a number of foreign companiesor brands, especially in Western Europe and the United States (see Table 8). Ac-cording to the U. S. International Trade Commission, eight Indian companies spentapproximately $1.6 billion in 2005–2006 to acquire generic drug manufacturingfirms in Europe, North America, and Mexico.40
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TABLE 8. Selected International Acquisitions and Foreign tie-ins by theIndian Pharmaceutical Industry
International Foreign Alliance, JVs,Company Acquisition(s) and other tie-ins
Nicholas Piramal Pfizer-Morpeth (UK),Avecia Pharma (UK),Dobutrex brandacquisition (US), Rhodiainhalation business (UK),Biosyntech (NPILPharma) (Canada),Torcan Chemical(Canada), 51% of Boots(S. Africa), Bio Syntech
Source: William Greene, The Emergence of India’s Pharmaceutical Industry and Implicationsfor the US Generic Drug Market (US International Trade Commission, Working Paper No.2007–05-A):10
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There have also been acquisitions of Indian companies by foreign multination-als which includes the takeover of Ranbaxy—the largest Indian company and the9th largest generic company in the world, valued at $8.5 billion—by Japan’s Dai-ichi Sankyo in June, 2008 in a $4.6 billion deal.41 Similarly, Dabur Pharma Ltd, aleading manufacturer of anti-cancer drugs, was acquired in early 2008 by Singa-pore’s Fresenius Kabi, a unit of the European healthcare firm Fresenius SE.42 TheIndian government has been concerned about these takeovers. An inter-ministerialtask force recently warned of a significant takeover threat for most Indian drugmakers by global big pharmaceutical companies under the new IPR regime. Thereport further suggested the “need to promote internal consolidation and developstrong companies that have width and depth in market access, manufacturing andR&D.”43 Further takeover of profitable Indian companies by multinationals is ex-pected. Since a large number of drugs are expected to go off patent in the nextfew years and since drug multinationals are experiencing slow growth, they havebegun to focus more on generic drugs. Taking over Indian companies would helpthem in leveraging the competitive price advantage offered in India. The pace ofacquisitions of Indian companies by pharmaceutical multinationals may acceler-ate in coming years: it has been projected that the market share of multinationals,currently at 23%, may increase to 40% by 2015.
A new phenomenon, unthinkable a decade ago, has emerged in the pharma-ceutical industry: major drug multinationals have entered into strategic tie-upswith Indian and Chinese companies and research institutes. Recognizing the ris-ing costs of discovering new drugs (average of $1.2 billion for a successful drug)and the shortage of promising new drugs in the pipeline to replace the blockbusterdrugs–such as Fosamax (osteoporosis) and Lipitor (cholesterol-lowering)—thatrecently went off-patent, drug multinationals are focusing on drug discovery andR&D alliances with Indian and Chinese companies. Merck, for example, enteredinto a drug-discovery alliance with Ranbaxy in May 2008 and agreed to payRanbaxy a hefty royalty if the program led to a commercially successful drug.Ranbaxy, now capable of discovering new drugs, is currently in Phase II of clinicaltesting for an anti-malarial drug. Merck has also entered into similar deals withAventis and Piramal Life Sciences in India.
Other leading pharmaceutical multinationals such as Eli Lilly, GlaxoSmithK-line, Johnson & Johnson, Forest Laboratories, Wyeth, and Bristol Myers Squibbhave also entered into partnership with Indian companies to help develop newtreatments for cancer, respiratory diseases, and heart conditions. According toBusiness Week, these multinationals are “sharing technologies and biological in-sights that would have remained under lock and key a decade ago.”44 These tie-upprojects are still in their infancy and it will be a decade or more before Indiancompanies can master the entire drug-development process. At this stage, Indiancompanies are not in a position to compete with multinationals in the area of drugdiscovery.
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(2) The Indian Business Model
Indian pharmaceutical companies, though small compared to Western firms, arehighly profitable and fast-growing. Starting with producing quality inexpensivecopies of patented drugs, they became capable of developing new drugs andcompeting internationally by adopting an indigenous business model differentfrom that of Western multinationals.
The literature on drug multinationals has identified institutional factors suchas IP protection regimes and venture capital, reimbursement systems to be majorfacilitators in creating successful pharmaceutical companies in the U.S. and theU.K. Indian companies, however, have followed their own business model. It hasbeen suggested in a recent study that Indian pharmaceutical companies followeda sequence of three steps: (1) they made generics to sell in India; (2) they obtainedapproval for and marketed generic drugs in the U.S. and Europe; and (3) theydeveloped in-house discovery capability, inventing and developing new patenteddrugs including biopharmaceutics.45
Between the 1970s and early 1990s, Indian companies focused on the pro-duction of cheap generic drugs for the local market. They specialized in themanufacture, through reverse engineering processes, of those drugs whose patentshad expired (see Table 9). Since India had a large pool of scientifically and tech-nically skilled people, including world-class chemists, Indian companies quicklyacquired technological capability that allowed them to move into the next phaseof manufacturing quality generic drugs for export markets in Europe, the UnitedStates, Russia, and other developing countries.
Another strategy adopted by Indian companies has been to challenge aggres-sively the patents of blockbuster drugs in American and European courts, andthey have succeeded in a few cases. Ranbaxy introduced cefuroxime, the genericversion of GlaxoSmithKlin’s Ceftin antibiotic, in 2002 after winning a patentchallenge. Similarly, Dr. Reddy’s started selling fluoxetine, the generic form of EliLilly’s antidepressant Prozac, in 2001 after a successful patent challenge. How-ever, Ranbaxy’s challenge to Pfizer’s patent on Lipitor, the world’s best-sellingcholesterol-lowering drug, was blocked in the Federal District Court in Delawarein 2005.46 It must be noted that the reward of a successful patent challenge isenormous: if a company succeeds in a patent challenge, it can obtain ExclusiveMarketing Rights (EMR) to sell its generic version for six months, at the endof which other competitors are allowed into the market. Therefore, the failureto succeed in recent cases has not deterred Indian companies from bringing newpatent challenges into European and American courts.
Indian companies have been aggressive in filing ANDAs to produce genericversions of innovator drugs (see Table 2) once they go off patent. In 2006, forexample, when a number of blockbuster drugs such as Pravachol, Zoloft, Zocor,Plavix, and Flonase went off patent, the US FDA approved Ranbaxy’s ANDAapplication to produce generic versions of 12 formerly patented drugs—including
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TABLE 9. Principle Products of India’s Leading Drug Manufacturer
Company Principle Products: bulk and generic drugs Percent of sales
Ranbaxy Labs Anti-infectives, cardiovascular,gastrointestinal, central nervous (diazepam,midazolan), opthalmac and ointments,urologicals, nutritionals, sex hormones,analgesics, anti-asthma, cough and cold,vaccines
Bulk: 22%Generic: 78%
Dr. Reddy’s Cardiovascular, gastrointestinal,anti-infectives, pain management
Source: William Green, The Emergence of India’s Pharmaceutical Industry and the Implica-tions for the U.S. Generic Drug Market, May 2007, p. 7
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popular drugs such as Zoloft, Valtrex, Zocor, Cefzil, Ambien, Imodium, andLasik–with annual sales of $6.5 billion. The same year the US FDA also approvedDr. Reddy’s ANDA application for generic versions of popular drugs like Zofran,Proscar, and Allegra that had annual sales of several billion dollars until theexpiration of their patents. It may be noted that the availability of cheap genericdrugs has been good for American consumers as Wal-Mart, Target and Meijer havestarted filling prescription for many popular antibiotic and other essential genericdrugs for a fraction of the cost of branded drugs, usually for $4.00 a prescription.47
Taking advantage of the low cost of R&D and clinical trials, Indian companies arenow slowly moving into the phase of discovering active ingredients.
(3) Contract Research and Manufacturing Services (CRAMS)
A new growth area, mostly for middle-size Indian companies, is contact re-search and manufacturing services (CRAMS). The major pharmaceutical multi-nationals have recently started outsourcing part of their research and manufactur-ing activities to India because of the increasing cost of R&D, low productivity,and declining profits. India is positioned to maximize the value of its uniqueresources—the large diverse patient population, the developed medical infrastruc-ture, and the well-trained, inexpensive, and English-speaking medical profession-als. It is a hotspot for clinical trial outsourcing. Clinical trials, which account for40% of the total cost of developing a drug, can save U.S. pharmaceutical com-panies up to 60% on the cost of the trials.48 Changes in the Indian intellectualproperty law—Article 39.3, requiring protection of data acquired in clinical tri-als against any “unfair commercial use” and the removal of the “phased lag” inclinical trial regulations – have increased the outsourcing boom. There has been atremendous growth in the number of trials and cutting-edge clinical drug researchconducted in India – growth further stimulated by the tax incentives provided bythe government for contract research and manufacturing services in India.
The growth record of the outsourcing market in India is impressive. Because ofits intrinsic competitive advantages, India has emerged as a preferred outsourcingdestination for global pharmaceutical companies. The Indian CRAMS market in2009 stood at $2.5 billion (out of an estimated global market of $58 billion) andwas expected to reach $7.6 billion by 2012.49 Also, it has been estimated thatby 2010 clinical trials alone will generate $1.5 billion for Indian companies.50
CRAMS has thus become a new area of growth for many mid-sized Indianpharmaceutical companies.
Conclusion
The Indian Pharmaceutical industry is the largest among the developing nationsand a major factor in the Indian economy. It has grown significantly under theTRIPs regime, fuelled by the competitiveness of the Indian companies in theexport of quality generic drugs. It has strengthened its position relative to foreign
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multinationals and it continues to dominate the industry. India is the only countryin the world besides Japan where multinational pharmaceutical companies do notcontrol the market – it is controlled by its generic drug industry. Though Indiancompanies have recently entered into joint ventures with multinationals in orderto move into new areas of the pharmaceutical industry such as drug discoveryand development and contract research and manufacturing, generics continue toremain the mainstay of the industry. The globalization of the industry reshapesthe relations between Indian and multinational segments of the pharmaceuticalindustry.
The prices of drugs, especially the essential ones, have not risen to the levelsfeared by the critics of TRIPs. Since 97% of India’s drug market consists ofsecond-and-third generation drugs no longer subject to patent protection in theWest and since the government price-control regime remains in place, the drugprices in India are still low, perhaps the lowest in the world. The prices of patenteddrugs may not rise as sharply as they have in the United States, due mainly to thevigilance of the public-interest groups, intellectuals, and the press in India. Theindustry is poised for growth and international visibility.
About the Author:
Sahu is the author of the book Technology Transfer, Dependence and Self-Reliant Development in the Third World: The Machine-Tool and PharmaceuticalIndustries in India (Westport, CT: Praeger, 1998) and book chapters “Religion andPolitics in India: The Rise of Hindu Nationalism and the Bharatiya Janata Party(BJP) in India,” in Religion and Politics in Comparative Perspective: The One, theFew, and the Many, edited by Ted Jelen and Clyde Wilcox (Cambridge UniversityPress, 2002) and “Changing Regimes in Technology Transfer and IntellectualProperty in India,” in C. Steven LaRue (ed.), The India Handbook (Chicago andLondon: Fitzroy Dearborn Publishers, 1997). He has published numerous articlesin scholarly journals and reference books and encyclopedias. He is currentlyworking on a book titled Democracy in the Third World: Why it has succeededin India and failed in Nigeria and an article on Narendra Modi and the 16th
Parliamentary Elections in India.
ACKNOWLEDGEMENTS
The author would like to thank the two anonymous reviewers whose comments and suggestions weretaken into consideration while revising the manuscript.
FUNDING
The research for this study, including the author’s travels to India for data collection during hissabbatical leaves in 2008 and 2014, was supported by the Faculty Development Committee, the Johnand Janice Fisher Fund for faculty Development, and the Asher Fund in the Social Sciences at DePauwUniversity.
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NOTES
1. Agreement on Trade-Related Aspects of Intellectual Property Rights Art. 27.1, April15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, LegalInstruments—Results of Uruguay Round, 33 I.L.M. 1147 (1994) [hereafter TRIPs], available atwww.wto.org/english/docs e/legal e/27-trips.pdf.
2. See Stuart Corbridge and John Harriss, Reinventing India: Liberalization, Hindu Nationalismand Popular Democracy, (Cambridge, U.K.: Polity Press, 2000); and Atul Kohli, “Politics of EconomicLiberalization in India,” World Development 17, no. 3, (1989): 305–328.
3. E. Penrose, The Economics of International Patent System (Baltimore: Johns Hopkins Univer-sity Press, 1951), 233.
4. H. P. Kunz-Hallstein, “The United States Proposal for a GATT Agreement on Intellectual Prop-erty and Paris Convention for the Protection of Industrial Property,” Vanderbilt Journal of TransnationalLaw 22, no. 2 (1989): 265–284.
5. United Nations, Intellectual Property Rights and Foreign Direct Investment (New York: UnitedNations, 1993), 11.
6. See United Nations publications, no. E90.II.A15.7. TRIPS defines “geographical indications” as indications that identify a good as “originating in
the territory of a Member, or a region or locality in that territory, where a given quality, reputation orother characteristic of the good is essentially attributable to its geographic origin” (Article 22).
8. Ted L. McDorman, “Unilateralism (Section 301) to Multilateralism (GATT): settlement ofInternational Intellectual Property Dispute after the Uruguay Round,” in George R. Stewart et al.(eds.), International Trade and Intellectual Property: the Search for a Balanced system (Boulder, CO:Westview Press, 1994), 120.
9. David Simonds, “Marauding Maharajas,” The Economist, March 29, 2007.10. Drug Controller General of India, “India’s regulator DCGI plans inspection of overseas
drug manufacturing facilities,” Available at http://www.dancewithshadows.com/pillscribe/indias-regulator-dcgi-plans-inspection-of-overseas-drug-manufacturing-facilities/
11. “US drug patent expiries to benefit Indian pharma industry,” Available at http://www.moneycontrol.com/news/business/us-drug-patent-expiries-to-benefit-indian-pharma-industry1175868.html
12. Report of the Taskforce: Strategy for Increasing Exports of Pharmaceutical Products (Govern-ment of India, Ministry of Commerce and Industry, Department of Commerce, 2008): 18.
13. McKinsey & Company, India Pharma 2020: Propelling Access and Acceptance,Realizing True Potential, http://online.wsj.com/public/resources/documents/McKinseyPharma2020ExecutiveSummary.pdf, 16.
14. The so-called “pharmerging markets,” such as China, Brazil, India, South Korea, Mex-ico, Turkey and Russia, are predicted to show the most growth in 2009, with numbersreaching $105 to $115 billion combined, or 14% to 15%. For further details see “GlobalPharma Market Will Grow by 5% in 2009: IMS Health,” http://www.mmm-online.com/Global-pharma-market-will-grow-by-5-in-2009-IMS-Health/article/120082/
15. This section draws on Sunil K. Sahu, Technology Transfer, Dependence and Self-Reliant De-velopment in the Third World: Pharmaceutical and Machine Tool Industries in India (Chapter 5, WestPort, CT: Praegar, 1998).
16. These formulations included household remedies containing vitamins and minerals, many ofwhich did not require a doctor’s prescription, such as cough mixtures, ring worm ointments, (healthsalts, (gripe mixtures, laxative tablets, eye drops, malted tonics, digestive tablets, ointments for burnsand piles, tonics containing calcium, alcohol-based tonics, and others.
17. Government of India (Ministry of Petroleum and Chemicals), Report of the Committee onDrugs and Pharmaceutical Industry (hereafter the Hathi Committee Report), 1975, 56–57.
18. Scrip, January 1986, 87, cited in Sahu, Technology Transfer, Dependence, and Self-ReliantDevelopment in the Third World: The Pharmaceutical and Machine Tool Industries in India, p. 66.
19. Reserve Bank of India, Foreign Collaboration in Indian Industry: Second Survey Report 1974(Bombay: RBI, 1985).
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20. .Francine R. Frankel, India’s Political Economy, 1947–1977: The Gradual Revolution ( Prince-ton University Press, 1978), 388–433.
21. Sanjaya Lall, “Multinational Companies and Concentration: The Case of the PharmaceuticalIndustry,” Social Scientist, March–April, 1979, 3–29; UNCTAD, Case Studies in the Transfer ofTechnology: The Pharmaceutical Industry in India, (New York: United Nations, 1977); P. L. Badami,“The Pharmaceutical Industry: A Survey,” Commerce, no. 116 (1968): 12–13; P. S. Agarwal et al.,“Anomalies in Drug Prices and Quality Control,” Economic and Political Weekly, Nov. 18, 1972,2282–2292.
22. Ashok Parthasarathi, “India’s Efforts in Building an Autonomous Capacity in Science andTechnology for Development,” Development Dialogue, no. 1, (1979), 46–59.
23. Other countries that allowed only process patents are: Australia, Brazil, Bulgaria, Canada,China, Chile, Czechoslovakia, Denmark, former East Germany, Hungary, Italy, Japan, Netherlands,Pakistan, Poland, Spain, Sweden, Switzerland, former Soviet Union, and Yugoslavia.
24. The most important among them was the Ayyangar Report (1959), which argued for abolishingthe existing Indian Patent and Design Act of 1911. The old patent act had been amended from timeto time, one of the notable amendments being the provisions introduced in 1952 relating to thecompulsory licensing of patents in the field of food or medicines at any time after the sealing of thepatent. See N. Rajagopala Ayyangar, Report on the Revision of the Patents Law (New Delhi, Managerof Publications, 1959).
25. In India, unlike some other countries—China, for example—urden of proof of infringement ison the patentee even for a process patent; this is practically impossible to prove in the case of importeditems.
26. Y. K. Hamied, “Address to a Gathering in Pune on Dec. 2, 1983,” cited in Sahu, TechnologyTransfer, Dependence, and Self-Reliant Development in the Third World: The Pharmaceutical andMachine Tool Industries in India, p. 70.
27. UNIDO, Appropriate Industrial Technology for Drugs and Pharmaceuticals (New York:UNIDO, 1984), 20.
28. See, for example, Andrew Barnett, Andrew Lacey Creese, and Eddie C. K. Ayivor, “The Eco-nomics of Pharmaceutical Policy in Ghana,” International Journal of Health Services 10, no. 3 (1980):479–499; John S. Yudkin, “The Economics of Pharmaceutical Supply in Tanzania,” InternationalJournal of Health Services 10, no. 3 (1980): 455–477; Harold Glucksberg and Jack Singer, “TheMultinational Drug Companies in Zaire: Their Adverse Effect on Cost and Availability of EssentialDrugs,” International Journal of Health Services 12, no. 3 (1982): 381–387; Owen T. Adikibi, “TheMultinational Corporation and Monopoly of Patents in Nigeria,” World Development, 16, no. 4 (1988):511–528; and Daniel Chudnovsky, “The Challenge by Domestic Enterprises to the Transnational Cor-porations’ Domination: A Case Study of the Argentine Pharmaceutical Industry,” World Development7, no. 1 (1979): 45–58.
29. See Gary Gereffi, The Pharmaceutical Industry and Dependency in the Third World (Princeton,N.J: Princeton University Press, 1983).
30. Broad-banding means that the description of items of manufactures in the Industrial Licensewould be in terms of broad characteristic categories instead of rigidly defined specific products. Forexample, if a drug company gets industrial license/permission for the production of penicillin, it canproduce all types of penicillins and chemically related analogues like ampicillins, and others. SeeS. K. Jain, The Drug Policy 1987–88 (Delhi: India Investment Publication, 1987), 78. This book isa collection of all the documents, statements, and press notes related to the drug industry that wereissued by the government since 1973.
31. Ibid.,38.32. A recent study of regulatory system in developed countries found that reference pricing, approval
delays and procedural barriers, restrictions on dispensing and prescribing, and reimbursement controlsare the principal methods employed by 11 OECD governments to control pharmaceutical pricesand costs. See Pharmaceutical Price Controls in OECD Countries: Implications for US Consumers,Pricing, Research and Development, and Innovation (US Department of Commerce, InternationalTrade Administration, 2004), http://www.ita.doc.gov/td/chemicals/drugpricingstudy.pdf
33. K. Jayaraman, “Drug Industry: A Crisis of Confidence,” Economic Times, August 21, 1987.
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35. “Karnataka HC asks Government to spell out policy on life-saving drugs –Stays imple-mentation of pharma policy,” The Hindu BusinessLine, November 15, 2002, available at http://www.thehindubusinessline.com/2002/11/15/stories/2002111502620500.htm
36. http://www.whoindia.org/LinkFiles/Trade Agreement Chapter04 Final Report IND GPE002–3rd.pdf
37. http://www.domain-b.com/companies/companies n/nicholas piramal/20031003 mnc.htm38. http://www.indianexpress.com/ie/daily/19980226/05750214.html39. http://brandfaqs.blogspot.com/2008/06/ranbaxy-promoters-to-sell-stake-to.html40. William Greene, The Emergence of India’s Pharmaceutical Industry and Implications for the
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dia, May 4, 2009, Available at http://timesofindia.indiatimes.com/Business/India-Business/Indian-drugmakers-facing-takeover-threat-Govt-panel/articleshow/4482643.cms
44. Peter Engardio and Ben Ridding, “Big Pharma’s R&D Booster Shot,” BloombergBusinessweek, June 11, 2008, available at: http://www.businessweek.com/stories/2008-06-11/big-pharmas-r-and-d-booster-shotbusinessweek-business-news-stock-market-and-financial-advice
45. D. Jane Bower and Julian Sulej, “The Indian Challenge: The Evolution of a Successful NewGlobal Strategy in the Pharmaceutical Industry,” Technology Analysis & Strategic Management 19,no. 5 (2007): 611–624.
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