Ranbaxy, intellectual property rights, and access to quality medicines.

As a follow up to our post last week on Katherine Eban's disturbing article on Ranbaxy's massive fraud on the FDA, we thought we'd follow up with a closer look at the U.S.-India trade environment, particularly with regard to pharmaceuticals and intellectual property rights (IPR).

The U.S. runs an $18 billion trade deficit with India, of which approximately $4.5 billion (or 25 percent) is attributable to pharmaceuticals, primarily generic drugs. Although India is an attractive and growing market for U.S. companies, U.S.-based pharma companies have been hesitant to invest in India or to make more of their products available to Indian patients for fear that their IPR will be stolen by Indian companies - with the blessing of the Indian government and courts.

These concerns are not unfounded. In a May 2013 report from the U.S. Trade Representative, India was highlighted on the USTR's "Priority Watch List" for countries with weak IPR and enforcement.

While investors have been hoping for several years that India would strengthen its IP regime and begin to move up the pharmaceutical value chain by producing more innovative pharmaceuticals, it seems to be a case of one step forward, two steps back. The USTR notes that:

In many areas, however, IPR protection and enforcement challenges are growing, and there are serious questions regarding the future condition of the innovation climate in India across multiple sectors and disciplines. ...

In the pharmaceutical sector, some innovators are facing serious challenges in securing and enforcing patents in India. ...

The United States is concerned that the recent decision by India's Supreme Court with respect to India's prohibition on patents for certain chemical forms absent a showing of "enhanced efficacy" may have the effect of limiting the patentability of potentially beneficial innovations. Such innovations would include drugs with fewer side effects, decreased toxicity, or improved delivery systems. Moreover, the decision appears to confirm that India's law creates a special, additional criterion for select technologies, like pharmaceuticals, which could preclude issuance of a patent even if the applicant demonstrates that the invention is new, involves an inventive step, and is capable of industrial application.

The United States will also continue to monitor closely developments concerning compulsory licensing of patents in India, particularly following the broad interpretation of Indian law in a recent decision by the Indian Intellectual Property Appellate Board (IPAB).... In particular, India's decision in this case to restrict patent rights of an innovator based, in part, on the innovator's decision to import its products, rather than manufacture them in India, establishes a troubling precedent. Unless overturned, the decision could potentially compel innovators outside India - including those in sectors well beyond pharmaceuticals, such as green technology and information and communications technology - to manufacture in India in order to avoid being forced to license an invention to third parties.

In other words, India is clearly maintaining policies designed to bolster its domestic generic pharmaceutical industry profits at the expense of foreign competitors and IPR.

When the patent for Novartis' leukemia drug Glivec was overturned, for instance, Novartis was already giving away, for free, supplies that met 95% of the Indian oncology market, selling just 5 percent of its product to the small sliver of insured or affluent Indians that could afford pay a higher price or co-pay for the drug. That's hardly a record of profiteering on human misery.

Indian courts have also overturned patents on drugs like Glivec, Bexxar, and Viread.

At the end of the day, Indian generic companies don't subsist on charity. Indian companies make billions in profits from sales to customers in other affluent and mid-market nations, including the U.S. (about 40% of all pharmaceutical Indian exports), Latin America, and the European Union. Wealthy country taxpayers also underwrite the Indian industry, since 70% of the drugs purchased through international aid programs come from India.

Because generic drug companies don't have to conduct clinical trials to prove that their products are safe and effective, producing generic drugs for export is an enormously profitable business, allowing generic drug companies like Ranbaxy to become large multinational companies in their own right (Ranbaxy currently is the 9th largest drug company in the U.S.; overall, Indian exports around $11 billion in drugs annually.)

As the Ranbaxy case shows, however, the sheltered treatment of Indian generics firms like Ranbaxy from domestic regulators and international aid groups appears to have led to a culture of complacency, entitlement, and greed. As Eban writes,

[Ranbaxy's own] confidential report laid bare systemic fraud in Ranbaxy's worldwide regulatory filings. It found that "the majority of products filed in Brazil, Mexico, Middle East, Russia, Romania, Myanmar, Thailand, Vietnam, Malaysia, African Nations, have data submitted which did not exist or data from different products and from different countries ..." The company not only invented data but also fraudulently mixed and matched data, taking the best results from manufacturing in one market and presenting it to regulators elsewhere as data unique to the drugs in their markets.

Sometimes all the data were made up. In India and Latin America, the report noted the "non-availability" of validation methods, stability data, and bio-equivalence reports. In short, Ranbaxy had almost no method whatsoever for validating the content of the drugs in those markets. The drugs for Brazil were particularly troubling. The report showed that of the 163 drug products approved and sold there since 2000, only eight had been fully and accurately tested. The rest had been filed with phony data because they had been only partially tested, or not at all.

No corner of the globe was untouched by Ranbaxy's fraud - including drug's purchased by the World Health Organization's antiretroviral programs in Africa.

In other words, Ranbaxy fell into the trap that all domestic industries that are shielded from international competition eventually fall into: shoddy quality, bloated profit margins, and negligent management.

Competition is the best solution to this problem. Large Western pharmaceutical companies are increasingly recognizing that there is a business and a moral case to be made in pricing both new products and branded generics at prices that are affordable in many developing nations.

Partly, this is because the market for their products in wealthy countries is saturated, with sales flat or declining (thanks in part to patent expirations, the total value of the U.S. prescription drug market actually declined in 2012, according to IMS). Not only does the developing world represent a new sales and profit opportunity, Western companies can compete on quality - backing up, with their brands, the quality of their product in markets where fake or substandard products routinely sold to patients.

Broadly, Western companies are also making much better efforts to expand access to their newer products. GlaxoSmithKline, for instance, caps prices of its products in 49 of the world's poorest countries at 25 percent of their developed world prices.

GSK and Merck have also pledged to make their rotavirus vaccines available to developing countries at sharply reduced prices through the Global Alliance for Vaccines and Immunisations (GAVI). Gilead, a leading innovator in HIV/AIDS either sells its life-saving AIDS medicines at little or no profit in poor countries, or licenses them (as in the case of South Africa) to local producers who sell them at affordable prices.

How does this relate to intellectual property rights and Ranbaxy's fraud?

Strong IPR regimes in developing countries - including India - will encourage large Western firms to expand access and sales even more broadly in developing markets.

Protecting IPR would also open India's domestic market to more foreign direct investment, injecting the much-needed expertise, technology, and adherence to international regulatory norms into India's pharmaceutical industry. This would be a win-win, for India, which would be able to raise the quality of its generic products while also expanding into the production of branded drugs.

Generic companies that make excess profits selling substandard drugs are the only companies who have anything to fear from greater competition. Indian patients would benefit from improved access to higher quality, but still affordable generic and branded medicines.

Ironically, regulators in the U.S. and EU - when they pay attention, as they likely will now - already have enough muscle to police Indian companies. It is the world's poorest countries, where regulation is weakest, who have the most to gain from bringing international regulatory and IPR standards to bear on Indian manufacturers.

India won't likely get serious about fixing its lax regulations and weak IPR restrictions until Congress and the Obama Administration signal that the status quo is unacceptable, given the risk to American patients. And if they don't, America should look elsewhere for high quality generic drugs.

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