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Issue dated - 24th February 2005

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TRIPs impact on R&D: Facts, facets and implications for Indian pharma industry

The post-TRIPs scenario offers a viable option in terms of partnerships with MNCs, which indigenous firms need to capitalise upon, say Mohd. Arif Khan, Imran Parvez, Anand Sharma and Parikshit Bansal

The Trade Related aspects of Intellectual Property Rights (TRIPs) was the outcome of a very important treaty called General Agreement on Tariffs and Trade (GATT). GATT for the first time after World War II, in 1947 brought together several countries (23) including India, on a common platform with the sole aim of reducing barriers to trade, so that polarisation could be prevented and world economy made stronger. Different rounds of GATT were quite successful in removing trade barriers and promoting world trade.

To overcome the fears of developed countries that their goods if sold in developing countries would be illegally copied, the agreement on TRIPs was signed under the 8th round of GATT also known as the ‘Uruguay Round’ under which intellectual property rights were brought within the scope of GATT for the first time.

Under TRIPs, rules for protection of intellectual property were made uniform in all member countries. Since rules for IP protection were governed by national laws, these could be changed only by legislation, which obviously was a difficult task for governments.

Accordingly, a ten-year transition period was allowed to all countries to make their laws compliant with TRIPs agreement. India, too, was a signatory to TRIPs and this period ended on December 31, 2004. What will be the post TRIPs R&D scenario? Will technology transfer be facilitated? Will TRIPs encourage or hinder growth of domestic pharma firms? What are the facts, facets and implications? These are some of the questions which the article attempts to address.

TRIPs and R&D

TRIPs establish minimum standards of protection for a wide variety of intellectual property such as patents and industrial designs. It is widely celebrated by industrialised countries e.g. USA as being the instrument with which to stimulate innovation and inventive activity. Apart from its many facets pertaining to protection of intellectual property, it also allows direct investment in domestic firms, by multinationals.

Foreign direct investment (FDI) is a necessity in developing countries simply because most of these countries do not have the capital to fund expensive innovations on their own. FDI has to accrue to the developing countries in order to promote technological innovation.

According to Article 7 of the TRIPs Agreement, ‘‘The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.’’ This is what should happen if the substantive provisions of the TRIPs Agreement are followed.

Transfer of technology is another aspect of innovation that TRIPs claims to stimulate. This is also important in creating an environment conducive to innovation because without new technologies being made available to developing countries, they will simply cease to compete effectively on global markets. They will also be handicapped when trying to develop cutting edge technology with what may be extremely primitive tools.

Introduction of strong IPR places pharmaceutical multinationals advantageously for exploiting knowledge diffusion and integrating the local capabilities of a developing country like India. Though the global pharmaceutical market is accelerated with the vast majority of market dominated by developed countries of Europe, Japan, United States but African, Indian and Australasian producers account now for just 4.4 per cent of total world production.

Technology transfer in post-TRIPs scenario

A number of factors have come into play following the TRIPs agreement, which have an important bearing on not only R&D, but also technology transfer for domestic firms. These factors are briefly discussed below:

Enhanced freedom to MNCs: In post TRIPs period pharmaceutical multinationals have certainly far more freedom to operate in developing countries. The link between strong patent regime and technology transfer is not easy to determine. This is because aspect of weak capacity of the buyer in a developing country to absorb technology can supersede the availability of strong patent protection.

However, strength of Indian pharma firms coupled with the technological superiority of MNCs can lead to mutually beneficial partnerships. Tie-ups of Orchid Pharma with a number of MNCs is a positive outcome in this regard. Also, greater freedom definitely encourages faster techno-economic evaluation and newer business strategies.

FDI as an instrument of control: FDI in pharmaceuticals functions for the benefit of merger, acquisition and takeover so as to facilitate parent firms to increase their control over operations located in India. Stronger control over investment is the main motive driver of merger and acquisition activity for pharmaceutical MNCs in India.

Technology acquisition options: MNC investing in pharmaceutical sector prefer green field investment to joint venture. However domestic pharmaceutical firms can improve considerably their technical capabilities by going in for technology buying rather than indigenous technology generation, which can take long.

Contract manufacturing: India today provides competent outsourcing opportunities to MNCs to subcontract manufacture of bulk drugs in short run. This segment can be best exploited for industrial upgrading. Current bulk outsourcing market is of the order of $14 billion and will be touching $ 27 billion in 2007.

Focus on selective R&D: Only a handful of MNCs currently conduct R&D in India and strengthening of IPR laws is unlikely to change this situation. The R&D intensity of MNCs is 0.74 per cent, which is three, and half times lower than the domestic firms which is 2.6 per cent. Further, R&D which is being taken by MNCs, emphasises more on formulation R&D compared to bulk R&D.

There lies a more hard fact that acceptance of TRIPs agreement has not led the MNCs to make higher R&D investments for the neglected diseases.

More benefits for well-established firms: Big pharmaceutical firms are expected to gain most from the introduction of strong patent regime than small and medium-sized domestic firms, which hardly invest in research. Research and patenting in pharmaceutical multinational companies, is essentially driven by the motive of obtaining a high level of rent incomes out of existing patents and demolishing competition through new and innovative patents.

Conclusion

The post-TRIPs scenario has important implications for the Indian pharma industry. In fact, the use of strategy of strong IPRs is one of the most profound institutional changes that the Indian policymakers can expect to come in the way of knowledge diffusion. It is unlikely that the developed world will invest more in developing countries now that competition is considerably reduced.

The decisions are likely to be based on practical considerations — why make massive capital expenditure on R&D when the relative cheap method of exporting to developing countries will do the job? MNCs are most likely to benefit from economies of scale if they increase the size and capacity of existing plants and export goods to developing countries. This strongly suggests that in the post-TRIPS scenario less FDI is likely to be spent on R&D, technology transfer or improving production facilities in developing countries and major benefits are unlikely to accrue to domestic firms unless they aggressively focus on strengthening their own technological capabilities.

Recommendations

Based on the above, some recommendation can be made.

Firstly, need to focus on strategic alliances and partnerships with MNCs as a tool for strengthening technological capabilities. The post-TRIPs scenario offers a viable option in terms of partnerships with MNCs, which indigenous firms need to capitalise upon. The excellent pool of trained human resources, infrastructure for bulk drugs etc are strengths that can pave the way for mutually beneficial partnerships.

Secondly, tapping the existing R&D infrastructure of public funded academic and research institutes already existing in the country. R&D is not cheap. It involves a lot of investment, without any guarantee of return.

This is one of the prime reasons why most of the Indian firms feel shy of locking up precious financial resources in R&D and instead adopt the path of producing ‘tried and tested’ products than new and innovative ones. But without R&D, how can there be innovation? How can there be global competitiveness?

A low-cost and practically viable option is to go in for technology sourcing from research institutes and also ‘sponsor’ innovation by way of industry funded research projects, contract research, industrial scholarships in new and challenging areas and a host of other activities in which industry and public funded institutes work together and emerge as winners.

Mohd. Arif Khan, Imran Parvez and Anand Sharma are with department of pharmaceutical management, while Parikshit Bansal
(email: pbansal@niper.ac.in) is with IPR cell at NIPER, Punjab

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