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When Prime Minister Manmohan Singh recently announced a plan to liberalize India’s restrictions on some foreign investment, it encouraged investors to believe the country is finally ready for a new round of reform. Yet across the economy steep challenges remain that offer a reality check. For a prime example, look no further than the regulatory train wreck expected this week in the pharmaceutical market.
The potential market for pharmaceuticals is huge, both for production and in terms of selling to a large population with rising incomes. Yet regulation hobbles the industry. Price controls burden local producers, which struggle to maintain quality at the low mandated prices.
Meanwhile, authorities have resisted protecting foreign manufacturers’ patents as leverage to force companies to sell drugs at lower prices. Rather than encourage foreign producers to make more drugs available more cheaply, this gambit discourages them from investing in India at all.
Now things are getting even worse. The Supreme Court today could formulate a new price-control policy. On Sept. 11, the court chided the Department of Pharmaceuticals for failing to promulgate price caps on 348 domestically produced generics. The court announced that if the government did not set a policy by today, it would do so.
The Supreme Court ostensibly is acting out of frustration at the government’s inability to form a policy itself. But this is a question of policy, not of law. The judiciary is ill-equipped to consider such a matter properly.
The case arises because the Ministry of Health has promised to provide essential drugs at no cost to patients in government-run hospitals and clinics. But the $5 billion it budgeted for this purpose is insufficient to meet this goal at current drug prices.
Indian law allows courts to step in to enforce such policy promises (this one was enshrined in a five-year plan), and sure enough, public-advocacy group All India Drug Action Network has been suing since 2003 to ask the Supreme Court to force the government to follow through. Never mind that the decision whether to keep such an expensive, and ultimately political, promise should be left to policy makers, not judges.
Under threat from the Supreme Court, the Indian Government may act. The Times of India reports that Ministers will meet today and could set caps that cut prices by at least 25%, and up to 90% on some medicines.
Industry lobbying may prevent some products being price capped. Yet the uncertainty, political brinkmanship and the court’s involvement will exacerbate the sense that India is not a suitable place for foreign and domestic investment in this important industry. Especially since this is only the latest in a series of major blows to drugs companies’ rights.
Not to be outdone by the Supreme Court, the India Patent Office also is getting in on the drug-pricing game too. In most of the world, patent regulators concern themselves only with the technical aspects of innovation—determining whether a product (in this case, a drug compound) is sufficiently novel to warrant intellectual-property protection. Not in India.
Starting in 2006, the IPO denied patents for cancer drugs Glivec and Tarceva (made by Novartis and Roche, respectively) and HIV drug Viread, produced by Gilead. All three drugs have been proven effective by other regulators, and all are clearly novel for purposes of patent law. They’ve been patented in dozens of other countries.
Among other reasons, the IPO denied these products patents because it considered the drugs too expensive. This is unheard of elsewhere. In those countries that administer price controls, normally the government negotiates with drug companies to set prices. In India, the current practice seems to be to deny a patent application and then allow local companies to copy the drug and sell it at a much lower price.
As a consequence, it is much harder to guarantee quality or consistent supply. Patients could end up unwittingly taking substandard medicines that are marketed as generics, or face drug shortages as tighter price controls discourage production.
The difficulty in obtaining patents is also a stumbling block for development of the local drug industry. Without patents, foreign drug companies are very unlikely to sign licensing agreements to allow local manufacturers to produce innovative drugs—traditionally a method of technology transfer in other countries—since they cannot even demand a royalty payment. While Gilead has still gone ahead and licensed to local companies, it is a rare exception.
India needs an honest and fair patent and pricing policy. Authorities should award patents to all deserving drugs, and then negotiate hard but fairly to achieve reasonable prices for those important foreign-made drugs.
Moreover, the Ministry of Health should remove its price controls on all domestically produced essential drugs, since competition already drives prices to the lowest levels at which quality can be sustained. It is a fiction that India can provide the poor with all required essential drugs free of charge. It should embrace reality and do what it can for the poor without undermining the pharma industry.
More broadly, the pharma case study highlights the challenges India still faces in attracting foreign investors. While the particular circumstances are unique to the drug industry, the general point—a sclerotic bureaucracy is misapplying regulatory tools such as patents, while a capricious judiciary is overstepping its bounds—can apply to almost any other industry.
New Delhi can’t cure what ails its drug industry overnight, just as many other industries await reforms beyond those announced recently. But the drug case shows that at least “do no harm” should be the rule in the meantime.
Mr. Bate is a resident scholar at the American Enterprise Institute in Washington, D.C. and author of “Phake:The Deadly World of Falsified and Substandard Medicines” (AEI Press, 2012).
Judges setting price caps is the latest ill to befall the pharmaceutical industry.
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