This article is written by Sahil Shrivastav and Yash Sahu, students of Marathwada Mitra Mandal’s Shankarrao Chavan Law College.

Introduction

Medicine has immense importance in the life of the 20th century. This fast-moving life has not only opened doors to multiple opportunities but has given rise to unnatural day order and lifestyle. Today’s world is moving so fast that it allows no time for personal health unless you prioritize it. This has led to exponential growth in the pharmaceutical Industry. With the market size of $27.57 Billion (as reported in 2016), and expected market size of $55.00 Billion(Gupta, 2017), it can be said that the Indian Pharmaceutical Market is no less than that of a developed nation. In the Global market, India is the second-biggest provider of pharmaceutical and biotech workforce.  

An industry with this big size can only form with help of the huge consumer base. While the consumer base in India is large, yet the income and affordability are still low. As per the recent reports by the World Bank, the Gross Domestic Product per capita annually in India is $2104.14 (WorldBank, 2019) which amounts to Rs.1,50,000 in India Rupees (approximately). This figure seems a fallacy as one-third of the whole nation falls below the poverty line. This clubbed with the price structure of medicines affects the purchasing power of the consumers and hence takes a toll on the health. 

Present Scenario

Let us take an example to understand the dichotomic situation, price of a chemotherapy injection named pemetrexed sold under the brand Pemxcel usually used to cure lung cancer was slashed by 90% bringing down the price to Rs. 2,800 for every 500 mg (Narayan, 2019). This price does not seem much if we take into consideration the GDP per capita, but once the population belonging below the poverty line are considered, this becomes an unsolvable problem leading to either unavailability of medicine or indebtedness of the family/ individual caused by purchase of medicines during exigencies. Hence, it becomes very important to understand the general pricing structure and cost components of medicines. 

Production of a new medicine involves multiple types of costs. Right from the investments made in the Research & Development wing to the cost actually incurred on production of drug and the cost of advertisement and marketing, every medicine has almost 5 vital cost components and the profit margin which are enlisted below:

1. Cost of R&D;
2. Production Cost;
3. Cost of Human Resource (production & management);
4. Cost of Advertisement and Marketing;
5. Cost of Royalty/ License Fee paid;
6. Profit Margin.

Despite of various controls exercised by the Indian Authority, the prices of medicines in India fail to be at par with the purchasing power of the consumer and one of the most important reasons for this is the excessive cost incurred during the production itself. The cost components enlisted above are inseparable as one would believe, yet the legitimacy of high pricing is always challenged. 

Future Scenario

The object of this article is to discuss the cost component of royalty/ license fee paid for production of a medicine and its effects along with an alternative solution for the same. Before entering the core of the article, it is important to understand the basic process of medicine patenting and royalty to be paid against licensing of the patents. 

Innovative ideas of production and drug combinations in the pharmaceutical industries are protected with the help of Patents. To understand patents in common parlance, it is a legal tool which provides exclusive rights of the invented process, design or any other form of invention to the inventor for a specific period of time. As per the Agreement on Trade-Related Aspects of Intellectual Property Rights (hereinafter referred to as ‘TRIPS’) patentable subject matters have been defined as “…., patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application”(WTO, 1995). In the pharmaceutical industry, generally the patentable objects are; process of production which are inventive and add value to the production in innovative terms & the combination of drugs that is unique and beneficial. 

These exclusive rights in form of patents are protected with the sanction of law, and in India, specifically, with the sanction of The Patents Act, 1970. This provides the inventor exclusive access to the process and the right to monetize the same by licensing. Licensing are of two types:

1. Voluntary licensing – It is the type of patent licensing where the patentee and applicant mutually come to an agreement over the terms and conditions of the use of patented object. 
2. Compulsory licensing – It is the type of patent licensing where the applicant is allowed to use the patented object/ process without the requirement of prior consent of the patentee. 

Compulsory licensing is widely used in case of Pharmaceutical patents in order to ensure the Public Health and Safety. However, it has received a lot of criticism from the manufacturers with the contention that it reduces the competition in the field of R&D which will in turn lead to orthodox methods of production without any invention. Justin Hughes has rightly said, “The philosophy of granting patent is to provide incentive to innovation and monopoly for a limited period of time”(The Philosophy of Intellectual Property, 1988).

In order to deal with the issue of high prices and prevalence of compulsory licensing in the Pharmaceutical industry, a solution is proposed at the end of the article. In order to understand the solution, it is important to understand two basic concepts, process of licensing and payment of royalty and concept of Corporate Social Responsibility (hereinafter referred as CSR) in relation to the Indian Companies Act, 2013. 

As discussed earlier, compulsory license is granted majorly in case of Pharmaceutical products in order to protect the interest of public at large. The TRIPS agreement has protected the rights of the patentee in case of Compulsory licensing by making a provision for payment of adequate remuneration to the patentee. This ‘adequate remuneration’ shall be decided by the respective National Laws or they can refer to the Remuneration Guidelines for Non-Voluntary use of Patent of Medical Technologies prepared by the World Health Organization. In consonance to this the Indian Patent Act, 1970 makes sufficient provision by vesting the authority in the Controller of Patents to determine the reasonability of remuneration in case of Compulsory licensing (IPA, 1970).

CSR is a philanthropic idea of giving back to the society of what the business earns with the help of the society. Indian Business houses have had a rich heritage of contributing towards the social welfare of the Society, right from the formation of a company to provide biscuits at very affordable rates, Parle-G, to being a part of the freedom struggle. Indian philanthropists like Mr. J.R.D. Tata, Mr. Ardeshir Godrej and many more have set a benchmark for various businesses to follow. India was the first country to put an obligation on the eligible companies to carry out CSR in form a compliance to the law. As per the provision of the Indian Companies Act, every company falling under the predefined category has to spend 2% of their average net profit for past three years(ICA, 2013). The Companies Act has also enlisted the activities which particularly fall under the category of social activities and the companies can spend the 2% on those activities only or any other activity within the same lines or having social welfare at its centre. 

Theory/Solution

Though there is huge space for ambiguity in regards to patenting of pharmaceutical products, the TRIPS Agreement has explicitly provided a choice, of excluding diagnostic, therapeutic and surgical methods for the treatment of humans and animals (WTO, 1995), to the members. The question hence arises, in today’s fast-moving world where prescriptions and out-patient services are preferred over inpatient services, why no firm stand has been taken in regards to the same? Why is there a void in the Pharmaceutical Market for Monopoly or monopolistic competition?

The answer to this question lies in the object outlaid in the TRIPS Agreement, where it says, “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”. Though the object clearly states that the sole object of protecting intellectual rights is not to monetize but to ignite a sense of competition among the members and hence achieving the next step of innovation. However, this exclusive protection of Intellectual rights has been used in the opposite manner as it can be seen. As it is observed in the United States of America, once the generic producers of the medicine enter the market, the price of the medicine falls up to 60% within 12 months(Kommendant). This is a clear indicator of how the protection against infringement is used as a tool of exploiting the prices and thereby affecting the standard of Public Health Safety.

Nevertheless, instead of just questioning the treatment given by the Business houses to the patented rights, it is equally important to give due consideration to issues faced by the counterpart, that is the Pharmaceutical Companies. whenever a company or an individual invents certain process or product, they monetize on it to cut the cost and earn more profits which stands justified on their part, however, it results in transfer of price to the consumer’s pocket. in order to curb this, I propose a solution as under.

As studied earlier, the patentee has to be compensated in form of adequate remuneration in case of Compulsory licensing, also the WHO has provided various guidelines based on which the Nation can frame a policy for payment of Royalty or can judge the reasonability of the remuneration paid. Even though control is brought on the amount of royalty to be paid or the terms of license are made favouring the public interest, yet the licensee is incurring a cost, even though it is negligible in the longer run. This cost will again have an effect on the pricing structure and will lead to a rise in the price of the medicine, as the company would always want to recover the cost. 

According to my proposed solution, the monetary benefit of compulsory licensing will reach the roots only when the ‘cost’ is converted into an ‘exemption’. Whenever a company seeks license from the inventor, it is must indemnify the loss caused due to sharing of idea or dilution of monopoly. In an instance of Compulsory licensing the loss incurred by patentee shall be ascertained and the same shall be allowed to be set off against the CSR obligation under the Sec. 135 of Indian Companies Act, this will lead to conversion of cost to exemption, which in turn would lead to decrease in the cost of production ultimately resulting in lowered prices. In order to ascertain the loss incurred an Independent Valuation expert shall be appointed; and as per the valuation report submitted by the expert a company shall be allowed to set off the amount against CSR obligation.

In order to make it easy to understand, refer the illustration below; 

Two competitive companies exist in the pharmaceutical market, Company X and Y. Company X has invented a new process of diluting the drugs for diabetic patients which makes the medicine more effective. Company Y approaches X to form an agreement and thereby obtain a license by paying a royalty of 4% on the total sales volume. As a part of the counteroffer, Company X wants Company Y to pay a royalty of 6.5% on total sales volume. 

As we can see, these arrangements will only lead to an addition in cost of the medicine and will minutely help the needful. As an alternative, if the Controller of Patents or any other relevant authority allows Company X to set off the total royalty receivable against the CSR obligations it has to fulfil, then it becomes a win-win situation for both the companies. In this case, Company Y gets the License without payment of any fees leading to no additional cost and Company X gets compensated for the loss incurred due to dilution of exclusive rights in form of reduction in the total amount of money to be actually spent on CSR. 

Such a solution upholds the dual objective of a competitive environment in the field of innovation and a maximum outreach of health facilities to the needful because all lives are important and equal. 

References

1. Gupta, Priyanka. 2017. Economic Times. [Online] August 09, 2017. [Cited: August 27, 2020.] https://health.economictimes.indiatimes.com/news/pharma/the-state-of-pharmaceutical-industry-in-india-an-overview/60273583#:~:text=New%20Delhi%3A%20Indian%20pharmaceutical%20industry,Brand%20Equity%20Foundation%20(IBEF).
2. ICA. 2013. The Indian Companies Act. Sec. 135 (5). [Online] 2013. 
3. IPA. 1970. The Indian Patents Act. Sec. 90 (i) . [Online] 1970. 
4. Kommendant, Erik. Association for Accessible Medicine. [Online] [Cited: August 27, 2020.] https://accessiblemeds.org/resources/blog/pharmaceutical-patent-abuse-infinity-and-beyond.
5. Narayan, Pushpa. 2019. TImes of India . [Online] Benett Coleman , May 19, 2019. [Cited: August 27, 2020.] https://timesofindia.indiatimes.com/india/almost-90-slash-in-prices-of-nine-anti-cancer-drugs/articleshow/69392319.cms#:~:text=The%20price%20of%20erlotinib%20tablets,old%20price%20of%20Rs%208%2C800.
6. The Philosophy of Intellectual Property. Hughes, Justin. 1988. 1988, Georgetown Law Journal, p. 287.
7. WorldBank. 2019. GDP Per Capita. s.l. : World Bank, 2019.
8. WTO. 1995. Trade-Related Aspects of Intellectual Property Rights Agreement. Article 27.1. [Online] 1995. 
9. WTO. 1995. Trad-Related Aspects of Intellectual Property Rights . Article 27.3.a. [Online] 1995. 

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