India’s new draft IP rights policy through a global lens

The new Indian government has wasted no time in demonstrating its pro-business attitude by releasing a long-awaited draft IP rights policy. In the past, India has always been lumped in with China when it comes to IP protection. However, the situation in India is complex as the country has a quite different relationship to IP rights from the other BRIC (Brazil, Russia, India and China) nations. On the one hand, India has a disappointing record of upholding the rights of products manufactured outside the country and the scientific and technical community still lacks a good appreciation of intellectual property. However, when it comes to products such as pharmaceuticals, India is arguably ahead of many other nations, with stringent laws that value innovation over offering protection to generic manufacturers. Similar efforts for enhancing patent quality are being instituted in the United States through the America Invents Act and recent efforts by the new patent commissioner, Michelle Lee. With a youthful workforce, a significant proportion of which is highly educated, India is also an innovation hotbed, especially for multinational corporations, with global giants such as General Electric (GE), Cisco, Intel, SAP, IBM and Microsoft all relying on India’s extensive workforce of engineers and scientists to produce innovations.

Over the last couple of decades, India has perhaps become best known as an outsourcing destination for mid to lower-tier IT and call centre jobs. The highly capable Indian workforce was used in this way in the 1990s and the early 2000s by multinationals including American Express, British Airways and Citigroup as a means of reducing costs. However, corporations such as Cisco and GE saw the same workforce as an opportunity to create innovation and establish open innovation models that have been the subject of extensive debate.

Drama in pharma

Pharmaceuticals are a different story when it comes to IP issues. Previously, the Indian government provided tacit support for generic companies manufacturing patented drugs because it had not signed up to the Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement and thus was not obliged to have product patents, including pharmaceutical products (see Gopakumar G Nair, “Impact of TRIPS on Indian Pharmaceutical Industry”, Journal of Intellectual Property Rights, Vol 13, September 2008, pp 432-441). Hence, when a new drug came out in the United States or Europe, generic companies in India could copy it immediately and with impunity.

Since signing TRIPs, India is now obligated and has eventually adopted pharmaceutical patents. However, Section 3(d) of the Patent Law (see Zoee Lynn Turrill, “Finding the patent balance: The Novartis Gleevec case and the TRIPS compliance of India’s section 3(d) efficacy”, Georgetown Journal of International Law, 2013, pp 1555-1588) states that a company may patent a molecule only if:

• it is novel (which is the same as in the United States and other countries); and
• the compound is therapeutically more effective compared to other similar molecules.

This has not only caused some consternation to pharmaceutical companies, with their preference for evergreening, but also proved to be an extremely contentious issue, as evidenced by numerous lawsuits, including those filed by Novartis, Gleevec, Bayer and Pfizer (see Charlotte Harrison, “India’s patent ecosystem – encouraging strong patents or discouraging innovation?”, Nature Reviews Drug Discovery, 12, pp 732–733, October 2013). Some have even suggested that the Indian government should adopt an approach similar to that of eminent domain in the United States, where power can be exercised over private interests for public good (see The Modi-Obama Summit A Leadership Moment for India and the United States – The Brookings India Initiative, September 2014), to ensure that new drugs can be accessed by the population.

The implications of Section 3(d) are far reaching, but unsurprising. Only recently the United States passed the America Invents Act, which sets out two instruments to improve patent quality: inter partes review and post-grant review, which allow any entity to request the invalidation of a patent on the grounds of novelty (35 USC §102) or obviousness (35 USC §103). This has opened a floodgate of filings and it looks likely that most current patent litigation will soon be replaced by inter partes reviews and post-grant reviews. As a result, many previously granted patents will be invalidated, thus compelling inventors and rights holders to take a long, hard look at the quality of their patents before filing them with the US Patent and Trademark Office (USPTO). In the past, the onus was on the USPTO to find the prior art and ensure that the patent’s quality was upheld. Now, with third parties using predictive analytics and crowdsourcing to find prior art, the industry itself is helping to ensure that granted patents are of the highest possible standard. While there was uproar when KSR v Teleflex was issued, this was largely because before the passage of the America Invents Act, the chemical compounds sector had been generally untouched by such decisions. Section 3(d) of the Indian Patent Law seems to have similar objectives to the America Invents Act.

Follow the money

US pharmaceutical companies were previously spending approximately 1% of their sales on R&D in India. However, since India signed TRIPs in 2005, this figure has fallen to 0.3% of sales (see Sudip Chaudhuri, “Intellectual property right and innovation, MNCs in Pharmaceutical Industry in India after TRIPS”, November 2014, Institute for Studies in Industrial Development, New Delhi). Clearly, none of the multinational pharmas is spending money on R&D in India. Those such as Astra Zeneca which did have new drug development programmes have since shut down their operations. This begs the question: why are multinationals producing inventions in other sectors, but not in pharmaceuticals? The answer is not simple, but at its core is the fact that pharmaceutical companies in India are not carrying out pure R&D themselves; they are banking on producing generics and now biosimilars. The development of new chemical entities requires a robust innovation ecosystem as well as an IP protection regime that eventually fosters the production of new pharmaceuticals. Most new drugs produced in the United States by multinational corporations are given a strong initial boost by universities. In India, such support is either lacking or non-existent. Most of the top US university-based research programmes have strong ties to industry. In addition, the framework of the Bayh-Dole Act of 1980 provides strong impetus for technology transfers from university to industry. It took the United States approximately 20 years after the Bayh-Dole Act was passed to reach a state of maturity in the field of technology transfer. We will have to wait and see how long it takes India to get to the point where industry feels comfortable collaborating with academia in a meaningful way.

So why are Indian pharmaceutical companies not working on R&D of their own, given that the cost of drug development is cheaper, access to patients is easier and the Indian population is so diverse and vibrant? In fact, not only are Indian pharmaceutical companies not performing their own R&D for new chemical entities, they are relying on the US IP system and market to sell their generics. Ranbaxy, Sun Pharmaceuticals and Dr Reddy’s Laboratories are all major players in the United States when it comes to selling generics. They are also quite astute in abbreviated new drug application (ANDA) litigation and are capable or taking drugs through the 505b(2) route. Since the Hatch-Waxman Act of 1984, there has been an explosion in the number of ANDA litigations being filed by Indian pharmaceutical companies. The appetite of such companies for generics and non-patented services is so voracious that waiting for a longer period of time to develop new patented products is not considered to be an option. Even companies which tried to start out with their own products – such as Biocon and Dr Reddy’s Lab – soon realised that generics and biosimilars are a much quicker route to market, albeit with a lower profit margin. Also, the cost of carrying out R&D is high; getting a new drug to market can take up to 10 years and involve as much as $2 billion in capitalised costs, which Indian companies are not willing to bear at this time. Compounded with this are Indian market dynamics: most patented drugs outside of India (essentially every new drug) come to the Indian market in a very short time, either through a compulsory licensing route – which the government enforces on the drug’s owner – or through a generic company which starts manufacturing in India, until recently with legislative support from the government. These dynamics may change with the adoption of the new IP rights policy.

The government’s new draft IP rights policy attempts to address this specific topic, but is unclear about how it would foster such collaboration. Without the support of research universities identifying targets and pathways, and carrying out pre-competitive research, it is not feasible to expect that early-stage research would be the sole responsibility of industry partners. The US federal government spends upwards of $65 billion each year on basic research, much of that in the area of life sciences research funded by the National Institutes of Health. Inadequate research funding is one of the biggest challenges facing India. The new draft IP rights policy talks about the need to “focus on improving IP output of national research laboratories, universities, technology institutions and other researchers” and goes on to state that it will “create an industry-academia interface for encouraging cross-fertilization of ideas and IPR-driven research and innovation in jointly identified areas” and “stimulate large corporations, both Indian and foreign, that have R&D operations, to create, protect and utilize IP in India”. While these goals are well thought through, the mechanisms that India will pursue to attain them will need much deeper review and consideration. We discuss a subset of these considerations and identify selected influencing parameters which will likely have an impact on such policy formulation.

Impact of IP rights policy changes on R&D in India

In the context of India’s IP regime, it can often be puzzling to see multinational corporations making a beeline for India and establishing an integrated R&D centre there. As discussed earlier, GE, Philips, Cisco, Google, Microsoft, IBM, Novozymes, HP Labs and dozens of other companies have established R&D centres in India, several in cities such as Bangalore and Hyderabad – Table 1 sets out a list of such centres (see R Gupta and BM Gupta, “Foreign MNC R&D Centers in India”, Journal of Library and Information Technology, Vol 34, No 4, July 2014, pp 287-292). While this list is representative and by no means complete, it demonstrates that multinational R&D centres in India are thriving.

Globalised R&D is another testament to Friedman’s flat-world hypothesis. Minyuan Zhao at Wharton has shown that products and technologies that have been developed in countries with weaker IP regimes are leveraged primarily within that country (see M Zhao, “Conducting R&D in Countries with Weak Intellectual Property Rights Protection”, 2006, Management Science, 56(7), pp 1185–99). Zhao concluded that multinationals establishing R&D centres in generally unfavourable IP environments maintain a close-knit internal technology management structure to prevent value leakage. Removing the inherent barriers of a poor IP rights enforcement environment has the potential to change the mechanisms, as well as the magnitude and direction of information flows. Branstetter et al have shown that US multinationals respond to IP reforms in the target economy with increased transfers of more advanced technology, exhibiting greater openness while coordinating with their captive R&D subsidiaries (see L Branstetter, G Li and F Veloso, Do Stronger Intellectual Property Rights Increase International Technology Transfer? Empirical Evidence from U.S. Firm-Level Data, NBER Working Paper 11516, August 2005).

These results have important implications for policy makers. They clearly demonstrate that firms will respond to positive policy signals from a country by engaging in the transfer of higher-value and more complex R&D activity to the target market, which in turn benefits the local market in several ways.

Increased patent filings: quantity but not quality

Figure 1 shows that patent filings have steadily increased in India from 2003 to 2009 (see K Sinha, M Singh, D Nag and S Basu, “Intellectual Property in India’s Innovation Roadmap: Vision 2020”, MIPS 2012, IIT-Bombay, Mumbai, India); and compared to its BRIC cohorts, India has done better than Russia and Brazil in growing patent quantity – although it severely lags behind China, which has surged ahead to become the highest patent filing country in the world.

Figure 1. Patent application growth in BRICs and other select countries 2001-2009

The authors have presented on strategies to develop a robust innovation roadmap for India focusing on intellectual property. We analysed resident versus non-resident patent applications obtained from the World Intellectual Property Organisation’s 2010 data for India, China and South Korea. The findings were published in the conference proceedings, referenced in K Sinha et al. However, while the number of patent applications filed and the number of patents granted were good estimates of the overall importance of a certain jurisdiction, these metrics do not provide an accurate representation of IP generation in a particular region. To get a measure of this, it was necessary to compare the number of patents filed (and granted) by resident and non-resident applicants.

On a global scale, the total number of resident patent applications was higher than for non-resident applications.

Figure 2a. Number of patents filed in India, China and South Korea 2001-2006

Figure 2b. Difference in the number of patents filed by residents and non-residents in India, China and South Korea 2001-2006

Figure 2 compares the level of patent filing activity (Figure 2a) and also the level of resident patent activity with regard to non-residents (Figure 2b) in three jurisdictions: India, China and South Korea.

It is apparent that the level of patenting activity in India lags behind the other two important Asian economies by a wide margin, in line with worldwide trends.

The findings reveal that the difference between resident and non-resident applications is positive for China and South Korea, but negative for India – that is, the majority of patent applications filed in India originated from entities outside the country. Also, the domestic growth that was taking place was to a large extent due to multinationals filing patents through their Indian R&D centres. The magnitude of this difference increased consistently from 2001 to 2006, which in itself was alarming enough to lead to calls for policy changes to encourage local patent filings by Indian entities in the public and private sectors.

Our findings are also supported by the data from L Branstetter et al, who also report that the rapid growth of patent filings in India is driven primarily by multinationals from the developed world, and that these patents are driven by co-invention – collaborative inventions across borders. The NBER paper describes the internationalisation of “division of R&D labour” in the context of the process of R&D and innovation”. Branstetter et al conclude that by becoming an integral component of multinationals’ R&D infrastructure, emerging economies can benefit from increased foreign direct investment and job growth. Further, this integration opens the door for countries such as India to engage in advanced technology development on a bigger scale and at a time that is greatly advanced relative to its position on an emerging market growth curve. This engagement in turn provides a significant time advantage, as opposed to indigenously developing the technologies at a much later point on the economic maturation curve.

Motohashi has developed a model for the evolution of multinationals’ R&D centres in emerging markets such as India and traced their path of transformation into centres of excellence. In such a model the impact of a robust IP rights environment can rapidly transform the emerging market-based R&D subsidiary of a multinational into a centre of excellence (K Motohashi, MPRA Paper 57281, July 2014, pp 1-24). Accompanying this transformation, the multinational gains the confidence to relocate critical R&D to this centre while engaging in higher-order and significantly more valuable R&D, which it did not carry out earlier due to the higher risk profile. Figure 3 demonstrates the potential impact of India’s new IP rights policy on R&D initiatives in India using Motohashi’s published model.

Figure 3. Transformation model for multinational R&D initiatives in emerging economies

We have tabulated a few of the advantages likely to result from India implementing its new IP rights policy. Figure 4 presents the advantages from both perspectives, to show those that will accrue to India and those that will be gained by the multinationals and developed economies.

Figure 4. Possible advantages of India’s efforts towards a more effective IP rights policy

Lessons from other Asian economies

India has taken the correct first step towards streamlining its innovation and IP policy, but much more needs to be done. The environment in Asia is one of healthy competition, with countries such as China, Singapore and Malaysia making big strides in the area of IP policy and national innovation strategy. China has become the world’s largest patent filing nation and while many debated the issue of quantity versus quality, there is no doubt that the Chinese innovation engine is firing on all cylinders.

Similarly, South Korea has become a global force of innovation, with Samsung, LG and Hyundai taking on other large global corporations in the battle for market share and intellectual property. Malaysia has set itself the goal of becoming a knowledge-driven, high-income economy by 2020 and has already taken significant steps in that direction, led by its National Innovation Agency. The Malaysian Patent Office has launched a platform for IP trading and the government has supported the development of a $70 million IP securitisation fund. All of these initiatives are building to the launch of the Association of Southeast Asian Nations Economic Community, which Malaysia chairs in 2015. Not to be outdone, neighbouring Singapore has publicly declared its ambition to become the IP hub of Asia.