1

Centre for Management Studies, DDU,

Nadiad.

Subject:
International Marketing

Assignment on
Impact of GATT and WTO on Pharma
Industry

Submitted to: Submitted by:

Prof. Frince Thomas Mahendra Dabhi
(MBO6) Marketing
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GATT- GENERAL AGREEMENT ON TARIFFs AND TRADE.

General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating
international trade. According to its preamble, its purpose was the "substantial reduction of
tariffs and other trade barriers and the elimination of preferences, on a reciprocal and
mutually advantageous basis." It was negotiated during the United Nations Conference on
Trade and Employment and was the outcome of the failure of negotiating governments to
create the international trade organization (ITO). GATT was signed by 23 nations in Geneva
on October 30, 1947 and took effect on January 1, 1948. It lasted until the signature by 123
nations in Marrakesh on April 14, 1994 of the Uruguay Round Agreements, which
established the World Trade Organization (WTO) on January 1, 1995.
The original GATT text (GATT 1947) is still in effect under the WTO framework, subject to
the modifications of GATT 1994.

WTO- WORLD TRADE ORGANIZATION

The World Trade Organization (WTO) is an intergovernmental organization which regulates
international trade. The WTO officially commenced on 1 January 1995 under the Marrakesh
agreement, signed by 123 nations on 15 April 1994, replacing the General Agreement on
trade and tariff (GATT), which commenced in 1948. The WTO deals with regulation of trade
between participating countries by providing a framework for negotiating trade agreements
and a dispute resolution process aimed at enforcing participants' adherence to WTO
agreements, which are signed by representatives of member governments and ratified by
their parliaments.

Effects of GATT on Pharma Industry

Effects of GATT on Pharma Industry

The drug price will increase because one of the major concerns of India after becoming a member of
World Trade Organization (WTO) is adopting Trade Related Intellectual Property Rights (TRIPS) and
Product Patents in Pharmaceutical Industry. In preview it seems to be like there will be
a steep increase in price and more investment on R&D by Indian pharma companies to get product
patents and a shutdown of large number of small scale industries in India due to lack of
infrastructure and Economy.

Multinational companies of India have started preparing and are eagerly waiting for the post-GATT
era (after 1stJan.2005). In fact, in India many of public people are not clear about the TRIPS
agreement due to lack of understanding that to effect on drug price.

Out of the 20,000 pharmaceutical industries in India, there are more than 19,600 medium and small-
scale industries in India and it will be a big question about the survival after post-GATT era due lack
of patents on our name. Normally it is accepted that pricing includes developmental expenses,
beginning with R&D expenses to the stage of plant and machinery, all expenses go to the costing of
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finished product. But the amount recoverable on an annualised basis is related to both the market
forces and the laws of the land. The main impact of the proposed globalisation of patents would be
on the prices of medicines which would go up several times higher making it extremely difficult for
the poor people of India to afford them after the GATT agreement. An essay in this regard is
described here in.

Introduction

Right now no patent is granted in India for the end product in the case of food, medicinal items or
chemical substances. Legal protections of such items only cover the method or process of
manufacture. This means an imitator can escape the charge of infringement by producing a product
already patented with minor variations in the process of production.

It needs a lot of idea and knowledge for creating something new in the area drug research. For
example, new drugs and new technology products are produced after a lot of research work related
to Chemistry, Biology, Analysis, formulations with time constrains and above all, huge costs. Sales
will depend on their innovativeness. So, creators should be given the right to prevent others from
copying their inventions, designs or other creations as well as negotiating with others the use of
their products. With this frame, the IPR was bought into WTO. As per the WTOs agreement
negotiated in 1986-94 Uruguay Round, Intellectual Property Rights was introduced into the
multilateral trading system from 1st Jan.2005.

Any country coming under WTO is obliged to follow TRIPS, although it has independence to make its
own patent law matching with the specific needs of the country. There is nothing like an
international patent law. There is a transition period given to each country to adopt the TRIPS
Agreement covered under three categories as per the WTO

-Developed countries were given a transition period of one year following the entry into force of the
WTO agreement, that is, until 1st January 1996.

-Least developed countries were given a transitional period of eleven years i.e. until 1st January
2006 with the possibility of an extension. For pharmaceutical patents, this has been extended
to 1st January 2016, under a decision taken at the Fourth ministerial Conference in November 2001.

Patent

A patent may be viewed as contract between a nation and the inventor giving the inventor exclusive
right to manufacture, use or license his invention for a specific period and in exchange the inventor
describes the details of his invention to permit those skilled in the art to employ it and it rewards the
patentee a legal monopoly to make use of his invention to his economic benefit.

India Joining GATT in the Year-2005

Indians are very good in Process Technology and Indian Scientists could develop their own process
once any new molecule was introduced overseas and the molecules were introduced in Indian
Market within a span of 3 to 5 years. This is because India was not a signatory to the Paris
Convention and was not a member of GATT at that time. New molecule introduction with minor
variations in process technology by Indian companies was called as PIRACY by original Researchers.
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However, with the policy of Industrial Liberalisation and to bring a global discipline, a number of
issues connected with the International agreement on trade related Aspects of Intellectual Property
rights have been discussed and the negotiations concluded in 1993. The outcome of the final
Uruguay round of discussion is the GATT Agreements, 1994, the final text signed by 115 countries
that are member of WTO.

Terms and Conditions of GATT

The GATT agreements cover aspect of international movements of goods and services along with
protection and enforcement for technological innovation. The salient features of GATT are: -

Trade related intellectual property rights (TRIPS) Trade related investment measures (TRIMS) and
Trade in services - agreement (GATS). The overall objective of the TRIPS agreement is protection and
enforcement of intellectual property rights to promote technological innovation and to the transfer
and dissemination of technology for the mutual advantages of producers and users of technological
knowledge. It contains specific provisions and scope of Patentability of Drugs and agrochemicals. The
TRIPS agreement also provides that patents shall be available and patent-right enjoyable without
discrimination as to the place of invention, field of technology and whether products are imported
or locally produced. On fulfilment of certain conditions Exclusive Marketing Rights (EMR) will be
allowed to the patentee to protect the innovations or product patent and prevents others from
making, selling or distributing such products even if manufactured by alternate process.

Since Patentability extends to products or process the terms of the patent would be applied for
twenty years for Product patent and then twenty years for process patent, particularly in the
chemical field including drugs and pesticides. In the case of drugs or medicines, patents will be
available for its usage forms, dosage forms and their combinations. New process would be patented
and new dosage forms etc. would also be patented and this kind of monopoly protection in some
forms or the other would in a period of 10 to 15 years, which cover almost 70/80% of turnover of
the pharmaceutical industry.

Impact of Patent Regime on Indian Pharmaceutical Industry

The specific fall out of the changes that would be made in the patent laws on the basis of the
provisions in the TRIPS agreement would be manifold. The consumer will be hit by high prices and
erratic availability of medicines and the domestic industry would face the question of survival.

Drug Price

The Government in India regulates prices of drugs through Drug price control order and National
Pharmaceutical Pricing Authority. Gradually, the number of drugs, which were there in the Essentials
list, has been reduced to 74, specified drugs. Further sources indicate that Prime Ministers Task
Force on Pharmaceutical and Knowledge based industries has recommended phasing out of drug
control orders by the end of 2003.

As India is a poor country (25% below poverty line), the ability to charge a premium amount on the
medicines is very difficult, but in post GATT era, the price of drugs are surely going to increase, which
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is evident from table3. The data compares Indian medicines price with other countries that have
adopted product patents.

TABLE 3: Comparison of price of medicines of various countries with India before GATT agreement

DRUG & DOSAGE PACK PRICE IN INDIA (Rs.) PRICE IN PAKISTAN (Rs.) PRICE IN USA (Rs.)

Ranitidine Tabs.300mg. 18 242 1111

Strip of 10s

Diclofenac Tabs. 6 56 350

50mg.Strip of 10s

Atenolol Tabs 50mg 23 120 460

TRIPS of 14s

Piroxicam Caps.20mg. 27 73 930

STRIPS of 10s

Ciprofloxacin 40 500 1140

tabs.500mg.

There may not be much impact on the price of existing formulations in India due to abundant small
players presence and fierce generic competitions. But increase in price competition would be seen
in the later period of post-GATT era where the inventor has a right to patent its product for 20 years,
which it has discovered, enjoy monopoly and make its own price. It may mainly be found in Life
saving drugs.

Normally it is accepted that pricing includes developmental expenses, beginning with R&D expenses
to the stage of plant and machinery, all expenses go to the costing of finished product. But the
amount recoverable on an annualised basis is related to both the market forces and the laws of the
land. The main impact of the proposed globalisation of patents would be on the prices of medicines
which would go up several times higher making it extremely difficult for the poor people of India to
afford them after the GATT agreement.

Some top economists and industrialists argue that if Indias price regulating authorities are strong
(DPCO, NPPA), and also due to compulsory licensing system, there may not be much effect in the
steep rise in prices, but as India is moving towards globalization, and comparing to other nations
who have adopted WTO implications, it is at least expected at this stage that there will be sure
increase in prices of drugs.

It is also expected that there may not be much hike in drug price initially due to some smart
marketing strategies adopted by multinational companies to keep the poor people of Indiaquiet, feel
interesting and not to abject. Then after some time slowly they will increase the drug prices one by
one because they cant keep their temptation down for a long time.
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Reasons for Hike in Prices after GATT-2005

Present Position of Patents-Indian Context

a) Total number of filing of patents in India on medicine and pharmaceuticals regarding product
patents is too small compared to other countries. (Major Indian players that have filed include
Ranbaxy, Dr. Reddys, Nicholas, Cedilla, etc.)

b) Only 20% of the total patents relate to Pharmaceuticals while the rest to other sectors like
chemicals, electronics, electrical, mechanical, etc.

c) The patents in medicine and pharmaceuticals are more related to some modification of the
previous drugs (process patents).

d) The benefit India would get after the introduction of product patents and signing WTO, GATT,
Paris Convention is Right of Priority which will give automatic preference in the queue for patent
rights in all the member countries. This will help to increase trade among the WTO countries and
also create an improved industrial climate, greater information flow, better and more extensive
protection of Indian investors abroad, encouragement to scientific research and technological
development and membership of Patent Co-operation Treaty (PCT) and other treaties leading to
overall growth of country.

e) The consumers will also benefit as global medicines will be available to consumers and global
competition will lead to better products.

Less Availability of New Drugs

The availability of new drugs from indigenous sources of the domestic companies would be totally
out of question. Dependence upon imports would go up.

Most of the new drugs permitted during the last five years are still covered by the patent and their
formulations in India are manufactured from imported bulk drugs. The sources of such imports are
mostly other than the original manufactures and are likely to dry out as a result of GATT. Their
continued availability will depend upon the development of alternate technologies or on technical
collaboration agreement.

Growth of Medium & Small Scale Indian pharma Industries will be reduced

The existing industry, particularly in the medium and small scale sectors will over a period of a
decade or so after the introduction of new patent regime, face serious de growth as they will have
no possibility of taking up new products. Even for the existing products or processes, new patents
will be taken, creating difficulties for companies to market their existing products.

Major Impact on Pharma Technology

With the acceptance of TRIPS, transfer of technology is likely to accelerate. Most of the leading drug
multinational companies are present in India having substantial equity participation in their Indian
counterparts. With the policy permitting them to increase the share-holding, they have already
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expressed interest in bringing their latest technologies to manufacture additional bulk drugs to
improve present facilities.

Indian indigenous sector have better opportunities to enter into technical collaboration with the
firms unrepresented in India.

Challenging Impact on R & D (of Indian Pharma Companies)

To establish an identity in the International market, Research and Development activities have to be
strengthened with substantial investment by Indian firms. As a result of the availability of the
patents in drugs and medicines, Multinational companies will not be interested to establish separate
R & D centres in India. In fact, it will be difficult for domestic companies to be able to match
multinational companies potential in R & D sector, sales turnover and world-wide infrastructure for
patenting and promotion of their products. Further to achieve significant performance on the basic R
& D front in India, Government will have to come forward in a big way to support public and private
efforts on a long term basis.

Investment on R&D will increase steeply due to the introduction of Product patents. The various
initiations, which have been taken by the Indian Pharmaceutical companies, can be cited in a figure.

Apart from this, the Indian companies will also have opportunities in contract manufacturing and
contract research and co-marketing. Further, R&D initiatives undertaken by Indian Government will
surely boost new drug development in India.

Indian Future Strategies to Face Hike in Drug Price after GATT Agreement

Now that the GATT is a reality and will come into force within agreed time-frame, the Indian
companies are visualising the best possible means to encounter the situation.

The more forward looking and internationally minded among them have evolved a two-fold
strategy: -

To strengthen R & D capabilities during the transitional period

To enter into strategic alliance with research-based companies abroad for setting up joint

Ventures in India or licensing in patented new Drugs.

To keep an eye on drugs which are going to be off patent in the near future and develop the generic
version of it at less price.

Upgrading technology to international standard so that we can do some advanced discovery

research which can be patentable.

Improving efficiency of operations through optimizations of IPR databases and proper legislation of
patent.

Taking a pro-active stance with respect to agreement on TRIPS and implementation of WTO.
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Building and sponsoring adequate capacity, proper infrastructure and resources for research and
development on indigenous drugs.

Adopt a holistic and need-based drug policy

Adopt a rational competition policy with respect to the pharmaceutical Industry and there by drug
price.

Both the Government policy of granting automatic approval for joint ventures in which foreign
investment is up to 51 percent (which is applicable to the Drug industry) and the new incentives
being considered for total R & D should go a long way to encourage indigenous companies to adopt
the future strategy.

The debate on TRIPS and product patents in pharmaceutical industry has become very significant
due to its socio-economic relevance among the developing economies like India. After1st January
2005, India has to adopt product patents for the companies to survive in long run. Although there
are a lot of seminars and projects organized on the topic, but till now, no effective solution has
emerged.

Several areas of study relating to TRIPS could be identified. Some of them are as follows:

There will be a big debate that after 1st Jan.2005, the cost of medicine will increase by two to
three folds. Study could be made taking various countries that have implemented TRIPS in their
country and present Indian scenario with respect to the price level of medicines.
To strengthen R & D capabilities during the 10-years transitional period
The effect of TRIPS on Small Scale Industries and Research & Development in India could be
highlighted.
Recently, many of the pharmaceutical companies have inclined towards Traditional
system of medicine (Ayurveda) and started investing in herbal sector. A study can be
made about the prospects of Ayurvedic and herbal sector.
Various pharmaceutical companies have started opening their own Hospital and health
care centre to promote their medicine basket. This has become a trend in the present
economic scenario. Study can be made on such strategy of the companies as a measure
of increase in revenue.
It is believed that merger and acquisition help in increasing the market share of the
companies. Study could also be made to quantify the increase in market share.
Many software companies have developed various type of software that reduces cost in new
product development and supply chain management starting from manufacturing to retail chain
management. An extensive study can be made in this topic.

Medicines deal directly with the life of people. There is a fear that after post GATT era, it will be
difficult for below poverty line and general patients to afford medicine due to increase in price. The
role of Government, pharmaceutical companies relating to corporate ethics/corporate
governance can also be studied. Or The Indian pharma companies together with public support
should abject GATT implementation in our country.
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To sum up, this essay presents a suggested approach for handling various managerial challenges
related to IPR in pharmaceutical industry. In brief, it also states the various challenges to be faced in
the pharmaceutical industry due to TRIPS and some other perspectives.

In conclusion, It is sure that drug prices will be increased and Indian Pharma Industries should strive
hard to counter attack in many ways to decrease the drug price if not suddenly after implementation
of GATT, at least over a period of time which in turn depends on how well we develop or get
equipped in order to survive or compete immediately before and after implementation of GATT in
India.

IMPACT OF WTO ON PHARMACEUTICAL SECTOR

After the independence, our pharmaceutical needs were fulfilled mainly by the imported
drugs. Initially some multinationals and later on some national companies started their
business in Pakistan. Currently there are over 400 pharmaceutical companies carrying out
business in Pakistan. The number of local pharmaceutical companies and their market
shares has increased more than that of multinationals. The number of multinationals
companies has decreased over the passage of time due to mega mergers but they are still in
a strong position to hold the sufficient market share and control the supply of many vital
medicines. Local pharmaceutical industry had not yet completely sprouted its wings when it
came across the threatening of WTO regime.

The threats for the local pharmaceutical industry are due to free trade, extension of patent
period and implementation of TRIPS (Trade Related Aspects of Intellectual Property Rights)
regulations of WTO. In addition lack of research and development, decreased productivity,
high manufacturing cost and poor quality of medicines can make the situation worse.

The first threat for the Pakistani pharmaceutical sector in the post WTO regime is the free
trade. New WTO regime will bring an influx of low priced products from the other countries
especially India, China, Indonesia and Malaysia. These low priced products will fill our
markets and give a tough time to their local competitors and many of the later will be wiped
out from competition. On one hand the imports will increase and on the other hand exports
will decrease since the competition will be based mainly on the good quality and low prices.
Furthermore Pakistani exporters will be required to produce to their customers the
documented evidence of following good quality management system (ISO-9000), a proof of
being environment friendly (ISO-14000) and following Good manufacturing practice (GMP),
Good storage practice (GSP) and Good laboratory practice (GLP). An increase in import and
decrease in export could produce a distortion in trade balance. At its worst the new scenario
could be catastrophic.

In the last few years many of the large multinationals companies have undergone mergers.
Glaxo and SmithKline merged to form Glaxo SmithKline, Pfizer joined Upjohn, Ciba Geigy
and Sandoz merged to form Novartis, Wyeth and Lederle merged with each other. The local
pharmaceutical industry feels quite desolated in these mega merger scenarios. Also these
mega mergers have resulted in the business giants that have deep pockets and can easily
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withstand any shock as against the local companies where a single shock affects the whole
of business.

Another threat for the local pharmaceutical industry is the new TRIPS regulations of WTO.
The nutshell of these TRIPS regulations is that the actual value of new medicines and many
high technology products lies in the amount of innovations, inventions, research and design
involved in their preparation. Creators must be given the right to prevent others from using
their inventions, design etc. These rights are known as TRIPS and they may take the form of
copyrights (as in case of books), patent (as in case of new medicines or other high tech.
products) and trademarks (for brands and logos). In pharmaceutical sector threat is from
patent period which has been extended to at least 20 years. In the post WTO regime the
patent laws will be followed more strictly.

The patent malpractices are more severe in China and India. This is due to better
coordination between pharmaceutical manufacturers and government regulatory agencies
of the respective countries. But this not a matter to worry about, such subversive practices
cannot be carried out over longer period of time. However in Pakistan, like other countries
of the world, a better coordination between government and pharmaceutical industry is
needed to resolve the ever conflicting issues of price fixation, high tariffs on the import of
raw materials and other tax rates.

Secondly Ministry of Health should have a friendly yet professional approach towards
pharmaceutical manufacturers. It must not be merely a watch dog having the job
description of finding contraventions of drug act or the violations of Good Manufacturing
Practice (GMP), rather it should adopt the role of an advisory committee and counselling
body determined to improve the quality standards and the uplift of pharmaceutical industry
for provision of better and economic health care, the ultimate benefit of which will go to the
poor masses.

The most important impact of extension of patent is that multinationals that hold patent
rights for the majority of medicines, will enjoy this monopoly for an extended period of time
and local companies will manufacture only those medicines whose patent periods have
expired or otherwise wait for the expiry of patent. The consequence will be that
multinationals will be in a strong position to control the supply of many important
medicines in the market which could precipitate the problems beyond the imaginations.

Although Pakistani pharmaceutical industry is raising voices at different forums for various
exemptions regarding patent rules relaxation, but this is not the long lasting solution to the
problem. This is the type of problem which cannot be solved by pharmaceutical industry
alone, rather government should come ahead to bring pharmaceutical industry out of deep
waters. Government must provide sufficient financial aid or incentive to the companies
going for ISO-9000 certification, environmental standards certification and labour standards
compliance certification since going for any one or more of these certifications is a costly
process and requires hundreds of thousands of rupees.

Our local pharmaceutical companies have not reached yet that level of good quality and
expertise where they could compete multinationals. In fact quest for quality is more a
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matter of mentality and commitment of top management than anything else. A

commitment for improvement in the quality and a change in organizational culture is the
need of time. Local companies have to change from the "Saith culture" to the "Corporate
culture" for a better work environment and effective combat of WTO challenges. Local
pharmaceutical manufacturers are working with old outdated machinery and unskilled
workforce leading to low productivity, high manufacturing cost and poor quality of
products. Government should facilitate the transfer of technology from developed countries
to Pakistan. Facilitating transfer of technology is the best role which government can play in
this regard.

Currently our educational institutes are teaching only theoretical knowledge that is hard to
integrate with the practical work in pharmaceutical organizations. Pakistan Pharmacy
Council and Pharmacy institutes have the responsibility to harmonize the pharmacy syllabi
with the future needs of Pakistani pharmaceutical industry. Currently there are 10 teaching
institutes of pharmacy accredited with Pakistan Pharmacy Council and over 400
pharmaceutical companies. Collaboration between teaching institutes and organizations can
produce human resource that that can successfully fulfil the needs of Pakistani
pharmaceutical industry as well as boost the research and development activities. Synthesis
of new drug molecules is imperative. A shift from the conventional drug manufacturing to
genetically engineered medicines requires greater research and collaboration than ever
before.

Although the new regime will also benefit the manufacturers by waiving all the import
duties on the raw materials that will eventually reduce the manufacturing cost of locally
manufactured medicines but increase in import, decrease in export, non-compliance with
the international standards and extension of patent period can effectively nullify any
beneficial effect of WTO.