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Sunday, November 04, 2001












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A primer on generics

Sanjiv Shankaran

A PATENT gives an innovator a monopoly over an innovation for a fixed period. This is meant to encourage innovation by allowing the innovator to extract the highest possible benefit during the life of the patent.

In the US, pharmaceutical products receive a 20-year patent. During the patent's life, the innovator has complete monopoly over the commercial aspect of the patent. For instance, if a patent drug hits the shop shelf, it cannot be copied for commercial use by any other entity.

Once the life of the patent is over, the drug is open for anyone to make. Competition results in a drop in prices and, thereby, declining returns for the innovator.

An innovator that is successful in taking a discovery to the shop shelf does so under a brand name. For example, Prozac is the brand name of a commonly prescribed drug to combat depression in the US. Fluoxetine is the chemical ingredient that goes into making Prozac.

Once the life of the patent is over, other companies can enter the market to sell Fluoxetine. That is when Fluoxetine becomes a generic, and returns are lucrative for companies that can garner marketshare.

Genesis of US generics

In the US, the generic market seemed to take off only in the mid-1980s. Checking rising healthcare costs seems to have been the motivation for the introduction in 1984 of the Hatch-Waxmann Act. This opened the field for generics.

The initial objective seems to have been met and in 1998, the Congressional Budget Office (CBO) found that savings from switching to generics are enormous. The regulatory push towards generics opened up possibilities for Indian companies.

The patent regulation in the US seems to provide just enough room for innovating companies to use loopholes to extend the patent. One way this is done is by getting additional patents a little after the initial patent is granted. The additional patents may seek to cut off the cost-effective production of the drug, thereby making it less likely for a potential generic competitor to enter the market soon after the original patent expires.

To add to the complications of the patent laws in the US, even generic companies are given a limited monopoly!

Ironically, the limited monopoly is given to the first generic company that successfully challenges the patent holder in order to encourage generic competitors. Using this tool, Dr Reddy's got a 180-day monopoly for the 40 mg Fluoxetine in August. The returns, thus far, for Dr Reddy's have been spectacular.

There may be more complications in the patent system because a couple of American Senators have begun to work on new ways to encourage generics.

New doubts about patents

As for Indian companies and consumers, the debate about generic accessibility has gained prominence over the last year. With the advent of uniform standards on the heels of multilateral trade agreements, a uniform patent law will exist in most countries, including India, in a few years.

The most important implication of an uniform patent law is that generic companies will lose out to innovators. In the absence of competition, innovators will be under no pressure to reduce prices.

The issue suddenly engaged the public's interest last year after Cipla offered drugs to combat HIV at a low rate in Africa. Until the Cipla offer, low-income African countries had to source drugs from innovators at a price that put them beyond the reach of most of those afflicted.

With new rounds of multilateral trade talks coming up, the issue of generics is probably going to stir debate again. The new rounds of discussions will be held in the backdrop of the developed world forcing innovator companies to sell under-patent drugs to public health authorities at a discount. Against this backdrop, the question of generics assumes an importance that is far larger than equity investing. But whatever be the outcome of the talks, Indian companies must be looking forward to the talks.

Participating in the US generics market has triggered interest in Indian companies, and led to investment to upgrade manufacturing facilities. But it is not merely manufacturing facilities that count. A lot goes into formulating a strategy that can minimise legal complications and, at the same time, get the most returns.

At the moment, while a lot of Indian companies are in the process of putting up manufacturing facilities, it remains to be seen if they can skirt the legal minefields across the US generics market.

Related links:
Generics market to surge to $45 b by 2005: Study -- `Outlook bright for Indian cos'
Ranbaxy, Dr Reddy's can make it big in US market: Credit Suisse
Pharma cos gearing up for a new era


Section  : Industry
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