Indian Patent Law Reform And Its Impact On Pharmaceutical-Related Outsourcing


Recently, India enacted changes in its patent laws that will have a significant impact on the pharmaceutical industry and others. These changes were intended to bring Indian patent law into compliance with requirements under the World Trade Organization's Agreement on Trade-Related Aspects of Intellectual Property Rights, or TRIPs. On Dec. 28, 2004, the Indian government issued an ordinance, an executive decree, directing amendments to be made in time for the TRIPs deadline. Subsequently, on March 23, 2005, the Indian Parliament enacted a patent statute amendment. That amendment retained most of the changes implemented by the ordinance.

Recent Changes In Indian Patent Law: Product Protection

The primary changes implemented by the amendment fall into five areas of patent law. The first provides for product patent protection for food and pharmaceutical products in India. Prior to the amendment, Indian patent law explicitly omitted from patentability "products used, capable to be used, or intended to be used as food or as drug or medicine, or relating to substances prepared or produced by chemical processes." Thus, under the law prior to the amendment, process patent protection for producing food and pharmaceutical products was available while product patent protection for the resultant food or pharmaceutical products was not.

The exclusion had served the local Indian pharmaceutical industry well. Without the threat of product patent protection, Indian pharmaceutical companies (INCs) were able to capitalize on brand-name pharmaceuticals of multinational pharmaceutical companies (MNCs) by reverse engineering brand-name products to develop and market generic versions much sooner than when the brand-name products go "off-patent." To do so, the Indian companies developed new manufacturing processes that avoided process patent protections for the brand-name products.

As a result, the INCs were able to market generic versions of brand-name products at significantly discounted rates over MNCs many years before generic versions could be marketed in other countries. In light of the size of the Indian market, this was a lucrative niche for generic companies.

The amendment closed this avenue of business for INCs by permitting product patent protection for food and pharmaceutical products. However, the change in the law was applicable as of January 1, 2005, to patent applications filed on or after that date. With respect to patent applications filed prior to January 1, the amendment provides that the rights of the patentee shall accrue from the date of grant and not from the date of publication, as would be the case for applications filed after January 1. In addition, for patents that issued from patent applications that were filed prior to January 1, the patentee shall only be entitled to a reasonable royalty from companies that had made significant investment and were producing and marketing the concerned product prior to January 1, and which continued to manufacture the product when the patent is granted.

The amendment also updates the laws on applications for exclusive marketing rights, a transitory set of rights that was created as an incremental step towards the ultimate enactment of a product patent regime. Under the amendment, any granted applications for exclusive marketing rights shall continue to be in effect as granted. However, the granted applications shall now be examined for the grant of a patent. In addition, any pending applications for exclusive marketing rights that were filed prior to January 1, shall be treated as a request for grant of patent.

Changes In Compulsory Licensing

A second area of change is with respect to compulsory licensing. Prior to the amendment, Indian patent law already included certain compulsory licensing provisions. The new provision protects INCs from the potential negative impact that the product patent regime may have on their business. The new compulsory licensing provision states that a compulsory license shall be available for the manufacture and export of patented pharmaceutical products to any country that has insufficient or no manufacturing capacity in the pharmaceutical sector for the concerned product to address public health problems. The provision further qualifies the compulsory license as applicable only in certain instances.

Specifically, the compulsory license shall be available in such cases where the country to which the product shall be exported "has, by notification or otherwise, allowed importation of the patented pharmaceutical products from India." An "explanation" within the amendment that is associated with the compulsory license provision clarifies that the provision applies to any "patented product or product manufactured by a patented process in the pharmaceutical sector that is needed to address public health problems and shall cover ingredients necessary for their manufacture and diagnostic kits required for their use."

As a result, the new law permits INCs to request the issuance of a compulsory license to manufacture and export a pharmaceutical product to countries that lack sufficient manufacturing capabilities to produce a concerned product as long as a compulsory license or other form of allowance to import the product has been obtained from the receiving country.

Novelty, Inventive Step

A third area of change is with respect to the definitions of novelty and inventive step. With respect to novelty, the change in the law prohibits the patentability of a new form of a known substance that does not result in "the enhancement of the known efficacy of that substance or the mere discovery of any new property or new use for a known substance." In an explanation associated with the change, the amendment further elaborates that salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations and other derivatives of known substance are considered to be the same substance except when these products of a known substance differ significantly in properties with regard to efficacy. Accordingly, the statute aims to prevent the pursuit of new patent applications on minor structural differences in a product that does not impart a significant property of efficacy.

With respect to inventive step, the new rule states that an inventive step means "a feature of an invention that involves a technical advance and has economic significance, or both, and that makes the invention non-obvious to a person skilled in the art." The notion of economic significance in the amendment appears to be analogous to the concept of commercial success in determining non-obviousness under U.S. laws. The import of technical advance, as compared to existing knowledge, is unclear. It appears to be directed to the extent of inventiveness a novel feature of an invention brings forth, but the amendment does not further elaborate on this issue

Software Protection, Business Methods

A fourth area is related to the patentability of software. In January 2005, the ordinance provided for the inclusion of embedded software as patentable subject matter under Indian law. The ordinance, however, had provided for patenting of computer programs that had "technical application to industry or a combination with hardware."

The amendment repeals this provision of the ordinance. The result again is that Indian patent law excludes from patentability mathematical or business methods or computer programs per se.

Opposition Proceedings

A fifth area of change involves opposition proceedings. The amendment retains pre-grant opposition provisions that were implemented by the ordinance, and also adds post-grant opposition as an available measure for challenging the validity of patents. In the case of a published patent application, a challenger has from the date of publication to the grant of a patent to file a notice of opposition. In the case of a granted patent, a challenger has one year from the issue date to file a notice of opposition.

In connection with the opposition provisions, the amendment specifies that public knowledge or use of an invention before the priority date of a patent claim shall be ground for invalidity and defines that if an invention relates to a process, the process shall be deemed to have been publicly known in India if before the priority date of the patent claim, a product made by that process was imported into India. However, the amendment provides for an exception where such importation has been for the purpose of reasonable trial or experiment only. As a result, the importation of a product shall render a process patent for making the product unavailable if a priority claim for the process had not yet been established before importation. (For example, secret knowledge of the manufacturing process of a brand-name product shall be considered public knowledge for the purpose of the amendment if a priority claim for the process that predates the importation was not established).

Impact On Pharmaceutical Outsourcing: Increased Demand For Brand-Name Products

The changes in Indian patent law establish an environment for cooperation between MNCs and INCs, which will stimulate the further development of outsourcing in the pharmaceutical industry in India.

For example, with respect to brand-name products, the new product protection will likely lead to increased demand for brand-name products of MNCs, which provides an incentive to MNCs to outsource such demand to INCs. The amendment likely will not spark an immediate jump in demand, but instead should cause an increase over time. This is because the amendment provides for protection to allow INCs to continue to manufacture and sell products that were already on the market as of January l, 2005. Therefore, INCs will be able to continue to produce pre-existing generics of brand-name drugs that were on the market prior to the amendment.

As new drugs are introduced and the demands for existing generics decrease, MNCs will likely face a higher demand for brand-name products. At the same time, INCs may find excess production capacity, which they will not be able to direct towards new brand-name products due to the product patent protection. The excess capacity will be attractive to the MNCs because it will likely be available at a much lower cost than the development of new infrastructure to meet such demand.

New Business Models

The product patent regime will also as a necessity cause the INCs to change their business model to pursue outsourcing and drug innovation. Consequently, INCs will be motivated to develop and market their outsourcing capabilities to MNCs. Already, INCs have a strong position with respect to their outsourcing capabilities.

India presently has over 60 manufacturing facilities approved by the U.S. Department of Agriculture, which is more than any other country outside of the United States. In addition, India is considered to have a large pool of expertise in the pharmaceutical area, favorable market prices, and a wealth of natural resources needed for chemical formulations, which are all highly attractive to MNCs. An additional incentive for the INCs to develop their outsourcing business is that it will allow JNCs to learn from the expertise of MNCs expertise in drug discovery.

Greater Confidence In IP Protection

As a general rule, the product patent regime will further ensure MNCs that their intellectual property will not be copied or garnered by an INC that is, for example, hired to conduct drug discovery. MNCs can now pursue product patent protection for their intellectual property in India, where before they were likely limited to process patent protection and breach of contract or confidentiality measures.

Therefore, the change in the laws will increase the likelihood that MNCs will enter into outsourcing relationships with INCs in areas involving critical MNC business information, such as R&D and clinical trials. For example, in the context of outsourcing of R&D, MNCs would be assured of product protection if an INC markets a drug formulation that was leaked to the INC during R&D. In the context of clinical trials, where patients would have access to developmental drugs, the INCs' ability to reverse engineer drugs by innovating new manufacturing processes would no longer be a concern due to the implementation of the product patent regime.

Import Of Compulsory Licensing

Other provisions in the amendment will also affect the MNC-INC relationship with respect to outsourcing. One such provision is the new compulsory licensing provision of the amendment. As explained above, the new law provides for compulsory licensing to INCs in certain situations. The provision could be viewed as counterproductive because MNCs may choose not to enter into business relationships with INCs that take advantage of the compulsory license provision. Therefore, INCs interested in outsourcing revenues from MNCs may as a necessity avoid pursuing the option of compulsory licensing because MNCs may view the license as a direct threat to their business and may refuse to work with such companies.

However, the license could effectively enhance cooperation. The provision could be used as a negotiation tool by INCs to increase their outsourcing business and related revenue generation by permitting INCs to use the compulsory licensing provision in bargaining with MNCs for their outsourcing business.

INCs could bargain away their right to pursue compulsory licensing for a period of time. This would provide a business incentive to MNCs to enter into outsourcing relationship with INCs. Thus, INCs can negotiate away their recourse to compulsory licensing as a stimulus for their outsourcing business.

Benefits From Renewed Software Ban

Another provision is the reenactment of the ban on software patents. The ban could also benefit outsourcing by reducing costs. This is because bioinformatics and clinical databases are key components of the R&D, clinical trials, and drug approval processes.

By limiting the patentability of such software, the overhead that is associated with protecting against software patents would be eliminated. In addition, the cost of developing a patent portfolio as a defensive mechanism would also be entirely avoided. INCs would therefore be able to offer their services at lower costs than in countries that provide software protection. In addition, MNCs based or operating in the United States may prefer to outsource such activity to INCs as independent contractors to insulate themselves entirely from any question of software patent infringement.

Overall, the law provides new incentives and assurances to MNCs to expand the scope of their business dealings in India while also providing protections to Indian pharmaceutical companies to motivate the growth of their outsourcing industry.

Published January 1, 2006.