NOVARTIS DECISION OF THE SUPREME COURT OF INDIA

NOVARTIS DECISION OF THE SUPREME COURT OF INDIA AND ITS IMPACT ON FOREIGN INVESTORS AND INVESTMENTS

                                                                               Author: Kritika Singh,
                                       Asst. Professor,
National Law University Jodhpur,
                            Email: kritika11oct@gmail.com



    INTRODUCTION-


    Investment has been defined by the court by suggesting that “the basic features of an investment have been described as involving a certain duration, a certain regularity of profit and return, assumption of risk, a substantial commitment and a significance for the host state’s development” in the case of Fedax NV. v. Republic of Venezuela. The WTO has tried to define investment as Foreign direct investment (FDI) occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage that asset.” Foreign Direct Investment cannot be defined in strict terms as such because its definition changes from one context to another and from one legal regime to another legal regime.
    ,India is one of the fastest growing economies of the world and FDI plays a key role in the development of an economy. FDI benefits both the host as well as the home country simultaneously. Therefore certain policies and framework needs to be maintained to sustain these investments and to attract more investors. FDI in India is always in accordance with the FDI Policy which is formulated by the Department of Industrial Policy and Promotion each year with amendments from time to time which are notified by the Reserve Bank of India. The primary statute governing the FDI in India is The Foreign Exchange Management Act, 1999 (FEMA) along with the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No. FEMA 20/2000-RB dated May 3, 2000).
    Pharmaceutical sector is one of the most vital sectors which attract FDI in India. Being a developing economy, India has to look forward to attract more and more investments and at the same time look after the interests of its citizens at large. Hence, each and every step taken by the government and the judiciary with regard to this sector can prove extremely beneficial at one instance and extremely detrimental also at the other. One such landmark judgment which affected the investments in the pharmaceutical sector in India was in the case of Novartis AG v. UOI & Ors.[1] When the judgment was pronounced it received a lot of applause and criticism at the same time. This paper seeks to examine the judgment’s effect on
    the foreign investments in the pharmaceutical industry.

    Judgment Of the Case


    After considering the contentions of both the parties in the matter, the Supreme Court proceeded to hold that patent could not be granted to Novartis as it did not satisfy the criterion of ‘enhanced efficacy’ as required under Section 3 (d) of the Patents Act, 1970. Section 3 (d) reads as-
    “the mere discovery of a new form of a known substance which 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 or of the mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant[2]
    Explanation – For the purposes of this clause, salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations and other derivatives of known substance shall be considered to be the same substance, unless they differ significantly in properties with regard to efficacy.
    The Supreme Court held that, the term “efficacy” in Section 3(d) implies “the ability of the product to produce a desired or intended result”. Hence, the element of efficacy with respect to section 3(d) shall depend upon the function, the utility or the result that the product under the application is expected or intended to produce. The court also concluded that in the case of a medicine which is aimed to cure a disease, the test of efficacy shall mean to be “therapeutic efficacy”, i.e. the capacity of the drug for beneficial change.[3] The court held that an alteration in the physical properties of a known substance without actually enhancing the therapeutic efficacy cannot be granted protection under the Indian Patents Act, 1970. The court has considered and focussed upon the meaning of the words ‘efficacy’ and ‘therapeutic’ to draw the conclusion. It held that- “Darland’s Medical Dictionary defines the term “efficacy” in the field of Pharmacology as “the ability of a drug to produce the desired therapeutic effect” and “efficacy” is independent of potency of the drug. Dictionary meaning of “Therapeutic” is healing of disease – having a good effect on the body.” In light of the above definition, the court stated that the applicant is required to show in his application the effectiveness of the drug for curing an ailment. Novartis, being a major pharmaceutical company, was well aware of the meaning of  ‘therapeutic efficacy’, yet failed to demonstrate the same in their present application.
    The Court suggested that the test of patentability has become more defined and specific with inclusion of concepts like ‘non obviousness’ of a process or product to a person skilled in the art. Apart from this shift, the amendment also added to the list of what cannot be patented, the discovery of a new form of a known substance which does not result in an enhancement of the known efficacy of that substance or the mere discovery of any new property or any new use for a known substance, unless it results in efficacy of use of the substance as a requirement of inventive ingenuity to entitle a patent applicant for protection. In other words, even if the elements of non obviousness of an invention in the pharmaceutical or the chemical industry are proved, the applicant should further be able to prove that even if the invention is the derivative of an already known substance, it does not fall under the excepted category in the explanation to Section 3 (d) as it comprehends a discovery of significant enhancement in known efficacy of such known substance.[4]Explanation to the amended section does not create any additional criteria but it only explains the amended section itself.
    The court also stated that the power given to the statutory authority was discretionary under Section 3(d) and that it is what was required to deal with the patent applications since a straight jacket formula cannot be carved out for dealing with all the patent applications. The desired levels of efficacy may vary from case to case and therefore, setting some fixed standards would amount to vagueness and difficulties. Giving discretionary power to a statutory authority is not in violation of Art. 14, however the arbitrary exercise of this discretionary power may amount to violation, which was not held to be so in the present case.
    Therefore, keeping in mind all the above said considerations, the court decided against the appellants and upheld the decision of the Controller of Patents while denying patent to the applicant.

    < span style="font-size: 12pt; font-weight: 700; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline;">CRITIQUE OF THE JUDGMENT-

    In India, the Novartis case is a landmark judgment with regard to grant of patents in pharmaceutical sector. The judgment was applauded for its prudence to place the needs of common man above the grant of patent to a foreign company for a life saving drug. The Supreme Court has been praised for its rational decision of denying patent to Glivic, thereby keeping a check and limiting the scope of ‘evergreening’ of the product. It upheld the fact that in case of life saving drugs, granting a patent for a mere improvement which does not result in the increased ‘therapeutic efficacy’ of the drug, would lead to exceptional hardships to common man in a growing economy like India where it is difficult for people to afford to pay exorbitant prices even for life saving drugs. It should be kept in mind that the basic object of the pharmaceutical sector is to serve the mankind and not merely to serve the business perspective.
    The criteria prescribed by the Supreme Court to granting patent protection in India is much more stringent than the criteria applicable in countries like USA or UK.  The criterion in India does not merely require novelty and non-obviousness to obtain a patent but it also requires an enhanced therapeutic efficacy of the drug for it to get a patent. The basic rationale behind this ideology is probably that people should be compelled to pay more only for a product which in fact increases the efficiency of the medicine to cure the ailment. A mere physical efficacy, (which was there in this case as the newer version of the drug was 30% more absorbent) will not render a product patentable until and unless it shows enhanced efficiency over a previous product.
    This case explains how India is making earnest efforts to respect its international obligations pertaining to intellectual property laws while ensuring that national needs are respected by interpreting its legal obligations in a manner that it corresponds with the domestic preferences and requirements. The Court’s verdict has placed social justice over commercial interests and also supports India’s own domestic pharmaceutical industry. What we see in the case of India is a complex situation that results in conflicts between international trade commitments and national public health concerns. The latter in this case has been given precedence over the former.[5]
    Where on one hand the judgment has been widely praised by the health rights activists, there is another set of people who believe that such stringent and rigid norms for patent protection in India would have adverse effects for the investments and prove detrimental to the pharmaceutical sector in the country.  The President of US India Business Council, Ron Somers had mentioned in his statement that-“Innovation requires the reward and protection of intellectual property. We are certain India’s leadership understands this, and that creating and maintaining an environment that inspires and enables innovation is in India’s ultimate, long-term interest. Such an environment is crucial if India is to attract investment in this or other highly complex sectors.”[6] Many stated that India did not provide for the desired protection which one aims to acquire for innovation under the Intellectual Property Rights and if India does not change its policies, it will have to face grave consequences as far as investments were concerned in the pharmaceutical sector in the near future. As a growing economy, India cannot undertake the risk of ignoring the investors with such stringent and strict laws. As per Pharmaceutical Research and Manufacturers of America (PhRMA) President and CEO John Castellani, this decision was said to have marked yet another example of the degrading innovation environment in India. Innovation was said to be critical in meeting the needs of patients and is particularly important in the context of changing and developing healthcare systems.
    The judgment has therefore received opposing responses and it indeed has certain pros and cons attached to it. “Critics of patent layering have hailed the Indian Supreme Court’s decision to uphold the law, while supporters of the practice, especially pharmaceutical innovators like Novartis, have decried the judgment, arguing that it will hurt India’s innovation and investment climate. Nuanced observers have noted that the decision discourages the least useful instances of patent layering, while still preserving an incentive for incremental innovation.”[7]

    INVESTMENT IN PHARMACEUTICAL SECTOR IN INDIA-

    The Indian pharmaceuticals market is third largest in terms of volume and thirteen largest in terms of value, as per a pharmaceuticals sector analysis report by equity master. The market is dominated majorly by branded generics which constitute nearly 70 to 80 per cent of the market. Considered to be a highly fragmented industry, consolidation has increasingly become an important feature of the Indian pharmaceutical market. According to a Fitch group company, India Ratings, pharmaceutical sector in India is expected to grow at the rate of 20% CAGR (Compound Annual Growth Rate) over the coming 5 years in spite of regular checks by the government.[8] The domestic pharmaceutical market is expected to grow at the 10-12% in the financial year 2015 as compared to 9% in financial year 2014.
    The sectoral caps in India for Foreign Direct Investment as per the FDI Policy 2015 are 100% for Greenfield investments via Automatic Route and 100% for Brownfield investments via Government Route.[9]  The drugs and pharmaceuticals sector attracted cumulative foreign direct investment (FDI) inflows worth US$ 12,813.02 million between April 2000 and December 2014, according to data released by the Department of Industrial Policy and Promotion (DIPP).
    Some of the major investments in the Indian pharmaceutical sector are as follows:
    • Pharma major Strides Arcolab has entered into a licensing agreement with US-based Gilead Sciences Inc to manufacture and distribute the latter’s low-cost Tenofovir Alafenamide (TAF) product used for HIV treatment in developing countries. The licence to manufacture Gilead’s low-cost drug extends to 112 countries.
    • Apollo Hospitals Enterprise (AHEL) plans to add another 2,000 beds over the next two financial years, at a cost of around Rs 1,500 crore (US$ 242.57 million), as per Mr Prathap C Reddy, Founder and Executive Chairman, Apollo Hospitals.
    • CDC, the UK’s development finance institution, has invested US$ 48 million in Narayana Hrudayalaya hospitals, a multi-speciality healthcare provider. With this investment, Narayana Health will expand affordable treatment in eastern, central and western India.
    • Cadila Healthcare Ltd has announced the launch of a biosimilar for Adalimumab – the world’s largest selling drug for rheumatoid arthritis and other auto immune disorders. The drug will be marketed under the brand name Exemptia at one-fifth of the price for the branded version-Humira. Cadila’s biosimilar is the first to be launched by any company in the world and is a finger print match with the original in terms of safety, purity and potency of the product, as per the company.
    • Torrent Pharmaceuticals has entered into an exclusive licensing agreement with Reliance Life Sciences for marketing three biosimilars in India — Rituximab, Adalimumab and Cetuximab.
    • Piramal Enterprises Ltd has acquired US-based Coldstream Laboratories for US$ 30.6 million in an all-cash transaction.
    • Indian Immunologicals Ltd (IIL) plans to set up a new vaccine manufacturing facility in Pondicherry with an investment of Rs 300 crore (US$ 48.53 million).
    • SRF Ltd has acquired Global DuPont Dymel, the pharmaceutical propellant business of DuPont, for US$ 20 million.[10]
    Over and above this, the market size is expected to grow to US$ 85 billion by 2020.[11] FDI in India had doubled to US$ 4.48 billion in January 2015 which was the highest inflow in past 29 months, from US$ 2.18 billion in January 2014. The FDI in pharmaceutical sector in India stands at 5th position with total FDI of 1.25 billion US$ as per January 2015.[12]
    As per the above statistics we can see that though it was anticipated by a group of people that the decision in the Novartis Case would prove detrimental to FDI in Pharmaceutical sector, it has not had any detrimental effect as such. Leaving apart a sudden fall in investments just after the judgment and because of the nervousness prevalent in the market then, the FDI in India has, in fact, been constantly growing in this sector as per the various reports. The total FDI attracted in India in the by March 2014 was around Rs.55, 986 crores more than half of which has been gathered after the 2011(as per the reports of DIPP). FDI in pharmaceutical sector had more than doubled from $589 million in April-December period of 2012-2013 to $1.26 billion in April- December period of 2013-2014(as per DIPP reports)[13]
    Unlike what some of the foreign drug makers had alleged that the intellectual property laws and trade policies if India would prove detrimental to the investments in India, the Indian Pharmaceutical Alliance has countered such claims stating that the facts do not support this idea and perception. The IPA has submitted that, after the amendment of IPR laws in 2005, a large number of foreign investments were attracted in India because of the view of the market that the business environment in India is positive overall. The cautious approach of the government in granting patents and implementing policies has in fact been applauded as a reflection of the government’s concern for its people in a developing economy. These strict laws have, in fact, caused the investment giants to investment in India with more surety of their rights being protected.

    CONCLUSIONS AND SUGGESTIONS-


    The policies made by the government in India ensure that investments and innovations are promoted but at the same time they also ensure that the interests of the common man are not put at stake and that the fruits of innovation are also accessible to the society. The judgment given by the Supreme Court of India in the Novartis Case was welcomed by the people in India stating that it is in compliance with the ideals of the constitution. The sole criteria of the judgment was, in fact, not only looking after the interests of the society but also to ensure effective implementation of the Patent Laws in India and to prevent ‘evergreening’ of patents. The judgment favoured the strict compliance with the language and intent of Sec. 3 (d) of the Patents Act, 1970 and laid emphasis on the fact that only the product which fulfils the test of ‘enhanced efficacy’, which in case of pharmaceuticals was to be understood as  the ‘therapeutic efficacy’, will be granted patent irrespective of the fact whether the product fulfills the requirements of ‘invention’ and ‘inventive step’ under sections 2(1)(j) and 2(1)(ja) of the Patents Act respectively. It was also stated that the real test under Section 3(d) was not that of novelty and non obviousness but that of ‘enhanced efficacy’ of the new product over its previous version.
    In spite of facing a lot of criticism from the skeptics of the industry, this judgment did not have a detrimental effect on FDI in India. Though there was an initial dip in the market due to an environment of nervousness, the investors regained their faith in the Indian markets and the investments have eventually improved tremendously over the period of time, according to the statistics. The judgment instead reassured the investors that the Indian government and Judiciary were laying emphasis on strict compliance with the laws and therefore they can be more assured of their investments and that the Government of India will protect their interests along with the interests of its citizens.
    The suggestions are that more clear and unambiguous standards should be set and the framing of statute should be such so as to lead to a no chaos situation in order to increase the efficiency of the application of laws and in attainment of the goals of the various legislations. Since it has already been proved in this paper that an amended Section 3(d) did not adversely affect the FDI in India, it is very hard to argue that any amendments are needed in this section. This section has in fact set higher standards to patent the drugs and it has also attained its objective to prevent ‘evergreening’. Only precision and clarification is the need of the hour.


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    References

    WEB-LINKS-
    • Ravinder Gabble & Jillian Clare Kohler, “To patent or not to patent? The case of Novartis’ cancer drug Glivec in India”, available at: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3884017/ (Visited on September 9, 2015)

    • Article 27, “Uruguay Round Agreement: TRIPS” available at: https://www.wto.org/english/docs_e/legal_e/27-trips_04c_e.htm (Visited on September 9, 2015)

    • “Analysis of the Supreme Court’s Novartis Judgment”, PXV Law Partners available at: https://pxvlaw.wordpress.com/2013/04/04/analysis-of-the-supreme-courts-novartis-judgement/ (Visited on September 12, 2015)
    • “Supreme Court Order on Novartis will impact investment in India: USIBC” available at: http://profit.ndtv.com/news/industries/article-supreme-court-order-on-novartis-will-impact-investment-in-india-usibc-320379 (Visited on September 13, 2015)
    • Rajarshi Banerjee, “The Success of, and response to, India’s Law against Patent Layering” 54 HILJ 204 (2013) available at: http://www.harvardilj.org/wp-content/uploads/2013/06/Banerjee-to-Publish.pdf (Visited on September 12, 2015)
    • “Indian Pharmaceutical Industry”, IBEF, available at: http://www.ibef.org/industry/pharmaceutical-india.aspx (Visited on September 15, 2015)
    • “Foreign Direct Investment”, India in Business, Ministry of External Affairs, Govt. of India, Investment and Technology Promotion Division available at:  http://indiainbusiness.nic.in/newdesign/index.php?param=investment_landing/247/1 (Visited on September 16, 2015)
    • “FDI in India’s pharma sector doubles during April- December” available at: http://profit.ndtv.com/news/economy/article-fdi-in-indias-pharma-sector-doubles-during-april-december-383074 (Visited on September 16, 2015)
    ACTS AND REGULATIONS-
    • Indian Patents Act, 1970
    • The Foreign Exchange Management Act, 1999 (FEMA) along with the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000
    BOOKS
    • V.K.Ahuja, Law Relating to Intellectual Property Rights 492 (Lexis Nexis, Gurgaon, 2nd edn. , 2013)

    [1] AIR 2013 SC 1311
    [2] The Patent (Amendment) Act, 2005
    [3] “Analysis of the Supreme Court’s Novartis Judgment”, PXV Law Partners available at: https://pxvlaw.wordpress.com/2013/04/04/analysis-of-the-supreme-courts-novartis-judgement/ (Visited on September 12, 2018)
    [4] F. Hoffmann-La Roche Ltd. And Anr. v. Cipla Limited, 148 (2008) DLT 598
    [5] Supra Note 2 at 7
    [6] “Supreme Court Order on Novartis will impact investment in India: USIBC” available at: http://profit.ndtv.com/news/industries/article-supreme-court-order-on-novartis-will-impact-investment-in-india-usibc-320379 (Visited on September 13, 2018)
    [7] Rajarshi Banerjee, “The Success of, and response to, India’s Law against Patent Layering” 54 HILJ 204 (2013) available at: http://www.harvardilj.org/wp-content/uploads/2013/06/Banerjee-to-Publish.pdf (Visited on September 12, 2018) 
    [8] “Pharmaceutical Industry Analysis” available at:  https://simconblog.wordpress.com/2015/06/05/pharmaceutical-industry-analysis/ (Visited on September 13, 2018)
    [9] Consolidated FDI Policy,2015
    [10] Indian Pharmaceutical Industry”, IBEF, available at: http://www.ibef.org/industry/pharmaceutical-india.aspx (Visited on September 15, 2018)
    [11] Ibid. 
    [12] “Foreign Direct Investment”, India in Business, Ministry of External Affairs, Govt. of India, Investment and Technology Promotion Division available at: http://indiainbusiness.nic.in/newdesign/index.php?param=investment_landing/247/1 (Visited on September 16,  2018)
    [13] “
    FDI in India’s pharma sector doubles during April- December” 
    available at: http://profit.ndtv.com/news/economy/article-fdi-in-indias-pharma-sector-doubles-during-april-december-383074 (Visited on September 16, 2018)

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