Patently Reasonable

India's Supreme Court has ruled against Big Pharma and for the country's generic drug companies. But who's the big winner in the end?

When the Swiss pharmaceutical firm Novartis lost its battle in India's highest court on Monday, April 1, it was hailed as a major victory in India. The Indian Supreme Court rejected a plea by Novartis for patent protection for the drug Gleevec, which has been called a "miracle drug" for patients with some forms of leukemia. Now, Indian companies are free to make and distribute low-cost versions of the drug to the 300,000-some Indian patients currently using Gleevec. "It is a very happy day for us. Now we can cater to all cancer patients," said Kiran Hukku of Cancer Patients Aid Association, which led the case against Novartis.

But Monday's verdict is about much more than leukemia patients in India. It's about India's ability to legally continue to uphold its reputation as "the pharmacy to the third world." Over the last decade, Indian pharmaceutical companies have pioneered the method of making cheap drugs by copy-catting brand-name medications when they go out of patent for everything from HIV to malaria. These drugs are used widely in India, where tens of millions of people still live on less than two dollars a day and cannot afford basic health care costs. It's estimated that less than 10 percent of drugs sold in India are under patent. That number can be partly accounted for by the country's thriving business in counterfeit drugs, which makes up between 8 and 25 percent of India's drug market.  But Indian drug makers also export about $10 billion worth of generic medicine every year. That means tens of millions of people across the developing world have come to rely on India's cheap drugs.

Essentially, the battle between Indian and multinational pharmaceutical companies boils down to a fundamental disagreement about the definition and the ethics of innovation. India's pharmaceutical companies have a very different business model than that of the research-focused big international pharma companies. Firms like Switzerland's Novartis and America's Pfizer -- which is the world's largest pharmaceutical company -- often spend decades and billions of dollars developing a single medication. They say they need patent protection on their drugs in order to support the high research costs that come with innovation. Indian companies do not invest in research and development on the same scale. Rather, they wait until successful drugs come off patent, and then make copycat versions to sell at a fraction of the cost across the developing world. Indian generic manufacturers sell their version of Gleevec for about $175 a month; the brand-name medication costs patients in India $1,900 a month, although Novartis has a support program that has provided over $1.7 billion worth of Gleevec, free of cost, to Indian patients since 2002.

To U.S. pharma companies, the divide seems stark: Indian companies are simply stealing and repackaging their intellectual property. Yet the view is not the same in India. There, they take the moral high ground, arguing that the long-term costs of drug production become irrelevant if they are not an option for millions of patients in the developing world. After the Novartis decision, an editorial in the Indian newspaper The Hindu declared, "The decision affirms the idea that a patent regime loses its social relevance when a drug is priced beyond the reach of the vast majority of a country's people." Popular sentiment against U.S. and multinational pharma companies, and support for domestic generic companies, remains strong.

Take Cipla, the country's most successful generics company. In 2001, Cipla made world headlines by offering to sell a generic version of a triple cocktail of antiretroviral drugs to HIV-positive patients in developing countries for $350 a year, per patient. The cost was radically lower: in the West, the cocktail cost between $10,000 and $15,000 a year, per patient. Today, some 40 percent of HIV/AIDS patients undergoing antiretroviral therapy worldwide take Cipla drugs. Cipla became known as the pharma company that cares. Its chairman and managing director, Yusuf Hamied, has been portrayed as a kind of Indian Robin Hood. In fact, he became a source of national pride in India. Hamied was awarded the Indian government's highest honor, the Padma Bhushan in 2005.  In an interview with Forbes Asia, Hamied claimed that he has done more humanitarian work than Bill Gates and Warren Buffet.

Last year, Cipla announced that it was slashing the prices on its cancer drugs by 75 percent, to make them not only affordable in India, but across sub-Saharan Africa and in other low-income regions. "We had taken the lead to provide affordable medicine for AIDS, and I think the time has now come -- 10 years later -- when we do a similar thing for cancer," Hamied told the Wall Street Journal. Not incidentally, Hamied is also one of the richest men in India. Last year, Forbes magazine declared that the ten richest tycoons who made their fortunes through generic drug manufacturing were worth a combined total of $25.7 billion. "India's Pharma Kings," the magazine dubbed them. Generic drugs may mean terrible business for multinational pharmaceutical companies, but clearly they have been a boon to India.

The sub-continent has been a frustrating market for big pharma. When India joined the World Trade Organization in 1995, the country was required to begin offering process patents on chemical compounds. However, it wasn't for another decade that India amended its patent protection act to recognize actual pharmaceutical products. When it did, pharmaceutical firms like Pfizer and Novartis streamed in. They had high hopes: India's economy was growing at 6 percent a year, and it was an essentially untapped healthcare market of 1.2 billion people.

But when India amended its patent law, it also added a provision that does not protect new forms of a known substance unless it results in "increased efficacy." This clause was intended to prevent the "evergreening" of drugs, the process of prolonging the life of a patent by making incremental or minor changes, such as changing the dosage or subtly altering the formula. India also sets a higher bar for patent approval than do many countries. In the Novartis case, advocates for low-cost medications argued that the company had not made fundamental changes to Gleevec. And on Monday, India's Supreme Court agreed, ruling that Novartis's Gleevec had failed "in both the tests of invention and patentability."

For multinational pharmaceutical companies, Monday's ruling was a major blow. Both Pfizer and the German multinational Bayer are already appealing decisions in Indian courts which have ruled that generic drug manufacturers can begin making their cancer drugs. Even if they lose these cases, though, neither company is likely to pull out of India altogether. Last year, Pfizer India saw revenues of $185 million.

Here in the United States, the industry group Pharmaceutical Research and Manufacturers of America called the decision "yet another example of the deteriorating innovation environment in India." The Global Intellectual Property Center (GIPC) at the U.S. Chamber of Commerce, echoed that overall criticism: "Unfortunately, this high court decision is a symptom of a much larger problem in inadequate protection of intellectual property rights in India." GPIC also noted that its recently released study comparing IP environments across the globe had found that that India "consistently ranked last among nearly every indicator."

India has disappointed big pharma companies on every front. Not only is its economy undergoing a dramatic slowdown, but the country's intellectual property and regulatory environment is not conducive to business, they claim -- and its crop of fast-growing, successful generics companies means increased competition on all fronts. Because lobbying is illegal in India and pharmaceutical companies can only do so much, the U.S. government has taken up a position as lead advocate for improving India's intellectual property environment. For the most part, it does so in an informal way, as with most issues. On Tuesday, the U.S. Trade Representative's office said it was reviewing the Supreme Court's order on Novartis.

After Monday's ruling against Novartis, the company suggested that it may begin to pull out of research and development in India. But that's unlikely. The possibility of great growth still beckons. According to the consulting firm PricewaterhouseCoopers, the country's pharmaceutical sector is expected to grow to at least $50 billion in sales by 2020, from close to $19 billion in 2009. But that same report acknowledges that Indian generics companies are capable of taking a chunk of that wealth. Something like $70 billion worth of drugs will go off patent in the United States over the next three years, the report says, and India will be well-positioned to take a substantial share of the resulting new generics markets. Which means we're likely to see a lot more frustrated multinational pharmaceutical companies pounding at the doors of the Indian justice system in years to come.



The North Korea Deal That Wasn't

I heard Pyongyang make a real offer -- but the Obama White House didn't even listen.

Given the torrent of threats and insults hurtling out of Pyongyang these days, North Korea's announcement Tuesday that it intends to restart facilities at its Yongbyon nuclear installation should come as no surprise. One of those facilities, a plutonium production reactor partially disabled under an agreement with the George W. Bush administration, should eventually be able to produce at least eight more nuclear weapons, adding significantly to Pyongyang's existing small inventory. What will come as a surprise is that, until recently, the North had been willing to agree to steps that could have prevented that outcome but was ignored by the United States and South Korea.

The facility in question has a long history. One of the first U.S. spy satellite pictures taken in the early 1960s was of the Yongbyon nuclear facility, where the Soviet Union had supplied the North with a small nuclear research reactor. By the early 1980s, spy satellites showed the construction of a larger 5 megawatt electric (MWe) experimental reactor, a significant development since it would allow the North to produce plutonium for nuclear weapons. The reactor started operating in 1985 but was shut down in 1994 by an agreement between the United States and North Korea before any plutonium could be produced. Once that agreement collapsed eight years later, Pyongyang picked up where it left off, restarted the reactor, and produced plutonium that was probably used in the North's nuclear tests.

The 5 MWe reactor was shut down once again by a U.S.-North Korea agreement in 2007, this time under the Bush administration. As a first step toward permanent disablement, Pyongyang invited international journalists and diplomats to witness the spectacular demolition of the reactor's cooling tower, needed to carry waste heat into the atmosphere. Fuel rods for the reactor, others that might have been retooled for its use, and still others that had already been irradiated were stored and periodically inspected by the International Atomic Energy Agency (IAEA). After Pyongyang's 2009 long-range missile test, Barack Obama's administration secured new sanctions against North Korea through the UN, prompting the furious North Koreans to stop the inspections and produce additional plutonium. The reactor itself, however, remained dormant and thousands of fuel rods also remained unused.

My personal involvement with the 5 MWe reactor dates back to 1995, when I was in charge of implementing the U.S.-North Korean agreement that required Pyongyang to shut it down and to safely store its spent nuclear fuel rods nearby. In 1996, I visited the facility for the first time to help set up the joint U.S.-North Korean project to accomplish those objectives. The reactor had been one of the most secret facilities in the country. Yet on my first visit, I was allowed to quickly pass by the guards while my North Korean Foreign Ministry escorts were barred from entering (they were eventually allowed in). The Yongbyon facility was enormous, the result of billions of dollars of investment over decades. The 5 MWe reactor itself appeared cobbled together with imperfect welds and a control room that looked straight out of a cheap 1950s science fiction movie. I imagined this was what nuclear reactors once looked like in the Soviet Union. But it worked, and that's all that counted. My visits to the facility continued, most recently in 2008 after I had left the U.S. government.

The future of the 5 MWe reactor became an important subject for unofficial contacts between the North Koreans, myself and other Americans. For example, during a Track II meeting in Pyongyang in November 2010, senior North Korean Foreign Ministry officials made it very clear that they were willing to relinquish thousands of fuel rods in their possession that could have been used by the reactor, rods that could help produce as many as eight nuclear bombs. That would have been a first step toward permanently disabling the facility, making sure the reactor would never again be a threat. Of course, the North Koreans wanted compensation -- standard practice in the international nuclear fuel industry -- and they wanted more than the rods were worth. But that was clearly their opening position. The offer was repeated during meetings in March 2011 in Berlin and once again in Pyongyang at the end of that year.

Each time, the North Korean proposal was dutifully reported to the Obama administration in briefings for the White House, the State Department, the Department of Defense, and the intelligence community.  The Lee Myung-bak administration was familiar with the offer, as they would have been intimately involved in any effort to shut Yongbyon down because Lee's predecessor had been willing to pay for the rods to take them off North Korea's hands.

The North Korean initiative was duly noted, but the United States and South Korea failed to take advantage of the opportunity to ensure that North Korea wasn't able to restart the reactor and turn the rods into new nuclear bombs. Some U.S. officials felt it wasn't worth the effort since the reactor was old and probably useless. Others believed that Washington should focus entirely on stopping Pyongyang's much more threatening program to enrich uranium, unveiled in late 2010, rather than putting the final nail in the coffin of the plutonium production program. Still others, infected by the Obama administration's policy of "strategic patience," did not want to do much of anything before the North demonstrated its willingness to reform and end its bad behavior. By August 2012, when another unofficial meeting was held in Singapore, the North Koreans' position had shifted. It was clear that Washington and Seoul were going to be in for tough times after their respective presidential elections at the end of the year.

According to an estimate by Siegfried Hecker, the former head of the Los Alamos Weapons lab now at Stanford University, the North Koreans may need as little as six months to restart the reactor. Unless they are willing to operate at very low power levels, reducing the output of plutonium, they will need to rebuild the cooling tower or put in place some sort of alternative cooling system. That might take six months. Another important job will be to modify some of the thousands of fuel rods either meant for another reactor or complete unfinished rods so that they can be used by the 5 MWe system. That task also may take six months from start to finish. Both of these tasks can be done concurrently.

The missed opportunity to stop the restart of the 5 MWe reactor and make sure Pyongyang has eight fewer nuclear weapons is now water under the bridge. More importantly, if the North Koreans make good on their threat, it's one more sign, if we need it, that Pyongyang is moving full-steam ahead with becoming a small nuclear power. How many nuclear weapons they will eventually produce is anyone's guess. But one thing should be clear by now: The Obama administration's policy toward North Korea has failed.