The Viewpoint: India pushes for continued growth in the Pharma Sector
India’s pharmaceutical and life sciences industry plays a pivotal role on the world stage, fulfilling over 50% of the global demand for vaccines, 40% of demand for generic drugs in the USA and 25% of all medicines in the UK. India continues to be the world’s largest supplier of cost-effective generic drugs. The Indian pharmaceutical industry has performed strongly over the past two (2) decades attracting foreign investments of over INR878.14 billion (approx. US$11.90 billion) from April 2000 to March 2020. With consistent growth expected to continue by 12% to 14% domestically and by 8% to 14% through exports in the next three (3) years, India offers exciting opportunities for this sector on the world stage.
In recent years, India’s top pharmaceutical companies have begun investing heavily in research and development, signalling an evolution of the Indian pharmaceutical market from generic drugs to unique drugs and biotechnology. In addition to branded generics, major pharmaceutical companies in India such as Cipla, Sun Pharmaceutical Industries and Dr Reddy’s Laboratories have, in the past few years, pivoted towards working on specialty drugs and complex generics.
Moreover, as one of the world’s largest vaccine manufacturer by volume, India is currently striving to develop vaccines for COVID-19 in collaboration with various international institutions.
Regulatory and licensing framework
Per India’s Consolidated FDI Policy, 2020 (the “FDI Policy”), foreign direct investment (“FDI”) in the pharmaceutical sector in greenfield (new) projects is permitted up to 100% without the approval of the Department of Pharmaceuticals (the “DoP”). In brownfield (existing) projects, FDI exceeding 74% requires the investor to seek prior approval from the DoP in compliance with the prescribed conditions under the FDI Policy.
Separately, FDI up to 100% is permitted for the manufacturing of medical devices for both greenfield and brownfield projects without the approval of the DoP.
An FDI approval from the DoP can be obtained within a period of ten (10) to twelve (12) weeks from the date of the application, depending on the completeness of the documentation submitted by the investor in support of the application, failing which, this timeline could vary.
This sector is primarily regulated by the Drugs and Cosmetics Act, 1940 (the “D&C Act”), the Drugs and Cosmetics Rules, 1945 (the “D&C Rules”), the Medical Devices Rules, 2017 (the “MD Rules”) and the New Drugs and Clinical Practices Rules, 2019 (the “NDCP Rules”).
The D&C Act requires each person seeking to import, manufacture, distribute or sell any drugs to obtain the prescribed license under the D&C Rules. The timelines for receiving the licenses depends on the licenses involved. For instance, an import license can be obtained in about forty-five (45) working days and a drugs manufacturing license can be obtained in about sixty (60) working days from the date of the application.
The MD Rules notify and regulate certain medical devices and prescribe the timelines for the grant of licenses under the MD Rules, with licenses taking anywhere between one (1) to nine (9) months, depending on the nature of the license.
Seeking to maintain internationally prevalent standards for clinical trials, the Indian government has promulgated the NDCP Rules in 2019. The NDCP Rules provide for compensation guidelines, prescribe the conduct of clinical trials and studies of new drugs and investigational new drugs in India, and mandate the constitution and registration of ethics committees for any entity seeking to conduct clinical trials or studies. A permission under the NDCP Rules to conduct clinical trials is granted within a maximum period of ninety (90) working days from the date of the application. Additionally, clinical trials in India are also guided by the National Ethical Guidelines for Biomedical and Health Research Involving Human Participants, 2017.
In addition to the core sectoral laws, compliances under applicable environmental laws concerning manufacturing facilities, employment laws, factory or shops and establishment laws, and laws relating to the use of boilers and weights and measures must be borne in mind by investors.
Earlier this year, the Indian government has launched the Pharma Bureau, a single point interface for effective communication with foreign and domestic stakeholders, to facilitate the ease of doing business in this sector. As businesses in this sector invariably need to get clarity and guidance from the Drugs Controller General of India, the DoP and various authorities appointed under India’s commerce, environment, and employment ministries, the Pharma Bureau aims to ensure that all concerns of stakeholders are seamlessly and efficiently addressed on a single platform.
The Patents Act, 1970 (the “Patents Act”) regulates the grant and protection of patents in India. India is a signatory to the Trade Related Aspects of Intellectual Property Rights, 1995 (“TRIPS”), and has amended the Patents Act in line with TRIPS in 1999, 2002 and 2005.
The amendments introduced the concept of product patenting for drugs in addition to process patenting, and extended patent protection period to twenty (20) years from the earlier seven (7) year period. These changes, in line with TRIPS, have reduced the prevalence of generic drugs developed in India using different processes to mimic internationally patented drugs, which was not protected previously.
The Supreme Court of India, in the landmark case of Novartis AG v. Union of India (AIR 2013 SC 1311), ruled that the applicant for a patent must show an enhancement of efficacy, and dismissed the patent claims in this case as they did not prove any enhancements of efficacy and failed the invention threshold under the Patents Act. This case has established the jurisprudence against evergreening of patents by patent holders, who require to show proof of novel efficacy enhancements in their patent applications.
The Patents Act authorises the Controller General of Patents, Designs and Trade Marks (the “Controller”) to grant a compulsory license to any interested third-party applicant to license a patented invention from a patent holder, after three (3) years of the patent being granted to the patent holder. Prior to issuing a compulsory license, the Controller is required to weigh the actions of the applicant, the patent holder, and the interests of the public. Thus far, India has seen only one (1) compulsory license issued, as this power is exercised by the Controller sparingly.
The approval process for grant of a patent in India was traditionally viewed as a time-consuming exercise, taking up to six (6) years from its provisional application to its grant. However, with the amendments to the Patents Rules, 2003, in 2016 and 2019, a provision for expedited examination under the Patents Act was introduced for certain specified entities. The expedited examination process has seen shorter queues for applicants, resulting in reduced timelines for patent grants. Patents are now granted within six (6) months depending on the promptness of the applicants in cooperating with the Controller.
Drug parks and tax incentives
On July 27, 2020, the Indian government has issued guidelines for setting up of three (3) bulk drugs parks and four (4) medical devices parks in India. The Indian government seeks to contribute 70% of the project costs for common infrastructure facilities in these parks.
The guidelines for these parks have been prompted by the global supply chain complications arising from the COVID-19 pandemic, necessitating indigenous production of key raw materials and protecting the sector from the global challenges due to the pandemic. These guidelines will require the applicant state government to implement a single window system for various approvals and clearances required for manufacturing units.
Tax incentives, tax holidays, lower corporate taxes, weighted expenditure deductions and additional depreciation allowances are available under Indian tax law. Weighted deduction of expenditure incurred on scientific research and development is available up to 100%, which works well for innovation in this sector. Additionally, deductions are available on capital expenditure (excluding land and building), including depreciation on medical equipment up to 40% of the written down value.
Indian tax law provides for income tax deduction to exporting units (for exporting services or goods or both) established in special economic zones prior to March 31, 2021, for a period of fifteen (15) years to the extent of 100% of export profits in a staggered manner.
As regards transfer pricing, the arm’s length margin for contract research and development of generic drugs in the pharmaceutical sector is currently available at 29%.
Since economic liberalization commenced in the early 1990s and India’s entry in the world market, India has played a dominant role in the pharmaceutical and life sciences sector. India continues to offer low-cost alternatives for global manufacturing supply-chain logistics. The internationally compatible laws on manufacturing, clinical trials and patenting have presented India as a desired location for investment and business opportunities in this sector.
Despite the tremendous opportunities available in this space, the nature of the regulations and statutory compliances, both unique to this sector and otherwise, highlight the continuing importance of diligence and legal awareness for any potential hurdles.