Big pharma's betenoire

THERE IS A NERVOUS energy about Rajeev Nannapaneni. Tall at 6’6” and lanky, he skips steps as he climbs stairs in a quick, loping gait. As if by habit, he stoops slightly to pass through doorways built for smaller people. He’s fidgety, forever thumbing his BlackBerry smartphone, or fingering his trousers. “I don’t think I was coordinated enough to take up basketball,” says Nannapaneni, 35, a quantitative economics and history undergrad from Tufts University, Massachusetts, who returned 13 years ago to join his father’s pharmaceuticals business
in Hyderabad.

His restlessness is sending shockwaves through global pharma. In March, Nannapaneni’s firm, the Rs 520 crore generics player Natco Pharma, was given India’s first compulsory licence that allows it to manufacture and sell a patented medicine. Such licences, infrequently awarded, are granted when a drug for a critical illness is not available at a reasonable price after three years of granting the patent, or if the patent is not used in making the product in the country. Nearly a year earlier, Natco had made a case that Bayer’s Nexavar, used to treat acute kidney cancer, merited compulsory licensing. It pointed out that Natco could make a month’s supply of the drug available for Rs 8,800, against Bayer’s price of Rs 2.84 lakh. The licence was granted on March 9 by the Controller General of Patents, Designs and Trademarks, P.H. Kurian, and the decision was made public on March 12, the day he retired. In his ruling, Kurian pointed out that in the past three years, though Nexavar’s global sales have been around
$2.5 billion (Rs 13,920 crore), in India they’ve been between $32 million and $40 million. In other words, Bayer didn’t bother about India.

Bayer, predictably, wants the licence revoked. The company’s spokesperson says it “strongly disagrees with the conclusions of the patent controller of India and has appealed his order on May 4, 2012, with the Intellectual Property Appellate Board”. The next hearing has been set for this month.

Considered a legal minefield, even big companies such as Mumbai-based Cipla and Sun Pharmaceutical Industries, and Hyderabad-based Dr. Reddy’s have stayed away from invoking the compulsory licence clause provided under the World Trade Organisation’s (WTO’s) 2002 agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Cipla, which had launched its own version of Nexavar in 2010, used the more common route of contesting the Indian patent for Nexavar and getting a marketing licence from the drug controller general of India.

For the compulsory licence to be granted, Natco had to furnish accurate data on the number of patients, their income, and the availability of the drug in different locations across the country. Even statistics from the National Cancer Registry or generalisations like the total number of people suffering from kidney cancer didn’t suffice—it had to be primary data that Natco gathered. Its counsel, Rajeshwari Hariharan of Chennai-based RA Legal, says, “Multinationals can frustrate an applicant by waging expensive legal battles in multiple courts.” Adds D.G. Shah, secretary general of the Indian Pharmaceutical Alliance (IPA), a consortium that represents the interests of local companies: “Natco has finally bitten the bullet that no one wanted to touch fearing the might of the litigious multinationals.”

Nannapaneni’s daring has generated a maelstrom of controversy that’s torn the world of medicine down the middle. In one group are a few governments and non-governmental organisations who believe Nannapaneni is on the side of the angels; they argue that compulsory licensing will ultimately reduce cost of medication, especially in poor countries.

Opposing their stand are other governments and big pharma companies who argue this is a dangerous course that may rob inventors of their incentive to create life-saving drugs. Though a German multinational, Bayer has found an ally in the Americans. Jay Taylor, vice president of international affairs and advocacy at Pharmaceutical Research and Manufacturers of America, the Big Pharma lobby, says that in India the prices of drugs have nothing to do with access. “Inadequate distribution and lack of access are as much a barrier to health as the cost of care. Compulsory licences are never the answer to access and it has to be given only for limited, extreme cases.”

Visiting U.S. commerce secretary John Bryson raised the issue with India’s commerce and industry minister, Anand Sharma (Congress, Rajasthan), making it out to be a case of intellectual property dilution. (The patent controller’s office is a part of the Ministry of Commerce and Industry.) Teresa Stanek Rea, the U.S. Patent and Trademark Office’s deputy director, has also spoken out against it. In his public statements, Sharma clarified that the law is on India’s side and there’s no question of backing down. Yet.

Through all this, Big Pharma’s newest bête noire is unperturbed. Unlike Cipla’s chairman Y.K. Hamied, whose anti-patent views are legendary, Nannapaneni, Natco’s vice-chairman and CEO, doesn’t have the resumé of a crusader. He was on sales calls in New York the day the verdict came out. “My wife and others from the company called and we kept on talking even though I was on international roaming,” he says. The head of another Hyderabad-headquartered pharma company, who didn’t want to be identified, says Nannapaneni is a hard-working businessman, deeply committed to pharma. That’s also the view on the street. An analyst who has tracked the company for five years says Natco had the opportunity, like many other Hyderabad-based companies, to enter the infrastructure business (build the Krishnapatnam port through public auction), but Nannapaneni nixed such plans.

But why is Nannapaneni, who is the youngest CEO from the second generation of family-run pharmaceutical companies, choosing the hard path? Looking at a local newspaper in front of him, he dives deep into the politics in his state, Andhra Pradesh. The ruling Congress party is facing a strong contender in Y.S. Jagan Mohan Reddy, son of former chief minister Y.S. Rajasekhara Reddy. As soon as Jagan Reddy quit the party after failing to get his father’s position, the Central Bureau of Investigation jailed him on charges of corruption. Now, Jagan Reddy is planning to contest the state elections from prison. Nannapaneni explores several options and the chances of Congress winning the elections to be held next year. He says, “Like politics, generics too can be a minefield of surprises. It shows you how to prepare for a certain goal.”

It was in 2009 that he thought of compulsory licensing. He examined nearly a dozen molecules across different diseases before settling for Nexavar. “The law [for compulsory licensing] always existed.” His motives were “partly ideological, and partly business. The licences are not going to bring windfall profits but will help us differentiate our model to focus on areas others don’t want to tread,” he says. Nobody can build a business only around compulsory licensing. By Nannapaneni’s own admission, Nexavar may fetch Rs 10 crore in sales this fiscal, on Natco’s overall projected turnover of Rs 700 crore, while a report by Baroda-based MP Advisors says Bayer’s cancer drug may contribute 10% to Natco’s gross profit by FY15. But equally, Nannapaneni argues, such moves correct “market behaviour”.

That’s where the ideology kicks in. He says he isn’t advocating a compulsory licence for every drug. But equally, he says Natco’s move raises a few important questions. “Is it ethical for multinationals to charge lakhs in a country like India? What’s the point of a patent if there is no utility to the country? And shouldn’t multinationals have a differential pricing strategy?”

Many do. GlaxoSmithKline Pharmaceuticals launched Tykerb, used for breast cancer, at Rs 60,000 for a month’s therapy, 40% lower than international prices. Merck & Co.’s blockbuster Januvia (for diabetes) sells for Rs 40 a tablet compared to $4 in the U.S. Januvia is nearly a Rs 150 crore brand. Nannapaneni argues that even if it were sold at U.S. prices here, it wouldn’t have been a bigger brand because of price inelasticity.

He then goes on to argue that the combined sales of Natco and Cipla generics, estimated to be between Rs 25 crore and Rs 30 crore annually, have never crossed Bayer’s sales even when they had a monopoly. “Bayer would have had the same sales even if it [Nexavar] was priced 90% lower,” says Nannapaneni. Of course, margins are a different matter.

The drug has changed Nannapaneni’s life somewhat. He never anticipated the full blast of publicity the case generated and is unhappy about the attention this has drawn to Natco. Companies and businessmen should never be in the spotlight, he says. Equally, he’s been receiving letters thanking him for extending the life of a loved one: People walk up to him at parties and congratulate him. His father, Chowdary V. Nannapaneni, Natco’s founder and chairman, talks of how his son has made him proud. But Nannapaneni is wary of haloes. Asked if he sees himself as a messiah or an opportunist, he instinctively says “opportunist”. “I am using the flexibilities in the law and the public policy debate to launch a product. If you identify a smart opportunity and make money, you are called a smart businessman, not a messiah. But there is a twist. You don’t just make money—you also do some good.”

THOUGH DRAFTED FOR THE greater common good, compulsory licensing is deeply controversial. It’s been tested mostly during AIDS outbreaks. Though nowadays most patent holders of AIDS drugs voluntarily licence away their rights, leading to large-scale genericisation, there have been standoffs between nations and pharma companies. In 2006, in order to tackle its rising number of AIDS patients, Thailand initiated compulsory licensing of Kaletra, a cocktail of drugs made by Abbott. Abbott responded by not launching the next generation of Kaletra in Thailand. Brazil has also had several showdowns over AIDS drugs.

But what makes the Nexavar case significant is that it’s a standoff over cancer medicines. For one, pharma companies are focussing on oncology these days and drug pipelines are stuffed with anti-cancer medicines. Then, last year, chronic diseases overtook communicable diseases as the biggest killer in the world. What that means is that even in poorer countries, more people are dying of cancer or heart attacks than tuberculosis or malaria. For Big Pharma that’s an opportunity, though for poor nations, it’s a crisis. Finally, these two trends are playing out in an era where pharma bosses are more concerned with costs of discovery than finding newer cures.

Tenu Avafia, United Nations Development Programme’s (UNDP’s) policy advisor, human rights, law, and access to treatment, says the Nexavar licence for a non-communicable disease was a “very important development”. He says there have been attempts to interpret compulsory licensing “restrictively” and suggests they be issued for essential medicines where “there were public health emergencies, or for a restricted scope of diseases. Indian authorities were acting within their rights under the TRIPS Agreement when the compulsory licence was issued”.

Compulsory licensing of cancer drugs isn’t entirely new. Earlier this year the U.S. government secured supply of Doxil, used to treat multiple myeloma and ovarian cancer, from Sun. Johnson & Johnson made Doxil at Boehringer Ingelheim’s Ben Venue Laboratories facilities in Ohio, which was shut down because of issues with general manufacturing practices. Sun had an abbreviated new drug application (ANDA) pending with the U.S. Food and Drug Administration (USFDA) which would have allowed it to launch Doxil’s generic some day, when its scarcity became apparent. Just on the strength of Sun’s ANDA, the USFDA gave it a temporary, emergency permission to sell Doxil’s alternative, Lipodox, in the U.S. Nannapaneni says if the U.S., traditionally Big Pharma’s biggest backer, can resort to compulsory licensing for public good, why can’t other nations? “Whether it’s because of a plant shutting down [Doxil] or because of pricing [Nexavar], ultimately the trigger is reduced access,” he adds.

Big Pharma has traditionally seen Indian pharma as a gang of cheeky outfits, forever copying their medicines because they can. In 1970, the Indian government amended a British-era law, which recognised process (how things get created) rather than product patents. This allowed the Indian companies to reverse-engineer medicines made by multinationals and offer the same chemical compound far cheaper. Nearly three decades later, as a member of the World Trade Organization, India had to accept a product patent regime, but not before, at the 2001 Doha round of talks, it, along with the help of Brazil, was able to push through the idea of compulsory licensing. The idea was that if an emergency arose, the state would be able to get around the monopolies that pharma companies enjoy to produce medicines in large numbers and cheaply. The epidemic that formed the backdrop to the discussions was AIDS. By the mid-1990s, AIDS was killing people by the tens of thousands in poorer nations and its treatment (through antiretroviral drugs) was expensive because the drugs were covered under patents.

Rajeev Ranjan, the government officer who drafted India’s WTO argument in 2002, says India studied the issue long before taking a position. “A joint parliamentary committee met 42 times, as it clearly understood the long-term implications in giving the government flexibility to overrule a patent.”

Meanwhile, thanks to decades of tinkering with medicinal chemistry, Indian outfits had emerged as champion medicine makers in the developing world. Each time there was a global epidemic (notably AIDS or bird flu) they sold huge quantities of medicines at a fraction of the branded prices to the affected nations. This ability to reverse-engineer the most complex chemicals makes Big Pharma wary of India. Now, throw in the fact that, in June, China announced that it also may resort to compulsory licensing, and a doomsday scenario for Big Pharma begins to take shape: scores of emerging nations resorting to compulsory licensing (and perhaps buying drugs from India) to wrestle power away from innovators.

This is not to say that innovator interests shouldn’t be protected. After all, pharma companies pour in billions of dollars into research every year and in the absence of incentives, that’ll dry up. This is why it’s important to distinguish between an emergency, and what may be an attempt by a sharp businessman to make a quick buck.

That’s where Natco emerges as a test case and generic companies around the world are waiting to see how it plays out. The response in India is cautious. Take the Dilip S. Shanghvi-run $1.45 billion Sun. Though Shanghvi has personally taken a 3.37% stake in Natco recently, Sun’s official response to the issue is calibrated. Its spokesperson says the granting of compulsory licences has sharpened the debate on the affordability of patented drugs. Though Sun has so far not considered applying for a compulsory licence, the spokesperson says the first case does lay out primary considerations for the granting of compulsory licences. “We haven’t gone in for compulsory licensing so far, but it doesn’t mean we won’t [in future],” he adds.

Others believe this kind of compulsory licensing will only harm India’s attempts at creating new drugs. “Such events undermine the whole idea of building an environment in India that supports discovery and innovation,” says the head of a pharma company trying to build his own R&D pipeline, not for attribution.

Nannapaneni feels somewhat let down by the reactions of the domestic drug industry. He says a third believes in what he did, a third is ambivalent, and the rest are against it. This, despite the fact that the price corrections he was hoping for have begun. “I have seen MNCs offer more discounts after what we have done,” he says. Meanwhile, Roche India has tied up with local firm Emcure to offer its biotech drugs at prices lower than the branded price. “Yet, in a way we are getting isolated. For the tempo to be maintained, somebody else should do it too,” says Nannapaneni.

The timing of Natco’s case is also interesting. It comes at a time when India is negotiating its free trade agreement with the EU and there is a feeling that a set of proposed agreements like the Anti-Counterfeiting Trade Agreement and Trans-Pacific Partnership Agreement will water down India’s ability to grant compulsory licences. These agreements, mostly driven by pharma companies, are meant to be additional safeguards to protect intellectual property rights of companies in the U.S. and Europe. India stands to lose the most as it exports more than $10 billion worth of generics to the U.S., more than any other developing country. Exports of generics account for more than 50% of sales of several large Indian firms such as Sun and Dr. Reddy’s. Says IPA’s Shah: “These are extra-judicial agreements, in addition to the WTO agreement, and will be more roadblocks to compulsory licences.”

IT IS NOT JUST WITH COMPULSORY LICENCES that Nannapaneni is testing the limits of the law. Recently, he launched a generic version of Bristol-Meyers Squibb’s cancer drug dasatinib despite having told a court he wouldn’t in 2009 when challenging the drug’s patent application. Nannapaneni won’t comment on the development as the matter is still in the court. But, according to legal experts, he resorted to a seldom-used provision to obtain permission from state drug authorities to launch it. Says Nannapaneni: “Litigation is a big risk in the generic business and there are times when you must be prepared to lose.”

It is not that Natco has run out of options. It has an impressive pipeline of approvals from the USFDA that will give it pole position to launch generic versions of blockbuster drugs right after they go off patent. In a brief window of six months after the drug goes off patent, the USFDA gives exclusive rights to the company that files for the first generic approval. Since there is only one generics company, or sometimes two, along with the innovator, the sales in these six months can be a big bonanza. Natco has three such drugs in the pipeline to be launched over the next three years. It also has a decent domestic business that gives it a steady 10% growth in sales and profits over the years.

The key phrase that Nannapaneni uses to define his strategy: “contrarian choices”. For the domestic market, he has set his eyes on oncology. Unlike Sun, which focusses on chemotherapy-related drugs that are used to treat many forms of cancer, Natco focusses on therapy for critical ones such as cancers of the kidney, liver, etc. Unlike Ranbaxy Laboratories or Sun, which makes several applications to the USFDA to sell generic formulations, Natco has stuck to just half-a-dozen tough ones each year. Nannapaneni has also adopted a strategy to partner with strong U.S. generics firms, Watson and Mylan, to mitigate legal risk. “The aim is to de-risk by taking the legal costs out of our books but still be able to showcase our technical skills,” he says.

When Nannapaneni returned to India in 1999, Natco’s finances were in a shambles. A year earlier, burdened by excessive debt, his father had sold off a successful respiratory business to Sun. The senior Nannapaneni, who worked in the U.S. for 13 years before returning to India to set up Natco in 1981 and is a chemist by training, retained the research and low-margin contract manufacturing business making bulk drugs.

Natco then was a small company with sales of Rs 15 crore. As a bulk drug supplier, it had to invest upfront to build manufacturing capacities and consistently faced price pressures from imports or otherwise. From the beginning, Nannapaneni had an aversion to the capital-intensive, low-margin business; instead, he wanted to capture better value for his father’s research skills. Natco’s technical prowess was well known—it synthesised complex products such as sustained- and time-release dosage forms, where drugs are released in the body at preset intervals. Natco’s chemistry skills were proven too—it made tough-to-copy cancer drugs, which involved navigating several patents around processes to synthesise a single drug. The generic version of Nexavar, sorafenib, involves peptide chemistry, an area only few companies in India, such as Cipla and Sun, dabble in. It has synthesised the generic drug of gleevac—Natco calls it imatinib—by claiming that Novartis’s patents for the product were invalid. That case is still in court. Cipla is the only other company which cracked the code for gleevac in India.

Nannapaneni decided early that Natco should focus on utilising its capability in chemistry by launching formulations rather than merely being a manufacturer. In 2003, Natco launched its formulations division, putting out more than 30 products in one go, to be sold as prescription medicines through doctors. Further, Natco focussed on anti-cancer drugs such as gleevac.

Today, domestic formulations contribute to nearly 40% of sales, of which 80% comes from oncology products. There are two advantages to this strategy: Natco did not waste its energies trying to launch me-too products and, therefore, played a price war with Ranbaxy and Cipla, which have larger distribution teams. Natco has just a 200-strong sales force for its Rs 190 crore domestic formulation sales, averaging a crore per person. The industry norm for Indian companies that have a few thousands in their rolls is half of what a Natco salesperson does.

Backed by a steadily growing business and windfall gains expected from exclusive generics, Nannapaneni says he has the appetite to go for a few more compulsory licences. There are two more in the pipeline, both anti-cancer, but he won’t disclose which therapies the drugs address. A close associate of his in the pharma business in Hyderabad, who did not want to be named, says Nannapaneni is most likely to target multinationals that don’t have a significant presence in India. So, by strategy, he won’t entangle himself with a company such as Pfizer, which demonstrated its might by stopping the manufacture of sidenafil citrate, Viagra’s chemical name, by India’s Orchid Chemicals. That wasn’t under compulsory licence though.

Despite having bagged the first compulsory licence within a year of application, Nannapaneni feels that the process is only going to get difficult going forward. Multinationals could subsidise the cost of drugs through various patient support programmes and come across as more sympathetic, for example. “Usually, the first success is the toughest, but in this case the complexities are only going to increase,” says Nannapaneni.

Natco’s counsel Hariharan feels pressure will increase as there is a precedent now for granting compulsory licences. IPA’s Shah, however, feels that a lot will finally depend on the government and its ability to withstand global pressure on compulsory licences. Says Nannapaneni: “Somebody had to get a compulsory licence. We did it and will do it again.”