Indian pharma shows patents a vital part of this
Given the fairly reasonable levels of royalty on mobile phones, it is odd that the department of industrial policy & promotion (DIPP) should want to reopen the debate on standard essential patents (SEP) and their availability on FRAND (Fair, Reasonable and Non-Discriminatory) terms—the cases in the public eye, of Ericsson and Micromax and iBall, talk of royalty rates between 0.8 and 1% though technology licensing fees on 3G and 4G phones is typically 3.5-5%. Possibly, local manufacturers of mobile phones may have lobbied the government or it could be the multiple cases in court on the matter that caught the government’s attention, especially since more and more manufacturing of phones is going to be taking place in India now—the fact that the courts have been giving injunctions in favour of patent-holders, though, suggests they are sympathetic to their view.
While the DIPP and the government make up their minds, it is important to be cognizant of the fact that royalties in the pharmaceuticals space are very different from SEPs. Since electronic devices require several patents, once certain patents that are essential for a device are accepted by a Standards Development Organisation, it is obligatory for patent-holders to allow anyone to use them based on a reasonable FRAND royalty—pharmaceuticals patents, by contrast, promote exclusivity since there is only one manufacturer of a patented drug while there are dozens of manufacturers of mobile phones. Also, to the extent the phones are assembled in India—right now, that is really what all the ‘manufacturing’ being done here tantamounts to—the royalty is already being paid on the imports of kits from, in most cases, China. So, whether India imports 150 million smart phones every year or produces them locally, the royalty of around R3,750 crore—assuming a per phone price of R5,000 and a royalty rate of 5%—is being paid anyway; in the case of semi-knocked down imports, the royalty is built into the price of the imports. Indian manufacturers of mobiles will only stop paying this royalty when, after considerable R&D, they have their own patents which they will cross-license to other patent-holders.
A good example in this context is that of the Indian pharmaceuticals industry. When the industry was growing by essentially producing generics, there was little R&D activity in the country. But when it became clear that there was big money in patents, and India started protecting patents more vigorously, several Indian pharmaceutical firms started increasing their R&D spending and started beefing up their own patent work—several firms even spun off their R&D centres in the hope of attracting investors in this end of the business. While few Indian pharma firms have the money to develop and bring to market a new drug from scratch, many are making good money by selling off during the early stages of development of the new molecules. If the government wants Indian mobile phone firms to start developing their own R&D—Apple makes big money in R&D while Chinese firms who make iPhones earn very little—it has to ensure that the rights of patent-holders are respected.