[Ip-health] Frontline: In the global net

[Thiru Balasubramaniam]

http://www.frontlineonnet.com/stories/20080718251404700.htm

DRUG INDUSTRY

In the global net

JAYAN JOSE THOMAS

The acquisition of Ranbaxy by Daiichi Sankyo raises concerns about the
future of the Indian pharmaceutical industry=92s social orientation.

At Ranbaxy Laboratories in Mumbai. A 2003 picture. According to the
company=92s annual report, in 2007 its legal and professional expenses
were more than one-third of its expenses on R&D.

ON June 11, Ranbaxy Laboratories Limited, India=92s leading
pharmaceutical company, announced that it would become a subsidiary of
the Japanese drug-manufacturing firm Daiichi Sankyo Co. Ltd. The
announcement came as a new twist in corporate India=92s growth story,
marked as it has been by a series of high-profile overseas
acquisitions in recent months.

Ranbaxy, established in the 1960s by the entrepreneur Bhai Mohan
Singh, has expanded aggressively over the years. It is now a global
firm with manufacturing operations in 11 countries and it sells drugs
in 125 countries. One of the earliest to have been called an =93Indian
multinational company=94 by the media, Ranbaxy represented in good
measure the successes and ambitions of the Indian pharmaceutical
industry. The acquisition of this company by an overseas investor thus
raises some concerns about the nature of the recent growth in
corporate India and in the pharmaceutical industry in particular.

As part of the agreement between the two companies, Daiichi Sankyo
will buy the entire promoters=92 shareholdings of 34.8 per cent in
Ranbaxy Laboratories Limited for a price of $3.4 billion to $4.6
billion. Daiichi Sankyo, which is the third largest pharmaceutical
company in Japan, intends eventually to establish majority control
over Ranbaxy by raising its stake to over 51 per cent.

The deal sets the stage for the creation of a new pharmaceutical
giant, likely to be the 15th biggest in the world, that will, in the
words of Malvinder Mohan Singh, chief executive of Ranbaxy, be a =93mix
of innovation and generics=94, a reference to the respective strengths
of Daiichi Sankyo and Ranbaxy. There have been rumours that other
Indian drug firms will follow the Ranbaxy example although major
companies such as Dr. Reddy=92s and Cipla have denied such suggestions.

The Ranbaxy-Daiichi Sankyo deal shows that, internationally, India=92s
pharmaceutical companies are valued highly. At the same time, this
deal is also a commentary on some of the weaknesses of the Indian
pharmaceutical industry, especially vis-a-vis the major international
drug companies.

It is recognised widely that India=92s Patents Act of 1970, which
withdrew patent protection for pharmaceuticals and food products, laid
the foundation for the domestic pharmaceutical industry in India. With
state support, India=92s drug firms developed new =93reverse-engineering=94
capabilities in chemicals-based processes for pharmaceutical production.

A study by the economist Sudip Chaudhuri showed how, after 1970,
domestic firms took over the leadership from the multinational
companies (MNCs) in India=92s pharmaceutical market, claiming a share of
77 per cent in total sales by 2006. The Indian industry became a major
producer of cheaper, generic versions of patented drugs, thus coming
to the aid of poor patients across the Third World.

However, as part of its obligations under the Agreement on Trade-
Related Aspects of Intellectual Property Rights (TRIPS) of the World
Trade Organisation (WTO), India had to make changes to the very patent
law that had, for many years, done great service to its domestic
industry. By 2005, the country introduced new provisions for product
patenting by means of new laws pushed through Parliament.

During the period of TRIPS implementation in India (1995-2005), major
Indian pharmaceutical firms increased their allocations for research
and development (R&D), intent on facing the challenges of a stricter
patent regime in the post-TRIPS phase. They also made significant
inroads into the lucrative markets in the West for generic drugs. The
high-value pharmaceutical markets of North America and Europe now
constitute a key business opportunity for Indian firms, especially as
a number of high-demand =96 called =93blockbuster=94 =96 drugs worth $80
billion will be going off patent by 2012.

According to the company=92s annual report, the United States and Canada
accounted for 26 per cent of Ranbaxy=92s global revenues in 2007. Major
Indian pharmaceutical companies, including Ranbaxy, have been
acquiring overseas drug firms as part of a strategy to consolidate
their businesses in the export markets.

Entry into Western pharmaceutical markets has put Indian firms on a
line of direct confrontation with multinational pharmaceutical giants.
Despite rapid growth, Indian pharma- ceutical firms are much smaller
than pharmaceutical MNCs based in the U.S. (such as Pfizer) and
western Europe (such as GlaxoSmithKline and Novartis). For instance,
R&D spending by Pfizer in 2002 was $4.8 billion =96 higher than the
entire national R&D expenditure of India, which was $3.7 billion in
2001 (figures cited in World Investment Report 2005: Transnational
Corporations and the Internationalization of R&D, United Nations
Conference on Trade and Development).

Malvinder Mohan Singh, CEO and MD of Ranbaxy, and Takashi Shoda,
president and CEO of Daiichi Sankyo, at the media conference where the
deal was announced.

Originator drug makers (such as Pfizer) try to ward off threats from
generic competitors through litigation over alleged patent violations.
Such legal battles involve high risks and heavy costs to the upstart
generic rivals. Ranbaxy has been engaged in fighting patent-
infringement suits filed against it by Pfizer over Ranbaxy=92s generic
version of atorvastatin calcium, an anti-cholesterol drug; Pfizer
claims that Ranbaxy has violated its patent on Lipitor. According to
Ranbaxy=92s annual report, in 2007 it spent Rs.154.5 crore on legal and
professional expenses, more than one-third of its expenditure on R&D
(which was Rs.413.9 crore). On June 18, a week after its acquisition
by Daiichi Sankyo, Ranbaxy agreed to settle most of its patent suits
with Pfizer, apparently under pressure to reduce high legal costs.

Even while competing with one another, Western pharmaceutical giants
and Indian firms have found areas for collaboration, especially in
drug research. The discovery of a new drug is an extremely lengthy and
risky process. Industry observers say that of every 5,000 drug
compounds that are evaluated at the preclinical stage, only five
compounds enter the phase of clinical trials and only one is
ultimately approved for marketing by the U.S. Food and Drug
Administration (FDA). Introducing a new drug into the U.S. market
takes an average of 12 years, and the costs range between $0.8 billion
and $1.7 billion. Pharmaceutical MNCs try to reduce the cost of new
drug discovery by entering into strategic alliances with smaller
pharmaceutical firms, biotechnology companies and academic
institutions worldwide.

Given its advantage of relatively low costs, the Indian industry has
ample opportunity to do contract research for pharmaceutical MNCs. In
some cases, when Indian firms conduct research and develop new drug
molecules, they do not proceed further into the difficult and
financially risky clinical trial and regulatory stages but license out
the molecule to bigger pharmaceutical MNCs instead. There has also
been a substantial increase in outsourcing clinical trials to
India.Will the leading Indian pharmaceutical firms be able to grow to
match the levels of Western pharmaceutical MNCs or will they remain
trapped as junior partners in the global chain of pharmaceutical
innovation? Given the hurdles posed by the global intellectual
property rights regime and the vastly inferior position of Indian
firms in respect of financial and research capabilities, the latter
appears more likely. No Indian firm has, thus far, been able fully to
develop an original drug. The acquisition of Ranbaxy by Daiichi Sankyo
is an indication of the limits to growth facing Indian and other
developing-country firms in the global pharmaceutical industry.
Affordable medicines

Pfizer claims that Ranbaxy has violated its patent on its cholesterol
drug Lipitor.

The World Health Organisation (WHO) points out that just 10 per cent
of the worldwide spending on pharmaceutical R&D is directed towards 90
per cent of the global disease burden. R&D activities are
overwhelmingly oriented towards the health needs of the rich in
industrialised countries, towards lifestyle-related and convenience
medicines. =93Tropical diseases=94 such as dengue, diphtheria and malaria,
which primarily affect people in the poorer countries, are given very
low priority in pharmaceutical research. With growing technological
capabilities and the assurance of a vast home market for affordable
medicine, the pharmaceutical industry in India is well placed to
undertake research on the treatment of neglected diseases.

However, research on neglected diseases is decidedly a low-priority
item on the R&D agenda of leading Indian pharmaceutical companies.
Their energies and financial outlays are now concentrated on selling
to the high-return, generic drug markets in the West and on profiting
from the outsourcing of R&D. From a survey of 31 large pharmaceutical
companies operating in India, which included companies under Indian
ownership and MNC subsidiaries, Jean Lanjouw and Margaret MacLeod
found that only 10 per cent of the entire R&D investment of these
companies in 2003-04 was targeted at developing-country markets and
tropical diseases.

Small and medium Indian pharmaceutical firms could possibly fill the
void left by the bigger Indian firms as suppliers of cheap drugs for
the domestic market. However, a number of factors are holding them
down, the most important one being the product patent rules
implemented as part of India=92s accession to TRIPS. The strategy that
came to the aid of today=92s major Indian firms during their formative
years =96 that is, manufacturing drugs for the domestic market using
process innovations =96 is no longer possible. Tightened regulatory
restrictions and intense market competition are further factors that
raise the cost of entry of small and medium firms into India=92s
pharmaceutical markets.

The Ranbaxy-Daiichi deal seems to exemplify the uncertainties and
drawbacks of the prevailing business model of inching for space in the
generic drug market for global diseases. At the same time, current
trends in the international pharmaceutical industry tend to confirm
WHO=92s concern that the industry is making little progress in attending
to the vast, unmet demand for affordable medicines for the people of
India and other less-developed countries.

Jayan Jose Thomas is a Visiting Scientist at the Indian Statistical
Institute, Kolkata.

------------------------------------------------------------


Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
thiru@keionline.org


Tel: +41 22 791 6727
Mobile: +41 76 508 0997