I understand the lure of China and India – yes, adding several billion people to your potential market valuation pool is hard, if not impossible, to ignore. However, there are some troubling signs on the horizon that all drug manufacturers considering expansion into these markets, both “big pharma” and biotech, branded and generic, should carefully consider.

Intellectual Property (IP) Rights and Patent Protection

First, the most obvious one pertains to intellectual property (IP) rights and patent protection. Over the past six months, there have been numerous incidents of patents being disputed in these countries and international courts refusing to recognize patent validity, or international courts upholding patents but refusing to recognize patent infringement on copycat products.

The most recent example comes from Cipla, not only marketing and selling its Roche Tarveca copycat product, but also slashing its price by 63%, despite the Indian court upholding Roche’s patent. Why is this allowed? Because the court determined that Cipla’s product did not infringe on the patent.

In India alone over the past six months, Roche, Bayer, Pfizer, and Novartis have all experienced this reality, allowing companies like Cipla and Natco (both Indian-based generics manufacturers) to provide copycat products of patented medicines at much lower prices. The result is the crippling of branded pharma’s abilty to compete in the Indian market, and the creation of a market disadvantage for other generics manufacturers who are still operating under U.S. or European patent law.

Branded Pharma Partnering

Another interesting trend is the increase in branded pharma partnering with Indian and Chinese pharmaceutical and biotech companies to serve as the pharma company’s R&D function. The rational has been two-fold:

1. Perceived greater opportunities within those countries for eventual sales/marketing/distribution, and
2. Leverage cheaper resources in these countries to reduce R&D costs.

On the surface, these appear to be sound reasons. However, there’s obvious risk in this approach based solely on the IP rights issues stated above.

Offshoring

There’s another potential side effect which could have a much longer-term impact – the outsourcing of scientific innovation to offshore organizations. “Offshoring” has been around for many years, largely starting with the discrete manufacturing sector where repetitive manufacturing done by semi-skilled labor in less expensive parts of the world was, and still is, a cost effective way to continue to make quality product at a lower cost. In the late 90’s through the 2000’s, information technology services went the same way, where commoditized skills (e.g., computer programming) was increasingly “offshored” to reduce IT expenditure. And offshoring is not uncommon in pharmaceuticals either, where companies often manufacture drugs in other countries. This is most commonly done to better serve other parts of the world, but increasingly it’s being done to supplement manufacturing in the US and Europe.

Unlike offshoring commodity skills as is done for manufacturing and computer programming, the “offshoring” of pharmaceutical R&D suggests for the first time the exportation of an industry’s core business – the innovation and future value of pharmaceuticals. This could have a significant impact on the Life Sciences industry. Not only would this affect the shift of scientific knowledge and innovation away from domestic shores, but it could greatly affect the biotech industry and the shareholders that support it, and eventually redefining the role of “big pharma” itself.

As pharmaceutical companies explore the offshore R&D option, and biotech companies look to mitigate the possible risk to their organizations, I suggest that time be spent understanding and learning from the successes and failures of offshoring in other industries. For instance, in both manufacturing and in IT, it’s interesting to note that there has been greater emphasis over the last 5-10 years in the value of bringing these jobs back domestically. Labor is still more expensive in the U.S. (although the difference in costs isn’t as great as it used to be), but there is much to be gained from keeping these jobs within one’s borders.

Of course, one such benefit is the political lift of bringing/keeping jobs domestically. But another big reason is over concerns of IP protection. And this, as we have seen in the examples in India, is not just a theoretical concern.