Pharmaceutical, Outsourcing, China, India, Intellectual Property

Survey: Pharmaceutical companies cautious of investments in emerging China and India markets

02 Dec 2005 | (Thinking Point)

Cost advantages, a growing well-educated workforce, and enormous long-term market potential are a few of the reasons why large multi-national corporations are trying to understand and overcome the complexities of operating in China and India. But a new survey commissioned by Ernst & Young LLP shows that concerns over leveraging these benefits, coupled with the efforts required to protect company reputation, intellectual capital and customer confidence, are causing multinational pharmaceutical manufacturers to take a more cautious approach to the region than companies in other industries.

Article provided by www.Top-Consultant.com

The survey, conducted on behalf of Ernst & Young LLP between September and October 2005 by the Economist Intelligence Unit, polled 348 senior executives in both pharmaceutical and non-pharmaceutical business sectors on their companies' operations in China and India.

Although both countries have entered agreements in recent years to strengthen intellectual property rights, prevent counterfeiting, and improve data security, it's unclear how well or how soon their intentions will convert to results.

"While China and India hold the potential to become two of the world's most significant drug markets, it's clear that pharmaceutical companies are closely evaluating the risks and benefits of doing business there," said Carolyn Buck Luce, New York pharmaceutical leader for Ernst & Young LLP. "The anticipated cost benefits and allure of potentially huge new demand for medicines could be eroded by required infrastructure improvements, strict reimbursement criteria, a nascent medical insurance industry and the still limited progress being made by government compliance with World Trade Organization agreements regarding intellectual property protection."

The survey found that pharmaceutical investment in China and India remains light. Sixty percent of pharmaceutical executives said that their companies had spent less than $50 million in either China or India. Comparatively, fewer than 50 percent of non-pharmaceutical companies said they had spent less than $50 million. There was also little expectation that investment would increase substantially. Only 37 percent of pharmaceutical executives believed their companies' levels of investment would reach $150 million or more by 2010, while more non-pharmaceutical companies -- 51 percent for India and 45 percent for China -- are planning to spend at least that amount in the next four years.

Protecting Intellectual Property Remains a Major Concern

When asked to rank individual risks, patent protection was the most significant issue for a majority of pharmaceutical companies doing business in China and India. More than 70 percent of pharmaceutical executives said that threats to intellectual property pose a business risk in China, with 62 percent considering patent protection in India an issue. Other findings:

* More than 63 percent and 71 percent of drug company respondents in India and China, respectively, believed that their companies risked losing intellectual property rights when trying to integrate their businesses with local suppliers and third party service providers.

* More than half of pharmaceutical executives saw counterfeiting and data security as a business risk to their company operations in China -- as did non-pharma businesses -- while 42 percent saw counterfeiting as a problem in India. The equivalent figure reported by non-pharm respondents was much lower at 16 percent.

China has strengthened its commitment to intellectual property by agreeing to adhere to the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement as part of its entry into the World Trade Organization. However, a new policy interpretation aims to limit follow-on uses of innovative drugs, meaning that protection will only apply to the original use of a drug, as stated in the patent. This "one drug, one patent" rule hurts multinational companies, which increasingly seek to develop new uses for their existing drugs. In terms of piracy, however, the Chinese government has escalated its anti-piracy efforts. In 2004, it closed 691 factories producing counterfeit medicine.

India also adheres to the TRIPS agreement and has enacted new laws to protect intellectual property. But despite the passage of the Patent Protection Act in 2005, no one knows how long it will take for the benefits of the new law to take effect. Although multinational companies were not completely satisfied with every part of the law, they continue to work with the government to address ongoing concerns. The compulsory licensing provision, which allows generic production in the case of an emergency, presents a viable risk to manufacturers with brand products.

Other Advantages Fail to Attract

The survey also found that tax incentives and R&D advantages offered by Chinese and Indian governments were not proving a big enough draw for pharmaceutical companies:

* Tax incentives provided by both China and India are not necessarily a major draw for pharmaceutical companies. A small number -- less than 33 percent -- of pharmaceutical executives indicated that favourable tax incentives were appealing and beneficial. China and India compete with numerous regions around the world -- including Ireland, Puerto Rico, and Singapore -- that also offer financial incentives for pharmaceutical investment. In addition, assuming the economies of China and India continue to grow at a rapid clip, policymakers may no longer see any need to provide the same level of incentives they do today. In China, there are already signs that such incentives are not as prevalent as they were five years ago.

* Language barriers and the limited number of institutions with specialty physicians and adequate health infrastructure may be two contributing factors to the low level of interest expressed by respondents in conducting research and development in China. Less than 20 percent of pharmaceutical executives said their companies were currently undertaking R&D in China. Companies were more likely to choose India for R&D activities (44 percent). Most of the R&D conducted in India ranges from late-stage discovery to early development.

Less Reliance on Strategic Partnership & Alliances

As foreign ownership and investment restrictions subside in both China and India, companies are eager to grow their operations in the region by investing more significantly in wholly owned operations. In China, only 35 percent of executives said their operations were wholly owned today, but they expected that to grow to 50 percent by 2010. India should see similar growth, according to the executives, from 34 percent today to 44 percent in 2010.

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