Big Pharma's R&D Booster Shot

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The forces driving Big Pharma offshore are gathering steam. Some key blockbusters, including osteoporosis drug Fosamax and cholesterol-lowering medication Lipitor, will soon go off patent and be exposed to competition from low-cost generics (BusinessWeek.com, 2/06/08). There is a dire shortage of promising new drugs in the pipeline to replace those moneymakers. Development costs in the West are skyrocketing, with pharmaceutical companies investing $1.2 billion on average for every drug that ever makes it to market. Pressure to cut development times, recruit global talent, and penetrate the huge growth markets for medicines in the domestic markets of India and China also are acute.

Return migration

These pressures have prompted big pharmaceutical companies to turn to outside partners to combine resources, share costs, and find new ideas. China and India, with their huge pools of scientific talent and ambitions to emerge as global biotech powers, are happy to oblige.

Neither Asian giant, however, is likely to become a major direct competitor to the U.S. and European drug industries in the foreseeable future. The companies doing outsourced R&D work lack the breadth of skills and experience required to develop and test their own drugs to treat complex diseases such as cancer and diabetes. Also, pharmaceuticals have one of the longest development cycles and regulatory review periods of any industry. Indian and Chinese firms are presently ill-equipped to independently navigate the lengthy, high-risk, high-cost clinical trials required to produce a commercial drug for the U.S. or Europe—and then market them globally.

But India and China must be taken seriously as major players in the future. These nations are rapidly building their capabilities through the return migration of top Indian and Chinese scientists who have amassed years of experience at U.S. pharmaceutical companies and universities. That is evident in the growing prevalence of Chinese and Indian inventors in global pharmaceutical patent applications. Since 1995, the Duke and Harvard study found, their contributions have grown fourfold. In 2006, 8.5% of all pharmaceutical patent applications filed through the World Intellectual Property Organization included an inventor located in China, and 5.5% included one in India.

Eventual competitors

The close interaction with multinationals, meanwhile, is helping Indian and Chinese firms learn to innovate. While such relationships rarely involve transfer of core intellectual property, they entail a significant sharing of knowledge about how to run long-term R&D projects and use state-of-the-art analytical tools and process methodologies that would otherwise take years to develop.

Eventually, the Indian and Chinese pharmaceutical industries will have to create their own proprietary drugs to sustain their growth. As labor and facility costs continue to rise, and as the Chinese and Indian currencies gain steadily against the U.S. dollar, the big cost gaps between East and West already are narrowing (BusinessWeek.com, 4/07/08). Firms such as Ranbaxy, Piramal, Biocon, and Dr. Reddy's, therefore, are using their profits from generics to fund their own internal research into original drugs. As Dr. Reddy's Chairman Anji Reddy puts it: "Drug discovery is the only way to become a major pharmaceutical player."

It could take a decade or more before Indian and Chinese companies master the entire drug-development process. Until then, their value as partners to Western multinationals will only increase.

BusinessWeek Senior Writer Pete Engardio focuses on the global economy and contributed to the study as a Wertheim fellow. Ben Rissing is a Wertheim fellow with the Harvard Law School's Labor and Worklife program, and is an author of the Ewing and Marion Kauffman Foundation study "The Globalization of Innovation: Pharmaceuticals."