In the global net

At Ranbaxy Laboratories in Mumbai. A 2003 picture. According to the companys annual report, in 2007 its legal and professional expenses were more than one-third of its expenses on R&D. - SEBASTIAN DSOUZA/AFP

The acquisition of Ranbaxy by Daiichi Sankyo raises concerns about the future of the Indian pharmaceutical industrys social orientation.

ON June 11, Ranbaxy Laboratories Limited, Indias 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 Indias 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 Indian multinational company 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 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 mix of innovation and generics, 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. Reddys and Cipla have denied such suggestions.

The Ranbaxy-Daiichi Sankyo deal shows that, internationally, Indias 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 Indias 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, Indias drug firms developed new reverse-engineering 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 Indias 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 called blockbuster drugs worth $80 billion will be going off patent by 2012.

According to the companys annual report, the United States and Canada accounted for 26 per cent of Ranbaxys 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 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).

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 Ranbaxys generic version of atorvastatin calcium, an anti-cholesterol drug; Pfizer claims that Ranbaxy has violated its patent on Lipitor. According to Ranbaxys 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.

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. Tropical diseases 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 Indias accession to TRIPS. The strategy that came to the aid of todays major Indian firms during their formative years that is, manufacturing drugs for the domestic market using process innovations 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 Indias 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 WHOs 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.