Wall Street Journal - March 6, 2001
Jesse Pesta

NEW DELHI -- India's pharmaceuticals industry is preparing to swallow a horse pill, and foreign drug makers want to be there when the medication kicks in.

On the first day of 2005, Indian drug makers must start honoring international pharmaceutical patents for the first time since the 1970s. They are scrambling to find new business models to replace their old one -- knocking off Western drugs -- and that is where the foreign firms see opportunity.

Eli Lilly of Indianapolis and Britain's AstraZeneca PLC are both buying out their Indian joint-venture partners, and AstraZeneca plans a "super-duper research center," one executive says, drawing on India's cheap and scientifically savvy labor pool. Novo Nordisk AS of Denmark is testing two new diabetes drugs in partnership with Dr. Reddy's Laboratories Ltd, an Indian company that developed the drugs after deciding it had better get into research and development or face the music in 2005.

There is an overlap with the Indian technology boom as well. Pfizer, Inc. of New York is doing biometrics in India; raw clinical data are shipped here electronically to be evaluated by teams of specialists. "We have every intention of expanding those operations this year," says Hocine Sidisaid, Pfizer's managing director in India, though he wouldn't give specifics. Sreeni Devidas of Connect Capital Holdings, the Asian arm of New York's Insight Capital Partners, says he is "scoping quite a few deals" in India, particularly in bioinformatics, the nascent field of building the software needed to root out the medical secrets of the human genome.

Asked whether more Indian and foreign companies might be teaming up in the next few years to prepare for the big day four years off, the chairman of Cipla Ltd. of Bombay, one of India's biggest drug makers, says: "There's no alternative."

Foreign investment in the Indian pharmaceuticals sector nearly doubled in the year ended last March 31, to $54 million, according to the Reserve Bank of India. That number represents only 3.4% of total investment inflows. Its modesty sheds light on the frosty side of the global drug industry's love-hate relationship with India, and on the fallout from India's legacy of economic reform in fits and starts.

India stopped recognizing drug product patents in the 1970s to try to cut the cost of medicine for its vast, poor population. While it has agreed to start up again in 2005 -- as part of a pact with the World Trade Organization and, more broadly, as a step in India's globalization of the past decade -- many of the legal mechanisms for the resumption of drug-patent observance aren't yet in place, and that makes foreign companies uneasy.

For instance, India still doesn't have a system for reviewing all those patents it is promising to honor. It is a year past a deadline to solve the problem, foreign drug-company officials say, adding that about 30,000 patent applications are in limbo as a result. The government ministry responsible for the matter didn't return calls seeking comment.

Then there's the debate over a patent-law principle known as compulsory licensing. In most countries, it is designed to allow the mass production of drugs in times of emergency, such as an epidemic. Compulsory licensing is the principle Cipla says African countries should invoke so the humanitarian group Doctors Without Borders can use Cipla's inexpensive knockoffs of HIV drug cocktails there to fight AIDS.

The Indian Pharmaceutical Alliance, an important lobbying group, wants a different compulsory-licensing standard in India. It says a drug's price should also be a consideration in invoking the special license. International drug companies strongly object. If the government can give other manufacturers permission to make a patented drug because it regards the pricing as prohibitive, "it's as good as not having a patent," says Rajiv Gulati, Eli Lilly's managing director in India.

K. Anji Reddy, vice president of the Alliance, illustrates the complexities of India's drug industry in transition. He says he personally disagrees with the Alliance's position on compulsory licensing -- after all, his own company, Dr. Reddy's Laboratories, is trying to bring its proprietary molecules to market, with Novo Nordisk. Dr. Reddy's Labs "is investing in research; I must get that back," he says. However, he adds that the Alliance must represent the will of the majority of its members, most of whom aren't involved in drug discovery.

Foreign companies are waiting for clarity on these patent-law issues before making big investments, says N. H. Israni, the president of the Indian Drug Manufacturing Association. Still, foreigners do see opportunities in India. The pharmaceutical business here is accomplished, thanks to years of practice in reverse-engineering complex molecules. GlaxoSmithKline PLC sources components for the ulcer drug Zantac from India, as well as components of its AIDS, hepatitis B and asthma medications. One of the largest vaccine-making facilities in the southern hemisphere is in Hyderabad.

There is "huge scope for doing more" clinical trials in India, says Mr. Gulati of Lilly, because of the reserve of quality physicians, the vast pool of patients provided by India's population of more than one billion and doctors' fluency in English, the international language of medicine. Mr. Gulati says a cancer trial that cost $5,000 a patient in the U.S. might cost $2,000 here.

-- Daniel Pearl in Bombay contributed to this article.

Write to Jesse Pesta at jesse.pesta@wsj.com¹

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