Rashmi Barbhaiya, CEO of Advinus, is worried about declining interest from large pharmaceutical companies in outsourcing drug discovery and development work to India. While India once seemed well-positioned to become a major center for pharmaceutical innovation due to its educational system, researchers, generics industry, and intellectual property laws, recent court rulings and an unfavorable policy environment have damaged India's reputation and given investors the impression that India is now hostile to pharmaceutical innovation. A broken clinical trials system and other issues have also created a poor research and development ecosystem in India.

1. Serious trouble to Indian Pharma Innovation OVER
PATENTS
To any visitor in its Bangalore campus, Advinus would appear to be a healthy company. Its
offices are plush, laboratories state-of-the art, coffers full. It has recently signed a $36-milliion
deal—as minimum payments—for drug discovery with the Japanese firm Takeda, which was
one of the largest deals struck by a pharma services firm anywhere in the world. Advinus, a
contract research firm belonging to the Tata Group, has other multinational clients too, and a
healthy pipeline of its own drug compounds for such a small company. Yet its founder-CEO
Rashmi Barbhaiya is worried. In recent times, large pharma companies have ostensibly
expressed little desire in using India as a base for drug discovery or development. It is
becoming harder and harder to get companies to outsource to India. For over a decade,
Barbhaiya had been a champion of Indian capabilities in drug discovery and development. He
believed, like many other industry veterans did till recently, that India could become one of the
world centres for drug discovery and development. The country seemed to have everything
going right at that time. It had a good educational system, an expanding pool of researchers, a
globally-competitive generics industry, a reputation for services, and a set of high-quality.
One serious flaw in its innovation system, its intellectual property laws, seemed to have been
fixed by 2005, although through external pressure. The outlook for domestic pharma innovation,
however, has become less hopeful in recent times. “My customers always ask me: why is it that
we get strong tail winds in China and face strong headwinds in India?” says Barbhaiya. The
recent patent judgment against Novartis, though insignificant by itself, may seem like the
proverbial straw that broke the camel’s back. In fact, industry insiders agree privately that
Novartis had a weak case, and that the Supreme Court had shown considerable insight and
expertise in its judgment. However, the Indian pharma innovation system was at a breaking
point when the judgment came. Compulsory licensing, a defunct system of clinical trials, a
strident generics industry, a series of patent revokes and a set of overactive NGOs had all
combined to give the impression that India no longer valued pharma innovation. “The world has
given too many frivolous patents,” says Kiran Mazumdar-Shaw, chair of Biocon, “and India
should veer away from that. But we should also not get carried away and create an atmosphere
hostile to innovation.”

2. A Poor R&D Ecosystem
The next few years will also show the seriousness of India’s regulators on fixing the broken
clinical trials system, without which the Indian pharmaceutical industry has little chance of
success in the long term. India’s approach to patent disputes may have a bearing on how
several other countries view drug patent cases. But patents may not form the most critical part
of the innovation ecosystem. And Indian pharma companies—by extension, even the
multinationals—are worried about the other components of this ecosystem. The situation in
India is bad for R&D not because of its laws but because of the clinical trials issue. There are
many other problems too. Getting new cell lines for research takes time. So would procuring
important chemicals regularly used in research. India is perhaps the only country—among those
with a decent research tradition—where a company has to wait for three years to do a trial on a
dog. The patent issue, when it comes on top of all this, appears to be more important than it is,
according to many industry insiders.
Yet, patents form a small part of the environment necessary to create a business based on
innovation. “There are many factors other than patents that are now impeding the drug
discovery business in India,” says VN Balaji, a drug discovery consultant and former chief
scientific mentor of Jubilant Biosys, a drug discovery services company. Unlike in all other
countries, Indian pharma innovation is now built almost exclusively through partnerships. Two
decades of domestic drug discovery and development have not resulted in many commercial
drugs, and the large Indian pharmaceutical companies now rely a lot on out-licensing, in-
licensing, or joint projects for drug discovery and development. The services companies have
been beaten squarely by China on the pure-services business model; their business model now
depends much on sharing the risk and developing drugs jointly and not just on plain-vanilla
services.
Patents And Indian Industry
More than two decades ago, when negotiations began for framing the ground rules for
membership in the World Trade Organization (WTO), there was little interest among the
developing countries to include intellectual property rights (IPR) in the discussions. However,
the pharmaceutical industry pressured the US government into including minimum standards in
IPR laws as key to WTO membership. “All developed countries, with the exception of the US,

3. allowed product patents only when their industries were ready,” says Sudip Choudhuri,
professor at the Indian Institute of Management in Calcutta, whose work was quoted extensively
in the Novartis judgment. “India is clearly not ready to allow them.” Here is a quick list: Germany
allowed product patents in 1967, Switzerland in 1977, Italy in 1978, Austria in 1987, and Spain
in 1992. While signing the TRIPs agreement under duress, developing countries negotiated
flexibility in their IPR laws in several aspects. This meant that, although WTO members were to
give product patents for drugs and agricultural chemicals, they were also free to provide
compulsory licensing during national emergencies or put in additional sections in the patent acts
to prevent ever-greening. Patent offices, as always, were free to interpret whether the
innovations satisfied the criteria for patents. Regulators were also free to define national
emergencies in their own ways. India, still smarting under the belief that it was forced to sign an
unfair system, now seems determined to exploit these flexibilities to the fullest possible
extent. The current hostility—real or perceived—to a rigorous product patent regime for drugs
would have hurt Indian industry directly if the country had a thriving innovation ecosystem.
Unlike in the IT industry, India is not a destination for pharma multinationals for R&D. Only Astra
Zeneca and Bristol Myers-Squib (BMS) have invested in drug discovery R&D in India so far.
Astra Zeneca recently closed its Indian drug discovery programme, leaving BMS as the only
company to have done some direct investments in India (See graphic: Domestic Firms Spend.
There is no indication that a rigorous IPR regime would have done otherwise. On the other
hand, few Indian company executives had shared the courage and conviction of the late Anji
Reddy and tried to discover drugs in India entirely on their own. What remains, both currently
and for the future, are partnerships where Indian and overseas companies share the intellectual
property and markets. Drug discovery services began in India in the mid-1990s. Biocon was a
pioneer when it set up Syngene in 1994 to offer services related to drug development. Indian
pharma industry observers then believed that this business presented a great opportunity for the
country, but it didn’t develop as imagined. No formal estimations exist about this market either in
India or China, but industry insiders estimate it to be around Rs 3,000 crore in India and three or
four times bigger in China. However, Indian companies quickly moved beyond plain services—
called ‘full time equivalent’ (FTE) services in industry jargon—and looked for ways of sharing the
risk as well as the reward in drug discovery services, and not just development. So many
services companies—Aurigene, Jubilant Biosys and Advinus are examples—now depend for
their revenues on substantial milestone payments rather than payments for the number of
people who worked on a project. Negotiating a milestone payment is quite different from

4. negotiating an FTE-based business, as there is a big leap of faith involved for the customer.
Many Indian companies have managed to get this leap of faith. Patent cases have not eroded
this trust so far, and could do so in the future only if the courts turn activist.
On reasonable Healthcare
Cost caution
Prices will rise as new drugs hit the market and fewer drugs go off
patent every year
Patented drugs form only 1% of the market for drugs in India, and so it does not require a genius
to figure out that the impact of patents on Indian healthcare is minimal. As more and more drugs
are patented in India, and as they get launched in the country with patent protection, the cost of
healthcare could go up gradually over the decade, just the way generics have gradually reduced
the cost of prescription drugs in the US. Will they put medicines beyond the reach of most people
in the country? Industry observers and analysts predict a rise in drug costs over the next decade
as more cancer drugs come into the market, and fewer drugs go off patent every year.
The US Food and Drug Administration (FDA) approved 39 new drugs last year, the highest
number since 1997. Three of those are now priced at over $200,000 (about Rs 1 crore) a year.
Some of these drugs are for rare diseases, but anti-cancer drugs form a good portion of the new
drugs approved. Anti-cancer drugs are also among the most expensive classes of drugs, and it
remains to be seen how companies price them in India. But it now seems that the low productivity
of the last decade is now giving way to a decade of high productivity for new drugs. High drug
prices are almost certain to follow, and India may not be an exception. The department of
pharmaceuticals is drafting a formula to price Rs 25,000 crore worth of patented drugs, which
might end the constant irritant for global drug makers of incessant compulsory licensing by the
government. The government thinks such licenses won’t be needed once a pricing policy is in
place, and so Big Pharma has so far not complained about this idea.