China's Generic Drugmakers Challenge India

China is coming from behind and challenging India in an industry it has traditionally dominated

During the first week of August, drug multinational (MNC) Novartis suffered a setback in India when it lost a legal challenge to the country's patent law.

After being refused a patent for Glivec, a leukemia drug, the company moved to challenge the validity of India's patent law, which does not protect incremental innovations. The company launched several lawsuits, including one that said the law went against WTO rules.

On August 7, a court in the southern city of Chennai ruled against Novartis, saying it was up to the WTO to make decisions on its own rules. The ruling will make it difficult for other firms to seek patents on drugs that are not entirely new but are based on existing compounds.

India's generic pharmaceutical industry is legendary and has helped bring down the cost of essential medicines. It takes compounds that are unpatented in a particular country, copies and sells them cheaply around the world.

Since India offered virtually no patent protection until 2001 and then provided a 10-year holiday on new registrations, the industry still has room to grow. For MNCs, this lack of legal cover does not encourage investment. China, by contrast has taken a very different approach.

"Just the opposite happens here," said Beatrijs Van Liederkerke, a director at PricewaterhouseCoopers (PwC) who tracks the pharma industry. She cites Pfizer's victory in the Chinese courts after generic drug makers tried to get its Viagra patent overturned as evidence.

"It gives confidence to the multinationals that IP is protected and that the right laws and regulations are in place."

STAR IN THE MAKINGA stronger legal framework combined with skilled scientists and government incentives are turning China into a pharma powerhouse. MNCs are queuing up to build R&D centers in the country with one eye on a domestic market that will be the world's sixth largest by 2010, according to healthy industry consultancy IMS.

For China's domestic pharmaceutical industry, however, the Holy Grail is a new manufacturing process that will play up its traditional strengths.

New guidelines put forward in 2004 by the US Food and Drug Administration (FDA) allow for new production methods based on principles rather than the old checklist method of approvals. This is a drastic change, as it allows for more creativity in production methods as long as they remain safe.

With India reluctant to switch over, China has a huge opportunity.

"Once they grasp the idea they will be ahead of the Western pharmaceutical companies," said Van Liedekerke. "If there is one company that does it, it's going to go quickly."

China's pharma industry is low-end but its cost efficiency has allowed it to become a major player in the production of important active ingredients. This growth has seen the country's pharma exports jump from US$300 million in 2000 to US$675 million in 2006, according to US Commerce Department statistics.

India's generic manufacturers are well aware of China's strength and are seeking to capitalize on it by building partnerships in the country. To them, it is another means of pushing up profit margins.

When asked to comment on the importance of China to the global pharma industry, Mahendra Bharadwaj, managing director of Ranbaxy China, replied: "Why comment on the obvious?"

Cipla, one of India's generics success stories, is also doing business in China.

"If tomorrow the Chinese decide not to supply the world with raw materials, the pharma industry would collapse," said Dr Yusuf Hamied, chairman of Cipla.

VOLUME BEFORE VALUEAccording to Hamied, India and China together accounted for about 2.5% of global pharma sales by value last year some US$6.5 billion in India and US$10 billion in China. Calculate by volume, they account for a combined 25%.

"Cipla's turnover is US$100 million this year. If I sold my entire production in America, at US prices, it would be in excess of US$20 billion," Hamied said.

Despite China's massive potential in the medical materials market, it is unlikely to expand its scope so quickly that it threatens India's generic drug business.

"There are 72 facilities in India that have been FDA inspected and FDA approved whereas in China this has recently happened for one product in just one company," said Van Liedekerke.

"The Indian market is a lot more mature than the Chinese market, although the Chinese market is catching."

PATENT POWER: IP PROTECTIONTen years ago, if you asked a Chinese scientist whether he was interested in registering some intellectual property, the answer would probably be a sharp "no." The level of suspicion was so high and the level IP protection so low that secrecy was seen as the only means of keeping an idea secure.

After all, it wasn't until 1993 that patents and pharmaceutical compounds were officially covered by Chinese law.

Since then, conditions have improved greatly for both foreign and domestic pharma firms. Regulation is carried out by the State Intellectual Property Office (SIPO) and the State Food and Drug Administration (SFDA).

Rulings on patents are made by the Patent Reexamination Board (PRB), which operates under SIPO. However, the SFDA is the final arbiter. It is able to withold manufacturing licenses until it is happy that no patents have been infringed, even if the PRB has already ruled in favor of the applicant.

"You can get a court injunction to force the SFDA to withdraw the registration of a rival's license," said Tony Chen, a pharmaceuticals and biotechnology patent specialist for law firm Jones Day in Shanghai.

"This is very effective there is one place in Beijing that everybody needs to pass through if they are to legally sell drugs to hospitals and pharmacies."

This regulatory structure doesn't reduce the number of patent infringements. If anything, it facilitates more cases coming to court. In 2005, China surpassed the US to become the world's most litigious country for IP disputes with 13,424 cases filed.

Only 268 of these involved foreign companies, a 76% rise on 2004 but still a relatively low number. Given that generic drugs account for 75% of the domestic drug market, it is not uncommon for copycat local manufacturers to either infringe against a patent on a foreign drug or appeal to the patent office for the foreign patent to be nullified in China.

Foreign firms' cautious approach to enforcement is blamed on unfamiliarity with Chinese civil litigation.

But a MNC with strong patents, particularly those covering active pharma compounds, can expect to be well protected. This was the case with Pfizer, which last year persuaded a Beijing court to overturn a patent office decision invalidating the company's exclusive rights to the main active ingredient in Viagra, the erectile dysfunction drug.

Nevertheless, the system still has its shortfalls. For drugs that were developed before 1993 patent law came in, MNCs are forced to rely on follow-on patents that apply to method of using the compound. In these areas guilt is more difficult to prove as the patent infringer can just claim to have used a different method.

"It's like a game of cat and mouse - some people are trying to find evidence while others are trying to hide it," explained Chen.

Another problematic area is patent linkage, whereby a manufacturer seeking to register a drug must declare that it does not infringe a third-party patent. Alternatively, the generic drug maker may apply to register an existing patent up to two years before the existing patent expires. Chen argues that the original patent holders have limited means by which to secure an extension or challenge the validity of the new patent.

"We heard that the Chinese government is not including patent linkage [in the current round of patent law amendments]," he said. "I think the domestic drug lobby is against it they hope to be able to enter a market when patents have expired."

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE