Compared to Other Industry Segments, Data Shows Pharma Less Certain of
Risk/Reward Balance
NEW YORK, Nov. 10 /PRNewswire/ -- Cost advantages, a growing well-educated
workforce, and enormous long-term market potential are a few of the reasons
why large multi-national corporations are trying to understand and overcome
the complexities of operating in China and India. But a new survey
commissioned by Ernst & Young LLP shows that concerns over leveraging these
benefits, coupled with the efforts required to protect company reputation,
intellectual capital and customer confidence, are causing multinational
pharmaceutical manufacturers to take a more cautious approach to the region
than companies in other industries.
The survey, conducted on behalf of Ernst & Young LLP between September and
October 2005 by the Economist Intelligence Unit, polled 348 senior executives
in both pharmaceutical and non-pharmaceutical business sectors on their
companies' operations in China and India.
Although both countries have entered agreements in recent years to
strengthen intellectual property rights, prevent counterfeiting, and improve
data security, it's unclear how well or how soon their intentions will convert
to results.
"While China and India hold the potential to become two of the world's
most significant drug markets, it's clear that pharmaceutical companies are
closely evaluating the risks and benefits of doing business there," said
Carolyn Buck Luce, New York pharmaceutical leader for Ernst & Young LLP. "The
anticipated cost benefits and allure of potentially huge new demand for
medicines could be eroded by required infrastructure improvements, strict
reimbursement criteria, a nascent medical insurance industry and the still
limited progress being made by government compliance with World Trade
Organization agreements regarding intellectual property protection."
The survey found that pharmaceutical investment in China and India remains
light. Sixty percent of pharmaceutical executives said that their companies
had spent less than $50 million in either China or India. Comparatively,
fewer than 50 percent of non-pharmaceutical companies said they had spent less
than $50 million. There was also little expectation that investment would
increase substantially. Only 37 percent of pharmaceutical executives believed
their companies' levels of investment would reach $150 million or more by
2010, while more non-pharmaceutical companies -- 51 percent for India and 45
percent for China -- are planning to spend at least that amount in the next
four years.
Protecting Intellectual Property Remains a Major Concern
When asked to rank individual risks, patent protection was the most
significant issue for a majority of pharmaceutical companies doing business in
China and India. More than 70 percent of pharmaceutical executives said that
threats to intellectual property pose a business risk in China, with 62
percent considering patent protection in India an issue. Other findings:
-- More than 63 percent and 71 percent of drug company respondents in
India and China, respectively, believed that their companies risked
losing intellectual property rights when trying to integrate their
businesses with local suppliers and third party service providers.
-- More than half of pharmaceutical executives saw counterfeiting and
data security as a business risk to their company operations in China
-- as did non-pharma businesses -- while 42 percent saw counterfeiting
as a problem in India. The equivalent figure reported by non-pharma
respondents was much lower at 16 percent.
China has strengthened its commitment to intellectual property by agreeing
to adhere to the Trade-Related Aspects of Intellectual Property Rights (TRIPS)
agreement as part of its entry into the World Trade Organization. However, a
new policy interpretation aims to limit follow-on uses of innovative drugs,
meaning that protection will only apply to the original use of a drug, as
stated in the patent. This "one drug, one patent" rule hurts multinational
companies, which increasingly seek to develop new uses for their existing
drugs. In terms of piracy, however, the Chinese government has escalated its
anti-piracy efforts. In 2004, it closed 691 factories producing counterfeit
medicine.
India also adheres to the TRIPS agreement and has enacted new laws to
protect intellectual property. But despite the passage of the Patent
Protection Act in 2005, no one knows how long it will take for the benefits of
the new law to take effect. Although multinational companies were not
completely satisfied with every part of the law, they continue to work with
the government to address ongoing concerns. The compulsory licensing
provision, which allows generic production in the case of an emergency,
presents a viable risk to manufacturers with brand products.
Other Advantages Fail to Attract
The survey also found that tax incentives and R&D advantages offered by
Chinese and Indian governments were not proving a big enough draw for
pharmaceutical companies:
-- Tax incentives provided by both China and India are not necessarily a
major draw for pharmaceutical companies. A small number -- less than
33 percent -- of pharmaceutical executives indicated that favorable
tax incentives were appealing and beneficial. China and India compete
with numerous regions around the world -- including Ireland, Puerto
Rico, and Singapore -- that also offer financial incentives for
pharmaceutical investment. In addition, assuming the economies of
China and India continue to grow at a rapid clip, policymakers may no
longer see any need to provide the same level of incentives they do
today. In China, there are already signs that such incentives are not
as prevalent as they were five years ago.
-- Language barriers and the limited number of institutions with
specialty physicians and adequate health infrastructure may be two
contributing factors to the low level of interest expressed by
respondents in conducting research and development in China. Less
than 20 percent of pharmaceutical executives said their companies were
currently undertaking R&D in China. Companies were more likely to
choose India for R&D activities (44 percent). Most of the R&D
conducted in India ranges from late-stage discovery to early
development.
Less Reliance on Strategic Partnership & Alliances
As foreign ownership and investment restrictions subside in both China and
India, companies are eager to grow their operations in the region by investing
more significantly in wholly owned operations. In China, only 35 percent of
executives said their operations were wholly owned today, but they expected
that to grow to 50 percent by 2010. India should see similar growth,
according to the executives, from 34 percent today to 44 percent in 2010.
The results of the survey were presented today to industry executives at
an Ernst & Young forum to discuss critical issues that face multinational
pharmaceutical companies operating in China and India. Three white papers
about the region were also released at the conference. The reports -- titled
"China and India: Risks and Returns in Asia's Blockbuster Pharma Markets,"
"Unveiling India's Pharmaceutical Future," and "Unmasking China's
Pharmaceutical Future" -- are available upon request.
About Ernst & Young
Ernst & Young, a global leader in professional services, is committed to
restoring the public's trust in professional services firms and in the quality
of financial reporting. Its 106,000 people in 140 countries pursue the highest
levels of integrity, quality, and professionalism in providing a range of
sophisticated services centered on our core competencies of auditing,
accounting, tax, and transactions. Further information about Ernst & Young and
its approach to a variety of business issues can be found at
http://www.ey.com/perspectives . Ernst & Young refers to all the members of
the global Ernst & Young organization.
SOURCE Ernst & Young LLP
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CONTACT:
Lisa Rosendorf of Ernst & Young LLP,
+1-212-773-4734, or lisa.rosendorf@ey.com ; or Ben Tanner of
Fleishman Hilliard, +1-212-453-2301, or tannerb@fleishman.com
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