Quagmire to goldmine?

Sunday, May 18, 2008

BRAZIL has long been a thorn in the side of the global drugs companies. The country’s vibrant generics industry has often trampled over their patents. As recently as last year, its government threatened to invoke compulsory licensing (a legal mechanism that, in effect, legitimises such trampling) to browbeat a foreign drugs firm into offering huge discounts. And Brazil’s state-funded researchers have devised some impressive drugs, including a new therapy for malaria (see article). Small wonder, then, that big drugs firms have remained leery of this market.

Indeed, they have been cautious about developing countries in general, which they have regarded as the source of many headaches and few profits. A decade ago Britain’s GlaxoSmithKline (GSK) got a bloody nose in South Africa when it tried too vigorously to defend patents on an HIV drug. More recently Novartis, a Swiss firm, lost a bitter battle in India over patent protection for Gleevec, a profitable cancer drug. In Thailand the government has invoked compulsory licensing for some drugs. And next week the industry can expect another drubbing over patents harming ?innovation for the poor? at the World Health Organisation’s annual assembly.

But consider the story of Moksha8, a new drugs firm launched last month with money from Texas Pacific Group, a private-equity outfit. It aims to capitalise on Big Pharma’s neglect of many emerging economies by striking licensing deals for branded drugs which it, in turn, intends to market to affluent customers in those countries. It already has some two dozen drugs under licence for Brazil from Roche and Pfizer. Fernando Reinach of Votorantim, a Brazilian firm that also invested in Moksha8, expects its annual sales to top $1 billion within a year or two.

All of which suggests that the situation is ripe for change. For much of its history, the industry has focused chiefly on the diseases that afflict people in rich countries, while largely neglecting research into diseases of the poor. But as growth slows in developed markets, and the twin threats of generic drugs and price controls advance even in pharma-friendly America, drugs companies are thinking again.

That is not simply because governments in developing countries are wielding the big stick of busting patents: their expanding middle classes also provide a tantalising carrot. McKinsey, a consultancy, estimates that the value of the Indian drugs market will grow from $6.3 billion in 2005 to $20 billion in 2015. China’s market is expected to soar even more spectacularly. Given such prospects for growth, says Mark Feinburg of Merck, an American drugs giant, ?you’ve got to be in these markets?it’s a great opportunity.?

G.V. Prasad, vice-chairman of Dr Reddy’s, a successful Indian drugs firm that is evolving from copycat to innovator, is convinced that the thinking at Western firms is changing, and cites a recent reorganisation at GSK as evidence. Andrew Witty, who takes over as the firm’s chief executive on May 22nd, wants to combine all its little divisions that deal with developing countries into one emerging-markets group, to be run by Abbas Hussain, whom he has just poached from Eli Lilly, a rival American firm.

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Source: The Economist (link opens in a new window)