India's elephant in the room: Weak patent laws

NEW YORK (CNNMoney.com) -- India's fast-growing biotech business has the potential to be one of the driving forces behind its enviable 8 percent GDP growth, and a government estimate sees the industry increasing 15-fold over the next eight years.

M.K. Bahn, secretary for the Indian government's Department of Biotechnology, projected in an open letter that the biotech industry could surge to $25 billion in annual sales by 2015, from its 2006 level of $1.5 billion, "if we act and invest decisively."

The revenue for India's fledgling biotech industry comes from a mix of contractual research, manufacturing, biogenerics and product development, according to Bahn. The bullish projections for the industry seems to suggest that Indian biotechs will eventually become less reliant on outside investors, and more innovative in producing their own blockbuster drugs. Blockbusters already serve as a major source of revenue for the $40 billion U.S. biotech industry.

But for now India's biotech elephant won't grow to its full potential unless it can attract more foreign investments and partnerships. In order to do that, the country's patent laws need to become more palatable for outside investors, experts say. Indian patent laws fail to protect U.S. and European drugmakers and biotechs and make it easy for Indian generic drugmakers like Ranbaxy Labs and Dr. Reddy's Labs (up $0.04 to $17.35, Charts) to make cheap knock-offs. (This is a similar concern in Brazil, China and Thailand.)

But even though drug companies from the West are afraid of getting intellectual property ripped out from under them by Indian biotechs, these fears don't seem to have curbed investment so far. India, the world's most populous country, is rivaled only by the U.S. for its PhD-educated work force, luring foreign drugmakers and biotechs with a wealth of scientists and researchers to toil in their labs.

"You're starting to get much more sophisticated medical professionals on the ground in India, along with research laboratories and professional staff that could pass the rigors of the FDA," said Ed Sagebiel, spokesman for corporate matters for Eli Lilly & Co.

The Indian biotech Clinigen, a subsidiary for Biocon, conducts clinical trials for U.S. drug giants Pfizer (Charts, Fortune 500), Merck (Charts, Fortune 500) and AstraZeneca (Charts), according to a paper co-authored by Sarah Frew, researcher for global health at the University of Toronto. Jubilant Biosys, a subsidiary of the Indian biotech Jubilant Organosys, is conducting clinical trials for the Indianapolis-based Eli Lilly & Co (up $0.48 to $59.62, Charts, Fortune 500).

Some Indian drugmakers have spread beyond their borders and set up shop in America. Indian companies Dr. Reddy's, Transgene Biotek, Shantha Biotechnics and Bharat Serums and Vaccines have established subsidiaries and research facilities in the United States, according to Frew of the University of Toronto.

The Indian government has been fueling the business back at home. Sridhar Mosur, chief executive of Jubilant Biosys, said the Indian government has put a fire under its biotech industry with a myriad of catalysts, including tax incentives, specially-zoned biotech parks and government seed funding for biotech start-ups.

"There used to be a lot of bureaucracy but [the government] has moved a whole lot of barriers in terms of getting things done," said Mosur.

Mosur, who is attending a U.S.-India biotech conference in Boston on Friday, said his company "has been growing at almost seven or eight times every year for the last three years," and that many other Indian biotechs are growing 30 percent to 50 percent annually.

But many who follow the industry believe that India should do more to protect the intellectual property of foreign investors, or Big Pharma will eventually lose patience with New Delhi.

"You're not going to see the $25 billion by 2015 unless their patent laws meet global standards," said Greg Kalbaugh, director and intellectual property counsel for the U.S.-India Business Council, based in Washington, D.C.

But Kalbaugh said that U.S. and European drug companies are "hesitant about delving into India in a big way because of concerns of property protection." He said that India needs to improve its laws to offer more protection to the patent holders.

"Indian patent laws make it difficult for outside companies to get their product patented in India, while at the same time making it easier for Indian companies to violate their intellectual property," said Kalbaugh.

Case in point, the Indian government rejected in 2006 an application from the Swiss drug giant Novartis (up $0.61 to $58.64, Charts) to patent its cancer blockbuster Gleevec. This is in spite of the fact that Novartis has held patents on Gleevec (also known as Glivec) since 1993 and launched the drug internationally in 2001. Gleevec, a treatment for chronic myeloid leukemia and gastrointestinal tumors and the company's second-biggest seller, is available in 40 countries, with sales totaling $2.6 billion in 2006. Novartis appealed the India government's rejection and the case is pending.

Les Funtleyder, drug industry analyst for investment research firm Miller Tabak, said the Indian government's tweaking of patent laws in 2005 was a step in the right direction, but failed to make any tangible changes.

"If you want to develop pharmaceuticals, you have to have strong intellectual protection," said Funtleyder. "If you don't, people don't want to do research in your country. Their ideas are just going to be taken away from them."

But for now, India's biotech elephant seems unstoppable, even in the face of an undesirable patent situation.

"I think biotech activity in India growing tenfold is by no means super optimistic," said Fariborz Ghadar, professor of finance and director of the Center for Global Business Studies at Penn State University.

Ghadar said that such an increase is likely even if the Indian government makes no changes to its patent laws. But a change is necessary if India wants to achieve its full potential, he added.

"But if they strengthen the patent laws and strengthen the business confidential information laws, then the business is likely to grow more than tenfold," said Ghadar. "That's the way you have to feed the elephant."