An Economist Intelligence Unit executive summary

sponsored by Ernst & Young

Foreign drug companies in India and China

A comparative view

© The Economist Intelligence Unit 2005 1

Foreign drug
companies in India
and China
A comparative view

Executive serious business risks. The The survey found that

significant tax incentives offered pharmaceutical companies are
summary by both countries could not wary of investing in India and
Foreign drug companies have been counterbalance these threats. China, at a time when foreign
attracted to China and India by the Surveyed participants, the investment by non-pharma
lower cost structures and the large majority of whom worked for companies is set to increase.
local markets (which are among companies with revenues in excess Roughly 60% of the pharma
the fastest growing worldwide). of US$1billion turnover, were all executives said that their
But despite the potential for cost senior executives familiar with companies had spent less than
savings and growth a new global their companies’ investments in US$50m to date in either China or
survey of 348 senior executives either China or India. Nearly 63% India. The equivalent figure for
(conducted by the Economist (218 respondents) worked for the non-pharma businesses in India
Intelligence Unit on behalf of Ernst pharmaceutical industry. The was lower at 50%, and similar in
& Young) found companies from remaining 37% (130 respondents) China at 58%. Although pharma
the life sciences sector to be were drawn from non-pharma respondents signalled their
cautious about their current and businesses (consumer, electronic, companies’ intention to scale up
future investments in the two IT and telecoms). The profile of the facilities in the two countries, the
territories. The survey found that survey respondents allowed scale of forecast investment trailed
pharma executives are uncertain interesting comparisons to be behind that reported by
about the ability of either China or made between the strategies of respondents from non-pharma
India to uphold intellectual pharma versus industries outside businesses. Only 37% of pharma
property law. Data security and the realm of the life sciences executives believed that their
counterfeiting were perceived as sector. companies’ levels of investment
would reach US$150m-plus in both
countries by 2010. The figures for
non-pharma were 51% and 45% for
About the research India and China respectively.
Foreign drug companies in India and China: a comparative view is an
executive summary by the Economist Intelligence Unit, sponsored China’s policy is to attract
by Ernst & Young. investment by foreign
The Economist Intelligence Unit bears sole responsibility for this technology-oriented companies.
report. The Economist Intelligence Unit’s editorial team conducted Yet much of pharma’s investment
the survey. Alexandra Wyke wrote the summary. The findings and in the country has focused on
views expressed in this report do not necessarily reflect the views of downstream activities, such as
the sponsor. Our thanks are due to the survey respondents for their marketing. Just over 70% of the
time and insights. 124 pharma respondents familiar
with China stated that they were
November 2005 marketing products to local
consumers (including new brands).

2 © The Economist Intelligence Unit 2005

 Foreign drug
companies in India
and China
A comparative view

Please rate the following risks with regard to your pharmaceutical company’s operations in China.
Rate on a scale of 1 to 5, where 1=Insignificant risk and 5=Significant risk
(% respondents)
1 2 3 4 5
Counterfeiting
12 17 19 26 26
Gray/secondary market
8 17 31 32 13
Unauthorised cross-border trade
15 21 28 25 11
Compliance with your company's internal code of conduct
10 21 33 30 6
US Foreign Corrupt Practices Act compliance
24 29 33 10 4
Intellectual property
5 6 19 31 39
Data security and privacy
2 20 27 33 18
Quality manufacturing compliance
26 27 28 12 7
Inherent risk from third-party vendors/partners
10 19 41 24 6
Corporate governance
14 28 33 19 6
Regulatory and legislative environment
4 15 28 34 18
Unfair competition
38 13 28 33 17
Product liability litigation
16 29 34 16 4
Source: Economist Intelligence Unit, 2005

0 20 40
Please rate the following risks with regard to your pharmaceutical company's operations in India.
Rate on a scale of 1 to 5, where 1=Insignificant risk and 5=Significant risk
60 80 100
(% respondents)
1 2 3 4 5
Counterfeiting
15 18 26 19 22
Gray/secondary market
26 20 21 27 6
Unauthorised cross-border trade
27 24 23 20 6
Compliance with your company's internal code of conduct
16 27 23 27 7
US Foreign Corrupt Practices Act compliance
26 35 22 12 5
Intellectual property
5 16 16 32 30
Data security and privacy
6 24 30 22 19
Quality manufacturing compliance
16 36 23 14 11
Inherent risk from third-party vendors/partners
7 28 39 19 7
Corporate governance
14 28 36 16 7
Regulatory and legislative environment
8 27 35 21 9
Unfair competition
15 19 40 16 10
Product liability litigation
23 29 29 13 6
Source: Economist Intelligence Unit, 2005

0 20 40 60 80
© The Economist Intelligence Unit 2005
100 3
Foreign drug
companies in India
and China
A comparative view

How risky are the following issues your pharmaceutical company faces in the post-closing implementation/integration
process in China? Rate on a scale of 1 to 5, where 1=Risk free and 5=Most risky.
(% respondents)
1 2 3 4 5
Corporate governance
3 25 37 30 5
Communications
5 21 34 31 9
Reaching milestones
6 23 43 22 6
Information technology security
5 20 35 28 12
Intellectual property protection
2 11 17 42 29
Regulatory compliance
3 11 31 40 14
Source: Economist Intelligence Unit, 2005
0 20 40 60 80 100

How risky are the following issues your pharmaceutical company faces in the post-closing implementation/integration
process in India? Rate on a scale of 1 to 5, where 1=Risk free and 5=Most risky.
(% respondents)
1 2 3 4 5
Corporate governance
9 31 33 19 8
Communications
7 24 37 26 6
Reaching milestones
3 21 43 28 5
Information technology security
9 29 38 19 5
Intellectual property protection
4 14 18 37 26
Regulatory compliance
11 16 32 28 13
Source: Economist Intelligence Unit, 2005
0 20 40 60 80 100

4 © The Economist Intelligence Unit 2005

 Foreign drug
companies in India
and China
A comparative view

Nearly 57% were involved in respectively. Pharma’s lukewarm of pharma respondents considered
distribution, and just over half in interest may be accounted for by patent-busting a problem in India.
manufactured product. But less the fact that the industry is spoiled Over 63% and 71% of drug
than one fifth were currently for choice worldwide in global company respondents in India and
undertaking early-stage R&D in the locations offering financial China respectively believed that
country (although 30% did remark inducements for inward their companies risked losing their
that they were “considering” investment. Ireland, Puerto Rico intellectual property rights when
conducting early-stage R&D in and Singapore all offer drug trying to integrate their businesses
China). This finding appears starker companies highly competitive tax with local suppliers. Pharma
when compared with the activities breaks. Pharma respondents respondents thus seemed
of other industries in the country: considered R&D credits to be the unimpressed with moves made by
30% of the non-pharma most appealing of the financial China in 2002 and India in early
respondents said that they were instruments deployed to lure in 2005 to bring national intellectual-
already conducting early stage R&D foreign investment in China and property laws into line with
in China. India. Over 62% of the survey’s Western equivalents. Indigenous
drug company participants Chinese and Indian generic drug
Pharma operations in India are commenting on their companies’ manufacturers account for a
more vertically integrated than situation in India stated that R&D sizeable chunk of the local pharma
they are in China. 44% of the credits were most beneficial to industry, and prove a source of
pharma respondents said that their their firm. And 45% of respondents cheap medicines. These producers
companies were conducting early- commenting on their pharma have sometimes flouted the two
stage R&D in India, compared with investments in China stated that countries’ new intellectual
37% reported by non-pharma R&D credits were beneficial—which property regulations and
respondents. is curious given the low levels of governments have failed to
pharma R&D activity in the latter intervene. Indian generic
Tax incentives provided by the country. producers have recently been
two countries fail to be a major challenging the legal validity of
pull for pharma. Less than one- Research-based life sciences some patented medicines in
third of the 218 respondents companies worry about the Western courts.
working for pharma companies, security of their products’
indicated that the two countries’ patents in China and India. Drug Counterfeiting and data security
favourable tax terms were companies are sensitive on the are other business risks
appealing and of benefit to their issue of intellectual property and identified by pharma
companies. Non-pharma survey argue that patents are the respondents. Over half of the
participants took a different view: lifeblood of their industry. Just pharma respondents saw
40% and 64% believed that income over 70% of the survey’s pharma counterfeiting and data security as
tax holidays offered a financial respondents said that threats to a business risk to their company
incentive to their companies’ intellectual property posed a operations in China—as did non-
investing in China and India business risk in China. Some 62% pharma businesses. These fears are

© The Economist Intelligence Unit 2005 5

Foreign drug
companies in India
and China
A comparative view

probably compounded by the large Chinese operations were said to be had trained local employees in
trade in forgeries of all types of wholly-owned today. 44% of the China on their company’s code of
branded goods in China. 42% of respondents anticipated complete conduct during the past two years
pharma respondents saw ownership of their facilities in to dilute business risks.
counterfeiting as a problem in India by 2010, compared with the Pharma respondents said that
India. The equivalent figure 34% that said they have complete markets are changing more
reported by non-pharma ownership in the country today. rapidly in China than in India.
respondents was, at 16%, much (Since 2002 India has permitted According to 41% of the
lower. foreign pharmaceutical firms to respondents with knowledge of
Respondents from all industry have 100% ownership of their China, companies investing in the
sectors want to reduce business investments in the country.) Over country face dramatic changes in
risks by taking over more control of 72% of the pharma respondents the profile of their target customers.
their assets in China and India. said that their companies had Economic wealth is diffusing more
Nearly half (48%) of the survey’s mitigated the business risks widely across the nation, and is
348 respondents said that, by inherent in corporate deal-making penetrating some rural areas. For
2010, their companies would have in India by auditing their vendors India, the proportion who thought
full ownership of their facilities in and business partners. 70% of their target customers would change
China. Only 35% of the foreign pharma respondents said that they the most dramatically was 26%.

About the survey Whilst every effort has been taken to

The Economist Intelligence Unit conducted a survey of 348 verify the accuracy of this information,
neither The Economist Intelligence
executives in October 2005, of which 57% said they were more
Unit Ltd. nor the sponsor of this report
familiar with China and 43% with India. In all, 58% said they were can accept any responsibility or
based in Western Europe, 18% in Asia-Pacific and 17% in North liability for reliance by any person on
America. A total of 63% said they were in the life sciences this white paper or any of the
industries, 18% in IT and technology and 16% in consumer goods. information, opinions or conclusions
set out in the executive survey.

6 © The Economist Intelligence Unit 2005