WORLD BANK TECHNICAL PAPER NO. 392 714 Work in progress for public discussion O> T 3?2 The Pharmaceutical Industry in India and Hungary Pofliris.r, Isfitit/tio/s, (/r d Dt hfl/Ot%1,(1/al I)cvc/opnicnt Kaafiu (jV6)pO,V(J w'ithl Akkil. 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Copyright X) 1997 The Intemational Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing December 1997 Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the proce- dures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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ISSN: 0253-7494 Greg Felker is completing his Ph.D. at the Woodrow Wilson School at Princeton University. Shekhar Chaudhuri is professor and research team leader for the Intemational Management Group of the Indian Institute of Management in Ahmedabad, India. Katalin Gyorgy is a researcher with the Innovation Research Centre in Budapest, Hungary. Melvin Goldman is senior technology development specialist for Asia in the World Bank. Library of Congress Cataloging-in-Publication Data The pharmaceutical industry in India and Hungary: policies, institutions, and technological development / Greg Felker ... [et al.]. p. cm. - (World Bank technical paper; no. 392) Includes bibliographical references (p. ). ISBN 0-8213-4071-9 1. Pharmaceutical industry-India. 2. Pharmaceutical industry- Hungary. I. Felker, Greg, 1966- . II. Series. 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Introduction -Pharmaceuticals Greg Felker The pharmaceuticals sector illustrates policy and and marketing have rendered the global market institutional influences on technological in final drugs oligopolistic. A few Western development in science-based industries, where multinationals command the market partly by innovations are tied to advances in scientific virtue of their massive investments in research, knowledge, usually considered a quintessential typically averaging 10 percent to 20 percent of public good. Pharmaceutical innovations are sales. built upon and integrate discoveries in biology, Because they are science-intensive chemistry, medicine, botany, and other scientific products rather than based on process fields. They are less often related to technology technology, drug innovations are relatively easy innovations of process or to firms' operational to copy or reverse-engineer, and technology know-how. The basis for such product may leak as codified formulas or via the innovations requires large and risky investments migration of staff. Intellectual property rights in scientific research, and an ability to live with and patent laws are thus central to a company's failure. Much of the basic and even applied ability to make profits and to followers' research is thus frequently carried out with attempts to catch up with technological leaders. public sponsorship and conducted in universities Patent laws vary from country to country. Many and government laboratories. Commercializing developing and socialist countries have been original drug products frequently involves even permissive toward imitators in order to stimulate larger investments in product development, local industry and hold down consumer prices. testing, and clinical research to demonstrate These countries may allow the patents for drug effectiveness and obtain official registration in processes but not products; may allow only major markets. Finally, selling brand-name short patent lives, sometimes shorter than the drugs requires extensive marketing networks. period required between patent filing and final testing and marketing; and may have lax These formidable costs influence the enforcement of patent infringements. sector's market structure. There are two major kinds of products: active substances (or bulk The Uruguay Round of GATT, however, drugs), and formulations, the products sold to includes commitments to raise many countries' consumers. Active substances contain the core protection of intellectual property rights to scientific and medical properties that are the international norms. The Trade-Related Aspects focus of research. Their development involves of Intellectual Property Rights (TRIPS) isolating natural substances or synthesizing Agreement, effective January 1, 1995, provides molecules with biochemical properties. The for all countries to make product and process production of active substances may be simple, patents available in a nondiscriminatory fashion for the relatively low-margin market segment. for all inventions subject to normal tests of Greater returns accrue to companies that hold novelty, inventiveness and applicability. The patent rights for innovative active substances or term (or life) of the patent must be a minimum formulations. Economies of scale in innovation of twenty years from filing. Transition 1 arrangements, however, have been provided for. performance is successful relative to their Specifically six year additional, (until January country's sector averages. Their governments 1, 2000), is given for adopting the above norms have promoted development through direct to developing countries as well to countries like investment, intellectual property and price Hungary which are in transition from centrally regulation, and support for scientific research. In planned to market economies. In developing both countries public investmnents in R&D, countries like India which do not provide education, and direct production have been more product patent protection in selected areas like successful in fostering industrial technology pharmaceuticals and agro-chemicals, a further development than is the case in many other five years (until January 1, 2005) is provided for promoted industries, for a number of reasons. adopting product patents in those areas. First is the nature of the product. Coupled with broader market-oriented Because advances are based more on science reforms, the new regulatory environment, even than firn-specific capabilities, public during the transition phase, challenges drug investments in research and training do not have producers in countries accustomed to limited to be so finely tuned to industrial and market patent protection. The new property rights, as needs to be useful to industry. Second, both well as explicit research and technology countries have traditions of academic excellence policies, will influence technological in the sciences within public institutions and development, although with time to adapt. firms. Public institutions have had mixed success in providing formal services to industry, Pharmaceuticals have provided but research and engineering skills have opportunities to countries with a strong base in benefited industry in both countries. And third, related scientific fields. The mismatch between both countries' social policy commitments to the theoretical orientation of public technology inexpensive drugs led them to adopt lenient institutions and the applied-science needs of patent laws, affording firms important industry, which typifies many sectors, may be opportunities to innovate without having to less of a hindrance to pharmaceuticals shoulder the full costs of original product innovation. Scientific knowledge and research research or pay prevailing rates for international capabilities in chemistry and biology are often access to intellectual property. While readily transferable to industry's product accumulating substantial process technological development efforts, whether aimed at original capabilities, their industries have relied on sales drugs or imitations. But industrial success still of imitation drugs discovered by Western firrns. depends on accumulating process technology to support productivity and quality in drug Hungary's role in the former East bloc's production. Process technologies like chemical division of industry included the export of synthesis and fermentation are more science- imitation Western drugs to the CMEA, the based than those found in many other industries. Soviet organized trading bloc. The industry was The following cases illustrate that successful primarily composed of state-owned firms, each institutional support involves a strong focus on producing a broad range of products. Drug applied research and process technology. technology was often acquired through licensing from Western companies eager to enter Hungary and India have developed otherwise closed markets in the East. Firms also substantial pharmaceuticals industries whose developed research laboratories to support 2 production of imitation drugs, process Hungary, indigenous firms acquired process improvements, and quality control. Their capabilities and exported active substances and mastery of production technology is generics. Larger firms had in-house research demonstrated by their success in units that developed processes for standardization, adopting Good Manufacturing manufacturing sophisticated products, including Practices and exporting active substances and antibiotics and analgesics such as ibuprofen. other intermediate products to Western markets. Government price regulation reinforced the Original-drug development was a lower priority, patent system, encouraging process innovations as reflected in R&D-to-sales ratios among over the high costs and slim rewards of original- Hungarian firms that were well below the drug development. Research in public international average. The country's universities technology institutes also emphasized process and industrial institutes generally did not form technologies and adaptation of Western drugs, effective research links with firms to support and several technology support institutions were drug development. Central planners attempted oriented toward applied problem-solving. to mandate coordination, and major firms held Formal links between industry and TSIs were nominal ownership of most research institutes. strongest in education and training as well as But firms used them primarily for routine standards and testing. Firms have used laboratory services and relied on foreign vocational institutions and industry associations licenses for new products and on their own for training workers. research for incremental process improvements. Important discoveries by local companies or Strong research in both countries research institutions, such as a drug used to treat contributed to development primarily through Parkinson's disease, were sometimes licensed training and process technologies, rather than early in development to foreign companies, who product innovation. Firms in both countries reaped most of the returns in commercializing relied most often on links to suppliers, licensers, them. and customers for technology acquisition and on their own capabilities for process improvements. India's pharmaceutical industry long focused on import substitution in a protected Policy changes in the 1990s have altered market. The industry is segmented, with a top the market for pharmaceuticals. Intellectual tier of large local, foreign, and joint-venture property reform and market liberalization will firms, a few hundred medium-scale units, and limit imitation-drug sales, presenting a strategic several thousand small-scale producers. Public challenge for technology development. firms historically have been important. Though Although the boom in older drugs and generics they now account for only 10 percent of output, as well as the transition period permitted under they have been a training ground for technical the TRIPS Agreement may provide breathing staff and entrepreneurs who later entered the space to some companies certain countries, like private sector. Drug formulas were acquired India, and firms in both countries must decide to from Western and Soviet firms both informally what extent they should pursue product and through licensing. India's patent laws long innovation or the development and marketing of recognized only process innovations, which original drugs. The latter option is feasible were protected for seven years. Multinationals because of the production and research nonetheless were players through local capabilities in both countries. But translating subsidiaries, particularly for formulations. As in underlying technological strengths into competitive advantage entails major challenges. lack the capabilities to develop new drugs. And One obstacle is the financial resources required the new firms have not established formal to assume the risks of research, which include service or research links with TSIs. vast long-term investments in a portfolio of R&D projects. Even the most successful In India, reform has proceeded more companies in Hungary and India are much gradually in both market liberalization and smaller than the Western multinationals that patent reform. Indigenous firns have continued finance broad-based new-drug R&D. The to pursue exports of bulk drugs and active expenditures and administrative burden of substances, but their investments in new-drug clinical testing and government certification in R&D remain low. With well-developed various countries take place between innovation research capabilities and a large domestic and commercialization. Finally, selling brand- market, some firms might produce modified name drugs requires distribution and marketing. imitation drugs that avoid patent infringement under the stricter standards of new rules. But as In approaching long-term technology regulations tighten, the question of research for investments, Hungarian firms are constrained by original drug development will become more inadequate access to capital and the uncertain pressing. India's public-sector TSIs, including progress of privatization. Most large drug universities, have developed strong capabilities companies have instead focused on expanding in process-technology research, but have had relations with foreign companies, acquiring limited success in commercializing new product licenses and serving as contract producers of innovations. Firms have relied on internal intermediates. Firms and TSIs have also begun research for technology development, and to profit from research agreements with external technology support has come primarily multinationals, arrangements that bring short- from long-term suppliers and customers. Links term financial benefits but often surrender to -TSIs remain largely limited to standards, potential profits from long-term development of testing, and information services. Firms have promising research. limited confidence in TSIs' ability to protect their intellectual property, a major inhibition to The industry's structure has changed contract research. Achieving confidentiality will with economic reform. Established firms have be critical if TSIs are to help firms compete on contracted in the face of the loss of traditional the basis of proprietary drugs. export markets and intense competition from imports. New producers have grown by serving As in Hungary, start-ups have grown niche markets in specialized intermediates and through their ability to commercialize product formulations including traditional remedies. technology rapidly, often drawing on the skills New firms frequently subcontract production to of the public sector and established firms. Many larger companies and often take advantage of firms entered the market in the 1980s, when weak intellectual property laws by hiring away price-controls and licensing regimes were key staff or commercializing their promising liberalized, and some have grown into large research. Small private firms have thus created establishments with considerable technological means of exploiting the commercial potential of capabilities. Some of them were built by the capabilities built up in established entrepreneurs and technocrats trained by public- companies. Though their flexibility enables sector TSIs and enterprises. more rapid commercialization, small firms still 4 These countries illustrate the potential and regimes that accompanied pharmaceuticals pitfalls involved in catching up to the promotion also enabled imitative learning. technological frontier in science-based sectors. Despite the research infrastructure, however, In such sectors, product and process capabilities drug companies in India and Hungary advanced often draw on the well-endowed research bases far more in production capabilities than in of some ex-socialist and developing countries. original drug development. As economic Protection of the local drug industry for social reforms have altered market and intellectual policy reasons created opportunities for property conditions, both industries are learning-by-doing. The permissive patent negotiating difficult transitions. 5 Chapter 2: The Evolution of the Indian Pharmaceutical Industry Shekhar Chaudhuri Introduction Pharmaceuticals is one of India's low-cost, quality labor, which enabled their most successful industries. State-owned affiliates to thrive. Loss of proprietary enterprises, locally owned private firms, and knowledge to Indian imitators incurred some affiliates of major multinational drug costs, but the multinationals benefited from companies have enjoyed strong growth since sales of brand-name products, and they the country's independence. The industry has retained control of export marketing. achieved sufficient mastery over process and product technology to produce sophisticated The industry's development is based antibiotics and synthetic drugs. India has on scientific knowledge. That knowledge is also become a significant exporter of bulk embodied and can be transmitted in books or drugs, or active substances. Success has through the experience of technical come despite strict price controls and personnel, even if government policies are regulations and an intellectual property heavy-handed and public institutions are system that until recently recognized only bureaucratic. process patents. This paper discusses the industry's India created institutions to train growth and the institutions and policies that researchers and technicians for the industry, supported its technology development. enabling it to master pharmaceutical process Section 1 outlines the sector's origins and technologies for high-quality production and expansion. Section 2 describes the to replicate foreign drugs efficiently. The industry's structural characteristics. Section government's early investments in state- 3 examines patterns of growth and export owned enterprises further developed local competitiveness. Section 4 concerns capabilities and experience. Though government policy. Brief case studies in industrial policies blunted competitive section 5 highlight the variety and roles of incentives for innovation, the development technology support institutions (TSIs) in the of state-owned firms resembled what Ergas industry's success. Section 6 details the (1986) calls a "mission-oriented" technology results of an industry survey. Conclusions policy, and many of today's private sector are drawn in section 6. managers and entrepeneurs gained earlier valuable experience in the state firms. The Indian pharmaceutical industry began in 1901 when the Bengal Chemical Local affiliates of multinationals and Pharmaceutical Works was established have contributed to the industry's in Calcutta by Professor P.C. Roy. Also at development. India's foreign investment the turn of the century, the British set up regulations and permissive patent laws several pharmaceutical research institutes for allowed the diffusion of technological tropical diseases: the King Institute of knowledge and expertise from foreign firms. Preventive Medicine, Madras, in 1904; the These factors might have led the Central Drug Research Institute, Kasauli, in multinationals to withdraw but for the lure 1905; and the Pasteur Institute, Conoor, in of India's giant market and the availability of 1907. During the First World War the 6 industry grew as local demand increased but Foreign multinationals entered the imports were cut off (Singh pp. 97-98). Still market as trading companies with small the country depended largely on the United investments. They imported drug Kingdom, France and Germany for formulations in finished form and marketed medicines until independence. them locally. At independence twenty-eight multinationals comprised a quarter of total During the Second World War India investment and 38 percent of sales (Ahmad, began to produce conventional medicines, p. 6). As there was no local substitute for serums and vaccines. Manufacture of the multinationals' technology, the synthetic drugs for dysentery aind leprosy government invited foreign investment and also began. Since independence in 1947, assured it of fair treatment. Foreign with the government's emphasis on investment in chemical and allied industries industrialization to achieve self-reliance, grew from Rs. 123 million to Rs. 2 billion India has invested massively the public and over the three decades ending in 1980. In private sectors and restricted imports (Singh the 1950s alone fifteen major foreign p. 99). Pharmaceutical sales were Rs. 100 subsidiaries were established in India. million in 1947, Rs. 540 million in 1954, Rs. 700 million in 1960, and Rs. 3.7 billion in Because of government pressure the 1973. Sales reached Rs. 12 billion in 1981 multinationals progressed to importing bulk and Rs. 40 billion ($2.5 billion) in 1990, and drugs (active substances), which they growth has continued (Nayar, page 51; Exim processed into formulations (final products) Bank; Indian Pharmaceutical Guide [IPG]). in country. They did not have to invest in Capital investment rose from Rs. 240 manufacturing plants, though they made million (approximately US $30 million) in good profits in the protected market. Within 1952 to Rs. 9.5 billion (US $400 million twenty years the multinationals achieved a equivalent) in 1991 (IPG). strong foothold in India, thanks to several factors: patent law protection, their control In the period soon after of technology to develop antibiotics and independence, India made little progress in synthetic drugs, their financial resources and the production of basic chemicals required management, and consumer preference for for synthetic drugs, and it remained foreign brand names (Nayar, pp. 48-61). The dependent on imports. To reduce imports of multinationals, through high-pressure sales antibiotics, Hindustan Antibiotics Ltd., a and massive advertising of world-wide public-sector firm, was set up in 1954. brand names, created a market for simple Indian firms started manufacturing sulpha medicines like cough syrups, tonics, and drugs from indigenous raw materials. In the vitamins. They were often accused of price- Second Plan (1955-60), the pharnmaceutical gouging. Prices for broad-spectrum industry was placed under the government's antibiotics, anveomycin, and achromycin, Directorate General of Technical were among the highest in the world Development to integrate development of (Nayar). This situation has changed, as is allied chemicals-based industries. During explored below. the Third Plan (1960-65), the government invested heavily in the public sector (IPG). 7 remains small compared to the industries in Industry Structure developed countries. The industry's total capital stock is about Rs. 9.5 billion (US Thnutyproduces-bulkdgs twoakindfonu ns o$275 million equivalent at today's exchange products - buLk drugs and formulations. ..... Bulk drugs are active chemical substances in rate), one-third of which is in the public powder form, the main ingredient in sector (though it accounts for only 10 percent of the industry's production). Of pharmaceuticals. Frutarethe fal 16,000 manufacturing units (IPG), 250 are preparatlon, such as t capsule, large-scale and are monitored by the injectables, and syrups, sold as a brand or Drcoae Gnrl o ehia generic product. Eighty percent of industry Drcoae Gnrl o ehia gaeneric poroducat.Eight pejrcn ok indrugstr Development. This group, also known as the saldues inIndia are formulattons. Major b organized sector, includes five public-sector produced in India are antibiotics, sulpha fim an si cmaiswtsgnfat drugs, vitamins, cortico steroids, analgesics, fin shxreomdings Th 2lge-scale an thos thtadrs..saeslk foreign shareholdings. The 250 large-scale athbercuoses, thaenteaddre disemas ldike firms account for more than 40 percent of tubrculaihns, dy betery, ast ma ardi. total production and export. Of these, 155 produce basic bulk drugs. Industry The industry includes large-firm, production has had a compounded annual small-firn and informal (unorganized) growth rate of 14.9 percent, according to the sectors. Forms of ownership include public, Export-Import Bank of India (Table 2.1) private, and foreign firns. Production Table 2.1 Production of Pharmaceuticals (Rs. Millions) Year Bulk % Change Ofrmu- % Change Total % Change Drugs Per Annum lations Per Annum Per Annum 1950-51 - - 210 - 210 - 1965-66 180 1,500 40.9 1,680 46.7 1975-76 1,130 52.7 5,440 26.0 6,570 29.1 1985-86 4,160 26.8 19,450 25.8 23,610 25.9 1986-87 4,580 10.1 21,400 10.0 25,980 10.0 1987-88 4,800 4.8 23,500 9.8 28,300 8.9 1988-89 5,500 14.6 31,500 34.0 37,000 30.7 1989-90 6,100 10.9 33,600 6.7 39,700 7.3 1990-91 6,750 10.7 35,600 6.7 42,350 6.7 1991-92 NA - NA - 57,000 34.6 1992-93 NA - NA - 71,500 25.4 Source: Adapted from EXIM Bank Paper, Pharmaceuticals: A Sector Study, 1991, and "India's Pharrnaceutical Industry: A Presentation of Drug Manufacturers" in Monthly Conmmentary, May 1993, VI. 8 A leading public-sector enterprise, colleges with university (including advanced Indian Drugs and Pharmaceutical Limited degree) programs. (IDPL), was incorporated in 1961 and . . became an industry leader. Technology The mndigenous sector, including from the Soviet Union was used to establish small finns, accounts for 90 percent of plants making antibiotics, synthetic drugs production. The remaining 10 percent is and surgical instruments. The firm built five produced by the six companies covered by plants and established three subsidiaries in the Foreign Exchange Regulation Act. Their collaboration with state governments. foreign-company equity ranges from 51 IDPL's operations contributed to a percent to 75 percent. geographic concentration of phanmaceutical Locally owned firms have been companies in and around Hyderabad. greater producers of bulk drugs than Discussions with officials of medium-sized formulations. in 1973, of total bulk pharmaceutical firms there suggest that production of 5,300 tons in the organized founders of perhaps a third of the two hundred-odd firmns had at one time worked sector, Indian firms accounted for 4,700 tons for IDPL's production or R&D departments. tunsc. -Stctor foirm acontedcfor 15 - . ~~~~~~~~tons). Still, the foreign firms' 11 percent of The owner of one of India's largest and most bulk-drug supply was 27 percent of sales. dynamic firms, Dr. Reddy's Lab, also Local firms produced only 30 percent of worked for the company. sales in the market for formulations. As a science-based industry, In 1992 most of the top twenty firns pharmaceuticals depends on research I 92ms ftetptet im institceution ls for pknowledge and h h had foreign company equity (Table 2). The foreign exchange act required foreign resources. Hyderabad has around forty companies to dilute their equity to no more institutions of higher learing, and is the than 40 percent in two years. Exemption was home of one of the industry's most important granted to companies employing high TSIs, the Indian Institute of Chemical technology and those that were Technology. A second major institute, the predominantly export-oriented. Such Centre for Cellular and Molecular Biology, companies could retain foreign equity up to is also located in the city. Finally, 74 percent. Firms with foreign equity Hyderabad has a number of pharmnacy holding of less than half were treated as Indian firms 9 Table 2.2 Top Twenty Pharmaceutical Companies (1992) Rank Company No. of Value Market Product (Rs. Millions) Share 1. Glaxo Pharma 116 187 5.5 2 Ranbaxy 42 129 3.8 3 Cadila Labs 135 129 3.8 4 CIPLA 79 98 2.9 5 Alembic 68 97 2.8 6 Ambalal Sarabhai 138 91 2.6 7 Pfizer 35 90 2.6 8 Hoechst 44 89 2.6 9 Lupin Labs 63 88 2.6 10 Boots 38 79 2.3 11 Burroughs Wellcome 54 75 2.2 12 Parke Davis 88 68 2.0 13 Torrent Pharma 98 67 2.0 14 Eskayef 63 50 1.5 - 15 Rhone-Poulenc 50 50 1.4 16 Hindustan Ciba Geigy 43 49 1.4 17 E. Merck 27 48 1.4 18 German Remedies 71 47 1.4 19 Wockhardt 68 46 1.3 20 Fulford India 29 46 1.3 Total Market 5,748 3,424 100.00 Source: Jay Narayan Vyas, et al. (ed.), Pharmaceutical Data Book, 1993, p. 4 Multinationals have always been a foreign sales were generated in India (Singh, significant part of the industry. They found p. 128). India attractive because of its large market, rapidly increasing demand, mild drug Until the early 1980s the industry control measures, lack of competition, and was very profitable. It has been reported that protection behind tariff walls and import the multinationals' returns may have been restrictions. Because of the heterogeneity of much higher because of transfer pricing and the industry, multinationals can dominate technology transfer payments (Lall, pp. 181- specific market niches through extensive 182). Despite foreign exchange mandates on promotion and established brand names. the dilution of equity in subsidiaries, foreign The Indian market is a significant share of parent companies have exercised control several companies' global sales. One study through restrictive clauses in technology and showed that for companies like Glaxo and management contracts. In response to Cyanamid, more than 10 percent of their declining profitability in the 1980s, however, many subsidiaries diversified into 10 areas related and unrelated to their parent countries, and establishing a sophisticated companies' main business lines. Some drugs not produced domestically. Despite its subsidiaries also severely curtailed their growth, India's pharmaceutical industry R&D in India because of poor returns. holds only 1.6 percent of the world market (Ex-im Bank). Per capita consumption is India's New Economic Policy, about $2, compared to $40 in the developed adopted in 1991, relaxed controls on foreign countries Table 3, give some earlier ownership. It has attracted new comparisons with other developing and multinationals and triggered others to newly industrialized economies. increase their equity in their subsidiaries to more than 50 percent. With less protection Direct employment in the industry is about and control and increased competition, a few 250,000, and employment in distribution multinationals have exited the country. and ancillary industries is about 750,000 (Ex-im Bank). Drug prices were among the Growth, Competitiveness, and highest in the world in the initial years of Technology Development development, but today they are among the lowest. Prices increased 122 percent from Sales have grown enormously in the 1971 to 1988, compared to inflation for all last forty years. Imports too have steadily commodities of 300 percent (Ex-im Bank) increased as the government has liberalized comparable plant in the United States or trade - an indication of latent demand for Europe may cost five times more than it Exports include basic drugs, intermediates does in India. Operating costs are half, labor and fine chemicals, and finished is one-tenth, and some important equipment formulations. Export sales have skyrocketed is one-fiftthe level of the developed world since 1980, increasing in some years 60 (Aggarwal). percent or more. India!s costs are a major advantage. Manufacturing costs for bulk drugs are one-third of those in developed Table 2.3 Annual Per Capita Drug Consumption (1988 - 89) Country Rupees India 34 (Rural Rs. 8) Pakistan 43 Indonesia 42 Nigeria 70 Philippines 95 Taiwan (China) 159 Turkey 165 Egypt 190 South Korea 346 Source: Ex-im Bank, Pharmaceutical: A Sector Study, p. 8. 11 Other factors that have contributed to injections and infusions. Though exports are the greater marginal profits manufacture of bulk drugs is more complex compared to domestic sales. Although than that of formulations, the latter pose profit margins have fallen in domestic sales technical problems that need careful because of increased competitiveness and investigation. Manufacture of enteric price control, price controls do not apply to coated, sustained or delayed-action tablets exports, nor do income taxes. Though the requires sophisticated techniques, and industry has made major strides in parenteral and ophthalmic products require international markets, it has a long way to aseptic conditions and foolproof methods to go. Exports remain less than a third of avoid accidental contamination. Even production, and India's share of the world packaging is challenging, as product market, whose total size is estimated at stability must be assured during storage perhaps $125 billion, is around 0.3 percent. (Narayana). Analysts estimate that the industry has the potential to reap annual foreign exchange The pharmaceutical industry world- earnings of $1 billion to $1.5 billion by the wide is characterized by intense R&D. In year 2000. 1989 sixty multinationals accounted for $89 billion in sales, 70 percent of the market. Herbal drugs have tremendous These companies spent $13.5 billion on potential. Exports of Ayurvedic and Unani R&D (Walker). Research is pursued in medicines have been increasing, as major synthetic chemistry, chemical technology, producers have built brand awareness. bio-physics, medicinal chemistry, clinical pharmacology, bio-technology, and Bulk drugs can be derived from molecular biology. plants or animals, minerals, and synthetic processes. Manufacture encompasses In India there is a heavy reliance on extraction, concentration, fractionation and foreign technology. While the turnover of crystallization, and complex, high- the industry has increased considerably over technology processes involving multi-stage the years, imports for the domestic market reactions of organic synthesis and increased from 5 percent in 1965-66 to 23 sophisticated formulation processes percent in 1991-92. The importance of (Narayana, p. 87). foreign know-how may be gauged from that fact that, of the top twenty firms, thirteen Formulations are diverse, ranging from pills had foreign origins. and syrups to ointments, inhalants and 12 Table 2.4 R&D Expenditures, Selected Years (Rs. Million) Year R&D Expenditure 1965-66 30.0 1976-77 105.0 1978-79 120.0 1979-80 147.5 1981-82 293.0 1983-84 400.0 1985-86 480.0 1986-87 500.0 1991-92 700.0 Source: Monthly Commentay, p. xiii R&D expenditures in India are quite The organized Indian sector (firms without low - 1.22 percent of sales - compared to 10 any foreign collaboration) took up the percent world-wide. R&D has grown at a manufacture of basic drugs slowly. They compounded annual rate of over 12.8 have acquired technological capability percent (see Table 4), but production has through a variety of methods, including in- grown much faster. Seventy-seven firms house R&D, the national research have in-house R&D departments approved laboratories and unreported and informal by the Department of Scientific and purchase of technology from abroad. Industrial Research. Much of the industry's Process research seems to be the forte of R&D is done by the larger firms. Only a few many large and medium sized pursue basic R&D to develop drugs. manufacturers. Narayana found fifteen firms that had developed processes to Narayana (pp. 97-99) found that manufacture bulk drugs. private-sector firms with foreign affiliations received up-to-date technology and technical The Government's Role assistance as required. Still, these companies made drugs by simple one-step India's post-independence emphasis or two-step processes from penultimates or on industrial self-reliance and social welfare late intermediates that were imported at made the production of low-cost prices much higher than those in the open pharmaceuticals by domestically owned market. On the other hand, public-sector companies a primary policy goal. The firms' choice of technology was governed by government also has sought through ideological considerations, and they regulation to prevent the marketing of poor acquired obsolete technologies. Though quality products. The first drug safety law they often made improvements through in- was enacted in 1919, and the Drugs Enquiry house R&D, these were not comparable to Committee was established in 1931 to the improvements in developed countries. recommend controls in the interest of public 13 health. The committee recommended a drug One government policy, the loan control bureau with branches in all licensing system, pennitted drug companies provinces, a laboratory system, and the to meet emergency needs during war or licensing of pharmacists. A 1940 law partly natural calamities. It helped promote implemented the recommendations. entrepreneurship and led to the development of the small-scale sector. About 8,000 loan By independence India had a licensees produce pharmaceuticals worth Rs. rudimentary industry, but newer drugs - 9 billion. Some products, however, were including sulphas, antibiotics, vitamins, hormones, anti-histamines, tranquilizers, and psychopharmacological agents - were being The government controls prices imported in increasing quantities, straining under the rationale that drugs are a basic the country's foreign exchange. The social need that should be available to all at government responded by encouraging a reasonable cost. Price controls began during comprehensive manufacturing base. It the war between India and China in 1962. envisaged plants to produce basic organic Beginning in 1966 manufacturers were chemicals and inorganic chemicals, required to obtain government approval to manufacturing in the public and private increase prices. Later orders fixed prices sectors, technical and financial support for and markups, allowing greater profit for research in industry and in national formulations involving R&D. In a 1987 laboratories, and training. India's rich plant price order, the R&D incentive was life would provide some of the raw material withdrawn, the span of price controls was to develop compounds. reduced from 347 to 161 drugs, and the price mechanism for bulk drugs and formulations During the second and third five-year wa adutd o enurg getr pln,fo- 95t 95 auatrr was adjusted to encourage greater plans, from 1955 to 1965, manufacturers production and better quality of essential began producing penicillin, streptomyc drugs. Manufacturers responded to these chloramphenmcol, and broad-spectrum governmental measures (Mittal, p. 130). A antibiotics of the tetracycline group. Firms 1993 measuref reduced pr control enterd foeigncollboraionsto aquir 1993 measure further reduced price controls ecntered foreign collaborations to acquire to 143 drugs. Price revisions are based on technical knowledge. Firms in the United States, Switzerland, West Germany, Italy governent cost-cum-technical studies. and the United Kingdom collaborated, and To encourage R&D, the government the Soviet Union supported the production exempts from price controls for five years of synthetic drugs and alkaloids. India also manufacturers that have developed received funds and technical assistance from production processes to produce drugs from UNICEF and WHO to set up plants in the the basic stage. Other reforms have been public sector. By 1993 Indians were aimed at spurring formulation research. consuming about 500 bulk drugs, of which Until recently price orders did not provide about 350 were produced locally (IPG, for automatic increases for higher material 1993). costs. Firms had to prove that cost increases affected profits. 14 Table 2.5 Pharmaceutical Industry Profits Year Profit Before Tax (% of Sales) 1969-70 15.5 1974-75 10.7 1977-78 11.7 1980-81 8.8 1982-83 7.5 1983-84 6.7 1984-85 5.8 1985-86 4.5 1986-87 3.4 1987-88 3.5 1988-89 2.8 1989-90 3.5 Source: Chemical Weekly Annual, 1992 as quoted in Pharmaceutical Data Book, 1993. Table 5 shows the erosion of profits. fees. This encouraged innovation of drugs Successive price orders in 1970, 1979 and at costs much lower than those of inventors. 1986 corresponded to decreasing With GATT, however, India recognized profitability. The decline is considered a product patents, extended patent life to major factor preventing investment in twenty years, shifted the onus to the alleged manufacturing and R&D. A 1994 drug policy freed from price controls all but the patent infringer to prove innocence, and most popular drugs. It allowed greater profit abolished the ceiling on license fees. and encouraged R&D and the development of Ayurveda and Unani. Controls on foreign R&D and Technology Institutions: An investment were loosened. The policy also Overview created an independent body to consider Drug research is carried out in firms, prices and a National Drug Authority to six labs of the Council for Scientific and monitor practices in drug promotion and Industrial Research (CSIR), several units of use. the Indian Council of Medical Research The Indian Patents and Design Act (ICMR), and nearly fifty universities. of 1970 reflected greater concern for firms Firm R&D Department that adapted products than for inventors. The law recognized only process patents, The R&D departments of medium and patent lives of five to seven years; and larger pharmaceuticals firms undertake placed the onus of proof of infringement on to master, improve and innovate product and the patentee, and set a ceiling on license Although R&D investments have been process technologies, as well as to traditionally low in the private sector, they reduce costs and improve product quality. have risen in the 1990s. 15 Table 2.6 Private Sector R&D Expenditures animal laboratories to industry, R&D Year Expenditures institutions, and others, and it undertakes (Rs. million) contract research and grant-in-aid projects. Its clients include firms in India and 1991-92 800 elsewhere. 1992-93 950 1993-94 1,250 The institute provides analytical and testing services to academia and industry, One of the industry's fastest growing and supplies laboratory animals, including companies is Dr. Reddy's Lab (DRL), pathogen-free animals, cell lines, and headed by Dr. Anji Reddy, a chemical parasites and parasite products. The engineer. The company was founded in National Information Centre for Drugs and 1984, when the drug alphamethyldopa was in short supply (Shenoy). Today DRL is the arceutical,ocatedataCD.It pro access to international databases. It also largest producer of several drugs in India offers short-term ad hoc training in research and the second largest manufacturer of techniques to academic organizations and norfloxacin and ibuprofen in the world. industry. It conducts training in laboratory Ninety percent of its sales comes from bulk animal science. drugs. The key to Dr. Reddy's success is its Indian Institute of Chemical Technology operation outside international patent law, a IICT, another laboratory under consequence of the shelter provided by CSIR, undertakes R&D in chemical India's patent act of 1970. The company's technology and develops strategy has been to develop and patent process/products/design and engineering indigenous processes to make drugs to know-how based on the use of indigenous capture the market. It also exports raw materials. It carries out applied research formulations to countries that do not honor in chemistry and chemical technology. IICT international patent laws. Its senior helps industry improve efficiency through chemists scan the international market for technical consultancy and testing services. best-selling drugs whose patents are soon to Its specialties are pesticides, drugs, organic expire. The company's focus is expected to intermediates and fine chemicals, catalysts, change, with India joining the Dunkel polymers, organic coating, low-grade coals, Agreement, which is to be implemented by and value-added products from vegetable 2005. The company plans to concentrate on oils. Process design and mechanical basic research rather than process research. engineering design form an integral part of Central Drug Research Institute technology development and transfer. IICT has transferred more than CDRI is a laboratory under CSIR that seventy technologies in various chemical develops drugs and drug technology, aes (nldn hraetcl) t areas (including phartnaceuticals) to investigates disease processes, evaluates industry, of which fifty are being used in natural resources for potential development, disseminates research, and provides technologies, particularly for bulk products, technical training. CDRI offers consultancy tnologie articularly for in technological development of drugs and 16 commercial plants with guarantees on raw facilities for fabricating engineering polymer material consumption, product quality and components. The laboratory offers plant capacity. A significant share of its consultancy to industry, R&D units, and work is sponsored by industry. project engineering organizations in India and abroad. The laboratory's international Services include development of clients include Du Pont, Eastman Kodak, technologies on contract; basic and detailed Rohm and Haas, and Toray. Pharmaceutical design of commercial plants along with work is less important in NCL. assistance for commissioning; analysis and testing facilities; simulation, optimization Formal TSIs focusing on drug and control of process plants; hazard and development are very few - perhaps CDRI is risk analysis of chemical and petrochemical the only one. TSIs like the Indian Institute of plants; and toxicity evaluation of pesticides. Chemical Technology and the National Pharmaceuticals is one of its most important Chemical Laboratory have worked on areas of work. pharmaceuticals as part of their portfolio. Other publicly funded TSIs related to the National Chemical Laboratory industry focus on areas like vaccine development and biological and Established immediately after toxicological studies. As there are so few independence, NCL also is under CSIR. Its TSIs, they cannot serve all the firms in the mandate is to conduct research in chemistry, industry. Only a few firms in the survey had develop technologies to use natural worked with them, though the TSIs had resources, help expand import substitution served a number of firms that were not and exports, and assist industry's covered in the sample. technological development. Its research involves catalysis, biotechnology, organic The India Institutes of Technology chemical technology, polymers and other have not trained graduates and post- high performance materials, and basic graduates in pharmacy, though some of them research in chemistry and biochemistry. do have programs in pharmaceutical engineering. Universities have traditionally Important drugs independently performed the educational role for the developed by NCL are ibuprofen and an industry but have not generally provided intermediate for ranitidine. NCL has other services. developed a method for producing Vitamin B6. Technologies for drugs and Survey Results pharmaceutical products have been transferred to industry. NCL has developed Mail surveys and interviews were a water-absorbing polymer of importance for conducted to evaluate firms' sources and wasteland development, forestry, and edible development of technology and use of oil programs. It has developed a fibre- technology institutions. Thirty-eight firms reinforced thermoplastic material to produce responded to the surveys. Large firms - critical components of vehicle engines. those with at least 500 employees - comprised nearly all of the respondents to NCL has developed instruments to the mail survey. study chemicals, a catalyst testing unit, and 17 Of the fourteen firms that had networks. Consultants were used for one- achieved "significant" product changes, four time jobs like trouble shooting, commercial had used TSIs and one had collaborated with advice, and training. a foreign partner. The others relied on in- house development. Of ten firms that The preferred methods of acquiring reported "incremental" product changes, two technological services were in-house had used TSIs and eight had no outside laboratories and long-term suppliers, which support. Concerning "significant" process constantly communicate with firm decision changes, eleven of fourteen firms had used makers. Long-term contacts - suppliers, no outside support; none of the eleven customers, foreign investors - were rated reporting "incremental" process changes had more important for technological outside support. development; short-term contractors like consultants and private laboratories were TSIs were not involved in organizing less so. Universities and academic and links among companies to pursue research associations were least regarded, innovation. Three firms said they had perhaps because they were thought to lack established their own links that had strongly practical perspective. It also may indicate contributed to improvements. It may be firms' lack of regard for basic research. supposed that the intense competition discouraged firms from working together for The most important benefits of TSIs fear of loss of trade secrets. were their ability to solve problems, provide quick access to information and technology, Firms used vocational institutions provide product development, and enhance and, less often, industry associations to technical and business contacts. On the provide outside training to workers, but the other hand, their defects included slow associations were found to be more helpful. response, inadequate confidentiality, and Several firms relied on universities, but they expensive fees. were not fully satisfied. A few firms used suppliers; only one sought out buyers for On the importance of government training. policies, firms rated export incentives useful, particularly with the surge in exports since Mail survey respondents drew on 1987. Fiscal incentives were popular, outside support most often for though they tended to be concentrated in standards/testing (because of the exacting better off firms. Other government supports standards required of products), trouble have included grants, technology loans, shooting, formation of technical networks, standards/testing, government procurement, and information services. They also took and training. advantage of their commercial advice and training courses. TSIs were used least often, Firm's technology management for contract and collaborative R&D among surveyed services, perhaps because of the A few examples illustrate how firms firms' fear of leakage of technical know-how acquire and use technology. and their lack of confidence in the former's Company A, established in 1907, is a capabilities. Long-term customers were reputable manufacturer of antibiotics. It is used for information services and technical credited with having been India's first 18 private-sector producer of penicillin and the manufacturing ampicillin from a process second company in the world to produce developed in-house, enabling it to reduce roxithromicin, a semi-synthetic macrolide costs. It developed a process for the antibiotic. Recent innovations include a manufacture of zinc picolinate and picolinic state-of-the-art fermentation technology. It acid, and it is the only exporter of this exports to Germany, the Netherlands and product from India. Switzerland. The company has a modem laboratory and a comprehensive library. Of thirty-three employees in R&D, Some of its scientists have done research in six hold doctorates and twelve are post- national laboratories; they now work in graduates. The company uses the Indian applied research, focusing on industrial Institute of Chemical Technology to train its needs. employees. It also conducts in-house classroom and on-the-job training. The The company runs a technical school company says it has benefited enormously in its factory for workers and students, from its memberships in industry including a foreign candidate under WHO's organizations, particularly by obtaining sponsorship. A six-month course for information on industry developments, recruits from universities involves lectures exports, and standards and testing. and practical work, and it is followed by on- the-job training for another six months. The It uses private consulting firms and company is a member of thirty-three individuals for process design and scientific/technical, commercial and engineering, product development, plant professional associations, with which it layout, and Good Management Practices mainly exchanges knowledge. Consulting (GMP) audits. It has, however, expressed firms have been used for energy and dissatisfaction with consultants for slow environmental audits and in engineering, work, inadequate testing facilities, and poor laboratory services, and R&D. Government equipment. The company believes R&D policies of which it has taken advantage and product development services can be include technological loans, apprentice provided by national laboratories and its schemes, market protection policies, and own facilities export incentives. Company C was established in 1924. Company B was founded in 1982 by In 1950 the company, originally an organic chemist with research and incorporated in India, became a wholly teaching experience in India and the United owned subsidiary of the parent States. It makes bulk drugs and drug multinational. To comply with Indian law, intermediates. Its growing export markets the parent diluted its holdings to 40 percent. include the Commonwealth of Independent The company was the first in India to States, Western Europe, and Southeast Asia. The drugs theufirstein and manufacture drugs, including steroids and The company has continuously vitamin A, from basic stages. It is a leading expanded its R&D and has developed manufacturer of advanced steroids, anti- processes for the manufacture of several ulcerants, broad spectrum antibiotics, infant drugs, including pyrazinamide, which fights foods, and diabetic foods. Export markets tuberculosis. In 1987 it started include Germany, France and Bangladesh. 19 Innovations have included an The company research director said indigenous process for bethamethasone GATT would push Indian companies to do disodium phosphate. Product changes research. Furthermore he asserted that with include development of suspension coating its strength in scientific manpower India for tablets and elimination of chloroform could become a global player in from expectorants and larger batches of pharmaceuticals. ointments. Finally, Company E, established in The company trained 600 1987 by two brothers, is the largest producer management staff in 1992-93 through in- of intravenous fluids in India, with thirty- house programs. About 1,000 workers five million bottles annually. One-third of received on-the-job training in GMP, safety, its production is exported - 90 percent of and productivity. Indian IV-fluid exports. The company has not approached The company considers technology any TSI for services, but it employs private crucial to achieving quality and cost consultants for effluent treatment and advantages. Its low prices depend on process technology. It expects to obtain efficient operations. Its laboratory services and technology from the parent equipment is of a standard seen in few company's research group. companies in the country, and its advanced manufacturing machinery was imported Company D, part of a multinational, from one of the world's leading was established in India in 1958. Until 1984 pharmaceutical machinery manufacturers. it was a closely held company, when like other multinationals it had to dilute its It is certified to be following WHO's holdings to 40 percent. Its research GMP norms. The company has taken laboratory works closely with other measures to keep abreast of technological laboratories of the group abroad. developments. It is a member of the U.K. Parenteral Society and the Parenteral Drug The company's Bombay research Association of the United States. It has center, which employs 200 including fifty deputed its senior personnel for training and Ph.D.s, was set up in 1972. It is the only participation in international conferences one of its kind in the pharmaceutical sector and invited internationally reputed scientists that is working at an international standard to talk to its technical staff. in basic research, modifications, product development, and process development. It Company E's in-house training offers is searching for biologically active capsule programs to employees, from top substances from plants and microbial management to shop floor personnel. During sources as leads for potential drugs. The 1991-92, about 1,000 persons attended fifty Indian subsidiary is the multinational's in-house training programs. Fifteen leader in target-oriented natural product employees have gone to Switzerland for research. Its laboratory is one of the few in training in machinery operation and India pursuing basic research. maintenance, and to be exposed to another culture. 20 The company has had no formal tie government financial support to TSIs have with any TSI, though it is exploring the kind forced them to become more industry- of interaction it wants to have. oriented, and they are seeking collaboration with firns and marketing their services. Conclusions Second, the recent GATT agreement is The pharmaceutical industty in India expected to trigger stringent enforcement of The industry as ia product patents. In anticipation the industry iS considered a life-liheidustry, as itS is examining the technological innovation products help alleviate the suffering of necessary for development. Many diseased people. It was designated as part of companies realize the importance of basic the core sector by officials who launched research and are creating in-house research economic growth plans in 1951, subjecting facilities. An increasing number intend to it to a host of government policies. The take advantage of TSIs. policies have been important in the phenomenal growth of the industry, though The analysis indicates the need for some of them have had an adverse effect on the industry, TIs and government to redefine technological development. their relationships. Suggestions for each follow. The industry is characterized by a large number of firms - small and large, Recommendationsfor industry technologically dynamic and stagnant. Exports have become a salient feature of the Most firms lack the resources to industry, especially bulk drugs. India conduct product research. They should benefits from low production costs therefore concentrate on process research, compared to developed countries. The which has become a strength. It would industry's technological status is mixed. allow them to pursue innovation in drugs Each of its major sectors - public, that are off patent, a market that could be multinationals and indigenous organized and worth $20 billion by 2000. Similarly firms small-scale - has its strengths and can focus on "me-too" drugs - devise weaknesses. products by manipulating their molecular structure, as Japanese industry did two R&D expenditures, though high for decades ago (Yamamoto). Finns that are India, are very low compared to developed relatively resource-rich may pursue both countries. Technological development has product and process research. Even so, the occurred mainly through in-house efforts. Japanese experience shows that product State laboratories have worked closely with research requires many years to reap some firms for product and process commercial benefits. Gradually, firms development. Most R&D, however, is should move into product research once they concentrated on process development, and accumulate resources and develop their large companies perform the most technological competence. significant in-house R&D. To overcome the scarcity of resources, firms may consider a variety of Two major developments have options: affected the industry. First, cuts in 21 * mergers with other Indian firms; also is important. For instance, the survey found that firms considered increasing * collaboration with foreign firms; product quality, reliability and development to be important means of competitiveness. * joint ventures with foreign firms R&D and training must be linked to firm in third countries, leveraging strategies. thelow-cost home base; * collaboration on R&D with TSIs; Recommendationsfor TSIs Support institutions should set up * joining R&D consortia centered extension centers where firms are clustered. around TSIs like the Central Drug There are too few TSIs to cater to the Research Institute, Lucknow or industry, but separate departments could the Indian Institute of Chemical address the needs of small-scale firms and Technology; or firms in the unorganized sector, which need ... . ing industry-orientedresearch to improve their product quality. They lack . joi i expertise in designing, implementing and organizations sharing expensive maintaining manufacturng systems fclte..matmg mnfcum sytm facilities. according to GMP norms. The price of Tlhe strength of the industry - its these services should be appropriate to the The srengt of te iriustry- its firmns' limited resources. ability to develop cost-effective processes for products patented abroad - cannot remain The continuing high growth of the a competitive advantage in the post-GATT industry indicates its dynamism The world. The industry must therefore create goverment's 1994 drug policy, the Dunkel training facilities and an environment Agreement, and changes in patent law supporting basic research. Young, creative individuals have to be encouraged to pursue serice a ngement con tecloical research to ensure the industry's long-term traicin, mandasesea capability. Some success. trang, and basic research capability. Some of these needs are short term, some are long Finns that pursue basic research may term. Even TSIs that want to offer the Firms~ ~ ~ ~ ~ ~ ~opitiae thatliie pursu basi resarc may consider focusing on tropical diseases (not a sophisticated capabilities that can only be strength of the multinationals) and herbal developed over time may benefit from drugs, which would exploit India's variety of serving some of the short-term needs that plants and its tradition of indigenous would help them build relationships with medicine. The failure to use publicly funded firns. TSIs is a lost opportunity. TSIs should be As noted in the survey results, firms involved in seminars and conferences, tur to TSIs to solve specific problems, training programns, and joint research provide quick access to information, help designed around mutual strengths. develop products, and enhance their Boosting expenditures on R&D and contacts. TSIs should be aware of the trade- technical training is an imperative, though it offs in providing these services. Solving will not ensure success. Managing these problems implies an organization that has activities consistent with a firm's strategy close relationships with clients, is aware of 22 their needs and can respond quickly, and can Until recently the government has work on problems that are likely to be of behaved like a regulator. It must do more to short duration. These problems are not promote and sustain the industry. Its 1994 likely to require basic or applied research, drug policy is a beginning. Other measures and customers are likely to be small firms. that would help industry move into the On the other hand, helping develop products world market include funding of R&D, requires a long-term focus, applied research, concessional loans to build research and perhaps basic research. Customers facilities, export incentives, and progressive likely would be medium and large firms. removal of price controls and restrictions on mergers where possible without harming the The skills required to pursue these public interest. two courses differ. TSIs should analyze their organizational imperatives to clarify The survey found that export the trade-offs. TSIs also need to be aware of incentives were considered important. their weaknesses as perceived by the firms: Fiscal incentives were also important. Finns slow response, inadequate confidentiality, took little advantage of other government and high fees. Market-rate fees are a recent programs; they reported ignorance of them development, often triggered by the need to and bureaucratic problems in obtaining generate revenue that the govermment had support. previously provided. Government should encourage Networking and collaboration among cooperation among applied-technology TSIs and between TSIs and engineering institutions, universities, higher level consultants may help meet industry's needs. scientific TIs, and industry. One avenue It would enable basic-research-oriented TSIs could be collaborative R&D, partly funded to strengthen their core competence and by the government, to develop drugs to treat respond to industry's need for practical tropical diseases. Other government-led technology, and it would save resources that mechanisms might be deputation of otherwise would have to be devoted to university professors to work in applied acquiring facilities and capabilities. TSIs or pharmaceutical firms, founding of chairs in universities and TSIs to work on Governmentpolicy applied R&D, creation of advisory boards with industry representation to advise Few Indian TSIs have the capability educational institutions regarding their to perform drug research. Given the growth research and curriculum, and deputation of of the industry, the government must scientists and executives from support the expansion of services for diverse pharmaceutical firms to the policy making firms. It should urge industry to be a partner bodies of goverment. The goverment may in institutions, which could be oriented also explore partially funding these toward applied research. At the same time, endeavors. the government should maintain support for existing TSIs, and it should urge them to The government should actively develop strategies to help the large number support alternative medicine - Ayurveda, of technologically laggard firms to produce Siddha, Unani, and homeopathy. These better quality drugs. altematives may be more cost-effective 23 given the country's huge natural resources, not have the same scientific rigor as the and they do not have many of the side allopathic medicine. This lacuna can be effects of allopathic medicines. The reduced if scientific research in these fields alternatives have suffered because they do is pursued. 24 Acknowledgments The study on which this report is based could not The research team and I have learned a lot from have been executed without the support of many people. I --the International Advisors: Mr. N. Vaghul, Chairman, thank the director and dean of IIMA for their continuing ICICI; Mr. Fumio Nishikawa, Chairman and Chief encouragement and support.I gratefully acknowledge the Executive Officer, Toray Research Centre; and Professors financial support of ICICI, Bombay and CIER, Taipei, Henry Ergas and Lewis Branscomb. Dr. Charles Davis of Taiwan for conducting the study. I am grateful to Mr. the IDRC and Mr. Carl Dahlman of the World Bank Melvin Goldman of the World Bank, who was instrumental enhanced our understanding of industry-TI interaction. in bringing the IIMA team into the project. But for his Our work with the country team leaders Professors San immense contribution from the concept through the Gee, Okada, Unger, Kim, Landry, Dr. Inzelt and Mr. Xu coordination of the various country teams, this study would also helped us develop perspective on the nature of not have been possible. industry-TI interaction. I also benefited from discussions with colleagues at Southern Illinois University, I wish to acknowledge the contribution of my Carbondale.This study would not have been possible colleagues at the Institute: Professors M.R. Dixit, S. without the cooperation of the large number of company Ramnnarayan, and others directly involved in the study; CEOs, senior executives, scientists, and directors of the M/s. Naresh Chotai, Anil Yadav, Arijit Sikdar, C.B. TSIs we surveyed.The burden of typing and retyping the Dasgupta, Dilip Hegde, Sumit Mustafi, and Dr. T. manuscripts several times fell largely on the shoulders of Rangarajan. Mr. Suresh Sharma provided able statistical Mr. Pauly. Editorial assistance was provided by Bennett support. Minton and Greg Felker. 25 Springfield, Virginia: National Technical References Infornation Service. Aggarwal, Rahul. 1994. "The Indian Narayana, P.L. 1984. The Indian Pharmaceutical Industry." In hnpact of Pharmaceutical Industry. New Delhi: Liberalization on Firm Level Export NCAER. Strategy: A Study of Five Industries. India: Indian Institute of Management Nayar,B.R. 1983. India'sQuestfor Ahmedabad. Technological Independence: Policy Foundation and Policy Change. New ASSOCHAM Bulletin No. 8, Auigust 1993, Delhi: Lancers Publishers.. pp. 7-12. Shenoy, Meera. 1993. "Quick Growth, Council of Scientific and Industrial Ready Money," Business India, August Research. 1993. CSIR Handbook New 16-29, pp. 82-84. Delhi. Singh, Satwinder. 1985 Multinational Annual reports, Department of Chemicals Corporations and Indian Drug Industry. and Fertilizers, Government of India New Delhi: Criterion Publications,. p. New Delhi. 128. Export-Import Bank of India. 1991. Vadamalai Media. 1992. Engineering: "Pharmaceutical: A Sector Study," Industry and Technology Survey - 1991- Occasional Paper No. 12, February 92. Madras. Ergas, Henry. 1986. "Documenting Vyas, J.N. and Shah, Gitesh. 1993. Technology Matters ......", Pharmaceutical Data Book -1993. Aihmedabad: Saket Communication Hussain, Ahmad. 1988. Technological Centre. Development in Drugs and Pharmaceutical Industry in India. New Walker, Stuart (ed.). 1991. Creating the Delhi: Navrang. Right Environment for Drug Discovery. Indian Pharmaceutical Guide, 1993.Lall, London: Quay Publishing. Sanjaya. 1980. TheMultinational Yamamoto, Hitashi. 1991. "The Corporation. London: The Macmilan Importance of the National Climate as a Press, pp. 181-182. Stimulus to Research in Japan," in Stuart Mittal, S.K. 1993. Drugs and R. Walker (ed.), Creating the Right Pharmaceutical Industry. New Delhi: Environment for Drug Discovery. Anmol. London: Quay Publishing. pp. 97-104. Morehouse, Ward, Brijen Gupta, K. and A Deolalikar. 1980. Assessment of US.- Indian Science and Technology Relations: An Analytical Study of Past Performance and Future Prospects. 26 I Indian Pharmaceutical Guide figures differ: production in 1989-91 was Rs. 6.4 billion, Rs. 7 billion, and Rs. 7.9 billion respectively for bulk drugs, and Rs. 3.4 billion, Rs. 3.8 billion, and Rs. 4.2 billion for formulations. 27 Chapter 3. Institutions and Technological Innovation in the Hungarian Pharmaceutical Industry Katalin Gy6rgy Introduction Pharmaceuticals is one of Hungary's most branch research institutes remain isolated from successful and outward-oriented manufacturing the needs of industry. Above all, economic industries. Some observers say it is the restructuring has created acute financial country's only technologically advanced difficulties for the industry and its support industry with competitive potential in global institutions, weakening their ability to invest in markets. The country's transition from development and commercialization. Changes socialism to a market economy, including trade are required within the industry and in the liberalization and privatization, has naturally relations between firms and research affected the industry. Privatization has been institutions. Resources must be invested in largely accomplished. The industry has modernization and innovation. continued to performn reasonably well, This report is based on a 1992-93 survey maintaining exports though losing ground conducted as part of a World Bank study on domestically to foreign competitors. It IS technology development institutions and unclear whether the industry will prosper in the policies. Since then important changes have long run, having adapted to the new occurred, particularly in the degree of industrial environment, or whether its present relative privatization, and these later developments are success is only temporary. discussed. Key to the industry's long-run With respect to the cooperation between competitiveness is innovation, capitalizing on technology support institutions (TSIs) and the country's underlying capabilities in related manufacturers, we cannot offer an update. Our technology and research. Hungary's leading impression is that the conclusions of the 1992- role in the defunct East bloc's Cooperation for 93 survey remain valid. Mutual Economic Assistance (CMEA) system built upon the country's tradition of Section 1 provides an overview of the pharnaceuticals production and research in historical and technological development of the chemical and biological fields. Although industry, emphasizing the changing relationship technological innovation lagged behind major between the state and industry. Section 2 Western multinational drug companies during profiles the industry, its growth, market the socialist era, the industry developed performance, finance, and structure. Section 3 substantial research capabilities within firms and describes innovation strategies of various types in designated branch research institutes. The of firms. Section 4 analyzes tfhe effect of industry's ability to draw on its strengths is government policies on the industry's hampered, however, by certain institutional technological development. Section 5 examines legacies of socialism. Even the larger TSIs and their relationships with industry. Three established firms are small and insufficiently case studies of industrial innovation are specialized by international standards, while the presented in section 6. The final section draws 28 conclusions concerning the industry's institutional system for technological innovation technological development. performed poorly. The branch institutes continued to expand but remained isolated from Industry History the needs of industrial firms, resulting in Hungary's pharmaceutical industry began redundant manpower and R&D. The institutes more than eighty years ago. Five of the seven concentrated on scientific research, but firms largest firms were founded before the Second used them primarily for routine tasks like testing World War, the first and largest in 1908 and the and laboratory services. second-largest in 1910. Its early development Socialism provided industry with was supported by chemical and pharmaceutical guaranteed markets and limited autonomy in research in Hungarian universities. Growth in exchange for state control over prices, profits, the 1920s was spectacular, and the industry's and production. The government assured a volume ranked sixth in the world. By the 1930s profitable CMEA export market, a protected these companies had built substantial domestic market, subsidized loans, and relaxed international marketing networks and patent laws under which firms imitated Western established several foreign subsidiaries. After drugs. Firms paid a tax on CMEA exports, the war, however, the socialist regime lived with low fixed domestic prices, and nationalized the industry. Lucrative export complied with requirements to supply certain markets in the West were cut off, and new links specific drugs. All industrial enterprises paid a to East bloc economies were formed.! special tax to finance the Central Technological In the 1950s the industry was managed by a Development Fund (KMUFA). centralized control system, much like a single, In 1991 the industry-government M-form corporation. All strategic decisions relationship was shattered with the collapse of regarding product selection, investment, and the Soviet bloc. With the dissolution of the R&D were made by supervising ministries, and CMEA, Hungarian firms lost trade with Eastern established firms were reduced to production Europe, while import liberalization challenged units with only operational independence. Even their domestic markets. However, by 1993 marketing was separated from production, with pharmaceuticals was one of the few one monopoly handling domestic sales and manufacturing industries to show an apparent another carrying out foreign trade. Basic recovery. research was assigned to academic institutions, and applied R&D was carried out by the new Profile of the Industry industrial branch research institutes. In the 1960s and 1970s, Hungary Growth and exports implemented modest though important Throughout the socialist period, the decentralization of some decision-making pharmaceutical industry enjoyed strong growth, authority to manufacturers. Pharmaceutical driven largely by exports to the East bloc. firms used their increased autonomy to rebuild Because of its substantial pre-war research and in-house research capabilities, giving them development tradition, Hungary's greater control over product decisions. They pharmaceutical industry was chosen to supply also received additional central government CMEA countries under CMEA's international financial support for research. Still the division of industry. By the 1960s, exports had recovered to pre-war levels, and by the 1980s 29 Hungary was the world's tenth largest drug adaptation and effort. The former export exporter, with $330 million in exports between monopoly, which became a company owned 1982-83. Exports represented 41 percent of jointly by four manufacturers, was able to pharmaceutical sales in 1991, well above exploit international aid programs in the CIS average for all industries. countries. The company used its relationships The drug sector's growth was higher than to gauge consumer needs, and through quick the industrial average in the 1980s, and its share action it consolidated its marketing channels of Hungary's GDP increased from 2.4 percent in before Western competitors entered. It has 1980 to 3.5 percent in 1990. In 1992 the remained competitive by virtue of its lower industry accounted for 3.1 percent of pnces. manufacturing employment, 5.5 percent of Table 3.2. Domestic, Export, and Total Sales, 1990-1994 manufacturing sales, and 10 percent of (million $) Sales 1990 1991 1992 1993 1994 manufacturing exports. These achievements Domestic 378 437 344 393 398 were largely due to Hungary's role as drug Export 522 394 385 390 375 supplier to the Soviet Union, which accounted Total 900 831 729 783 773 Note: Data for the seven largest companies. Converted at for 80 percent of the industry's CMEA exports annual average HUF/$. in the late 1980s. Exports to Western European Source: Pharmaceutical Manufacturers' and Wholesalers' and other hard-currency markets, which began Association in the 1970s, continued to grow through the Domestic sales and import liberalization 1980s. CMEA exports were primarily finished The Hungarian drug market is relatively drugs, whereas the smaller volume of exports to attractive because the country spends about 7 the West, most importantly the United States, percent of GDP for health care, a ratio Japan and West Germany, were almost entirely somewhat below the world average of 8 percent active substances, the less lucrative intermediate but significantly higher than the 3.6 percent products. average of ex-socialist countries (Merrill Table 3.1 Distribution of Industry Sales (percent) Lynch). After 1990 import liberalization has caused a steady loss of domestic market share Market 1980 1990 1991 1992 (see Table 3).2 Apart from the quality gap Domestic 41.5 40.0 49.7 43.3 between foreign and local drugs, other factors Export 58.5 60.0 50.3 56.7 are significant in the industry's domestic failure Eastern Europe despite long success abroad. One is marketing. 36.1 27.0 15.6 20.2 Unlike ordinary goods, drugs are usually not 22.4 33.0 34.7 36.5 chosen by customers but by the prescribing Source: Pharmaceutical Manufacturers' and Wholesalers' physicians, the primary targets of drug Association companies' marketing. Hungary's over-the- With the collapse of the CMEA, exports counter trade is only 12 percent to 13 percent of dropped after 1990 (Table 2), but they quickly drug sales, low by international standards. stabilized, and exports to the post-Soviet Multinational firms typically spend almost as Commonwealth of Independent States actually much on marketing, including lavish increased. CIS exports are dominated by the conferences for physicians, as on R&D. established firms who held positions in the Superior marketing has enabled foreign former Soviet market,. and they consist of a few companies to invade the Hungarian market by top products. Still, retaining markets required convincing physicians and even government 30 authorities that their products are better than therapeutic fields have been replaced by a wider similar locally produced drugs. Hungarian choice of medicines, and old domestic products firns, by contrast, had little need for marketing have stayed competitive because of their lower under socialism, as sales were channeled prices. According to a recent study the four through a government monopoly. largest domestic manufacturers still control at Table 3 - Production by market share (percent) least a third of the market, and their share has been increasing slightly (Merrill Lynch). Sales 1990 1991 1992 1993 1994 Profitability, investment, andfinance Domestic 74 71 62 53 47 As industry has adjusted to a market production system, its financial health has become a central Imports 26 29 38 47 53 isu. Reorn une.oils a loe Source: Pharmaceutical Manufacturers' and Wholesalers' issue. Reforms under socialism had allowed Association firms to accumulate accounting profits, but they A secon issue is the establishedfirms' were long depressed by the tax on CMEA unfam secondais wish theket establhedfir' exports. In the wake of restructuring, industry unfamiliarity with market competition, profits rose from HUF 3.4 billion in 1989 to stemming from oligopolistic practices and HUF 6.7 billion in 1991, a performance in government control. Before liberalization, the srkn con to the overallmanceuin six~~~ ledn cbpne iiddtemre striking contrast to the overall manufacturing SX leadig companies divided the market sector, whose profits fell from HUF 87.9 billion through the Association of Hungarian to HUE 23 billion in the same period. After Pharmaceutical Manufacturers so that each lo in 2, all dre fims rerned to therapeutic and research field was occupied by a poftit in 1993, and mns cotued to single company. Government regulations also rise in 1993-19944 to around 10 percent, lower placed local firms in a poor competitive than the3internatonaloind averae, btwel pstio. Che amn.hs er tttr than the intemational industry average, but well positlon. Chlef among these were statutory above other Hungarian manufacturers.5 The supply obligations. Once it had registered a revival of exports to ex-Soviet markets in drug with the Ministry of Health, a company coviblexcurrn ao boost profit neede pernisson t witdraw from convertible currency also boosted profit needed permission to withdraw from magn,a.i h litn ofdmsi rc distribution. In practice, that was impossible to cons. T he lintin of s oblgtions obtain, and the company had to continue has.aloe compn ation ali oduct production even if demand was negligible. The policy resulted in firms having a wide range of lines and discontinue unprofitable drugs. products, up to 200 to 300 each, and the lack of Even with its relative profitability, the specialization hurt efficiency. industry's share of manufacturing and gross domestic investment has declined. From 1989 In 1991 Hungarian firms welcomed the to 1991, overall manufacturing investment grew lifting of supply obligations, as well as price by more than 55 percent and economy-wide controls and import restrictions (Borszeki). investment grew more than 21 percent, but Prices rose steadily and firms shed unprofitable nominal pharmaceutical investment declined product lines.3 But industry managers were slightly, a substantial reduction in real terms. quickly shocked by the flood of imports. Declining investment raises concern about the industry's ability to renovate its production and The loss of share has been cushioned by product technologies to secure its long-term strong market growth, as foreign firms have competitiveness. In recent decades the industry introduced new products, monopolies in has had two waves of investment, 1977-81 and, 31 supported by World Bank loans, 1984-87. Both and medium firms base their activities on were aimed at building capacity for hard- process innovation, introducing improved currency exports. World Bank loans were given production and management techniques to to TSIs as well as firms. The financing of these established product lines. One group of firms investments resulted in the sector having a long- makes paramedical drugs or traditional term to short-term debt ratio of 66 percent in remedies. Sales of paramedical drugs have 1989, well above the industrial average of 25 increased dramatically since 1990. Entering this percent. As investment declined, the ratio fell to market segment is easy for small firms, as 45 percent in 1991. Access to investment paramedical remedies do not require rigorous capital was constrained in the early 1990s, and time-consuming clinical trials. However, threatening the industry's future. There are this huge growth in demand may be temporary, signs, however, that recent acceleration of resulting from their novelty after their virtual privatization has led to better financing absence from commercial distribution during opportunities, and firms have again begun to socialism. make substantial investments. make substantialinvestmentsOnly one company specializes in generic drugs, and it has been successful in applying Industrial structure modem production technologies. The firm Through the 1 980s the pharmaceutical based its strategy on incremental process sector was dominated by five firms, which improvements, an area neglected by the larger together made up the predecessor of the firms under socialism. Smaller enterprises Hungarian Pharmaceutical Manufacturers compete by producing original drugs. Such Association (HPMA).6 In 1990 the top seven firms have usually drawn on forrner staff of companies accounted for 95 percent of domestic large companies in entering the market. (The sales. Since then the industry has changed role of these firms in commercializing product significantly. It now has several distinct innovations is discussed in the next section.) segments: six established producers of human One firm produces in-vitro drugs (compounds medicines, a few veterinary producers, and a used in diagnostic testing) for laboratory fine-chemicals producer involved in customers who demand only small quantities pharmaceuticals; new small manufacturers, but require high purity and hygiene. Unlike the including foreign joint-ventures and makers of retail drug market, this segment does not require traditional home remedies; and the expensive marketing networks or complicated representatives of foreign drug companies. clinical trials. Small firms making a few products have Small and medium companies have several grown dynamically, while some of the large, other advantages over the large firms. They do over-diversified, state-owned firms have not suffer from overemployment, they have contracted. The HPMA's formal membership smaller overhead, and they specialize in a few has grown to eighty-six companies, including profitable drugs. Many of them, established at forty-four in pharmaceuticals trade, as well as the end of the 1980s, have foreign equity. Their representatives of foreign drug companies. For modem facilities are also an advantage over instance, the seven new manufacturing firms most older firms. Foreign joint-venture firms included in the sample are all small and have better access to foreign financing, both medium-scale enterprises, whose owners are equity and loan rates. New firms have received predominantly private or foreign. Some small generous tax relief. Free from the legacy of 32 socialism, some have registered spectacular closed CMEA market. As former East bloc growth. Even heightened import competition markets have opened, Western companies now has affected them only slightly, given their prefer to enter them on their own rather than concentration in niche markets. through Hungarian licensees. Thus new Even more spectacular changes have agreements typically confer on Hungarian firms occurd ionly the right to sell in the domestic market. Occurred in trade. Before 1990 a monopolyy g wholesaler handled all marketing. Today The current 20 percent share of licensed several dozen companies, including all the products in total industry output (34 percent in manufacturers, are involved in large-scale domestic sales) will probably continue to fall commerce. Integrated marketing and (Concorde). production allows greater profit margins. Since the 1980s firms have sought to rely Representatives of foreign drug companies have on their own R&D for product development to also acquired wholesaler licenses for their own complement foreign product licensing. The lack products. of capital and marketing networks has precluded an independent strategy based on exporting R&D and Innovation Strategies proprietary drugs to Western markets. Most Hungarian companies were neither large firms have entered into agreements with foreign nor innovative by international standards!. They principals either to sell active substances or to collaborate in drug development. All of the typically spent only 5 percent to 8 percent of large ir regadeR&D wit fore gross sales on R&D, compared to the caries as more sigifiant tha international norm of 12 percent to 18 percent. collabrio wt Hnreia .initions or Wihi Hugr,hwvr.h nutyrne collaboration with Hungarian institutions or With'in Hnrm , however, tirndstry ramnk other firms. The five largest firms have had thig in terms cofpaniesi R&D;four frspwerddesm R&D agreements that confer exclusive rights to their toper ten tpanes ine R&Dgspendi, de spi their foreign (mostly Japanese) partners to (market Hungarian innovations in certain regions largest pharmaceutical companies spent about HUF 3 billion on R&D in 1990 and HUF 5 in exchange for royalty payments. While the billion in 1993 (albeit in nominal currency; this large companies see exteral R&D agreements was a 13% increase in U.S. dollars, from $47.5 as a way of bolstering their financial viability, wasia t3 inc.r inU. they appear to be neither a long-run solution to the industry's problems nor an alternative to full Established s'strategies privatization. The foreign partners covet Established firms promising Hungarian R&D results that they can Before 1970 firm research and product develop and market independently and so reap strategy was based largely on imitation of the largest share of the profits. They are Western drugs, eased by permissive domestic reluctant to shoulder much of the risks of capital patent laws. In the 1970s, however, when the investment, research, and management government sought to increase hard-currency renovation that the Hungarian industry needs. exports to Western markets, the industry began Together, the expiration of former licenses, to formn links with Wester companies and the tightening of domestic patent laws, and the obtain product licenses. Western companies are collapse of the former R&D fmancing system generally reluctant to license drugs but were challenge fms to reconsider their product and willing in Hungary's case to enter the otherwise .ovation strategies. They must decide 33 whether to continue R&D or concentrate on less dedicated equipment and more specialized risky generic drug production. Past investments science. Most Hungarian biotechnology plants in R&D were large, and though inefficient they have outdated facilities. Two biotechnology did yield some internationally recognized companies had been started, but they failed and results. Internal R&D capabilities represent a were closed or absorbed by larger firns. A few significant asset that could be exploited by firms have had successful biotechnology developing and producing higher-margin projects, and at least one academic institute is original drugs. R&D can also bring short-termn pursuing research. financial benefits in cases where foreign firms agree to finance collaborative projects. A Strategies of new companies product-innovation strategy is riskier and . gy ~~~~New small and medium sized private requires formidable capital and marketing. The enterprises have used more moder technology, alternative is to reduce the number of research and many of them are intemationally projects or sell research findings early in competitive in specialized niches. Others development. produce active substances or laboratory Most firms have reviewed their projects and compounds, requiring strict quality control. abandoned many of them to concentrate their Unlike established firms, most of these entrants resources. Contracting out research tasks to compete on quality or product differentiation in TSIs has declined sharply. The most drastic addition to price. changes have occurred at Chinoin, a large firm Under Hungary's intellectual property privatized in 1991, where R&D projects have UdrHnaysmelculpoet beenatscrutinized1 morearefully than bforet rights system, before 1994, migrating staff could been scrutinized more carefully than before andaar noain rmterepoe osat very few new projects have been launched. As a annotionsmfro timployer toiah * ~~ups and other small companies, which result its R&D staff has been halved. Survey frequently could offer better compensation than respondents said the organization of R&D had state enterprises. (It should be noted that the improved significantly with the introduction of state-owned companies were slow to exploit Western laboratory and management norms, technological opportunities, thus the transfer of Hungarian firms have barely begun to knowledge might have meant avoiding the loss consider the revolution from chemistry-based to of it.) Small-company managers are almost biotechnology-based research. The traditional always former employees of large firms. Some mode of discovering new drugs is largely based kept a watch on promising research of their on chemistry, wherein molecules are screened former companies and tried to acquire results for their pharmacological properties, a without investing in R&D. The start-ups also procedure known as molecule roulette. have had official channels with the older firms. Experience with particular compounds and sheer Sometimes they contracted out excess serendipity are critical to breakthroughs. production to the large firms. In other cases, Biotechnology allows more deliberate and lacking production and R&D capacity, they precise manipulation of biological processes at relied on large firms for all but marketing and the molecular level, for example by influencing management functions. In a sense these firms the activity of enzymes or proteins, known as serve as venture capitalists by identifying and protein engineering (Kovacs). While bio- commercializing promising research. molecular research is more efficient overall, it is more costly in its early stages, requiring 34 Large firms may have begun to use the new SWA automatically put imported drugs into the patent laws to control their intellectual property. highest subsidy classes, 95 percent and 100 And some small firms have begun independent percent. Because of industry complaints and the development. After years of high growth they growth in subsidy outlays, a new system was aim to become "large enterprises." introduced in 1992, under which subsidies were made fixed amounts rather than percentages of Government Policies the retail price. This meant that among the The Ministries of Industry, Trade, Finance drugs with the same active substance, the The Mini s of Icheapest determined the subsidy.9 The new and Health exercised authority over the industry mechanism was thought to make manufacturers during socialism. Government intervention was m ensitive to make manufand particularly imotn intreaes .rc more sensitive to changes in demand, and paricarols, dimportant in three areas: price coupled with the privatization of pharmacies controls, drug registration and statutory supply and competition among wholesalers, obligations, and finance through grants or loans. In the transition privatization policies have iflationary pressure would be reduced. The become equally important. system seemed to create an incentive to produce cheaper generic drugs, but subsidy expenditures continued to grow because of the sharp increase Price regulation in subsidies for imported drugs.10 Another Drug prices are regulated in many change in the system in 1995 put the more countries, commonly by subsidizing prices to important medicines into higher-subsidy consumers. In these cases governments must categories. Its effect remains to be seen. balance public health objectives against other budget priorities. Before 1989 Hungarian prices Financefor innovation were fixed for long periods, and companies had to secure permission from the Finance and Government finance for technological IIelthmiistiestomak prce"corrections." innovation in pharmaceuticals has come from Health ministries to make price stionslo several agencies. The main actor has been the Because the authorities prefeffed stable low National Committee for Technological prices, companies usually looked for ways to Nationt Committee h al bargain for financing or other favors from the Development (OFMB). The committee had a government. Since the transition prices have substantial role in the tenders for World Bank been set free, but price negotiations have restructuring loans in 1984 through 1987. It bee se fre, ut ric neotitios hve was a cofinancier of the Technology continued between manufacturers and the Social Development Project loans, which sought to Welfare Administration (SWA). A specific helpmengarian fi ans, thir sought o drug is assigned to a product category, each of help Hungarian firms escape their reliance on which receives predetermined subsidies. During low-margin exports of active substances to the registration process, the National Institute of Western markets, and market final drug Pharmacy recommends a category for the drug products abroad. Loans backed by the World to SWA. The welfare agency thus has Bank could be used only for acquing licenses, discretion over subsidization and must reconcile equipment, technical know-how, or fairness in classification with economy of tchnological services, and borrowers were governmessint csification with economy of required to match financing. Loans were used govermment subsidy expenditures. for toxicological and pharmacological projects Some Hungarian manufacturers contend closely related to drug development, as well as that classification has not always been fair. production equipment. The industry's export 35 potential in final drugs was limited by firms research findings in practice, and assume partial poor marketing skill and inability to achieve responsibility for the repayment of debt. They international manufacturing practice and quality were not bound to use the TSIs, however, and standards. As a result their usual export options not surprisingly this method failed to promote were to sell rights to promising research genuine commercialization of technology. For findings. instance, one academic institute received Between 1990 and 1994, OMFB's main funding for twelve projects, ostensibly in device to promote technological development partnership with industry, but drug firms have was its right to distribute money from the not used them. After 1994, following Central Technological Development Fund. The complaints from several industries including Cental Tchnoogicl Deelopent und.The harmnaceuticals, the industr tax that financed long-established fund was derived from a tax thermacels,et industreplax a dirct levied on all industrial enterprises. OMFB, the development fund was replaced by a direct giving priority to "applied research projects," government allocation, and then the fund was provided special loans to both industry and was abolished. The government made the research institutions to finance projects that OMFB subordinate to the Ministry of Industry would yield short-term returns.'1 But OMFB and Trade. The reform represented a return to has largely shied away from pharmaceutical centralized allocation of research finance, in research as long-term and risky. Between 1991 centrastio the chader t oward and 1994, HUF 930 million was allocated to decentralization. The change also cut off TSIs' applied research in pharmaceuticals, one-third of most important channel of financing. which went to one research institute. The firms themselves spent several times that amount but Privatization received almost no government money. The ownership of state enterprises did not Owing to OMFB's conditions, companies change significantly until 1995. After the early rarely bothered to apply for research loans sale of one firm, Chinoin, to a multinational in except for collaboration with research 1991, privatization in pharmaceuticals came to a institutions. Interviews indicated that standstill. Foreign investors' early interest had pharmaceutical managers thought OMFB's been based on the industry's unique access to requirements were too stringent and demanded the huge Soviet market, but the collapse of the confidential information. Thus internal East bloc trading system made them more financing or even foreign loans were preferred cautious. Nonetheless, since 1993 a new wave alternatives for funding research, Even the of transactions has taken place. First, managers of the TSI that received the largest individuals have acquired blocks of shares part of OMFB allocations were dissatisfied. floated on the Budapest Stock Exchange. They said the loan maturity was too short Pharmaceuticals were among the most actively compared to the time required for development traded stocks, but their prices fluctuated greatly of a drug in the best case. along with the broader market, and it appeared unlikely that the swings reflected changes in the The development fund aimed to promote fundamental health of the finns. Two firms cooperation in research by giving priority to issued new equity, benefiting the capital industry projects involving both firms and TSIs. structure of these highly leveraged enterprises. Research institutes and enterprises applied jointly for funds. The applications included a According to the mandate of the State Asset letter of intent that enterprises would apply the Holding Company and its successor, the State 36 Privatization and Asset Holding Corporation, participation makes investment unattractive to the state must retain at least 25 percent of shares foreigners. in large pharmaceutical companies. The policy In the second half of 1995 the government was justified by the high research intensity of radically changed its attitude toward the industry and the need to maintain it to a privatization. First, the long-term involvement degree that supposedly short-sighted private of the state was almost eliminated. In only one investors, especially foreigners, might otherwise firm does the govermnent maintain a 25 percent forego. Some (outside) critics pointed to (plus 1) share, on grounds of the sensitivity of Chinoin as evidence of the harmnful one of the company's main products. Next consequences of foreign ownership for followed a series of transactions that resulted in technological development. It was alleged that an ownership structure diametrically opposite to some promising research was transferred to the the structure that had prevailed in 1991. By parent company for development and 1996 the state had a majority stake in only one commercialization, that few new R&D projects among the seven biggest companies, and in had been launched, and that contracting to local three it had no share at all. In most cases TSIs had been decreased. The firm's position is strategic investors became the majority that Western management norms, particularly stakeholders, though usually the share of other project monitoring, have improved the stakeholders was insignificant (see Merrill organization of research (Chinoin). Assets were Lynch). The effect of these changes remains to rationalized and many wasteful and unpromising be seen, but there are indications that investment projects were abandoned, while new projects 'has increased, and that may bring technological were launched in fewer fields to focus efforts and improve efficiency. Employees no longer own the patents for drugs discovered during working hours, another tightening of Patent law and drg registration management preventing losses of inventions to The 1994 patent law was intended to the company(Gy6rgy-Vincze). One institute encourage R&D. After three years of that provided technical services to Chinoin negotiations, American and Hungarian maintained that, even though its volume of delegations agreed that Hungary would business had declined, new contracts with the recognize not only process innovations but also firm provided better commercial terms. product patents. The agreement averted the Itissurrounding American threat to withdraw most-favored- It is uclear hw the toublesnation status. Automatic patent protection in privatization, frequent organizational changes, Hungary was retroactively extended to U.S. little consensus on principles and methods, and ptngranted beginnin int1987. th U.S. its prolonged process affected firms' technology had asked for retroactive protection of patents decisions. Managers seemed to believe that increasing technological investmnents would put granted in the past twenty years; the seven years to which Hunar asreed iS longer than U.S. them in a better bargaining position, and some gary gr g companies (like Chinoin. sterms with any Western European nation. companieations (lkeWestem Chinoin) led thnei Similar intellectual property agreements have organizatons along Western management lies been reached with the other Eastern European (seeatizationywasinlowe) Mhanagcerssaiy, and countries, though none of them have Hungary's privatization was slower than necessary, and lvlo eeomn npamcuias that the required govemment equit level of development in pharmnaceuticals. Opinions on the consequences of the U.S.- 37 Hungary agreement vary. Some experts say that was channelled back. Thus, few managers no ongoing research would be impeded. The identified any government policy as being Hungarian Pharmaceutical Manufacturers' beneficial to development. World Bank loans at Association declared that seventy-two projects preferential rates were cited, but respondents could be affected by patent protection usually also noted the consequent increased retroactive to 1987. It seems that enterprises interest burden. Managers of established firms will be affected differently, as some firms have seem most to regret the loss of domestic market prepared for the changes for several years. An protection, which they regard as harmful to important caveat is that loopholes in the technological development. agreement will allow Hungarian companies to continue copying and selling reproduction The Structure and Evolution of TSIs generics. Estimates of the agreement's full Hungary's socialist goverment established effect range from the year 2000 (Concorde), to the independent branch research institutes to ten years following the final agreement (Mernill conduct applied industrial R&D, and assigned Lynch). The negotiations appeared to affect basic R&D to academic institutions. The managers' propensity to detail their R&D country's independent industrial and academic strategies, and some were suspicious of this institutions carried out a far larger proportion of p)roject's entire questionarmae. project' entire uestiaenational R&D (70 percent) than in any OECD The agreement has several major country (Pavitt). The institutional separation of implications. Licences will be required for production and R&D frustrated collaboration. domestic production of imitation drugs, and if Firms were unwilling or unable to adopt these are not obtained, imports will be allowed inventions originated in research institutes, as to increase. Either outcome will result in higher they would have to assume the risks of failed domestic prices. Second, certain exports of innovations brought to market but would have imitation drugs will be lost. Third, imitative to share the profits of successful products with research projects must be abandoned. Some the institutes. The branch institutes, lacking pilot government experts tentatively estimate losses plants, let alone production capacities, were to the industry of as much as $300 million per unable to demonstrate or exploit their year. innovations commercially.'2 As a consequence, The number of drugs registered increased firms typically contracted out only simple sharply after 1990, because of import technical and laboratory services to the branch liberalization, and slowed in 1994 mainly institutes. Contrary to the goal of close because of satiation. There is evidence that cooperation between industry and the branch foreign producers sought to register drugs in institutes, the two remained distant, resulting in Hungary that were subject to increasingly strict duplication of effort. Firms began to rebuild regulation or whose patents were expiring in their R&D departments, using manpower and Western European markets. capital, even as the institutes conducted basic research while performing simple tasks for Other policies industry. Established firms blame the old economic Three branch institutes were dedicated to system for their current economic difficulties. serving the pharmaceutical industry (a fourth, The government had appropriated a high discussed in a case study below, was assigned to proportion of their profits, though some of it the chemicals industry but performed research 38 relevant to pharmaceuticals). The biggest of Consistent with its obligation to offer these (with 450 employees) was set up in 1950 promising research findings to industry, the after being spun off by a major company. It was institute entered into negotiations with the intended to develop technologies for producing manufacturer for development and marketing. major known drugs, but by the 1960s it had One obstacle to an agreement was shifted toward original research and invested informational: the manufacturer could not heavily in facilities. It became a research and evaluate the institute's incurred expenses, development center rather than an institution remaining development costs, nor the potential catering to the needs of manfacturers. A second market value of the compound. Finally the two institute dealt mostly with the technology of parties decided simply to divide the patent drug production on a large scale, and companies rights, with the firm acquiring rights to export moved away from using it because they believed markets while the institute retained rights to the that an outside institution had little domestic market. The agreement conferred understanding of their working conditions. A responsibility for further development of the third institute specialized in herbs and occupied chemical compound to the firm, which was to a modest place in the industry. Its signficance keep the institute updated. But the institute was increased with the advent of paramedicines, unable to assess the additional development though not especially for the traditional work and grew suspicious that the firm was companies. devoting insufficient attention to the project. In With its desire to reduce expenditures and 1988 new government regulations allowed the make firms finance technological development, branch institutes to conclude their own foreign the government in 1983 transferred ownership collaboration agreements. By 1990 the of the branch institutes to the six member compound had interested several foreign companies of the HPMA. The change did not companies, but they could not come to an result in management coordination, and the agreement with the Hungarian company. To problems inherent in the divided institutional seize the opportunity, the institute bought out structure, including the misallocation of the foreign patent rights from its erstwhile scientific and research personnel, the partner and entered into a cooperation redundancy of institute and company research agreement with a multinational drug company to capabilities, the under-specialization of institute market the drug. The moral of the story is activities, and limited interaction with industry, unclear. It may have been that in the still-public remained unresolved. The government's company, no one had sufficient interest in the reforms of the central funding mechanism for compound, which seems to have been a R&D, which were intended to promote greater prerequisite to innovation in the socialist era. industry/TSI collaboration, also met with little And the institute must have been eager to success. exploit an opportunity that was significant to its portfolio, whereas the company found it of The difficulties of fostering industry/TSI trifling importance. collaboration may be illustrated by a case involving the most important branch institute Despite various difficulties, the branch and he lrges manfacurer In he erly institutes have had more business links than and the largest manufacturer. In the early have the academic institutions (AIs). Among 1980s, during a centrally financed research haetecdmiiniuios(I)Aog program, institute researchers invented a AIs, university institutes have been more active molecule that appeared to prevent heart attacks. than the Hungarian Academy of Sciences. As 39 are even less business-oriented than the branch focusing on pharmaceutical production and research institutes. They cannot enter into direct process technology, which could help them relationships with firms but must contract adapt foreign-licensed drugs and other acquired through their parent institutions, universities or technologies. Historically most formal the Hungarian Academy of Sciences. In cooperation between industry and TSIs was practice, this means that a large part (usually 80 encouraged by government programs and percent) of their contract revenue is retained by earmarked funds. Because formal projects did the universities or the academy. Some Als have not stem from industry needs, they were largely striven for greater autonomy, but because their uncoordinated, commissions were given without main mission is education and basic research, clear objectives, and projects lacked timetables. their prospects for contract research have been The principal goal seems to have been to spend limited. government money. Hungary's pharmaceuticals-related TSIs While critical of TSIs, some firms do report regard themselves as organizationally different using some of their services. Firms have from Western corporate research departments. maintained close contacts with universities, Before the transition, they were affiliated with other academic institutions, and hospitals for state industrial combines or groups of clinical research and testing. The main contact companies, and they engaged in a range of with branch institutes involved testing and research disciplines with little specialization. laboratory services. As they increased R&D (An exception was one large fine-chemical investments in the 1980s, firms initiated two- to firm's research unit, which was established in three-year contracts with applied and academic the 1980s with World Bank loans. The TSIs. In all relationships personal contacts were company, however, was unable to use the decisive, especially because of the inadequate facilities fully or to commercialize its research. fornal protection for intellectual property. The rising interest rate on the foreign-currency Contacts were made with persons rather than the loan forced the company to spin off the unit.) institutes. Equally, TSI researchers turned to Notwithstanding their lack of specialization, friends or acquaintances in industry when TSIs typically have more modern facilities and looking for partners to commercialize research laboratory equipment than the manufacturing findings, since in this way they could avoid companies they are to serve. yielding most of the royalties to their employers. Firm managers' views of the TSIs varied. As the case studies below illustrate, these Among established firms, a few managers were relationships sometimes produced excellent very satisfied with their performance, but others results. Even so, disputes were endemic, and viewed them as of little use. The main attempts to regulate industry-TSI contacts did complaints were that TSIs lacked practical not resolve the problems. capabilities and had little awareness of Economic reform and the restructuring of the industry's needs and limitations. Indeed, some branch research institutes enterprise managers regarded their ownership .. shares in institutes, vested in them by theInterasio,bncisiueshv shares in insitte,esedicome under severe financial pressure because of government in 1983, as a liability. A second the loss of goverment funding. Employment in criticism is the branch institutes lack of ... .. . ~~~~~~many TSIs has fallen. Researchers have specialization. Manager did comment that emigrated. Government subsidies and contracts companies would work with an institute from traditional clients have declined, while 40 new private companies have commissioned little Case Studies work. Despite the difficulties, most institute managers do not fear being shut down, as they Jumex are owned jointly by manufacturing companies, Jumex, a medication used to treat whose managers in turn are not much afraid of Parkinson's disease, is the first Hungarian drug closing. TSI managers expect that orders from sold in the U.S. market. Its history began in the dynamic small companies will increase in 1961, when Chinoin synthesized the molecule due time even as those from larger firms wane. on which it is based. Semmelweis University of They regard informal, personal relationships Medicine in Budapest examined it as an anti- with industry as all-important to generating depressant in pre-clinical testing and found it to contracts. be a MAO-B inhibitor, without the dangerous Despite wrenching adjustments in the side effects found in other MAO-B inhibitors. industry and renewed pressure on TSIs to find Further investigations by institutions in Hungary clients, there is little evidence that TSIs and and Austria resulted in the discovery of its anti- companies are more inclined to cooperate. Parkinson's effect; paternity for the discovery is Rather, both appear to be in search of foreign unclear. A Czechoslovak institute, partners. The branch institutes are seeking commissioned by Chinoin, later found that research contracts with foreign companies, Jumex could be used to treat Alzheimer's which have far more resources to spend on disease. outside research. They also offer better terms A Finnish company bought the marketing than domestic companies, which remain rights to Jumex in 1984 and sub-licensed it accustomed to a system under which the throughout Europe and engaged in further institutes were bound to offer their research to clinical testing. Chinoin licensed Jumex to the local firms in exchange for government funding. Canadian and U.S. markets, drawing the Hungarian firms paid one-fourth of attention of the U.S. National Institutes of development costs, but foreign firms finance up Health (NIH). NIH trials, involving up to 800 to 100 percent. Also in line with previous patients annually, were far beyond the practice, domestic firms insist on retaining Hungarian firm's capabilities. The drug has intellectual property rights for all export proved a commercial success in the U.S., but markets; foreign firms negotiate for rights to sell Chinoin has received little of the profits. It in specific markets. In the benefit-sharing supplies the active substance at a small fraction contract system set up in the early 1980s, local of the finished product's price. Though Chinoin firms paid royalties to the branch institutes only hoped to repurchase U.S. rights in 1986, the after a drug was marketed, requiring the institute price (about $30 million) would have required to bear up-front expenses. Foreign firms Hungarian government financing, in hard typically pay maintenance fees from the time the currency (Chinoin). Still, Jumex, now sold in contract is concluded, along with royalties on many countries, is Chinoin's most important sales. Finally, contracts with domestic firms product. usually do not include joint research, whereas foreign firms allow the institutes valuable exposure to state-of-the-art research through Ypriflavon collaboration. Ypriflavon, another Chinoin product, also is based on a molecule synthesized in the 1960s. The compound was discovered in 1964 at 41 Budapest Technical University, during research development of a drug, and perhaps that in a commissioned by Chinoin to develop veterinary small country like Hungary purely domestic drugs. Research eventually led to establishing development of drugs may be unviable. the compound as a human medicine. In 1979 a Japanese company, Takeda, became aware of Toxi Ypriflavon and directed research toward the compound's use as a medicamnent for inToxi, a laboratory within a branch institute osteoporosis .Chinoin. Taked lic d i, ithe chemical industry, was founded in the costeoporos Chinoin). Takeda icnsed t, 1980s with World Bank financing. The institute cm 1988 began to sell the product in Japan and foundered in 1990, the same year Toxi began inh1988o beganuto Asell te product in Japn aend functioning, in the wake of rising interest rates throughote AinIta.y, Srgeince tend itehasiband capacity under-utilization (because of marketda'sro intay Argei, adeelgi. declining contracts from chemical firms). Tefleteda'snrolewinthendverag's develo nties tThough owned by the branch institute, Toxi was reflected in lower-than-average royalties toto Chinoin, though its supply of the active a separate entity specializing in toxicological substance makes its pply ofte a testing and analysis. It resembled TSIs in industrial countries rather than the Hungarian Curiously, the drug acquired only partial pattern of broad research. Following the registration in Hungary, in 1988, which means institute's bankruptcy, Toxi prepared for that a restricted circle of physicians can privatization and was finally acquired in 1995 prescribe it but it cannot be sold widely in by the First American Fund (FAF) (for one-fifth pharmacies. Several explanations have been of its 1992 value). FAF transferred Toxi's offered why full approval has not been given. ownership to a new Hungarian pharmaceutical One is that its therapeutic effect is difficult to firm in which it held a majority stake. Toxi's establish because of the particulars of role in the new firm is under review. osteoporosis. Some Chinoin managers claimed Toxi's brief history illustrates the that certain officials were opposed to approval ownership-rights mayhem that has characterized because neither the Japanese nor the Italian the transition. Physically valuable assets like a clinical trial results were accepted. The lack of moder institute with good capabilities may domestic recognition was an obstacle to have had low market value because it happened international registration. In the meantime, to be in the "wrong" hands. Chinom was privatized to a foreign investor, which is waiting for new clinical trials before deciding whether to market the drug. Conclusions .. ~~The Hungarian pharmaceutical industr, These two cases show the capability of gary Hungarian researchers to produce top-level entered the post-socialist era with significant exhibit technological resources and production innovations Thi .itresas capabilities, dating from the substantial inefficiency in the socialist system, specifically in the long timne between the original invention academic research institutions and industry and commercialization. Contract terms might before the Second World War. These hand been better if Hungarian managers had not capabilities were deepened during the socialist have been better if Hungarian managers had not been isolated from world markets by decades of era, particularly as firms rebuilt in-house socialist policies. The cases also show the technical units following the limited reforms of relationship of parties all over the globe in the the 1960s and 1970s. With licensing and the 42 reproduction or imitation of molecules, made pharmaceutical research requires major possible by relaxed patent laws, Hungarian investment in clinical trials and marketing producers were able to pursue fast-follower networks, and these pose major obstacles to strategies in competition with leading drug financially strapped Hungarian firms. producers in the West. But while they were able Privatization, viewed as a way to recapitalize to produce sophisticated imitations and supply the industry, has only recently accelerated, and quality active substances to Western markets, initially foreign direct investment waned for they failed to become competitive in the several years. Domestic finance is scarce, and production and export of proprietary final drugs, market instability makes internal financing of by far the most profitable market segment. major technology investments all but Recognizing the industry's technological impossible. Caught between their immediate strengths, the socialist government attempted to financial difficulties and the potential long-term drive innovation from the top down, mandating value of their research capabilities, Hungarian cooperation between industry and state-run firms turned to international R&D agreements in research institutes and financing research which foreign drug companies funded specific through centralized mechanisms. Its efforts projects or research-related investments. These produced limited results. The industry's focus contracts usually reflected firms' short-term on East bloc markets did not pressure firms to financing needs and entailed selling research improve quality, and the state's branch research findings at an early stage of development, institutes were unresponsive to industry needs. without long-term commitments on the part of Formal industry/TSI collaboration was thus the foreign partner. largely confined to routine tasks. The central Recent reforms have been even more govermment's control over the profits from traumatic for the research institutes. innovation, either within industry or the branch Government funding has shrunk dramatically, institutes, also discouraged efficient innovation. and contract revenues have also fallen as their Still, the industry has had some developments main clients, the large state-owned companies, that have been marketed internationally, and the have limited their research and production. At public investments in research have produced a the same time, institutes have been unable to large reserve of research and engineering supply specialized services that might attract the personnel upon which the industry has drawn. rapidly growing smaller firms. Finally, Informal personal networks within industry, and institutional obstacles discouraged industry from between industry and the TSI community, did collaborating with TSIs: there were substandard enable technological ideas and information to documentation of research, delays in project circulate. Many firms modernized their completion, and disputes over patent rights production technologies in the mid-1980s, using growing out of joint research. Unable to raise World Bank loans. But the investments were revenue by increasing services to industry, the never enough to achieve a complete updating of institutes have turned to selling their research to technology, and companies remained foreign firms. As their activities have technologically outmoded. diminished, they have lost staff to industry and In the transition, financial constraints and emigration. the difficulties of institutional reform have Government policies have been largely prevented the industry from capitalizing on its ineffective in helping the industry respond to the technological potential. Commercializing new competition. The central system of 43 research funding was reformed, and competitive tenders became the main vehicle of distributing government research funds. But technological development has not noticeably increased. A bureaucratic shift in authority over pharmaceuticals, involving a change from drug price controls to govermment subsidies of production, has been controversial in implementation. The industry views government policy as hampering their effort to become competitive, particularly by removing import protection, but also by disproportionately subsidizing the sale of foreign drugs in Hungary. Case histories show that the industry has developed drugs of international renown. (The successes originated in the 1 960s, and thus it may be that quality work stemmed from the industry's traditions.) But they also reveal failures, through lack of capabilities to develop and market innovations, poor institutional performance, and a lack of industry/governnent cooperation. Financial and institutional weaknesses could jeopardize Hungary's technological capabilities as economic restructuring continues. Chief lessons from the Hungarian experience are the importance of strong support for research and the necessity of effective financial and regulatory mechanisms (patent law, drug registration, and price regulation) to link innovation to the market. 44 References Borszeki, Zsuzsa. 1993. A vegyipar az importliberalizaldsi program tfikreben KOPINT-DATORG, Budapest. Chinoin. 1996. A Chinoin tortenete. Budapest. Concorde. 1996. Magyar Gy6gyszeripari Ittekint9s Gy6rgy, Katalin and Janos, Vincze. 1991. "Incentives to innovate." In A. Inzelt, ed., Innovation, Competition, Competitiveness, IKU. Gy6rgy, Katalin and Janos, Vincze. Privatization and innovation in the pharmaceutical industry in a post-socialist economy. Rivista Internazionale di Scienze Sociali. 1993. pp. 403419. Figyel. 1993. (Special Issue). Kovacs, Gabor and Szilvia, Orban. 1995. Originilis kutatas a magyar gy6gyszeriparban manuscript. Merrill Lynch. 1996. Hungarian Pharmaceutical Industry. Pavitt, Keith. 1995. "Transforming centrally planned systems of science and innovation: The problem of obsolete competencies." manuscript. Sharp, Margaret. 1995. "The Science of Nations: European Multinationals and American Biotechnology." to appear in the International Journal of Technology Management. 45 Notes While the division of Europe into rival blocs cut off access to Western markets and technology, it also resulted in a one-time boon to the industry after the disclosure of patents of leading German pharmaceutical fimns. A jump in domestic sales in 1991 resulted from speculative buying by the then-monopoly drug distributor in anticipation of the relaxation of price controls. Data supplied by the PMWA show that the average price of imported drugs was about four times higher than the price of domestically made medicines in 1994. The two firms exhibiting the poorest financial condition specialize in fine chemicals/diagnostic agents, and veterinary drugs, respectively. Dispersion around the average is significant, however, with profit ratios ranging from 2.6 percent to 16.8 percent. 6 A sixth member of the association primarily produced fine chemicals. The largest Hungarian company's 1992 sales were about $160 million. Drug subsidies amounted to HUF 18 billion in 1990, HUF 61 billion in 1994. A similar system is in force in Germany. Measured at producer prices, sales of domestic drugs doubled and imports grew quintupled from 1990 to 1994. Loan maturity was usually five years, with a two-year grace period and a proviso that research institutions were obligated to pay back only 50 percent. 12 In-house research is particularly critical among firms that compete globally, and firm competitiveness depends on the generation and protection of proprietary knowledge. (See Sharp.) 46 Distributors or tAuLUMUIA GERMANY ISRAEL NEPAL PORTUGAL SWEDEN Intoenlace Ltda. UNO-Vedag Yozmot Literature Ltd. Everest Media International Services (P) Ltd. 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San Femando No. 37 Intemational Pubtishing Service Lake House Bookshop Telt (610)63338257 66, avenue drlena Offig an tSolathair Col. Toriello Guerra Ul. Plekna 31/37 150, Sir Chittampalaan Gardiner Mawatha Faa: (86 10) 64017385 75116 Pads 4-5 Harcoud Road 14050 Mexico, D.F 00-77 Warzawa Colorrbo 2 Tel: (331)40-69-30-56/57 Dublin 2 Tel: (525)624-2800 Tel: (482)628-8089 Tel: (94 1)32105 Fax: (331) 40-69-30-68 Tel: (3531) 661-3111 Fax: (52 5) 624-2822 Fax: (48 2) 621-7255 Fax: (94 1) 432104 Fax: (353 1)475-2670 E-mail: inlotec@rtn.net.mo E-mail: books%ips@ikp.atm.com.pl E-mail: LHL@sn.lanka.net URL: htp://rth.net.mx URL: hftpl/www.ipscg.wawpl'ips/expod/ I RECENT WORLD BANK TECHNICAL PAPERS (continued) No. 350 Buscaglia and Dakolias, Judicial Reform in Latin American Courts: The Experience in Argentina and Ecuador No. 351 Psacharopoulos, Morley, Fiszbein, Lee, and Wood, Poverty and Income Distribution in Latin America: The Story of the 1980s No. 352 Allison and Ringold, Labor Markets in Transition in Central and Eastern Europe, 1989-1995 No. 353 Ingco, Mitchell, and McCalla, Global Food Supply Prospects, A Background Paper Prepared for the World Food Summit, Rome, November 1996 No. 354 Subramanian, Jagannathan, and Meinzen-Dick, User Organizationsfor Sustainable Water Services No. 355 Lambert, Srivastava, and Vietmeyer, Medicinal Plants: Rescuing a Global Heritage No. 356 Aryeetey, Hettige, Nissanke, and Steel, Financial Market Fragmentation and Reforms in Sub-Saharan Africa No. 357 Adamolekun, de Lusignan, and Atomate, editors, Civil Service Reform in Francophone Africa: Proceedings of a Workshop Abidjan, January 23-26, 1996 No. 358 Ayres, Busia, Dinar, Hirji, Lintner, McCalla, and Robelus, Integrated Lake and Reservoir Management: World Bank Approach and Experience No. 360 Salman, The Legal Frameworkfor Water Users' Associations: A Comparative Study No. 361 Laporte and Ringold. Trends in Education Access and Financing during the Transition in Central and Eastern Europe. No. 362 Foley, Floor, Madon, Lawali, Montagne, and Tounao, The Niger Household Energy Project: Promoting Rural Fuelwood Markets and Village Management of Natural Woodlands No. 364 Josling, Agricultural Trade Policies in the Andean Group: Issues and Options No. 365 Pratt, Le Gall, and de Haan, Investing in Pastoralism: Sustainable Natural Resource Use in Arid Africa and the Middle East No. 366 Carvalho and White, Combining the Quantitative and Qualitative Approaches to Poverty Measurement and Analysis: The Practice and the Potential No. 367 Colletta and Reinhold, Review of Early Childhood Policy and Programs in Sub-Saharan Africa No. 368 Pohl, Anderson, Claessens, and Djankov, Privatization and Restructuring in Central and Eastern Europe: Evidence and Policy Options No. 369 Costa-Pierce, From Farmers to Fishers: Developing Reservoir Aquaculturefor People Displaced by Dams No. 370 Dejene, Shishira, Yanda, and Johnsen, Land Degradation in Tanzania: Perception from the Village No. 371 Essama-Nssah, Analyse d'une repartition du niveau de vie No. 373 Onursal and Gautam, Vehicular Air Pollution: Experiencesfrom Seven Latin American Urban Centers No. 374 Jones, Sector Investment Programs in Africa: Issues and Experiences No. 375 Francis, Milimo, Njobvo, and Tembo, Listening to Farmers: Participatory Assessment of Policy Reform in Zambia's Agricultuire Sector No. 376 Tsunokawa and Hoban, Roads and the Environment: A Handbook No. 377 Walsh and Shah, Clean Fuels for Asia: Technical Options for Moving toward Unleaded Gasoline and Low-Sulfur Diesel No. 378 Shah and Nagpal, eds., Urban Air Quality Management Strategy in Asia: Kathmandu Valley Report No. 381 Shah and Nagpal, eds., Urban Air Quality Management Strategy in Asia: Greater Mumbai Report No. 382 Barker, Tenenbaum, and Woolf, Governance and Regulation of Power Pools and System Operators: An International Comparison No. 383 Goldman, Ergas, Ralph, and Felker, Technology Institutions and Policies: Their Role in Developing Technological Capability in Industry No. 384 Kojima and Okada, Catching Up to Leadership: The Role of Technology Support Institutions in Japan's Casting Sector No. 385 Rowat, Lubrano, and Porrata, Competition Policy and MERCOSUR No. 386 Dinar and Subramanian, Water Pricing Experiences: An International Perspective No. 387 Oskarsson, Berglund, Seling, Snellman, Stenback, and Fritz, A Planner's Guide for Selecting Clean-Coal Technologiesfor Power Plants No. 388 Sanjayan, Shen, and Jansen, Experiences with Integrated-Conservation Development Projects in Asia No. 389 International Commission on Irrigation and Drainage (ICID), Planning the Management, Operation, and Maintenance of Irrigation and Drainage Systems: A Guidefor the Preparation of Strategies and Manuals No. 395 Saleth and Dinar, Satisfying Urban Thirst: Water Supply Augmentation and Pricing Policy in Hyderabad City, India THE WORLD BANK ISIS II Sti-cct,..\.NW \:Lishiniiton, D).C. 20433 I' SA I'cpl1ol(nlc: 202-477-1234 Faicsinilc: 202-477-6391 I'Lcx: NICI 6414S W( )lA.I);AIK .\ C . 248423 \\ ORllt I)iS. \.\ k \\orld W\idc \\Ch: http: /. x.\ orIdhaiiik.or' IE-n.aiil: hooks(t \ orldhank.orr, ISBN 0-8213-4071-9