Why India’s Novartis ruling is good for innovation

Today’s news that the Indian supreme court has effectively denied the Swiss multinational pharmaceutical company Novartis the patent protection for its ‘new’ blood cancer drug Glivec (Gleevec in North America) has been discussed controversially in the media. On the one hand, commentators sympathetic to the industry have pointed out that without patent protection a publicly owned company loses its incentive to develop new drugs. Pharmaceutical innovation, so the argument goes, is driven by the hope of future returns. Since development of new drugs is very costly, time consuming and competitive, companies can hardly justify investments when rulings such as today's kill their hopes of recouping the costs through future sales. In short, the Indian ruling "will hinder medical progress" (Novartis press release) and thus kills innovation.

On the other hand, activists and other voices critical of the industry argue that this is a win for all those that have the interest of poor people and their access to affordable drugs in mind. After all, a year’s supply for Glivec for a leukemia patient currently comes at a whopping $70,000, while Indian generics can do the same job for about $2,500! (Generics btw. are drugs, that use the same chemical recipe as the original and can be sold much cheaper as the generics company does not have to cover the R&D costs)  For India, which has the biggest generics industry in the world, this ruling of course has also a very national commercial interest...

What most commentators are missing though in their evaluation of the case is a somewhat minute detail, which however has huge ethical implications. The crucial point here is whether the version of Glivec for which Novartis was claiming patent protection, is actually a ‘new’ drug. What the Indian supreme court in fact ruled was not that Novartis should not enjoy patent protection on their new drugs; they mainly concluded that the new edition of Glivec, for which the company applied for protection, was in fact not sufficiently ‘new’, not different enough from the old version of Glivec, for which the patent had expired.

This points to a well know strategy of the pharmaceutical industry. Rather than fighting generic companies, ‘originator’ companies such as Novartis just marginally change the chemical formula of an existing drug whose patent is about to expire and then pretend to having come up with an entirely new one, for which of course they should enjoy full patent protection.

This, however, is just one trick pharmaceutical companies use in fighting generic companies. The EU Commission on Competition has had an eye on the practices of the industry in circumventing patent law for a long time. Their 2009 report is an inspiring read which sheds an interesting light on the claim, that it is the generics companies that stifle innovation (as rehearsed today on BBC, CNN and the likes).

Basically, companies such as Novartis and other ‘originators’ are using a whole host of ‘defensive patenting strategies’ and the use of ‘second generation products’ ruled out today in India is just one of them. Others include the filing of numerous patent applications for the same medicine (forming so called 'patent clusters' or 'patent thickets'). This is an important tool to prevent competitors in advance to develop new medicine as the potential new drug would already be covered by the patent right filed in advance by another competitor.

All in all, the EU Commission identified a host of industry strategies all of which resulted in numerous "situations where innovation was effectively blocked” (p. 19). So in reality, what Novartis was stopped doing – at least in India – is not so much about innovating for new drugs, but rather one element of a rich toolbox of strategies to stifle and prevent innovation while protecting patents and thus the profits of the company.

After all then, today’s ruling may indeed result in more real innovation. Rather than focusing their R&D teams on insignificant changes in existing drugs which may satisfy the legal team of the company to file a new patent application, Novartis and other pharmaceuticals might take this event as an incentive to actually develop new drugs that address hitherto unaddressed and untreatable diseases. One of the reasons the Bill and Melinda Gates foundation is so active in developing new drugs for the diseases of the poor (such as malaria) has to do with the fact that pharmaceutical innovation is too much driven by potential economic benefits of future drugs. And of course the diseases of the poor are bad for the business case of a drug.

This problem now hits a company whose outgoing CEO just had to turn down a $78m severance package - reacting to public outrage in Switzerland. After all, a company that can afford such golden handshakes for their CEO in the first place can’t be ailing too badly from all those third world generics producers...

(An edited version of this blog was published as an Op-Ed in the Globe and Mail, April 2, 2013).

Photo by Images_of_Money, reproduced under the Creative Commons License.

The Elephant in the Room

For the past two and half days I've felt a strange tension in this conference. It is about the thorny question of whether ethics pays. The business case for CSR. The harmony between economic, social and ecological sustainability.

Most of the time panellists and speakers were hammering it home that joining the UN Global Compact and implementing the principles just makes good business sense. I had a very lively conversation with Peter Solmssen, Executive VP of Siemens about this, who joined the company recently as part of the revamp of the board in the aftermath of the corruption scandals. He was fairly bullish that fighting corruption makes good business sense, 'we are more profitable now' he argued. He argued that in most countries big conglomerates like Siemens or General Electric are doing business with public purchasers who at the top level are not interested in corruption, and that companies who are known for not engaging in it, in fact have a competitive advantage. His view is that big players have indeed the chance of forming a 'cartel of the good' to collaborate on addressing ethical issues like corruption – and be the better off with it.

A similar take I got from talking to Gustavo Grobocopatel, President of Grupo Losgrobo from Argentina. His company works in agriculture and adjacent supplies and services, and he sees the particular value for his organization in engaging with the UN Global Compact in improved stakeholder relations. In particular his customers value this inclusive approach and for him CSR is very much about competitive advantage. His organization is particular interesting as it tries to keep more of the value chain of agricultural products in the country, rather than just exporting commodities and falling victim to what is commonly referred to as 'Dutch disease'.

In some ways then it was quite a little 'scratch' (I mentioned my Teflon-ized ears) to hear Klaus Leisinger (President and CEO of the Novartis Foundation for Sustainable Development) say on Friday morning that the talk of 'ethics pays' or 'ethics is just good business' is – in his words – just 'bullshit'. Why, he argued, would companies not do the right thing anyway if it were just good business? Instead he called for a commitment to basic values, brought forward in the 'Manifesto for Global Economic Ethics', by companies a priori, simply because it is morally right, as in some cases it might even cost money in the short term.

I tend to agree with this. Again, we can turn to the ten year old-metaphor: at this age, kids are at the 'conventional' level of moral development (in Kohlberg's theory): they do right and avoid wrong, because mommy and daddy say so and he tries to be a nice boy, and he tries to avoid the smack on the back or wants to get that ice cream as a reward. At least on the rhetorical level, the UN Global Compact members – by and large - seem to be not much beyond the conventional level. Which – don't get me wrong – is quite an achievement. Whole societies have survived on that, so that's fine for our birthday boy.

This apparent reluctance to think about the firm beyond the immediate business case became quite clear today in the sessions dealing with Development. I put the question to Jeffrey Sachs, Georg Kell and Chad Holliday in the final press briefing. Kell re-iterated that we are seeing an 'evolutionary transformation', a re-orientation from short- to long-term and a stronger focus on the (financial) risk which non-financial issues can cause. But 'the basic model remains intact', he said. In a similar vein Holliday, who hinted at further economic incentives to internalize sustainability issues, such as pricing carbon. It was then Sachs, who I think took up the question of whether it is time to move beyond the current framework. He said, that providing malaria medications to poor people 'is not a money making venture'. But still he argued that the business contribution to achieving the Millennium Development Goals is vital. So he pointed more at models of shared responsibility and sees business getting much more involved in public-private-partnerships. This was re-iterated by Robert Orr, Assistant Undersecretary General of the UN, who moderated the press briefing. For him the UN Global Compact is very much about becoming/being a player in global governance. He stressed there is hardly no issue on the global political agenda, where business is not part of any possibly thinkable solution. I liked that candour and agree.

Followers of this blog familiar with our writings will know that this is where I see the future of CSR going: Business as a political actor, intricately involved in societal governance. In Kohlberg's model of moral development, this would be the post-conventional level: understanding social contracts and universal moral principles – and doing the right thing based on understanding this. So let's wish our ten year old a healthy further development – there are new stages to discover!