From Imitation to Innovation: The Evolution of R&D Capabilities and Learning Processes in the Indian Pharmaceutical Industry

Abstract

Since the mid 1990s the Indian pharmaceutical industry has emerged as a leading supplier of generic drugs to both developing and developed countries.The movement of the Indian pharmaceutical industry along the R&D value chain represents a remarkable shift from an importer to an innovator of drugs. The Indian government's industrial and technology policies along with changes in regulation of intellectual property rights played a crucial role in shaping this development of R&D capability. Using the ‘capability creation model’ this paper discusses the learning processes and stages involved in this dramatic accumulation of technological capability. This analysis shows that the Indian pharmaceutical industry has followed a trajectory from duplicative imitation to creative imitation to move up the value chain of pharmaceutical R&D. Finally as a result of changes in patent law the industry is learning to develop capabilities in innovative R&D. The basic and intermediate technological capabilities gained from imitative learning gave these firms a solid base for development of competence in advanced innovative R&D. These findings have implications for government policies as well as firm strategies in other developing countries albeit with some limitations due to global harmonisation of patent laws being promoted by the World Trade Organization.

Notes

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5. L. Kim, From Imitation to Innovation: The Dynamics of Korea's Technological Learning (Boston, MA, Harvard Business Press, 1997).

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7. Ibid.

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12. S. Chaudhari, Growth and structural changes in the pharmaceutical industry in India, Working Paper, Indian Institute of Management, Calcutta, 1999.

13. L. Kim & R. R. Nelson, Introduction: technology and industrialisation in newly industrialising countries, in: L. Kim & R. R. Nelson (Eds) Technology, Learning and Innovation: Experiences of Newly Industrialising Economies (Cambridge, Cambridge University Press, 2000).

14. If an original patent holder has developed the product with process A, then another company develops the product with process B, a third company tries to developed product with process C. The profitability of a drug in the market place is mostly determined by the cost and timing of entry in the market. If a research based pharmaceutical firm operates on 95% production margins; the total cost of manufacturing involved in the development of the drug is 5%. So the marginal or significant improvement in process development does not have a significant effect on profit margins. The Indian pharmaceutical firm operates on an 8% production margin; the cost of manufacturing makes up the 92% of total cost of the product. Therefore even if a firm makes only a 0.5% improvement in process, then a firm can achieve a significant improvement in margins, which finally can result in an effective increase in profit. This was the driving force for firms in developing efficient cheap processes as the 0.5% on an 8% margin makes a big difference.

15. Kim & Nelson, op. cit., Ref. 13.

16. Ibid.

17. A Drug Master File (DMF) is a submission to the Food and Drug Administration (FDA) containing confidential, detailed information about facilities, processes or articles employed in the manufacturing, processing, packaging and storing of one or more drugs intended for use in humans or animals, while abbreviated new drug application contains data that when submitted to FDA provides for the review and ultimate approval of a generic drug product. Generic drug applications are termed ‘abbreviated’ because they are generally not required to include preclinical (animal) and clinical (human) data to establish safety and effectiveness. Instead, generic applicants must scientifically demonstrate that their product is bioequivalent (i.e. performs in the same manner as the innovator drug).

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20. Kim, op. cit., Ref. 5.

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22. Kim & Nelson, op cit., Ref. 12.

23. J. P. Murmann, Knowledge and Competitive Advantage: The Co-evolution of Firms, Technology and National Institutions (Cambridge, Cambridge University Press, 2003).