Indian pharma

Indian pharmaceutical companies are making inroads in the global industry, not just in generic drugs (although that is a large part of their current success). There moving into other parts of the value network, according to Pankaj Ghemawat in > Global Economy” href=”http://www.theglobalist.com/DBWeb/StoryId.aspx?StoryId=6570″>Big Pharma’s Eastern Sunset:

In addition they engage in a variety of related activities other than drugs manufacturing:
&bull Contract R&D: Instead of simply engaging in contract manufacturing, a number of Indian firms are also undertaking contract R&D for Western manufacturers. Such an approach focuses on the largest arbitrage differentials in the sector. Pfizer estimates that Indian chemists make about $5 an hour, versus more than $50 an hour for U.S. scientists. Thus, in early 2007, Nicholas Piramal and Eli Lilly signed an agreement under which the former will be responsible for the global design and execution of pre-clinical and early-stage clinical work for some of the latter’s new drugs.
&bull Clinical trials: A new medicine must go through clinical trials — the final and most expensive stage of trials — on a carefully selected sample of patients. These trials have also attracted great attention — from drug-industry arbitrageurs. Forty percent of all clinical trials are now conducted in poor countries. India attracts particular attention because of a large supply of patients and of English-speaking doctors.
&bull IT-enabled services: India has also been successful as a destination for IT-enabled services, accounting for nearly half of total off-shoring activity in 2005. As a result, the pharmaceutical sector has shown great interest in exploiting its potential to contain the surging costs of data management and informatics support during the drug development process in areas such as data entry, database management and trial study design, customer support services and data analytics.

As I’m mentioned before, India is attempting to move toward becoming a Knowledge Economy. The pharma companies are certainly headed that way. The nation itself has a long way to go — much of the country is still poor and agricultural. But the part of India that is competitive in the modern economy is huge — and will continue to present both challenges and opportunities for the US.

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Krugman on “financial inovation”

From today’s Paul Krugman column Innovating Our Way to Financial Crisis – New York Times on the financial mess:

How did things get so opaque? The answer is “financial innovation” — two words that should, from now on, strike fear into investors’ hearts.
O.K., to be fair, some kinds of financial innovation are good. I don’t want to go back to the days when checking accounts didn’t pay interest and you couldn’t withdraw cash on weekends.
But the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized.

So how to we facilitate the good innovations and protect from the bad? Unfortunately, no one has come up with a really good answer to that. Krugman blames that lack of regulatory oversight: “The bottom line is that policy makers left the financial industry free to innovate — and what it did was to innovate itself, and the rest of us, into a big, nasty mess.” While I believe that lack regulation and oversight was a factor, I’m hesitant to jump on the “lets just re-regulate everything” bandwagon. I think we need to take a hard look at where the regulatory system and the market incentives failed (or, in actuality, drove the system to this bad outcome). Then we can devise the appropriate response.
There will be those who will fight any attempt at reform — like there are those who are still arguing against the basic premises of Sarbanes-Oxley. As Krugman notes, the laissez faire mentality dies hard.
But his implication that regulation should get ahead of innovation is misguided. Regulation doesn’t drive innovation – but it has to keep up in tandem. And that has been one of the biggest failings of public policy recently – its inability to understand, let alone keep up, with the changes driving the I-Cubed Economy. Financial regulation is but one area of that failure. Let’s hope others don’t end up with the same costly result.

Patent reform – from the right

There is a new report out supporting patent reform legislation, apparently commissioned by the Coalition for Patent Fairness. Written by Georgetown University Law Professor Viet D. Dihn and attorney William Paxton. Dihn served as an Assistant Attorney General for Legal Policy in the early years of the Bush Administration and is considered one of the rising conservative legal stars. The report, Patent Reform: Protecting Property Rights and the Marketplace of Ideas argues that the current system is a court-mandated process, thereby damaging the market and, by implication actually weakening property rights:

The marketplace of ideas, like any market, is vulnerable to exploitation in the absence of effective oversight and clear governing rules. Unfortunately, the legal rules governing patent infringement—particularly those concerning damage awards—are outdated and, as a result, engender strike suits and other net loss speculative endeavors. Perhaps even more disturbingly, these legal rules actually encourage bona fide patent holders to seek judicially coerced transactions for the simple reason that the courts routinely compensate successful litigants over and above the true value of the infringed patent. The enterprising patent holder is now driven—by a system of perverse incentives—away from mutually beneficial arrangements such as voluntary licensing agreements, and toward more profitable holdout positions anchored by judicial fiat. This devolution is hardly what the Framers or Congress intended for the patent system.

The authors also use an argument that I have also used for clearer patent rights: that patent holders and investors need unambiguous title.

The patent system cannot work if the personal property right embodied by the patent is ambiguous. An inventor’s property right is most valuable and best protected when the right is clearly defined. Indeed, our legal system recognizes this in other contexts by accepting that disputes are inevitable in any system with multiple rights holders, and by developing mechanisms to allow challenges to property rights that clarify the owner’s interests and resolve any competing claims to it. By providing a forum for resolving competing claims, properly designed legal procedures eliminate the uncertainty surrounding the owner’s right, making the title more transferable, and, consequently, more valuable.
For example, in traditional real property law, surveyors and others seek to describe the parcel of land so that an owner’s right is fully captured by the title. An owner can bring a quiet title action to resolve challenges where the title to the property is ambiguous due to a competing claim of adverse possession, a surveying error, or the assertion of a tax lien. Thus, the legal system resolves disputes by determining who rightfully has title to the property, and eliminates uncertainty as a result. In turn, this encourages the owner to develop the land because certainty reduces risk, and decreasing risk lowers the cost of capital. In addition, by conveying unambiguous signals, clear title serves as a deterrent to abusive litigation by reducing the likelihood of success of unmeritorious, competing claims.

The real estate market has interesting parallels here, especially on the investor/lending side. If I can’t show clear evidence that I actually own my house (or the Brooklyn Bridge for that matter), how am I able to use it collateral on a loan or securitize it? Of course, other factors are holding back patent securitization — such as the lack of a central clearinghouse of who has what secondary claims on a patent (“prefecture” to use the legal term). And right now, real-estate backed securitization is revealing all its flaws and downsides.
But securitization of patents and other intangible is only a matter of time. And patent reform would move the process forward. More on this in the forthcoming paper on Intangible Asset Monetization.