Cover Story: The CEO's Guide to The New Patents Regime, Pg 3

R Vasant Kumar

"The basis for post-patents competitive advantage in the pharma industry will be R&D"
R Vasant Kumar,
Director, Ranbaxy

The scope of patent protection is constantly widening not only because the laws are changing, but also because discovery has become an inherently-competitive process. And in this competitive battlefield, patents are a strategic weapon. In India, however, weak and cumbersome patent protection systems make it a fairly ineffective weapon. Thanks to a massive backlog of over 20,000 patent applications, it takes 5 to 7 years to obtain a patent as opposed to the global standard of 2 to 3 years. Even after this protracted procedure, the validity of the patent can be challenged all over again in the courts. Indeed, if an appeal is filed, the sealing of the patent is automatically stayed, often ensuring that the lag between patent application and receipt exceeds the life-cycle of the product. Damages are rarely granted as a result of patent infringements, and, worse, the damages that are granted are minimal. Complains patent lawyer Pravin Anand, 43: ''The entire system is defective. It makes it easy to block patents, and creates incentives for piracy.''

Little wonder, then, that business has not been able to tap into a vast science and technology infrastructure. The Global Competitiveness Report, 1988, ranks India first out of 53 nations in terms of the availability of competent scientists and engineers. Yet, in terms of business ability to commercialise research, India ranks a lowly 51st. Certainly, the laws have to change; patent administration has to be streamlined, but this is not enough. Recognising IPRs is only the first step towards intellectual property development. To capitalise on inherent scientific strengths, to convert innovation into property, to transform research into a business, India Inc. must learn to manage its patents portfolio.

THE DEFENSIVE BLOCK. A patent is a legally-created entry-barrier. The grant of exclusive, albeit temporary, rights over the invention blocks the entry of potential competitors. Explains R.A. Mashelkar, 55, Director-General, Council for Scientific & Industrial Research: ''A patent flags your competitive territory.'' Actually, it is a series of flags; for, a company will typically apply for an entire array of patents. For instance, the $12-billion Exxon and the $30-billion Hoechst hold nearly 50 per cent of the 400-plus patents worldwide on metallocenes, an important industrial catalyst. Exxon even sues companies entering this field for violation of its patents to pre-empt any future competition in this area.

Thus, incursion becomes difficult. And once changed laws and tighter enforcement raise the cost of infringement, it becomes expensive as well. Competitors will have to spend enormous amounts on researching innovations which will circumvent the maze of patents. Add the considerable costs of litigation and the possible compensation to be paid in case patent violation is proved, and the costs can be prohibitive. Take the $14.71-billion Eastman Kodak's misadventures with instant cameras. Assuming it could work around the $2.20-billion Polaroid's 12 patents, Kodak launched an instant camera in 1976. That flashed off a 14-year-long legal battle which culminated in a bill of over $1 billion and Kodak's exit from the market.

THE CEO SUMMARY: By establishing patents over their exclusive products, corporates will be able to ward off competition.

THE OFFENSIVE CHARGE. Like any other asset, a patent is a revenue-generating tool. The exclusive rights that a patent confers can be sold or licensed for a fat fee. In 1994, the $10.56-billion Texas Instruments earned more from patent royalties than from its manufacturing operations. One basic biotech patent fetched Stanford University a whopping $87 million in licensing fees. Suggests Pravin Anand: ''Firms can put their patents into a common pool, creating a web of cross-licensing arrangements.'' Consumer electronics giants like the $55-billion Sony, the $38.05-billion Philips, the $68.57-billion Hitachi, the $128.42-billion Mitsubishi, and the $44.47-billion Toshiba have done just that for patents relating to digital video display technology. Hardware and hard-disk manufacturers will be able to obtain a one-step licence for the whole package, and the revenues will be shared among the consortia members.

N B Zaveri

"Drugs under development for diseases like AIDS will be patent-protected, and beyond reach"
N B Zaveri,
Legal Counsel, IDMA

Licensing arrangements are proliferating because the costs of taking an invention from mind to market are escalating. Consider, for instance, drug discovery. Estimates vary, but introducing a new drug in the market can cost over $500 million (Rs 2,125 crore). Making this investment affordable requires identification of the various stages of the technology growth cycle and, then, apportioning out the costs. The sequence starts with basic research, followed by laboratory work and pilot projects. Only if the pilot project proves successful does commercialisation begin. At each stage, the costs and risks increase exponentially; so, it makes sense for Indian firms-who have limited resources but an abundance of low-cost and highly-trained scientists-to focus on basic research and then license the results.

That is precisely the strategy that has been adopted by Dr Reddy's Laboratories. Utilising its strong research- skills to cut through a web of 135 patents to develop 2 new insulin-sensitiser molecules, the firm has signed a $3.25-million licensing deal with the $2.20-billion Danish pharmaceutical giant Novo Norodisk. While the huge costs of clinical trials and marketing are transferred, the company still benefits through royalty payments if the drug is a commercial success.

THE CEO SUMMARY: Marketing technology will become a viable business, leading to the growth of hot R&D companies.

TECHNOLOGY MAPPING. A patent is also a well-structured public document. It contains vital information on the invention, the prior art in the field, and the countries in which related patents are in force. Most important of all, perhaps, is the unique code which constitutes the first line of any patent document: its 6-digit International Patent Classification (IPC) codes, which facilitate search and retrieval. Since they identify specific technologies, processes, compounds, formulations, and activities, the codes can be used to map out the technology profile of an entire industry.

Such profiles will not only indicate focus areas for future research and development efforts, they can also constitute the basis for technical collaborations, joint ventures, and, perhaps, even mergers. Says Reddy: ''We have developed advanced information systems that monitor patents filed worldwide in the fields of diabetes, oncology, and cardiology on a daily basis. So, we are always aware of possible areas of infringement as well as potential areas for future research.''

THE CEO SUMMARY: Companies will be able to use patent databases to track worldwide technology developments.

Since the signing of the trips agreement in 1994, patent applications in India have spurted, growing by about 30 per cent a year. That rate has to accelerate further if companies are to build competitive advantage. For, the most important factor of production now is not land, labour, or capital, but knowledge. Says Mashelkar: ''Tomorrow's wars are going to be fought in the market for knowledge. And, in that market, patents are a way of converting knowledge into wealth.'' Thus, the choice for India Inc. is clear: Patent. Or perish.

HOW WILL THE GOVERNMENT BE AFFECTED?

Policies for conforming to the new regime must be created.
The process of granting patents must be speeded up.
Patent application fees will become a source of revenue.
Penalties for violation of patent laws will have to be hiked.