In its August 8th 2015 leader, the Economist magazine questions the evidence for patent protection and proposes innovative alternative ways to foster innovation, including new forms of public sector regulation. Our aim is to suggest a market-based alternative and complement to regulation that leverages the joint benefits to companies that choose to cooperate and compete (co-opete), as opposed to the two extremes of direct competition, or collusion. We draw on the idea of market co-creation by companies in ‘advanced’ and emerging countries, using the pharmaceutical industry as our focus of examination.
Over the last two decades, emerging country pharmaceutical companies operate in an increasingly challenging competitive environment (Ghauri and Santangelo, 2012; Angeli, 2013). This new environment is, in part, the result of a series of international trade agreements that have strengthened the Intellectual Property (IP) regime worldwide. These agreements include the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, the subsequent Anti- Counterfeiting Trade Agreement (ACTA), and the more recent Trans-Pacific Partnership (TPP) agreement. They are based on the view that global IP protection will foster trade opportunities across the world and also facilitate technology transfer from advanced to emerging countries (Blakeney, 2013; Yang, 2012).
This new IP regime is affecting competitive dynamics, particularly in the pharmaceutical industry where patents confer robust protection and are essential for the commercialization of innovations (James et al., 2013). In the past, emerging country pharmaceutical firms (EPFs) relied extensively on reverse engineering of patented compounds to produce “generic” versions of branded drugs at a fraction of the costs faced by the original innovators (McKinsey Report, 2013). However, the result of TRIPS (and the subsequent agreements) has been to place restrictions on the space for the production of generic drugs (Shaffer and Brenner, 2009). Thus, EPFs had to fundamentally rethink their “closed” business models, which were oriented towards reverse engineering and low-cost manufacturing (Angeli, 2013).
Pharmaceutical firms in emerging countries, such as India, have adopted different strategies to adjust to the new environment. Some firms try to leverage their location advantages at home, such as relationships with hospital and doctors, but also frugal innovation-type strategies (Anand and Kale, 2006; Greenhalgh, 2013). Others attempt to upgrade their production and marketing capabilities to offer ‘branded generics’. And others contest the IP rights of advanced country multinational companies. In 2005, for instance, several Indian generics producers successfully challenged Novartis’ attempt to obtain patent protection for an updated version of its drug Gleevec (for chronic myeloid leukemia) in India (Shadlen and Guennif, 2011).
Direct competition, however, between EPFs and “advanced” country multinational enterprises (AMNEs) may not be the most desirable competitive outcome for either groups of firms. Instead, some form of cooperation can prove preferable to both parties when EPFs can leverage complementary assets and capabilities to extend and co-create market space. For instance, in 2009, Dr. Reddy’s Labs established a partnership with GlaxoSmithKline plc to develop and market drugs in fast growing therapeutic segments (e.g. cardiovascular, diabetes, oncology, gastroenterology) across several emerging markets. Products were manufactured by Dr. Reddy’s and were licensed and supplied to GlaxoSmithKline in various emerging markets, while revenues shared between the two partners. In other products and markets the two firms continued to compete.