Reference no: EM131199607

Business Week reported in September of 2008 on another major outsourcing effort by U.S. businesses - this time involving the pharmaceutical industry. U.S. and Western drug executives have been flocking to India and China to look for joint venture partners in drug research and manufacture endeavors. Business Week commented that this movement could reflect the beginning of "wide-scale outsourcing" of drug research and manufacture to Asia. Recently, five Western pharmaceutical companies - including Eli Lilly, Amgen, and Forest Laboratories - have formed "drug discovery" partnerships with the Indian drug firm, Jubilant, which interestingly is also the co-owner of India's Domino's pizza franchise. Lilly as well as Merck are also forming joint ventures with the Indian firm Piramal. The fundamental objective of these deals is for the Indian companies to take the promising compounds discovered by the Western multinationals, to conduct tests and to eliminate the non-productive and weakest compounds, and to develop the most promising into marketable drugs. The ultimate goal, however, is that the Indian firms will come up with breakthrough scientific discoveries that will lead to entirely new drugs for diseases such as cancer, diabetes, and Alzheimer's disease. During this process, the companies have created a powerful new model for international research collaboration. Billions are being spent. Business Week noted that the pharmaceutical companies have been in a five year economic "slump" with virtually no revenue growth; and thus they hope that this outsourcing effort will produce revolutionary and highly profitable medical products.

As with prior outsourcing to India as well as China, in the fields of software and computer services, the Asian attraction is the combination of "brain power" and cost savings. As Business Week noted, in the "East," five Ph.D chemists can be obtained for the cost of one in the "West." In order to accelerate this new form of outsourcing, Western pharmaceutical companies are now not only willing to share their intellectual property but also their profits. They are, moreover, willing to share intellectual property rights on new discoveries.

However, Business Week also reported that Western pharmaceutical companies are "slashing" U.S. R&D jobs "by the thousands" as well as decreasing research budgets in the United States. According toBusiness Week, the research "...buildup in Asia is bound to set off alarms that America is sacrificing another key industry through radical outsourcing." Yet, as the magazine also stated: "...But if the strategy works, it could save the drug industry billions of dollars, bring down the prices of new drugs, and accelerate breakthroughs.

China also is emerging as another major outsourcing venue for drug manufacture and research. China has even a bigger pool of biochemists than India. Lilly and Sanofi-Aventis have already formed partnerships there. Business Week reported that the Western firms have announced about $400 million in deals so far, but that the total value of the Asian outsourcing deals is probably much higher.

Of course, the East-West collaborations, as noted by Business Week, are very new and as of this writing have not produced a single drug. The first collaborations involved basic lab work, mainly to save on labor costs. Yet the magazine also reported that the Indian and Chinese firms are achieving targets set by the joint venture projects, and that there is "extraordinary potential" in the two countries. The partnerships now have reached the stage of "co-development arrangements," as termed by Business Week. Of course, one objective still remains to cut costs. The magazine reported that in the United States, a specialized research firm will charge a drug company about $250,000 and up for the full-time services of a PhD chemist, but with an Indian partner, the work can be done for approximately one-fifth of the cost. Cost savings are critical since it can cost about $100 million to bring a drug from its idea to the point where it is tested on people. After that, Business Week pointed out that the chances of FDA approval in the U.S. are only one in eight. Thus, if drugs fail, it will be cheaper as well as faster for them to fail in India and China.

What is most interesting is that not too long ago, India was regarded with disdain and as an outcaste by the Western pharmaceutical companies. The Western multinationals were outraged in the 1970s when the Indian government declared it would no longer honor the patents of the pharmaceutical companies. The result was that thousands of generic drug companies produced reverse-engineered Western medicines, and distributed them throughout India and to the developing world. The drugs, including AIDS drugs, were sold for a fraction of what the Western patent holders demanded. For example, in the 1990s, Indian generic drug manufacturers, Cipla and Ranbaxy Laboratories, started to sell AIDS "cocktails" in India and Africa for just a $1 per dose. Indian government leaders and business executives said they were only providing a "social service."

Today, however, that drug "knock-off" business is practically over. Indian drug executives and government leaders are now saying that in order to truly wipe out diseases in the Third World, "break-through" medicines will be necessary, and not merely "pirated" drugs. Moreover, they are saying that they now recognize that the only way to "jump start" a modern drug industry is by means of true collaboration with Western pharmaceutical companies. In 2003, therefore, the Indian government announced that it would protect the intellectual property rights of foreign patent holders. The Western company executives, as indicated by Business Week, have gotten over their initial suspicions, due in part to the deserved reputation of India as a "world class" research center but also by the "charismatic and passionate" Indian business leaders.

The Western and Asian companies now assign senior staff to "joint research councils," and there are also parallel teams of chemists and biologists that meet regularly and keep in touch by means of teleconferencing. The arrangements have been working very well, and the Eastern partners, as reported by Business Week, are being given more and more responsibility for the research and manufacture of drugs.

1. Discuss the legal issues involved in the outsourcing of drug research and manufacture to Indian and Chinese firms. Discuss not only intellectual property law but also U.S. contract, employment, and labor law.

2. Is this new form of outsourcing moral pursuant to Utilitarian ethics? Why or why not?

3. Is it moral pursuant to Kantian ethics? Why or why not?

4. How should a U.S. pharmaceutical company approach drug outsourcing using the principles of Value-Driven Management?

5. Did the Indian companies and government act morally years ago when they violated the Western companies' patent rights to produce and sell cheaply AIDS and other drugs in the Third World? Did they act in a socially responsible manner?

6. What should the U.S. companies, in order to be "socially responsible" firms, be doing for their own R&D employees who are now losing their jobs due to this new outsourcing effort?