Why are Indian R&D Centers Closing Down?

Are the top tier private R&D organisations in India closing down their operations? Just look at the following data compiled by Biospectrum in its August 2015 issue 

• In January 2014, AstraZeneca announced the shutting down of its drug R&D unit, dedicated for neglected diseases, one of its kind, located in Bangalore.  
• In August 2014, Indian healthcare giant Piramal announced its decision to shut its Mumbai R&D unit.
• In 2015 Pfizer's Thane plant is shutting down its operations.
• Sandoz is shutting down its Turbhe R&D site in Maharashtra
• Merck has announced shutting down of its Bangalore Genei facility, recently.

Those who are familiar with the South Indian way of speaking English would have heard this expression – "what is happening, I say?!" (in typical south Indian fashion, ‘say’ pronounced with an elongation). That’s the question that comes to one’s mind as R&D centers shut down one by one. 

To set the record straight, Pfizer’s Thane plant was a manufacturing facility. Same is the case with Sandoz Thurbe plant which was manufacturing APIs. Others are all R&D units. This does not digress from the fact of R&D closures - Biospectrum has brought out an important issue. 

It is tempting to see these closing downs as random business operation and go on with business as usual. The numbers are far too many to lose sight of its significance. The R&D units that are being shut down are in pharmaceutical sector, a key driver of innovation. In pharmaceutical sector, it is R&D which determines the standing in the pecking order. As I discuss below, it might have repercussions in other areas. 

Way back in 2004, noted columnist Swaminathan S. Anklesaria Aiyar (Swaminomics), in his column in The Times of India, titled ‘R&D: India’s New Star Industry’, had pointed out the emergence of R&D industry in India. During the license permit raj there was no incentive to do R&D, he argued. The competition brought in by economic liberalisation in the 1990s made R&D is an essential tool to compete and survive. He warned the Americans who complain about call centers that they had not seen anything yet, as biggest American companies were setting up R&D centers in India; citing examples of setting up of R&D centers by General Electric, Microsoft, IBM, Cisco, Intel, General Motors, Astra Zeneca, Motorola , Texas Instruments. He predicted an R&D revolution in India and hoped with many other Indians for blooming of Indian R&D.

A decade later, it looks like Swaminomics has had to eat his words. Instead of bloom, we are witnessing a withering; we are witnessing a slow retreat by those who set up their R&D centers. And at the same time, some of Indian R&D companies are going abroad to set up their research facilities. Glenmark has set up an R&D center in Switzerland. This is a reason for worry about anyone who is interested in R&D and innovation in India.

In India, prior to the wave of MNC R&D centers cited above by Swaminathan S. Anklesaria Aiyar, R&D was done mainly in the public sector laboratories. The traditional Indian public policy approach on R&D was to create a golden handshake of public sector laboratories and private enterprises. Public sector labs were established to support R&D in the industry. In 1944, the then Government released ₹10 million (US$150,966) to set up National Physical Laboratory, National Chemical Laboratory and National Metallurgical Laboratory (NML). The stated objective was to develop industry in pre-independent India, and also to incentivize private firms to support industrial research. It worked; the objective was met. The Tata Trust promised to donate ₹1.17 million (US$18,000) to NML.  The government in its turn located NML at Jamshedpur, where Tata Steel is located. For many decades, and even now, NML provide world class R&D support to Tata Steel located at Jamshedpur. Two other laboratories Central Mining Research Institute(CMRI)  and Central Fuel Research Institute (CFRI), were set up to provide basic research, R & D back up, advisory services and help in technology upgradation and adaptation to coal and mineral based industries to reach the targeted production with high standards of safety, economy and cleaner environment. These two labs were later merged to create Central Institute of Mining and Fuel Research (CSIR-CIMFR). CSIR’s chemical laboratories have been the backbone of India’s generic industry and it has been acknowledged widely. 

The setting up of private sector R&D by MNC majors as pointed out by Swaminathan Ankaleseria Ayer was a qualitative shift, which acknowledged the research capability available in the country which could give competitive advantage to MNCs, globally. He wrote: “The biggest American companies are now setting up R&D centres in India. They are not coming for cheap labour in sweatshops. They are coming for India’s brains.” Indian education system had produced quality human resources who could produce world class R&D for MNCs. From a public sector dominated R&D, India was moving to private sector R&D, which, it was hoped would drive innovation and growth. This shift is getting reversed with dangerous portents. 

Those who are familiar with R&D and innovation knows very well that both innovation and R&D thrives within the surrounding ecosystem. The early movers into R&D centers have therefore taken extra pains to set up the ecosystem around them. For example, the Astra Zeneca research center at Bangalore created a drug discovery ecosystem around it. It was benefited by the scientific innovation ecosystem created by the Indian Institute of Science. This ecosystem enabled creation of Contract Research Organisations who do contract R&D for global majors. Shutting down of the research centers decimates the ecosystem that got developed. Repeated shutting down as Biospectrum has pointed out might irreversibly damage the ecosystem built up assiduously, with great effort.

How challenging is it to set up a new R&D center in India? If experience of some passionate ex scientists of Astra Zeneca is anything to go by, it is an uphill task, choked by bureaucratic stranglehold. Dr R K Shandil, Dr Sridhar Narayanan were with Astra Zeneca facility which was shut down. Passionate about discovering new drugs for neglected diseases, they founded a Foundation for Neglected Diseases Research, along with P Gopal Krishnan, a Chartered Accountant. After almost a year of its setting up, they are still running from pillar to post to get the approvals required to set up an R&D unit, a drug research facility for tropical infectious diseases which predominantly affect India. Will we ever learn to make it easy for people to do business, even if our Prime Minister himself wants it? Luckily scientists are optimists and they are still at it. But when decisions are taken on business considerations by MNCs, luck plays very limited role.

The Prime Minister of India gives considerable importance to developing manufacturing facilities in India which will create jobs, through his 'Make in India' campaign. Make in India requires extensive R&D. The shutting down of R&D centers does not augur well for the make in India campaign. Policy makers need to realise this.

The much acclaimed human resources (‘brain power’ and research capability) still exists in the country. Indian minds are driving innovation in many parts of the world. Then, why are these R&D centers are shutting down? The reasons have to be systemic, and goes far beyond the availability of skilled human resources. These reasons are definitely large enough to obfuscate the human resource and cost advantage that India enjoys. Our policy makers need to find the real reasons and take quick corrective measures.

The Economist Decries Patent System

The Economist, one of the most reputed journals, has raised a red flag on the patent system, with a cover story titled ‘Set Innovation Free: Time to Fix the Patent System’ in its August 8^th to 14^th, 2015 issue. Its Editorial titled ‘Innovation: Time to Fix Patents’ states: "Today’s patent regime operates in the name of progress. Instead it sets innovation back. Time to fix it."

The issue carries an Editorial (called leader in The Economist parlance) and a detailed 3 page article titled ‘Intellectual Property: A Question of Utility’. The main arguments put forward against the patent system is summarized below:

i.                    Evidence show that stronger patent system do not necessarily promote innovation. In a surprising twist to the narrative, more akin to the lingua of a civil society organization, The Economist goes back to the history and recall that the industrial revolution that led to steam ships to the railroads did not have patents as we know today.  It also recall that it argued against patents in the 19^th century.

ii.                  The policy premise supporting patents is they serve public good. It provides an incentive to innovate and publish the new idea, in return of a material gain. Publication of new ideas spread the technological advancement as one innovation builds on another. The Economist argues that the evidence to support this claim is weak. Patent documents are carefully written by experts to obscure how it works even from the experts in the field. Instead of spreading knowledge, the current patent system has created a parasitic ecology of trolls and defensive patent holders, who aim to block innovation to grab a share of the spoils than to promote innovation.

iii.                A growing body of research including a 2004 study by the National Academy of Sciences led to the conclusion that the society as a whole might be better off with no patents, with a few exceptions, such as medicines.

iv.               The patent system is expensive and increases costs on the consumers. The cost of challenging a patent thorough legal process is high.

v.                 The cost of innovation that never takes place because of the flawed patent system is incalculable.

vi.               The article rely extensively on a book ‘The Case Against Patents’ by two economists Michele Boldrin and David Levine, compiling the research done so far, arguing that patents are neither good at rewarding innovation nor help in real spread of technology. After analyzing 23 studies carried out in the 20^th century on the patent system, they found “weak or no evidence that strengthening of patent regimes increases innovation”.  All it does is to get more patents filed, which is not the same thing as innovation. The main arguments of the book are summarized in the article as below:

a.     Evidence suggest that 19^th century countries that lacked patent systems were no less innovative than those which had them.

b.     An exception to the general finding only goes to prove the rule proposed that patents per se do not promote innovation. The exception is the case of Taiwan’s 1986 patent reforms. After the reforms that strengthened Taiwan’s patent system, the R&D spending in the country went up and more American patents were granted to Taiwanese nationals. The article argues that this evidence show only that the countries with weaker patent protection can divert investment and R&D spending to their territories by strengthening it. It does not demonstrate any increase in worldwide R&D spending or innovation.  

c.      Expansion of patent system do not bring about more innovation as evidenced from US experience. In 1970, US extended patent protection to sexually reproducing plants. Studies on wheat showed that this measure did not lead to greater research spending or increase in yield. Even after extending patent protection to all biotech products in the 1980’s, the productivity of agriculture in US rose only at the same rate as before.

d.     The rate of innovation show little relation to patents. In industries from chemicals to computer software, waves of innovation began with lots of participants. Patents started to get filed only years later, once the spurt of innovation die down the incumbents in the maturing industry seek to exclude new entrants as well as to protect themselves from their rivals law suits. The real cause of patents is competition and is only a result of innovation and not the cause of it. The patent system is good for incumbents for fending off competition and not in public interest of promoting innovation.

e.     The system may be offering benefits to some start-ups with little access to capital but having new ideas but not s in mature industries like aerospace and car making. In such industries, the patent on technologies is only one of the component of creating a world beating innovative product. The article cites the cases of market leadership of BMW and Boeing which Chinese companies are unable to crack.

f.       In some sectors like the pharmaceuticals, the argument for continuation of patent is strong due to high initial cost. Here also, evidence do not stand up to the claim of patents fostering innovation. Till 1967 German companies could only have process patents. But they produced more innovation than the British ones which enjoyed product patents.

vii.            The Economist argues for a top to bottom reexamination of whether patents and other forms of intellectual property protection do their job and whether they deserve to exist.  It notes that outright abolition proposals may create issues in terms of ethics of property rights. It points out that no property rights are absolute, citing examples of demolishing houses to make way for roads, taking money through taxation, and putting controls on land use. In these cases a balance is struck between claim of the individual and that of the society.  It says that with ideas, the argument that the government should force the owners is strong.

viii.           The Economist put the argument of free riding upside down.  Free riding problem on ideas is the strongest argument for providing property rights, because the imitator can reproduce the idea, once created, without investment. It says sharing will lead to extra innovation. Ideas overlap and innovations depend on earlier advances, for example, there will be no Iphone without touchscreen. The signs are that innovation today is less about entirely novel breakthroughs but more about clever combinations and extension of existing ideas. Therefore free riding has value in fostering innovation. Open source software including the Android operating system are clear examples.

Suggestions for Reforming Patent System:

The Economist cautions the reformists that they should be aware of their own limitations.  As innovation is complex. At the same breath it points out that the current regime is susceptible to lobbying and plea of special interests.   A ‘clear and rough and ready patent system is better than a complex and an elegant one. In government as in invention, simplicity is strength (Highly desirable but easier said than done as anyone involved in policy making knows. Anyone other than Economist saying this would have been dragged down and beaten up).

The Economist gives the following suggestion for reform:

i.                    The patents should come with a “use it or lose it” rule, so that they expire if the invention is not brought to market.

ii.                  Patents should be easier to challenge without the expense of a full blown court case.

iii.                The burden of proof for overturning a patent in a court should be lowered.

iv.               The requirement that ideas should be non-obvious should be strengthened. Economists states that Apple should not be granted patents for rectangular tablets with rounded corners and nor Twitter the patent on ‘pull to refresh’.

v.                 Governments should gradually reduce the term of patent protection. 20 year is a long term for patent. In fast moving industries, governments should gradually bring down the length of patent. The Economist argues that even the pharmaceutical firms could live with shorter patents if the regulatory regime gives faster approvals.

vi.               Experiments with other forms of financing innovation should could be run alongside the patent system. It beseeches the defenders of the Patent system to do so in their own backyard.

Observations:

What the Economist did not say:

One is disappointed that a critique as comprehensive as what The Economist has done has left out one of the main challenge in driving innovation for large populations. Patents drive innovation only in those areas where market forces are active. It fails to drive innovation in market failure situations. Take the example of neglected tropical infectious diseases which affect vast segments of population in the tropics. These tropical infectious diseases are called neglected because the pharmaceutical industry which drives innovation does not see profits in them. It is a clear example of incalculable cost of innovation that never takes place due to the patent system. The patent system is inequitable in itself. Some suggestions proposed by The Economist, like different modes of financing innovation could address this. There are working examples of product development partnerships in neglected diseases like TB Alliance and MMV, DnDi, Gavi and many others which goes on to show that an alternative system of financing innovation exist in areas where patents do not work.

Compulsory License

The Economist argues that property rights are not absolute. The state can place restrictions on property rights in public interest. There are extensive arguments about wide sharing of ideas and governments have recognized the limits on the patent system. Yet, it shy away from mentioning about the TRIPS recognized too of compulsory license in public interest. To be fair, there is an indirect reference to compulsory license while discussing the US Federal Trade Commission’s recommendation to President Franklin Roosevelt to replace patent system with compulsory licensing.

How can any article which discusses the thereat to innovation posed by the patent system and list out some outlandish (and some not so outlandish) solutions not even discuss this tool available in the existing law? 

Conclusion

The Economist has not said anything really new or path breaking. What has been listed are well known issues and the solutions are also known ones.  

The difference is only this – The Economist, the champion, mouthpiece and lead advocate of free market capitalism is saying this. One can only hope that the world sits up and notice.

The Curious Copyright Case of Happy Birthday Song

You might find it hard to believe, the ubiquitous Happy Birthday song which we sing in all birthdays is claimed to be under copyright protection, which earns Warner Music a licensing royalty of about $2 Million per year.

A dispute that is ongoing in a New York Court is unraveling its interesting story.

The claim of original creation of "Happy Birthday" song is with two sisters from Kentucky, US, Mildred Jane Hill and Patty Smith Hill who were Kindergarten teachers. Mildred, born in 1859, was a concert pianist and composer. They composed a song of greeting for the children and Mildred came up with the melody (which we now know as the tune of "Happy Birthday") for teachers to use in welcoming students to the class each day:

Good morning to you,
Good morning to you,
Good morning, dear children,
Good morning to all.

During the 19^th century, birthday celebrations as we know it today were not so popular. To quote from Prof Brauneis’ essay (aptly titled 'Copyright and the World's Most Popular Song'):

According to scholar Elizabeth Pleck, birthday parties did not become common even among wealthy Americans until the late 1830s; modern birthday cakes emerged after 1850; and peer-culture birthday parties, involving children of the same age as the child whose birthday was being celebrated, emerged between 1870 and 1920, after American urban public schools became age-graded.

The history of how “Good morning to you” song turned into “Happy Birthday to you” is unclear and that adds o the intrigue of the ongoing copyright dispute. No one knows who wrote the words to "Happy Birthday to You" and put them to Mildred Hill's melody, or when it happened. The lyrics to "Happy Birthday to You" began appearing in conjunction with the "Good Morning to All". One of the earliest known book to include that combination of lyrics and melody is The Beginners' Book of Songs, published by the Cable Company in 1912.

A Broadway musical called Thousand Cheers used Happy Birthday version of Good Morning to you without the Good Morning to you part. The Hill sisters sued the producers for copyright infringement of their song claiming $250, at that time. This lawsuit was apparently settled. It was the Thousand Cheer show which was immensely popular which made the song a household ritual in all birthday parties. Time reports that the song and the practice of organizing birthday parties emerged around the same time, in the beginning of 20^th century – ‘the song and the occasion to sing it came up together’. “Happy Birthday to You” became the standard birthday song in the period between 1915 and 1935. A statement of the American Society of Composers, Authors and Publishers (ASCAP) in 1999 claimed that “Happy Birthday to You” was the most popular song of the twentieth century.

In 1935, a music publisher Clayton F. Summy Company, published "Happy Birthday (to You)" with the authorization of Jessica Hill in 1935 and filed copyright registrations for several versions of the song. This company which owns the copyright changed hands and is currently owned by Warner Music Group which collects about $ 2 Million in royalties per year. 

The song could claim to still remain in copyright domain due to peculiarities of the US copyright law. Under the laws in effect at the time of publication copyright would have expired after one 28-year term and a renewal of similar length, falling into public domain by 1991. However, the Copyright Act of 1976 extended the term of copyright protection to 75 years from date of publication, and the Copyright Term Extension Act of 1998 added another 20 years, so under current law the copyright protection of "Happy Birthday to You" will remain intact until at least 2030.

In June 2013, a film company working on a documentary about "Happy Birthday to You" filed a class action lawsuit to invalidate Warner Musics claim to copyright ownership of the song. It is this case that is making news. The New York Times reported that Lawyers for a filmmaker in New York said they had discovered “smoking-gun” evidence that the song “Happy Birthday to You” should no longer be subject to copyright restrictions. The court filing argues that copyright law at the time required the work to exhibit a copyright notice to claim copyright protection. This was not found in a 1922 publication without which the work was “interjected irrevocably into the public domain”. The following image has been produced in the court to substantiate this claim as reported by Techdirt.  

The actions of Warner Music, it is claimed, was to deliberately suppress the above evidence. We have to wait to hear what the court has to say on this matter. 

So do you have to worry if you sing Happy Birthday song in India? 

No, not at all. The song is in public domain in India due to an interesting provision of copyright law.  Though Copyright enjoys international protection, the duration of copyright, comes under the national treatment principle. In India, the copyright term is till 60 years from the year of publication. The Happy Birthday song which was published in 1912 is clearly outside copyright domain in India. 

However, in the United States Warner Music asserts copyright and till a court invalidates this claim of copyright ownership, the song "Happy Birthday to You" remains in a copyright-protected state! But as per the evidence that are being placed before the court, the US$ 2 Million that Warner Music earns seems to be without legal basis.

This is a clear case of Copyright overreach. It is such behavior that puts the entire system to disrepute in the eyes of the law abiding common-folk.