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Feature Articles : Feb 15, 2009 (Vol. 29, No. 4)

Does Offshoring Put Patents in Jeopardy?

Piracy of Intellectual Property Remains Major Concern Especially in Gene Manufacturing
  • Jeremy Minshull, Ph.D.

It is impossible not to be aware of the big, scary stories about goods manufactured in China: diethylene glycol in toothpaste, melamine in everything from dairy products to dog food, and children’s toys tainted with lead paint. According to Bloomberg, Mattel lost at least $30 million in 2007 from the recall of toys that contained excessive levels of lead.

Beyond the shadow of these consumer-oriented, shock-inducing headlines, businesses and institutions face the daily reality that offshoring is a necessary tool for cutting costs in an ever more competitive global economy. Striking the right balance between managing risk and shoring up the bottom line is essential for companies and institutions that are considering this move.

Offshoring continues to grow dramatically in the area of life sciences. For example, researchers from MIT reported that R&D outsourcing to other countries in the biopharmaceutical industry has been  growing steadily since 2000 and is expected to continue to grow at a rate of approximately 14% annually. In addition, Thomson CenterWatch projects that by the end of this year, the global outsourcing industry will reach $21 billion annually. It makes fiscal sense for life science companies and institutions to offshore certain functions of their operations.

China has an extensive pool of scientists to conduct research, many of whom were educated at American universities and have experience with U.S. companies. These researchers are instituting American standards and practices into Chinese companies and research entities, while China continues to invest in its research infrastructure to support a booming life science industry and has constructed many state-of-the art facilities. Chinese research teams may also provide specialized expertise to American researchers.

While a strategic approach to offshoring is required to remain competitive, the practice continues to be fraught with considerable risk. Deciding what functions to offshore and where requires significant orchestration, with plenty of attention paid to managing the risks associated with doing business in China.

Intellectual Property Risk

The single most prevalent and costly risk associated with offshoring to China is the risk posed to intellectual property. According to statistics out of Hollywood, 9 out of 10 DVDs that are sold in China are pirated. While there have been some efforts made by the Chinese government to better protect IP, estimates are that global piracy costs U.S. companies upwards of $60 billion a year. Closer to home for the life science industry, it is reported that 9 out 10 Western medications sold in China are pirated.

The GAO reported before a House Judiciary Committee last year that, “High profits and technological advances have also increased the risk of IP infringements by making counterfeiting and piracy more attractive and easy to conduct. At the same time, deterrents such as penalties and other measures have failed to keep pace. The seriousness of these risks has been exacerbated by weak enforcement in some countries, particularly China.”

What does the piracy of entertainment or software industry intellectual property have to do with life science? In the area of gene manufacture, the intellectual property is in the precise sequence of bases in the same way that the programming of bits that make up a software application is what is valuable. In either case, ripping additional copies of the physical original is incredibly cheap and easy to do.

Intellectual property is the cornerstone of the life science industry. Certainly the sequences of DNA that are being utilized in drug discovery, biofuels research, and in furthering the understanding of biological and biochemical processes are some of the most fundamental elements of intellectual property for life science companies and research institutions.

Scientists have naturally come to depend on an industry of gene suppliers in order to facilitate their research in a timely, cost-effective manner. Gene suppliers are able to apply their expertise and scalability to produce genes and sequences of DNA in a fraction of the time that it would take researchers to do on their own.

Quite a number of gene manufacturers operate out of China, while many major gene suppliers have taken to offshoring the manufacture of genes to sites in the country. Genes manufactured in China can be attained at a cheaper price, but what are the risks in procuring genes made there?

With no concerted effort by the Chinese government to enforce IP protection, companies and research organizations are playing Russian roulette with their patents and confidential intellectual property. While it might make sense to manufacture common sequences at whichever competent facility can provide the lowest price, why would a company risk its valuable IP by having patented sequences manufactured in a country notorious for the violation of intellectual property rights? 

Start-ups, in particular, are in need of watertight protection for their intellectual property, as they don’t have the legal resources of the big pharma companies to engage in filing suits and otherwise protect IP.
Several U.S.-based suppliers of genes offshore the manufacture of genes to China without any mention of the practice to their customers. This practice is dishonest, and it puts their customers’ intellectual property at risk without their knowledge. Certainly, reputable gene providers will make it clear to their customers where their orders are being made. However, organizations need to be responsible for protecting their critical intellectual property.

Managers, company attorneys, investigators, and researchers themselves need to be vigilant in protecting their organization’s intellectual property. This means being cautious in deciding how and where to manufacture genes and finding out just where the gene manufacture takes place.

With the economic downturn greatly affecting both life science companies and academic institutions, the importance of protecting intellectual property is more critical than ever. While outsourcing is certainly an important cost-saving measure to be utilized strategically, there is still too high a risk of exposing intellectual property associated with manufacturing genetic material in China. Although recent passage of stronger IP laws in China should offer better protection, academic institutions and companies must continue to be vigilant in protecting their highly confidential sequences.