One of my first blog posts for 2013 expressed the hope that this would be the year for systematic innovation. Half-way through the year, this is a good time to take stock.
The Macro Situation
A quick look at the macro situation first. It’s been bad, much worse than most of us expected. High inflation, an uncontrollable current account deficit, the rapid slide of the Rupee (all three of these are, of course, related) and the recession in manufacturing (yes, the most recent GDP numbers show a contraction of the manufacturing sector!) are worrisome. In such a situation, firms’ posture towards innovation can take two paths – if innovation is seen as critical to a firm’s competitive advantage and a driver of growth, a firm could choose to invest more in innovation; but, if innovation is seen as a “nice to have,” discretionary expenditure, then a firm could choose to spend less than before.
I haven’t studied spending patterns across sectors, but I did come across an interesting report that FMCG R&D spends have been declining rather than increasing. The report suggested that FMCG companies are trying to increase the efficiency of their R&D, and tightening their belts to aid the bottom line.
In another prominent sector, Infosys, which took a courageous leap into the domain of innovation with its Infosys 3.0 strategy, now appears to be backtracking after the return of Mr. Narayana Murthy as Chairman. When I combine his comments about seeking more plain vanilla services business, and trimming flab to enhance margins, I see an obvious consequence looming – a cut-back on innovation investments.
Almost every time I speak to someone in industry who has worked in both Indian companies and MNCs, he comments on how Indian companies just don’t have the appetite for innovation investments that have medium to long term payoffs. That doesn’t seem to be changing easily.
The Pharma Sector
For innovation trackers in India, pharma is a key sector. The pharmaceutical industry accounts for more than 40% of the R&D expenditure by Indian industry. Here the news is decidedly mixed. On the one hand there is the good news from Zydus Cadila on the creation of a new diabetes drug for those who have high cholesterol – this appears to be the first “new chemical entity” from India to have crossed all the regulatory hoops of drug development. This is a welcome development considering that Indian firms have been involved in new drug development for 20 years. While my colleague Chirantan Chatterjee pointed out in his recent provocative talk on “Is 2013 an Inflection Point for Healthcare Innovation in India?” that Indian drug firms are yet to address unvalidated targets or technologically complex modules, that doesn’t, in my opinion, detract from Zydus Calida’s achievement.
There are other bright spots as well. I was speaking to the innovation head of a fast-growing domestic Over-the-Counter (OTC) drug maker the other day, and he told me that the company is investing in a structured innovation development process with a goal of 3 to 4X growth over the next few years. I hope this company is not just an outlier!
Unfortunately, there is a lot of bad news on the pharma innovation front as well, and this may outweigh the good news. The record fine of $500 million levied by the US FDA on Ranbaxy has brought the spotlight on manufacturing practices in India. Another major company, Wockhardt, has seen a ban on export of products from one of its plants to Europe. DRL’s new Chairman, GV Prasad, has put a brave face on this by saying that the increased regulatory scrutiny is good for the industry, but in the short run there is no doubt that this will result in higher costs of compliance. The NIH recently announced suspension of 40 different clinical trials projects in India. In parallel, the government is into a new round of price control. All this doesn’t bode well for the industry.
Multinational pharma has always been reluctant to invest in core drug discovery in India. The Glivec judgement and the compulsory licensing of the Bayer cancer drug to Natco have only reinforced this reluctance. MNCs were enhancing their investments in trials in India, but recent guideline changes that have made trials in India more onerous are bound to slow down this trend.
MNC R&D in India
I wrote about the cautious mood in MNC R&D centres in an earlier post. While MNCs across sectors are encouraging their Indian employees to be more innovative through innovation contests with attractive prizes, and focusing on a training and motivation (I have myself spoken at 5 MNC innovation events in the last quarter), there is no evidence of major new R&D investments in India. On the contrary, I recently had an interesting chat with the financial controller of a large MNC R&D center about how his parent company is trying to estimate the return on investment from their R&D investments in India!
Overall, this doesn’t seem to be a good time for R&D-driven innovation in India. I hope this gloom is short-lived. India’s new STI Policy announced at the beginning of this year at last moves away from the R&D institution centric policy of the past. And India continues to have some innovation-related advantages. One of these is the ability to innovate at low cost. I recently ran into Dr. Sumantran, who chairs all the automotive initiatives of the Hinduja group, and he told me that the development of the successful Dost range of Light Commercial Vehicles by Ashok Leyland was done at an estimated one tenth of the cost that would have been incurred if their alliance partner Nissan had done it. Can Indian companies convert this cost advantage into a durable source of innovation leadership?