What prevents Indian companies from doing radical innovation? And, how can we build the capabilities to undertake such innovation? These are questions I have been grappling with for quite some time. [See my article in Businessline and an earlier post]
The India Special conference of the Strategic Management Society (SMS) held at ISB’s Mohali campus last month provided the opportunity to hear some insightful speakers address these issues. GV Prasad of Dr. Reddy’s Laboratories, Kannan Srikanth of ISB, Phanish Puranam of Insead and Anita McGahan of the University of Toronto were the speakers on a panel on “R&D in Emerging Economies.” Most of the discussion revolved around the pharma industry since the key industrial speaker (Mr. Prasad) is the Chairman of a major Indian pharmaceutical company.
The Indian pharma industry is an obvious candidate to take the lead on radical innovation. Pharma R&D accounts for more than a quarter of Indian industry’s investment in R&D. It is the one sector in which we have critical mass.
This was corroborated by the data presented by Professor Anita McGahan on pharma R&D from India, China and Brazil. Her study suggests that companies in these countries are making rapid strides towards becoming innovator companies. Her study which has appeared in Nature Biotechnology identified 165 innovative products in the pipelines of local companies from these countries. Interestingly, India is the largest contributor to this with about 55% of the innovative products. India’s focus is more on Chemistry-based products, while China is doing better on biopharmaceuticals. Most of the products from these countries are in early stages of development. 18% of the products identified in her study are vaccines (India is a strong player in vaccines with pioneering companies like Shanta Biotech [acquired by Sanofi] and Bharat Biotech). Professor McGahan pointed out that Indian companies in-license and collaborate more than the companies from China and Brazil.
Clearly, pharma is a sector in which we have a track record of successful innovation. So, why don’t we see more radical innovation by Indian pharma companies? Both GV Prasad and Kannan Srikanth offered some answers to this question.
GV Prasad on Innovation in the Indian pharmaceutical industry
Mr. Prasad started by pointing out that India has done a great job in providing affordable medicines to the world. Though the public health infrastructure in India is inadequate, the saving grace is the low cost availability of medicines thanks to the Indian pharmaceutical industry. Mr. Prasad attributed these low cost drugs to the phenomenal process chemistry skills in organic synthesis developed by Indian pharmaceutical companies. He pointed out that Indian companies have been the main supplier of antiretrovirals as part of the WHO’s AIDS combat efforts in Africa.
To underline India’s innovation skills, Mr. Prasad gave these examples: For one complex drug that involves 64 steps in organic synthesis, an Indian company is the only generic company to make the drug even though it has now been off patent for 3-4 years. Indian companies are #2 (after American companies) in mounting patent challenges to new drug inventors and filing Para 4 applications. An Indian company was the source of the first biosimilar for monoclonal antibodies (that provide a breakthrough in cancer therapy).
Scale, resources and risk profile
In response to questions, Mr. Prasad agreed that Indian companies have slowed down their efforts on new chemical entities. He attributed this to: Indian companies lack scale and resources. The largest Indian pharma company has annual sales of only $2.5 Billion. And, Indian companies lack the risk appetite to back a small number of high risk projects.
Mr. Prasad pointed out that initially companies like DRL chose what drugs to develop based on scientific considerations. But in many areas (like diabetes), the existing drugs are already quite effective and coming up with a new drug that is significantly better is very tough. According to Mr. Prasad, DRL is now more savvy about what drugs it tries to develop. It makes a more careful analysis of the market/therapeutic areas before choosing niches where it is possible to make a better impact. Mr. Prasad argued that there are low hanging fruit in terms of increasing efficacy and targeting specific needs.
According to Mr. Prasad, another barrier to drug development is talent. Indian scientists can solve a problem very effectively, but they can’t formulate and shape problems well. Yet, that’s a skill needed for new drug discovery. He added that our scientific research lacks depth and scale. The world over, radical ideas come from academia but Indian has only a small number of institutions that do high quality research.
Mr. Prasad explained that DRL is trying to overcome the talent problem through acquisitions. They have acquired a small company in Cambridge UK, and another one in the Netherlands (with expertise in vaccine delivery) that are potential sources of radical new ideas. The teams in these companies are complemented by Indian team members to work on further development and scaling up. In fact, in many areas, DRL is now forming global teams that can complement each other to come up with successful drugs.
Mr. Prasad identified another major barrier to drug development from India as the difficulty in doing clinical trials. The regulations have become very restrictive thanks to the influence of what he called some “misguided activists.” The result is that trials now have to be done outside India at much higher cost.
Kannan’s Srikanth’s insights into the IPR Regime & its implications for Radical Innovation
Professor Kannan Srikanth of ISB has been doing some fascinating work using patent data to track innovation in India. He cited data from his research to show that increasing multinational R&D investment in India has been accompanied by increasing patent filings in the US, not in India. This is because most of the products / technologies are being built for the global/US market. But many companies are not willing to locate sensitive R&D in India not because of poor patent protection but because of poor enforcement of trade secret protection. Indian laws are not strong on preventing employees from taking trade secrets with them to local competitors. China has a similar problem where 90 employees of Siemens are accused of having taken its magnetic levitation technology to local competitors.
Phanish Puranam: Are there workarounds?
Professor Phanish Puranam of Insead (co-author of India Inside) suggested that there are ways of using managerial ingenuity to compensate for inadequacies of IP protection. He gave the example of Intel India which has its own internal IP protocols which are far stricter than what it uses at its other sites. It enforces higher levels of data protection and documentation. For instance, an employee who left a document unprotected while using the washroom was suspended from the company. Aurigene, a subsidiary of DRL that does discovery research on a contract basis set up a US subsidiary and allowed clients to enter into contracts with this legal entity to give them a sense of greater enforceability of IP rights.
Mr. Prasad agreed with Phanish that, atleast as of today, Indian companies are banking more on ingenuity than deep innovation skills.
What emerged from this discussion is that the main barriers to radical innovation in the Indian pharmaceutical industry are scale, resources, attitude towards risk, and talent. But there are important external factors as well such as the regulatory environment and the IPR framework. These external factors can be addressed to an extent partly through ingenuity and partly through incurring higher costs. But it will be quite some time before the ecosystem in India becomes fully supportive of radical innovation.
[The views expressed in this blog are the personal views of the author.]