TION OF R&D THE CASE OF INDIAN PHARMACEUTICAL INDUSTRY

Transcription

1 Dehi Business Review X Vo. 5, No. 2, Juy - December 2004 RECENT TRENDS IN GLOBALISA ALISATIO TION OF R&D THE CASE OF INDIAN PHARMACEUTICAL INDUSTRY K.B.. Saji T HE word economy and competition becoming a goba phenomenon, the ony way to win is by using a the resources the word economy coud offer. Mutinationas from a over the word are acceerating the pace of their direct investments in overseas R&D and strategic aiances. Previousy, companies expanded their R&D operations overseas primariy to support oca manufacturing and marketing operations. But now, companies are making overseas investments to compement their domestic research, technoogy, and product portfoios. They are integrating their domestic and overseas R&D faciities into goba R&D networks thereby achieving cost reductions and price advantages. These R&D faciities cover a wide range of industries, incuding computer hardware, computer software, consumer eectronics, automobies, pharmaceuticas, consumer products, and chemicas. Cross-border investments in R&D remain concentrated amongst the industriaized countries. However, of ate, a number of newy industriaizing/deveoping economies have emerged as important hosts to R&D investments by mutinationas of industriaized countries origin. Looking at this, an exporatory study has been conducted to anayze the recent trends concerning gobaization of R&D in the Indian pharmaceutica sector. The present paper brings out the preiminary resuts of this study. Introduction Gobaization of R&D has foowed the gobaization of markets, and is essentia for customizing products to meet oca demands as we as gaining new knowedge and effectivey utiizing cutura differences (Behrman and Fischer, 1980). The important issue here is how to organize and conduct R&D in other countries in ine with one s domestic R&D efforts. At present, many firms do recognize gobaization of R&D as the number one item in their priority ist. In fact, a recent survey of CEOs indicated that gobaization is their number one chaenge (Saji, 2003). The move from simpe geographic expansion to integration is a new stage in the goba management of R&D. The Industria Research Institute and the Massachusetts Institute of Technoogy defines it as the abiity of the technoogy deveopment organization to recognize and respond to technoogy and market signas from a strategicay important ocations in a study in Gobaization is both a core competence and a process (Forida, 1997). It is expected that this competence wi be even more critica for this new stage. The pharmaceutica industry is mainy driven by the growing expectations of the consumer and the rising cost of deveoping new products. A pharmaceutica companies want to reduce their R&D costs and are under extreme pressure to deveop new drugs. To economize on R&D and to reduce the ead-time for new drug deveopment many companies have sought aiance partners with beading-edge technoogies and expertise in particuar fieds as a way to outsource R&D activities. The pharmaceutica industry is one of the most R&D intensive sectors and the R&D activities invove scientific research in emerging or unexpored fieds. It comes aong with a ot of risk as the research may or may not utimatey ead to a commercia product. The drug firms prefer greater fexibiity inherent in internationa aiances to the substantia investments required for mergers, since the drug deveopment generay entais great risks and an aiance can aow partners to change strategies and even withdraw if necessary. The R&D function among the Indian pharma companies is * Associate Professor (Marketing & Technoogy Strategy), Amrita Schoo of Business, Amrita Vishwa Vidyapeetham, Ettimadai Post, Coimbatore , India. 111

2 K.B. Saji at a very nascent stage. Even we estabished companies spend as ow as 2.5% of their tota turnover towards R&D expenses. Signing of the recent WTO agreement by India faciitates the recognition of product patents. To counter this regime, domestic payers have initiated investment on research. The Notion of Gobaization Faced with tough goba competition, firms have recognized the need to internationaize their operations: a trend evidenced by a ten-fod expansion of foreign ventures during 1980s, and it got acceerated in the 1990s. Cross border mergers and acquisitions, strategic aiances and Greenfied investments are the atest trends in expanding the scope of goba business. Motivators of this expansion incude search for new markets in order to expoit unique assets in overseas markets and to achieve ower costs or higher quaity inputs, and for argescae economies and other efficiencies. As a resut, there is increasing infuence of mutinationa enterprises in economies of nations wordwide (Paich and Gomez-Mejia, 1999). Industry is gobaising more rapidy and through different modes than previousy. New patterns of gobaization are acceerating internationaization of industry and reshaping the industria structures at goba eve. Firms earier expanded geographicay through foreign trade and investment. Now, internationa strategy for compete restructuring of their operations is being pursued. Cross border mergers and acquisitions (M&As) and strategic aiances are common paths to internationaizing operations, research and markets. A variety of factors are promoting the above cause. Reguatory reforms, iberaization of trade and investment couped with decreasing computing, communications and transport costs have encouraged firms to adopt goba strategies. Privatization and dereguation of vast sections of industry by governments have opened up cross border transactions. This has ed to intense goba competition. In order to survive in such an environment and enhance fexibiity, firms have chosen the path of co-operation to growth. (Kang and Sakai, 2000). Firms are now adopting newer business strategies. Core competence focus, downsizing, more speciaization, and adopting eaner and fatter structures are the new set of business dynamics. Outsourcing functions such as R&D, computer system support and market anaysis are in vogue. This is a in reation to the growing importance of intangibe assets (Serapio et a, 2000). Corporations are defining their vaue in terms of intangibes and these assets are being re-organized on a goba basis in search of efficiency gains. Gobaization is pacing more importance in pooing technoogy and know-how, rather than combining pant and equipment or buiding new faciities (Saji, 2002 a ). This has ead to the expansion of product ines by firms in speciaized niche markets. The demateriaization of economic activity has fixed the new pattern of gobaization. Gobaization of R&D Mutinationas from the United States, Europe, and Asia are acceerating the pace of their direct investments in overseas R&D (Bruner, 2000). The focus of these companies have shifted from using overseas R&D operations for supporting oca manufacturing and marketing operations to compement their domestic research, technoogy and product strengths. Overseas R&D operations are thus becoming important sources of new science and technoogy for the entire goba corporation (Saji, 2002 b ). Companies ike these do more than simpy acquire science and technoogy. They are integrating their domestic and overseas R&D faciities into goba R&D networks. The acceeration of industry investment in goba R&D shows that firms beieve they need a presence in foreign markets if they are to grow. To be effective in these markets, they aso need to benchmark themseves against the best performers in the word. Gobaization of R&D is an exceent way for firms to utiize the word s growing stock of resources and knowedge, and to support business growth. (Pury, 1994). Emerging Technoogy Centers Traditionay, R&D has stayed cose to company headquarters, and cross-border investments in R&D remain concentrated among industriaized countries. However, a number of industriaizing/deveoping economies have emerged as important hosts to R&D investments by mutinationas from industriaized countries. China, Taiwan, and India are the three most successfu emerging economies in attracting foreign R&D in recent times (Serapio et a, 2000). The foowing exampes iustrates the same: Microsoft has R&D centers in India; ICI has abs in China; Technoogy centers ike HITEC City at Hyderabad in India; Hsinchu Science Industria Park of Taiwan. The success of technoogy centers in emerging markets ike India in attracting R&D and high-technoogy investments can be attributed to severa factors, which incude: avaiabiity of high-quaity R&D personne; 112

3 Dehi Business Review X Vo. 5, No. 2, Juy - December 2004 proximity to companies speciaizing in the manufacture, design and deveopment of certain products (e.g., semiconductors in Taiwan); avaiabiity of word-cass R&D infrastructure and presence of a vibrant research cuture; and the Government incentives and protection extended to investing companies. In sum, these deveopments point to an emerging trend in the gobaization of R&D, where expatriate R&D is assuming a more significant roe in the generation of technoogy and innovation for the goba corporations. The Corporate Advantage There are now corporations invoved with many divisions, aiances and increasing numbers of subcontractors. R&D is moving in that same direction. Severa advantages wi accrue to the mutinationa corporation in goba R&D. First, the cost of technica work in many parts of the word is substantiay ess than in Europe or the United States. But the cost of materia, particuary high-tech equipment, is higher. Once that capita investment is in pace and continuay supported, however, the overriding expense in R&D highy educated human abor wi be cheapy avaiabe. Second, overseas-trained scientists wi work with coeagues and associates in an environment that may be more congenia to their creativity by presenting fewer cutura and socia barriers. On the other hand, the inkage to R&D headquarters wi be just as firm and soid as if they were down the road. The avaiabiity of technoogies ike artificia inteigence in expert systems wi aow the best of the technica taent to be coned and made avaiabe throughout its aboratories. (Van den Buteand Moenart, 1998). The Chaenges and Opportunities Working across cutures wi be the biggest chaenge to R&D gobaization. Training costs woud pummet as the goba network aows one to deiver technica materia on an ad-hoc basis to the trainee (Hems, 1998). Interna communications documents and reports wi a be avaiabe eectronicay throughout the corporate network quicker and in a much more responsive and interactive mode than paper permits. The pace of scientific iterature production wi get speeded up. In many situations, traditiona pubication wi be archiva, whie the most rapid deveopments are disseminated through the eectronic network both within corporations and between the corporation and the outside community. Learning has emerged as a key eement in the gobaization of R&D. More and more companies are viewing direct investment in R&D as not ony a vehice for transferring a parent company s technoogy to the host country but, more importanty, as an opportunity to earn and deveop externay-deveoped science and technoogy. Finay, the goba network wi make it easier for R&D managers to aert and drive home to researchers corporate goas and the potentia practica consequences of the research that they are doing. (Coates and Woff, 1994). The Logic behind the Trend The business ogic behind the move towards gobaization of R&D is often cear. Creativity, combined with technoogy, is undoubtedy an increasingy important determinant of competitiveness, and most companies are ooking for more effective ways to respond to this changing market situation. Aso, as a consequence of past downsizing of R&D groups, some companies are strugging to maintain a position in important deveopment areas. Managed outsourcing is a way of maintaining this necessary critica mass. Simiary, there are a number of technoogica driving forces behind this trend, viz. the convergence of markets and technoogies; the high cost of technoogy eadership across a widening spectrum; increasing ease of access to new technoogy; the impications of the technoogica revoution (IT revoution is intensifying the R&D process by breaking time and space barriers); the importance of tapping regionay concentrated science bases; and customer demand for superior and ow priced products. Managing the Difficuties Most R&D organizations acknowedge that they wi have to respond to tomorrow s word, where customers ifestyes and behaviors require the deivery of new products, processes and services that wi necessitate a change in the way R&D is carried out. However, in accepting the need for gobaization of R&D, even if ony appied seectivey, there are sti many questions to which companies need to find the answers if the approach is to be adopted successfuy. 113

4 K.B. Saji To be abe to gobaize R&D, a company needs to demonstrate abiity in five areas, viz. A goba understanding of technoogies and their reevance; Assessment of reative competences; A cutura shift to an open sourcing poicy - companies must be abe to deveop the right contacts, and be abe to make objective partner assessment - considerations such as cutura affinity and communications need to be addressed; Negotiation of partnership agreements on mutuay beneficia terms (The technoogy ownership must be sorted from the start, and managing the tension between the retention of technoogica ownership and buiding trust requires constant effort. Simiary, effective expoitation is part of the virtua R&D cuture, and how commerciaization is to be achieved needs to be detaied at the outset of any coaboration); and a technoogy management process, which must incude the integration of business and technoogy thinking, and use mutidiscipinary team working. These five aspects aso have to be transated into an R&D structure. Overa, for most companies this a adds up to a totay different cutura way of thinking about R&D management. Gobaization of R&D in India Generay, technoogy fows from deveoped to deveoping countries (Saji and Jain, 2004). Liberaization, privatization, and gobaization have a changed the business context of a the deveoping countries. If a country has a reasonabe eve of factor endowments incuding technoogica competence, goba firms are ikey to expoit it. In high technoogy areas, four major changes have been observed in India, namey: Many goba companies have started R&D centers in India to access the research skis there, especiay since Technoogy has started fowing from India through aiances, especiay in the pharmaceutica sector, and most of these are entrepreneuria firms. Entrepreneuria firms have started appearing in the biotechnoogy segment, after economic iberaization mosty supported by venture funds. Goba companies have aso increased contract research and contract manufacturing in India. (Bowonder and Richardson, 2000). The Case of Indian Pharmaceutica Industry The goba pharmaceutica industry is a knowedge-based industry, and is presenty undergoing a series of changes induced by competition, evoution of biotechnoogy-based drugs, harmonization of inteectua property rights, vaue chain disintegration, changing demographic profie, and most importanty the gobaization of R&D. Due to gobaization of R&D, India is fast emerging as a destination for funding creative ideas in the pharmaceutica sector. The word s best R&D Pharma industries not ony wanting to set up their own aboratories in India, but aso desire to cooperate with the Indian research. Even Indian pharma firms are treading on the big boy s turf. There are various reasons for this. Studies indicate that drug discovery in India can be 80-90% cheaper than in deveoped markets (Carvaho, 2002). Indian pharma companies have buit competence in chemistry, by copying drug processes of mutinationas. The chemistry capabiities are cheap and word-cass in India. Post 2005, once the product patents come into force and Indian companies can no onger copy drugs made by Big Pharma which in turn wi be more eager to aunch more of its newer drugs to aunch more of its newer drugs domesticay much of the domestic industry runs the risk of osing out on growth avenues. Besides this, India offers some other unique advantages. It has a 53 year od democracy. It has an educated work force and Engish is commony used. It has a soid ega framework and strong financia markets. Professiona services are easiy avaiabe. There is aready an estabished internationa industry and business community. It has a good network of word-cass educationa institutions and estabished strengths in Information Technoogy. The country is now committed to a free market economy and gobaization. Above a, it has a 70 miion midde cass market, which is continuousy growing. Some of the pharmaceuticas MNCs who have set up their bases in India recenty incude: Ei Liy & Company, Astra Zenecca, Pfizer, and Novartis AG. The top Indian pharma majors who have the scae of investing 5-6 per cent of their saes in research are aso opting for the discovery gambit in a big way. The pioneer in Indian R&D, Dr Reddy s which began the process 114

5 Dehi Business Review X Vo. 5, No. 2, Juy - December 2004 when it was a Rs.150 crore company 12 years ago has increased its budget on R&D from 3.3% to 8% of turnover this year. It is betting most of its chips on discovering new moecues in the areas of diabetes, cancer cures, nonsterioda anti-infammatory drugs, and anti-infectives. Ranbaxy Labs has at east five moecues in the pipeine that have reached phase-i of cinica trias. Wockhardt has three NCE (new chemica entities) in the works. The Daburs have fied 41 NCEs in the area of oncoogy and Torrent pharma has concuded pre-cinica trias on three cardio-vascuar compounds. But a this impies, that Indian companies wi have to continue growing at doubedigit growth rates, for aocating substantia portion of their turnover to sustain their growth rates. However, there are a few companies ike Ranbaxy, Sun Pharma, and Lupin Labs that are foowing a more midde-of-the road game pan. In the shorter term, they are focussing on the US market for drugs going off patent. In the medium term, they are chasing nove drug deivery system (NDDS), which is a modification of an existing moecue, which can be patented. And there are others ike Dabur and Genmark, who are targeting the generics market, as they fee that new drug discovery is a onger process and more expensive. Pharmaceutica companies are aso utiizing substantiay the services of Contract Research Organizations (CROs). Indian Pharmaceutica Industry, with its rich scientific taents, provides cost-effective cinica tria research. It has an exceent record of deveopment of improved, cost-beneficia chemica syntheses for various drug moecues. Some MNCs are aready sourcing these services from their Indian affiiates. For exampe: Advanced Biochemica Limited (ABL), a Thane based 1 biion biotech major has tied up with Pacific Corporation, South Korea, the argest drug manufacturer in South Asia. Wockhardt has tied up with German based Rhein Biotech, the biggest producer of enzymes in Asian region. Cipa has invested about Rs.100 miion in its biotech ventures with smaer companies overseas. East India Pharmaceuticas has tied up with US based Ceveand Cinic Foundation for research in biotechnoogy and moecuar bioogy. Zydus Cadia has pans to invest 7.5% of its turnover on R&D and tie up with other R&D institutions internationay. In Ranbaxy, the R&D process deveopment faciities exist to transfer technoogy from ab to piot pant to manufacturing ocations wordwide. DRL has struck a dea with Novo Nordisk, the word eader in diabetic care, under which the Danish company woud conduct cinica trias and deveop the drug further. Ceary, the opportunities for Indian pharma firms are virtuay imitess. The strategy pharma majors are foowing is to bring in the formua from generics, and pump it into innovation and drug discovery. Other shorterterm avenues incude sourcing buk drugs to generic manufacturers (Sun pharma) and targeting export markets in a big way (Ranbaxy, which today makes more money in the US than in India). But, the emerging scenario of gobaization of R&D brings chaenges aso to the Indian pharmaceutica industry. Compared to their Big Pharma counterparts, Indian drug companies sti have a ong way to go, with just a handfu progressing to cinica trias. The Indian companies other than Dr Reddy s have yet to dea with faiure, which in the ong run means a proportionate increase in discovery costs. Indian Pharma is sti miniscue compared to Big Pharma, so investments wi aways be a constraint. Licensing out discoveries for deveopment and marketing to internationa majors is inevitabe, which in turn means sharing the spois. Indian skis are no doubt word-cass, but the ski-sets are imited and restricted to a few therapeutic areas. Indian companies wi have to continue growing at doube-digit growth rates post 2005 to sustain their research thrust. In generics, more than research what matters is investments in itigation, which can be as much as US$18 miion per drug (Carvaho, 2002). Today, the drug deveopment costs are soaring and the faiure rate is not coming down either. Deveoping a drug today costs about US$800 miion, and the average revenue per drug is ony US$265 miion in its ifetime. More than two-thirds do not get a return on investment. Another important factor is by 2005, 53 of the top 100 drugs wi go off patent. So the pharmaceutica industry has to increase its R&D productivity. The pharmaceutica industry has severa options, but a of them have to finay try for getting the probabiity of success increased. 115

6 K.B. Saji Concusion Going by the industry trends, post 2005, Indian companies woud be research outfits for MNCs or powerfu payers in niche segments with unmatchabe price competitiveness. With just few months to go before product patent bi impementation in India, ony two discovery research projects of Indian origin have moved to phase I/II, and even they are an improvement on existing targets. Not surprisingy, ony five Indian companies have undertaken serious R&D investments, and even they are necessariy meagre, given the imited profitabiity and the ow vaue of the rupee. Much of the research efforts are sti focused on anaog research, as that is not ony financiay affordabe, but aso what the current ski eves woud aow. No doubt, the effort in the ast one decade has been quite encouraging, and the outook is very bright indeed, given the very taented and highy educated workforce and increasingy goba resource base of the seected companies. There is ony one probem; there is very few experience of drug discovery in India. Once this experience gets buid up, India coud hope to become a hot destination for drug discovery as it has reaised in the IT services sector by now. References Behrman, J.N. and Fischer, W.A. (1980) Overseas R&D Activities of Transnationa Companies, Gunn & Hain Pubishers, Cambridge: Oegeschager. Bowonder, B. and Richardson, P.K. (2000) Liberaization and the Growth of Business-Led R&D: The Case of India, R&D Management; Apri; p Bruner (2000) Ominous Trends in R&D, Eectronic News, Vo.46, No.29. Carvaho, B. (2002) Strong Medicine, Business Today, Vo.11 (October); Issue.20, p Coates, Joseph F. and Woff, M.F. (1994) Managing Scientists in the Virtua Corporation, Research Technoogy Management, Vo.37, No.6. Forida, Richard (1997) The Gobaization of R&D: Resuts of a Survey of Foreign-Affiiated R&D Laboratories in the USA, Research Poicy, Vo.26, p Hems, R. (1998) Next-generation R&D Partnerships, Soid State Technoogy, Vo.41, No.8. Kang, Nam-Hoon and Sakai, Kentaro (2000) R&D, Gobaization and Governments: Directorate for Science, Technoogy and Industry, OECD Observer, Pubished on: January 19, Paich, L. E. and Gomez-Mejia, L.R. (1999) A Theory of Goba Strategy and Firm Efficiencies: Considering the Effects of Cutura Diversity. Journa of Management, Vo.25, No.4, p Pury, David de (1994) Innovate or Die is the First Rue of Internationa Industria Competition, Research Technoogy Management, Vo.37, Issue 5. Saji, K.B. (2002 a ) Technoogy Strategy based Networking of SMEs for Goba Competitiveness, In the refereed conference proceedings of the 2002 Internationa Conference on Sma and Medium sized Enterprises in a Goba Economy, hed at the University of Woongong, Woongong, NSW, Austraia, during Juy 12-13, Saji, K.B. (2002 b ) A Technoogy Strategy Framework To Gain Competitive Advantage in Goba Market, In the refereed conference proceedings of the 2002 Hawaii Internationa Conference on Business, hed in Honouu, Hawaii, USA, during June18-22, The Conference is sponsored by University of Hawaii, West Oahu, USA. Saji, K.B. (2003) The Innovation Capabiities of SMEs: The Case of Indian Manufacturing Sector, In the refereed conference proceedings of the 2003 The European Appied Business Research Conference, hed in Venice, Itay during 9-13, June Saji K.B. and Jain, Karuna (forthcoming) Modeing the Technoogy Transfer Process in IJVs: A Reationship based Approach, accepted in Juy 2004 for pubication in Internationa Journa of Technoogy Management, a specia series on Technoogy Transfer and Commerciaisation. Serapio, M. Daton, D, and Yoshida, P. (2000) Gobaization of R&D Enters New stage as Firms earn to integrate Technoogy operations on Word scae, Research Technoogy Management, Vo.43, Issue.1. Van den Bute, C. and Moenart, R.K. (1998) The Effects of R&D Team Co-ocation on Communication Patterns among R&D, Marketing, and Manufacturing, Management Science, Vo. 44 (November); Issue