A national innovation system for pharma

A world-beating pharmaceutical industry built on innovation is within reach if we make the changes needed in our firms, public research and regulation

Part one of this article (Business Standard, May 18, 2023) argued that in building an effective national innovation system, we should learn from the most successful economic development stories of the last 70 years: In Japan, South Korea, Taiwan, Singapore and China. “Each followed a sequence in building innovation capacity…. of a competitive industry followed by deepening technical sophistication followed by in-house R&D followed by public research…” Our best bet for a world-beating industry built on innovation is in pharmaceuticals, the one industry where we come close to world levels of investment in R&D. What does it take to get there?  We draw (anonymously, as we were operating under Chatham House rules) on the comments made in a recent closed-door roundtable on innovation in the pharmaceutical industry, attended by some of our most insightful leaders from industry, academia and government, jointly hosted by the Centre for Technology Innovation and Economic Research and the Ananta Centre.

The challenge for firms: The Indian pharmaceutical industry is a success story. From an overwhelming dependence on foreign firms and brands 50 years ago, we have today a vibrant and large pharmaceutical sector with highly entrepreneurial Indian players operating alongside multinationals. The industry is the third largest in volume worldwide, with a 10 per cent share. But with $42 billion in sales, it is the 14th largest in value, with just a 1.5 per cent share. The industry aspires to grow three times by 2030, with most of the increment coming from innovation. But this will need the full ecosystem to step up, where all the pieces must connect.  We must start with much greater investment in R&D by the industry. Consider where we stand today relative to other countries (see table).

The US, Japan, Germany, Switzerland and the UK have giant pharmaceutical companies, each investing billions of dollars in R&D (the giants are Roche and Novartis of Switzerland; J&J, Pfizer, Bristol-Myers, Merck and Eli Lilly of the US; AstraZeneca and GSK of the UK; Bayer, Boehringer and Merck DE of Germany; and Takeda, Daiichi, Astellas, Otsuka and Eisai of Japan). What must we do to match them? We need a 10-year ambition for leadership, as these firms on average spend much more on R&D ($7 billion) than the turnover of our top five pharmaceutical firms ($1.5 billion).  Our firms will need to drive sales and investment in R&D, both sustained over 10 years, to get there.

Incentivise investment in in-house R&D:  We are loath to ask for incentives for firms to do what they should do for their own good, but there is a case to be made for a well-designed incentive for our top R&D investing firms to expand R&D investment: Perhaps a full tax credit against income tax for increases in R&D spending over the recent average spend for the next t10 years? 

A regulatory system that supports innovation in firms: Several speakers at our roundtable asked for a revamp of our regulatory framework.  Administration by officials who do not understand what it takes to discover a new molecule (a review by experts would put the “medical” back into medical regulation), have driven Indian firms to conduct Phase I trials of new drugs in Australia instead of India. Australia costs 10 times as much, but the process is systematic, transparent and sure. A revamped regulatory system could turn our huge population and low labour cost into a major competitive advantage for drug discovery.

Reorient public research: We invest around 0.4 per cent of gross domestic product (GDP) in publicly funded R&D, just below the world average of 0.5 per cent.  We get, however, very little return on this investment. The problem is not how much we spend, but what we spend it on, and where we do it.  A little over half of national R&D is done by the government in its own autonomous laboratories. Defence comes first, then Space, Atomic Energy, CSIR and Agriculture. Healthcare research comes sixth, at under 6 per cent of government spending on R&D.  In the US, healthcare R&D is second only to defence, at 27 per cent of government R&D spending, as it is in the UK at 20 per cent.  Strong in-house investment within industry is a precondition for taking advantage of public research.  Allocating a larger share of government R&D spending to healthcare would be particularly fruitful precisely because the pharmaceutical industry is our one industry that is itself R&D intensive.

There is a further opportunity.  Any leader of our pharma industry will tell you they can easily hire fresh graduates from our many pharmacy courses.  But they struggle to get advanced research talent, and often set up laboratories in the US and UK precisely to tap into pools of specialised talent. This also connects them to well-funded universities that do a lot of healthcare research, paid for by the federal government (US) or the Wellcome Foundation (UK). This is our where opportunity. For various historical reasons, we chose to locate most of our public research in autonomous government laboratories; almost every other country conducts public research within universities. By doing much more of our public research in our higher education system, we would simultaneously train more advanced talent that our pharmaceutical firms need.

A national ambition for innovation : Let’s put these points together, by learning from the China experience. Fifteen years ago, the Indian pharmaceutical industry was well ahead of China in innovation.  Today it is 10 years behind. Something happened in China around 2012. Regulatory changes made it easier to conduct clinical trials, competition between different local governments incentivised firms to expand R&D facilities in their city, the Thousand Talents programme attracted experienced technologists, a major initiative pushed the industry up the value-chain to biologics, and the size of the Chinese market and the export orientation of industry turbo-charged the whole thing. A thriving venture capital (VC) industry formed around all this. Last year, VCs invested $15 billion in life science start-ups in China; India was a small fraction. The way ahead clearly lies in a broad national purpose to build our pharmaceutical industry into world leaders in innovation. That will take ambition and investment from our entrepreneurial firms, a revamped regulatory framework that facilitates clinical trials, and much stronger state investment in public research in health sciences within our higher education system. Ten years from now, a transformed innovation performance by our pharmaceutical industry could show the way to Indian industry at large.

The writers, respectively, are co-chairman of Forbes Marshall, and chairman of Dr Reddy’s Laboratories. They are also directors of the Nayanta Education Foundation and past office bearers of CII. One of them also chairs the Centre for Technology Innovation and Economic Research and the Ananta Aspen Centre