Competitiveness and Innovation – Mr Dilip Shanghvi, Managing Director of Sun Pharmaceutical

Mr Dilip Shanghvi, Managing Director of Sun Pharmaceutical

I’m thankful to AIMA for giving me this opportunity to share my thoughts on ‘Competitiveness and Innovation’ with this distinguished audience. Innovation is a subject that is really close to my heart.Pharmaceutical business, worldwide, is linked to its ability to manage innovation for its success. Creating intellectual capital and the ability to grow the business with innovation is the reason why at Sun Pharma we’ve been successful. As a company, we have always focused on innovation and ability to do more with less by focusing on excellence and that I think, in a significant way, has differentiated our performance over last 30 years that we’ve been in existence.

Shiv talked about return on capital employed and linkage with competitiveness and innovation. It’s an return on capital employed over the last thirty years that has been consistently in excess of 30 percent and that to me is the reason, which reflects our internal focus on innovation. When we look at innovation there are no shortcuts to manage and achieve it. Innovation is a process by which companies or countries focus on doing things differently. People talk about innovations in ideas, innovations in execution.What I find in Indian context,which is a bigger challenge,is the ability to manage complex innovative tasks, as a group. And, as we learn to manage this process, I think we will continue to improve on our performance on innovation.

If we look at the history of the world, the countries that have done well or the countries which have managed innovation maybe thousand years or fifteen hundred years ago and when this ability to innovate, the ability to work hard,ability to work as a team came down,the civilizations fell and the civilizations which could continue to find a way to renew themselves, prospered and continued to do well. Over the last 30 years,that we’ve seen liberalization in India, bringing about focus on innovation in India, I noticed that India started becoming part of a global environment in last thirty years. There has been a shift in our focus from self-sufficiency to international competitiveness. Our ability to do everything which we acquired during the period of our focus on self-sufficiency helped us transition effectively to focus on international competitiveness. Two industries out of India,pharmaceutical and IT, have truly demonstrated its ability to innovate and becoming globally significant player. As the country continues to evolve,many other industries continue to find a way to make a mark in global scene.

If I look at SunPharma and our approach to innovation,we’ve never focused on arbitraging the lower labour cost in India as a basis to grow the business. We have always focused on being competitive. So, we’ve manufacturing facilities outside of India and we’ve research facilities outside of India. So, we don’t measure our productivity in terms of cost because labourer cost in these countries is much higher than in India.But we want to remain competitive here irrespective of the cost of laborer in India.Therefore, we measure our productivity in terms of output, in terms of hours that we take in executing whether developing a product or manufacturing a product in India or in international markets because,if we see annual increments for people in India, they are in between 10 to 15 percent,in some industries like pharmaceutical or IT,it is in excess of 15 to 20 percent annually. In most of the western markets and in Japan, the annual increments are in the region of 2 to 3 percent in a company that is doing well. Thus,as we catch up in terms of cost of doing business in India and cost of developing products in India, the labour arbitrage is a transitionary advantage and if we focus on being the best in the world,it will help us remain competitive, irrespective of our cost of doing business in India,goes up or not.

Since, I’m focused on pharmaceutical industries,I would like to share with you some of the statistics, which are relevant to our business.In last five years, India has managed to become a significant player in the US market and US for pharmaceutical companies is the largest single market. Thus,if we see the number of products that Indian companies file in the US,we are consistently filing anywhere between thirty to forty percent of new products which are becoming generics.If we look at the number of complex generics that are getting registered in the US,at last count, I think, more than fifty percent of products which are complex have some linkage with India.Either the product was developed in India and filed by international company or by an Indian company.So, that’s a huge transition.Let’s say,‘made in India’ label was a limitation up to fifteen years back when we entered the US market.People asked us if the hospitals in the US would accept injectables made in India or not.So, from that time to now, where many of the injectable products,which are made by our company, we have more than 50 percent market share. There has been a significant transition in the perception of quality, the perception in acceptance of Indian products.I give a large credit of this to our competitiveness as well as ability to manage innovation.

People talk ofour ability to develop products in India because they are cheaper.But, my own assessment is that Indian companies including pharma companies are successful in the US because we are better in execution than the people that we compete with.There’s always a dichotomy what innovation actually means.Whether it means doing new things,creating new blockbuster drugs,or doing things differently.At Sun, we’ve defined innovation as the ability to do things differently. Now, we can have innovation in sales and marketing,we have innovation in manufacturing; we’ve innovation in product development.The idea is to do things differently so that we can progress and compete more effectively in the marketplace.As we saw the strategy working for us, we put up internal measures and processes,by which we can see our progress and we wish to be better than what we’ve been India year after year.

Now, those who are looking at cost of medicine, because in India an Indian context excess is becoming increasingly important component of health care cost and if we look at average per capita spend on pharmaceutical products in India then it is only one to one-and-a-half percent of the cost of per capita consumption of drugs in the US. So, if we don’t find a way of differentiating in innovating the ability to make new products we will not be able to meet our country’s aspirations for drugs. If we look at the 1.8 billion dollar that is the cost of developing a new drug in the US or globally.Now, if you spend 1.8 billion dollar in developing a product you will need to charge a significant premium t o patients to justify your investment.So, as a company, what we’re trying to do is focus on finding away to develop products more cost-effectively.

Thus, we’ve spun off our innovative research company into a separate company called ‘SPARC’ and in this company we spend on an average 150 crore rupees a year. Because of the work that we’ve done in last eighty years,we’ve to differentiated innovative new products in face 2 studies.If, we are able to bring even one of these drug to the market the cost of developing this product for us will be less than $200 million dollars.So, we are talking about 10 percent of the cost of developing a drug compared to what it is costing in international company to develop a similar product.Also, if we are able to execute this effectively,it gives us a long-term and sustainable competitive advantage because cost of research is an important component of the cost of doing business in the US for an innovative company.In such a critical component if we have an advantage that will give us a long-term sustainable advantage in the global markets. I’m expecting that in next 10 to 15 years at least 3 Indian pharmaceutical companies will work towards becoming global pharmaceutical company with innovative products in most of the markets.Now,there are few constraints that I see in India for us to do innovation.And the most important constraints that I see is‘innovation management’. It is the ability to protect the intellectual property right as a country till maybe ten years back there was no patent protection in India.We have it now in India but the ability to get a judgment if somebody’s violating your patent is still a very long-drawn process.Therefore, I think if we change the way in which we reward innovation in a country, I think, it will give a significant amount of importance to every company to invest on innovation. So, we’re working as an industry with government to set up separate courts to focus only on patent related litigation like there are in Germany or in some other European countries,so that, we are able to encourage every company to invest in innovation.

So, I wish what has helped Sun do well by focusing on innovation is something which other companies in pharma sector, other industries in India,will use as a tool for their future growth. Thank you.

The above article is an excerpt from the speech delivered by Mr Dilip Sanghvi, MD, Sun Pharmaceuticals at AIMA’s 58th Foundation Day which took place in February 2014. 

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