Emerging Markets: Setting a New Agenda

The rise of the emerging markets as an opportunity for Big Pharma cannot be measured solely by growth and revenue statistics. These new players in the global economy are also having a profound impact on how the industry innovates, as the source for new ideas ranging from how to market medicines to underserved consumers to the application of traditional knowledge that brings down drug development costs. Seeding the thought leadership base is a new class of activist scientists, many of whom advocate an equally activist national industrial policy and, in contrast to their counterparts in the West, enjoy close ties to government.

Getty images: Glen Allison

An exemplar of this influential sect is India's Dr. R. A. Mashelkar, a scientist, management expert, and IP specialist who has chaired no less than 12 policy commissions for the government and is currently President of the Global Research Alliance, a network of some 60,000 scientists from publicly-financed research institutions in Asia, Europe, and North America. Mashelkar has spoken out forcefully in India—at some risk to his reputation—to promote recognition and enforcement of IP rights. More recently, he has become a proponent of new business models designed to deliver medicines profitably, but cheaply, to low income consumers—on the premise that if this market is approached as a distinct community, even the poorest have significant disposable income to spend on health. Finally, despite his government ties, Mashelkar is also widely known in the business community, serving on the boards of Tata Motors, Reliance Industries, and Piramal Life Sciences, as well as Microsoft's global science advisory board. Last month, Mashelkar sat down with Pharm Exec to discuss the life sciences business—with the compass pointed south.

PE: You advocate a shift in business strategy for emerging markets, from the exclusive pursuit of "value for money" to an approach that incorporates "value for many." How does management avoid losing focus in moving from satisfying a distinct and familiar customer base to a larger, more diverse set of consumers, with varying preferences?

The challenge is twofold: first, to create a strategy to serve the market you wish to address and then to adapt the larger process of management to make a successful transition from the "journey of the mind"—the plan on paper—to the real world of the marketplace. For example, companies often start their strategy review by asking: "Given our cost structure, which segments of a market can we serve?" Instead, companies must ask: "Given that we need to cater to the unserved, what should our cost structure be?" Project teams have to change their ways. They have to work within self-imposed boundaries that stem from a deep understanding of consumers. That will lead to a novel, "outside in" view of how to be innovative in addressing the needs of the unserved. The language inside the organizations should change, too. The thought process should start with an understanding of consumers as people and individuals rather than an undifferentiated mass; likewise, your suppliers are better seen as partners, not just vendors; most important, we must regard every employee as an innovator, the in-house safety net that helps organizations keep pace with disruptive change.

In building a new business model for the unserved, the question to be asked is "What if we change the way we operate to reduce costs and focus on return on capital employed, not just on operating margins? If we reduce prices enough and make our products available to many more people, won't there be explosive growth as they quickly find uses for and buy our offerings?" This is precisely the outcome from the effort by India's Tata Motors to create a new car to cater to the aspirations of an emerging class of lower-income workers. In marketing the Tata Nano, the company soon realized it was dealing with a customer who had never used a car before—and had never gone to a showroom. In fact, the showroom had to come to the customer! Building consumer confidence in the Tata Nano meant raising the warranty guarantees from 18 months to four years, a world record for a car. Financing car loans to customers who were not salaried, or did not have bank accounts, was a challenge that led, in turn, to some innovative financing methods.

Reaching millions of new customers with a low-priced product means keeping an eye on production and distribution costs to such an extent that the addition of a single dollar to overhead might endanger the profitability of the enterprise. Such cost pressures require extreme innovation in building rapport with the customer. ChootuKool, an ultra-low-cost refrigerator retailing at $69, was created by the Indian manufacturer Godrej-Boyce to appeal to largely rural households earning an average $5 per day—a market consisting of over 100 million people in India. To build support for the brand, the company enlisted local villagers to help market the refrigerator by guaranteeing a commission of $3 for every unit sold.

PE: Can a 'value for many,' low-cost model be productively applied in the healthcare and drug development business?

Healthcare has to be segregated from drug development, which has its own intricacies. For poor people with few resources, affordable healthcare is not an option but a necessity. The four billion people with incomes of less than $2 per day can spend only a few of those dollars on health care each year. But there is a brighter side to this picture, because ultra-low-cost products and services are now being made available routinely in countries like India, where the combination of scarcity of resources and the public desire for better health has become a driving force behind innovation—not only in new medical technologies, but in the processes and services that enable delivery to rural communities and other hard-to-access populations.

Take vaccines as an example. When Shantha Biotech India entered the recombinant DNA vaccine business, the cost per dose of vaccine was around $18. Through process improvements and locally appropriate technologies, the cost was brought down to 40 cents. This was noted by the international community, and for a time, Shantha Biotech was meeting 40 percent of UNICEF demand for the vaccine.

When it comes to therapeutics, cheap generics produced in India have created 'value for many.' A year of anti-retroviral drugs for the treatment of HIV/AIDS used to cost $10,000. India's own Cipla found a way to offer these ARVs in generic form, for $350. Competition helped push the price down even further, to $100–$150, thus creating value for many more.

All these innovations are technology innovations. However, workflow innovations in India have led to dramatic cost efficiencies in the delivery of health related services. For example, Aravind Eye Care does cataract surgery for $30–$300 per patient, compared to $3,000 per patient for surgery in the U.S. The company treats 300,000 patients per year, and 40 percent of these get their treatment for free. A very clever use of workflow innovation based on a McDonald's assembly line approach has helped Aravind achieve this. Similarly, Narayana Hrudayalaya, another India-based health provider, is able to do heart surgery for an average cost of $2,000, compared to $ 20,000 in the U.S.

The health sector also benefits from lower costs at the base. The Emergency Management and Research Institute (EMRI) in India is a leader in emergency medical services. It spent only 50 cents per person treated to build the infrastructure to supply this emergency care, compared to the $100 per person cost for the same service network in the U.S. The expense per ambulance is less than $15 versus $600 to $800 in the U.S.

The payoff from 'value for many' innovation is not limited to resource-poor settings. A non-profit company, Diagnostics for All, has a unique printing technology that lowers the cost of many diagnostic tests, from simple blood draws to complex assays of liver function. The technology is a game-changer and can be used in every environment, including the extreme conditions of dust and humidity often found in the rural tropics. The big multinationals are entering this game as well. Siemens India unit is developing an ultra-low-cost x-ray machine and is looking at other breakthroughs with cost profiles that will bring the technology within the reach of millions of lower income patients—and carry the potential for sales leadership in Europe and the U.S., where cost is an increasing factor in health purchasing decisions.

PE: What about a low cost 'value for many' approach to drug development?

We need to remember what Sir Francis Bacon once said: "When you want to achieve results that have not been achieved before, it is unwise to think that they can be achieved by using methods that have been used before." 'Value for many' implies creating therapeutics at not a few dollars a tablet, but a few cents a tablet. Improvements to current methods of drug development will produce only a modest return in lowering costs. Realizing significant drops in cost requires a radically different approach. Just as an illustration, let me cite two examples here.

First, traditional or alternative medicine can offer accessible and affordable healthcare, especially for preventive medicine and chronic pathophysiological states. It can also serve as a rich knowledge resource for new drugs. One promising approach is traditional knowledge-inspired reverse pharmacology, which comprises a rigorous scientific approach to use documented clinical experiences as well as qualitative patient experiences and observations for developing target candidates or formulations, through robust pre clinical and clinical research. In this process, safety remains the most important starting point and efficacy becomes a matter of validation.

Second is Open Source Drug Discovery (OSDD), which has the potential of providing a new, inexpensive way of discovering drugs by creative collaboration of scientists from around the world. The OSDD initiative launched by the Council of Scientific & Industrial Research of India has leveraged the distributive power of the Internet to tap hitherto-untapped human potential towards drug discovery. In less than three years, the OSDD community now comprises more than 4,500 scientists from over 130 countries. OSDD has integrated the in silico, or computer-based, approaches with actual laboratory experiments, with researchers sharing data in the open portal and receiving feedback from an open, collaborative community.

PE: What is your view on the potential for "frugal science" in biopharmaceuticals?

Recently, in a submission to The Economist magazine, George Whitesides of Harvard University discussed the promise of cost-conscious science. He said, "Western medicine does many things well, but it is not affordable in, or very useful to, most poor populations. What then should be the technology base for affordable health care? Answering that question requires the development of science that is conscious of cost from the beginning—a frugal healthcare that might, perhaps, be more related to public health than to end-of-life, high-tech medicine." I fully agree.

PE: Much of your career has been spent leading groups with a policy mandate to connect the regulatory responsibilities of government with the entrepreneurial instincts of private enterprise. What lessons can you provide in overcoming the historical divide between the public and private sectors? Is it possible for a country to prosper and innovate absent the firm hand of government? Are there good examples of productive partnerships between business and government to promote an innovation agenda?

I have had the privilege of chairing several high-powered national committees in India, which have dealt with complex policy issues. The assignments included the overhaul of the Indian drug regulatory system; finding solutions to the problem of spurious drugs; developing strategies on fast-tracking the recombinant pharma sector; promoting R&D and innovation in the Indian pharmaceutical industry; and examining the compatibility of excluding certain categories of innovative medical technologies from patentability under the WTO Agreement on Trade Related Intellectual Property Rights (TRIPS), where India is a signatory.

What are the lessons that I have learned from all this? First, drawing a distinction between the public good and private enterprise remains a contentious issue, especially in leading emerging markets like India, where 800 million people still earn less than $2 per day. One has to find innovative and creative solutions to create a balance between the aspirations of the private sector to make profits and the aspirations of all people to have access to health care at an affordable cost. The debate often gets politicized into a perceived conflict between "intellectual property rights" versus the "rights of the poor." I have always sought to find ways by which both sets of rights are protected. It is not an easy role to play; many times, emotions run high, and the "evidence-based analysis" that is sought does not take center stage. My task has always been to ensure that evidence—the facts—is not lost sight of in working toward a resolution.

There are a number of good examples of productive partnerships between business and government in promoting a broad innovation agenda. One of the programs I was personally responsible for was the New Millennium India Technological Leadership Initiative, launched in 2000. In this program, we established government-funded partnerships between the public and private sector to tackle some of the "grand challenges" that India would confront in the new century. When I left as Director-General of the Council on Scientific and Industrial Research (CSIR), there were more than 100 private-sector companies and 200-plus public institutions working together. Our list of achievements was long, and included the sponsorship of a new drug for treating psoriasis, developed at a fraction of the cost in the western world; it is now at the pivotal Phase III trial phase, and was done by using the reverse-pharmacology approach. Likewise, we produced an entirely new drug for treating tuberculosis—the first since commercialization of rifamypicin in 1963—as well as a world-class Bioinformatics software called Biosuite. Both are at the same high standard as Western science but much less costly to develop and sell.

PE: You have also played a direct role in executing science and technology policy, particularly in India. Why does the scientific community tend to perform below potential in influencing the public policy agenda to create the stimulus that science and technology provides to national development?

I agree that the scientific community often misses the opportunity to influence public policy. Science has to be judged on the basis of relevance, as well as excellence. The public does not so much care for the conventional measurable outputs with which scientists judge science, such as the number of scientific research papers, but they do care about practical outcomes like the new jobs that are created. I believe scientists, with some notable exceptions, have not been sensitive to these realities.

Communication is a critical skill for any scientist. I always tried to tell the political leadership the impact of science in a language that they understood. I remember once explaining to the Prime Minister of India how the creation of superior varieties of menthol mint by the Central Institute of Medicinal and Aromatic Plants at CSIR had helped India displace China as global leader in this sector, creating in turn thousands of new jobs in just a couple of years. In other words, a competitive advantage fosters national development, and helps a politician get re-elected. This emphasis on the practical elements behind the science helped CSIR increase its budget by almost a factor of three in real terms over the 10 years I led it. And the 12 high-powered "Mashelkar Committees" I chaired were reflective of the importance the government started giving to the scientists' viewpoint in policy making.

PE: What has been the most engaging and successful assignment in your career to date, both in India and in the larger international community?

I can cite three engagements that have been the most rewarding. The first was my role as Director of the National Chemical Laboratory during 1989-95. When I took over in 1989 (two years before India opened up and liberalized its trade economy), reverse engineering and copying was the norm in the chemicals business. What I did was convert the National Chemical Laboratory to an International Chemical Laboratory. For the first time, we committed to export Indian knowledge to the giant multinational companies, building in turn a new spirit of confidence in the national laboratory system. Our rallying cry was "yes, we can" and the guiding principle behind our work was "it's not the size of the budget but the value of the idea that matters." From a syndrome of "publish or perish," NCL moved to a new paradigm: "patent, publish, and prosper." It was a politically risky proposition at the time because Multinational was an unwelcome word, widely associated with colonialism and exploitation. Nevertheless, NCL forged bold partnerships with leading foreign firms like GE, Du Pont, and Ciba-Geigy. Holding hands with these global leaders meant that NCL had to run at their pace, and NCL did that—and more. Our success in showing that India could innovate and compete at their level had a catalytic influence in the subsequent turnaround of the Indian science and technology sectors into a fully globalized competitor.

My second most challenging assignment was the position as Director General of CSIR, the world's largest chain of publicly funded R&D institutions, with 40 laboratories and over 20,000 employees here in India. When I took over, there was serious doubt about the viability of spending public funds on a network like this. And there was scant coordination of effort: 40 laboratories moved in silos of their own making. What we did was to build "Team CSIR." When I ended my tenure after 11 years, the transformation of CSIR was being touted as one of the top 10 achievements of Indian science and technology system in the 20th century. The CSIR transformation is today a textbook case of managing radical change for business school students across the globe. It was cited as a model for institutional transformation by the World Bank.

Finally, my current service as the President of the Global Research Alliance is equally challenging. It requires leading 60,000 scientists from nine chains of institutions around a common objective. Our members include the leading research institutions from South Africa (CSIR) to the US (Battelle Institute), Malaysia (SIRIM), and Germany (the Fraunhofer Institute). The Alliance today has become a major knowledge partner in emerging reverse innovation economies like Vietnam.

PE: How important are Intellectual Property rights for a country like India in terms of promoting its innovation potential and competitiveness?

A nation's ability to convert knowledge into wealth and social good through the process of innovation will determine its future. In this context, issues of the generation, valuation, protection, and exploitation of intellectual property (IP) are going to be critically important for India.

Exponential growth of scientific knowledge; increasing demands for new forms of IP protection as well as access to IP-related information; the dominance of the new knowledge economy over the old brick-and-mortar economy; and complexities linked to IP in traditional knowledge, community knowledge, and animate objects will all pose a challenge in setting a new IP agenda relevant to the 21st century. India should no longer see IP as a self-contained technical domain, but rather as an effective policy instrument that is relevant to resolving India's socioeconomic, technological, and political challenges. The development of the competence to manage IP rights and leverage that influence is critical if India is to continue to grow in global competitiveness.

PE: Do we need more innovation in the global system of intellectual property rights? If so, what are the most important elements of reform? How do we ensure that the system continues to provide economic and social benefits to all?

The TRIPS Agreement has important provisions for fair play in technology transfer from which the developing world should benefit. The more affluent signatories—including the U.S. and the EU countries—simply need to follow them.

Article 7 of the Agreement states, "The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and ecnomic welfare, and to a balance of rights and obligations." Furthermore, Article 8.2 states, "appropriate measures, provided they are consistent with the provisions of the Agreement, may be needed to prevent the abuse of intellectual property rights by right holders or the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology."

Facilitating the access of the "have not" countries to technologies required by them constitutes one of the key elements in accelerating the pace of their economic and social development. Such access is generally the result of licenses and technology transfer agreements. The fact of the matter is that the prospective technology-seekers in developing countries face serious difficulties in securing this transfer. In fact, there are concrete examples to show that technology transfers to the third world have not taken place when they were needed most. The 1990 Montreal Protocol on Substances that Deplete the Ozone Layer ran into conflicts over commitments to ensure fair and favorable access for developing countries to chlorofluorocarbon (CFC) substitutes protected by IP rights. The 1992 Convention on Biological Diversity aims to ensure fair and equitable use of genetic resources partly through technology cooperation, but its technological provisions have received little attention. The TRIPS Agreement itself calls for technology transfer to the least developed countries, yet that provision has scarcely been translated into action.

The transfer and dissemination needs of the developing countries have to be seen from the point of view of the capacity of those in need of accessing the technologies, particularly where the cost of technology may be prohibitive due to economies of scale and other reasons. In such cases, in order to implement the related provisions of the TRIPS Agreement, commercially viable mechanisms will have to be found.

PE: What excites you about the promise of India as a key emerging economy of tomorrow? Where do you see your country in the year 2020?

If India's real GDP continues to grow at more than 8 percent annually, it will become a true middle-income country by 2020. And if it steps up that growth rate by one to two percent, it will emerge within a generation into the ranks of the truly affluent. The promise is there to become the second biggest economy after the U.S., surpassing China. But there are several "ifs" in this scenario—these include, among others, the pace of India's reforms.

In terms of our positioning among the emerging economies, we need to understand what a strong player India can be in attaining a leadership position in providing `value for many' products and services.

In fact, 'value for many' products and services will no longer be motivated by concerns about fulfilling the obligation of corporate social responsibility. To the contrary, 'value for many' should be seen as a business opportunity with the potential to spawn new industries able to generate significant employment and profits for India. Most of the growth in consumer spending is expected to come from people in emerging markets, who have a much lower spending capacity than traditional middle-class consumers in developed countries. The fastest-growing consumer class in the emerging markets of Asia consists of people spending just $2 to $4 a day, according to the Asian Development Bank. This market can be served only by innovations around the 'value for many' concept.

Indian companies are well positioned to take advantage of this opportunity. They have direct access to the world's second-largest emerging market, in which a huge low-income group is poised to enter the middle class. By 2030, the share of the total population in the emerging middle class, those earning $4 to $20 a day, will triple, to 49 percent, or 725 million people—exceeding for the first time the number of those earning under $4 a day. An explosion of consumer demand, spread across a range of low- and middle-income segments, will allow Indian businesses to experiment with different scaling strategies, making the cost of pursuing value for many business models much lower for firms in India than for competitors in other emerging markets.

PE: What do you anticipate as the next steps in your work—are there new areas of interest that you wish to influence in your remaining years?

Suddenly the vocabulary of innovation is a global one—and it is changing around the world. Terms like "frugal science," "reverse innovation," "nonovation," "indovation," and "Gandhian innovation" are emerging. I described "Gandhian Engineering" as getting "more from less for more and more people, not just for more and more profit." This new paradigm has popularly been called, in an abridged form, multi-level marketing (MLM). Essentially, what MLM means is not just doing well (making profits) or doing good (the social good) but doing well and doing good (social business). The idea of MLM has caught on. The World Economic Forum annual meeting in Delhi in November 2010 had a half a day session on MLM, and I was pleased to see the CEOs of some multinational companies speaking in support of MLM.

What I intend to do for the remainder of my career is to champion MLM, spread the message of 'value for many,' make "inclusive innovation" a key element of national innovation systems, and generate more funding for it. I was very happy when the Indian government recently announced that it was creating a new Indian Inclusive Innovation Fund, whose resources may grow to $1 billion in the next few years.