Cost of Innovation

Following on from my last post I’ve been thinking about what it costs to achieve and sustain innovation in an international, vast and highly competitive market. A good example is the pharmaceutical market with a worldwide market of around $800 Billion USD in 2009. I could check this figure further but the point is that it’s HUGE with US sales of around 300Bilion USD and “emerging” markets in India, China and Russia. A detailed market analysis is available here
So what does it take to compete at the top of this market? To constantly innovate, sustain a leading position in established market (e.g. the USA) and take advantage of opportunities for dramatic growth in emerging markets? In trying to answer this question I decided to look at GlaxoSmithKline for a few reasons. The company is among the most profitable in the business with profits of around $10.5 Billion on sales of around $40.5 Billion. GSK is headquartered in England and has around 100k employees worldwide. A major drug success (e.g. Zantac for stomach ulcer treatment) is the difference between places in the top 5 of Big Pharma and GSK is under constant pressure to out innovate it’s biggest competitors Pfizer, Novartis and Johnson&Johnson. Furthermore, the difference between a new blockbuster drug being approved by the various regulatory agencies and issues being discovered during trials can be multiple years of researchers’ effort, a billion dollars in research funding and the loss of billions in future revenues. Prizer’s viagra contributes, for example, around half a billion USD to annual revenues yet these sales are dwarfed by those of cardiovascular drug Lipitor selling almost 6 times that worldwide.
In 2008, GSK spent £3.68 Billion on Research & Development as described in their annual report annual report. So that’s 4.12 Billion Euro.
Or to look at it another way, If we assume 51 Bn Euro of toxic debts in NAMA with the majority of these being NPL’s issued in the wild west years from 2005 onwards we come to a startling fact. Irish Developers’ misguided credit splurge could have supported a world-beating pharaceutical research company generating profits of around 8.7 Bn Euro (pre tax) per year for about 12 1/2 years. To understand why we’re still on the wrong track consider that the banks will make 255Million coupon profit on their NAMA bonds or about 1/16th of a GSK for the privilege of getting us into this mess.
Relating this to Chris Horn’s figures MIT would produce 5 spinouts for the NAMA bond profits alone.
Rather than cry over the embarrassingly large amount of milk spilled it’s important to focus on the positive points. Up until the boom we arguably never had enough money to create a world beating R&D organisation. Since then, we’ve invested more than enough money in this country to produce world beat companies in IT, biotech etc. We’ve just invested it in the wrong things 🙂 It’s how we react to our mistakes that will determine whether our fate is that of Switzerland or Uraguay.
Now we need to priortise to ensure that we create R&D ventures of a critical scale AND that individuals who made money during the boom (especially “diaspora” figures and tax emigrants) invest in future R&D. I’m not exactly sure how to do this. Although I’m pretty sure that it won’t be successfully achieved by cutting pay and raising taxes of 3rd level researchers in Ireland. Just a hunch!
A tech bond along the lines of McWilliam’s diaspora bond could be an idea. The money’s out there and getting it in the form of investment is a damn sight more realistic than naieve “tax the super rich” suggestions made by people who forget that the super rich can live anywhere they like. If we can prove that our research is world class and industrially relevant then we’ll find investors. Easy to type these words, more difficult to put them into effect. Building a knowledge economy founded on high-value engineering and niche manufacturing is, perhaps, the only alternative to what some pundits call the “race to the bottom”. World Class Innovation may be the only game in town