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


Suggestion for the Innovation Task Force

Just one suggestion for the Irish Innovation Task Force. Promote funding to disruptive technologies. Let’s start with a definition from wikipedia.

Disruptive technology and disruptive innovation are terms used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically by being lower priced or designed for a different set of consumers.

The important aspect here is that disruptive technologies improve a product or service in an unpredictable way, creating or fundamentally changing a market. An example would be something like Skype. There’s another reason why I’ve chosen this.
I’ve blogged about Nassim Taleb’s “Black Swan” before and his advice for investors about understanding their real risk profiles. Most people get confused between relatively solid investments like treasury bonds versus risk like supposed “blue chip” stock market investments. The ideal Taleb portfolio is about 85% governmental bonds and 10-15% pure risk.
There’s an analogue here with disruptive technologies and the investment strategies of state funding agencies.
Enterprise Ireland is essentially Ireland’s state VC and angel investor. We don’t have much of a VC sector, as such, so we’re reliant on EI to fuel indigenous tech growth. EI is an oft maligned organisation but they are responsible for giving a lot of indigenous tech companies a chance. One of the areas where they fall down, I believe, is in funding disruptive technologies as this is organisationally problematic.
EI’s review process for commercialisation funding for research institutes is based on industrial and academic review. In my experience of grant application submission, which is considerable, they attempt to reach a consensus across the reviewers as to whether a proposal is commercially and technically viable. This is useful at picking ideas where a) there’s already a market b) the technology is mature c) the idea isn’t contentious. However, I’ve seen neat ideas like creating a P2P Telecommunications network dismissed out of hand in 2002 as technically and commercially unrealistic. Perhaps they were right 😉
More annoying are reviews where 2 reviewers love the idea (A marks) and one reviewer hates it (C or D). This has happened and sometimes the nay-saying review reads like an ad-hominem attack. Perhaps it was!
The disruptive idea is inevitably contentious. It will attract naysayers like flies to s&%t. Its market will not be tested and its technologies may be immature or, at best, not industrially tested. Yet Mr. Taleb would probably suggest we should invest 15% of our R&D grants on such technologies. Perhaps more as R&D grants are inevitably risky. This could be accomplished by a two step review process. Step 1 involves establishing what the “consensus” projects are. What projects the majority of people think are likely to yield commercial rewards. Ear-mark 80% of funds for these. Then let’s be ambitious in step 2. Weed out the ideas that a) were highly contentious, b) would revolutionise a market yet c) are being proposed by a credible team. These are your disruptive technologies. Ignore the consensus and fund as many of these as 20% of grant funding will allow.
Another improvement to the process sounds obvious but is the exact opposite of what is practiced currently. Right to reply. Once the applicant submits a proposal, success is in the lap of the gods (not meaning to give reviewers a power complex). Queries regarding applications are rare. Generally you’re presented with an opinion of the review board as a fait accompli without the ability to question reviewer’s comments or clarify misinterpretations. If you consider that, sometimes, the reviewers are in direct competition with the applicant for funding OR the proposed commercial product it’s a process that demands a right to reply.
Modifying the review process as suggested would, in my opinion, lead to a better selection process for grant funding and would improve the chances of funding yielding a massive success. Ultimately, this is what Ireland needs. Much of our techie nous wouldn’t exist but for the early wave of indigenous tech companies such as IONA, Baltimore and Logica, illuminaries of which dominate the tech landscape in Ireland. A massive indigenous success gives a taste for tech enterpreneurship like nothing else and ignites the passions of school leavers towards the ICT sector. It also trains the kind of highly-skilled and adaptable staff we need to build a knowledge economy.