On his second visit to India, the schedule of Dr. Daniel Vasella, Chairman and CEO of Novartis AG, wasn't cramped with meetings with policy makers or the leading lights of the Indian pharmaceutical industry. The 51-year-old head of the world's fifth-largest pharmaceutical and healthcare company instead dragged his entire executive committee for a tour of the Indian countryside, "in all its shades and colours", right from Jaipur to Agra to Varanasi to Ellora. He recognises the potential along the way, but is quick to point out that more than the population size, it's the pool of highly-skilled people that exist in India that's the biggest attraction for Novartis. Dr. Vasella spent an afternoon with the Indian media on the last day of his whistle-stop India tour. In an interview with BT's Brian Carvalho, the Chairman touched upon various issues, including his reasons for being more optimistic about China than India, and on the prospects of Big Pharma in the years ahead. Excerpts:

Rising costs, intense competition, increasing intervention by governments-these are challenging times for the global pharmaceutical industry, and that's reflected in their valuations on Wall Street. Would you agree that the industry is under pressure?

Yes, sure you had a decrease in price-earnings multiples, which was quite dramatic, and which reflects the perception of investors that times have become more difficult. But you also have to see that there are more clinical trials going on today than ever before. So the decline that one is seeing in approvals (for new chemical entities) is not going to stay. We will see an increase in these numbers once the product pipelines of companies mature. From that point of view, I feel pretty confident that the industry is remaining innovative and there is justified hope that we will continue to have a stream of improved medicines for diseases that need to be treated.

What effect will the FDA's recall of Merck's Vioxx have on the industry?

The FDA has acted on a scientific basis... After every big problem, the FDAs will tighten the regulations. As a result, costs will go up, timelines will increase and the speed at which patients get access to new medicines will decrease. But then we will also see counter-pressures from activists and consumer organisations, which in turn will lead to the streamlining and simplification of regulations, and that will eventually result in the reversal of the negative trend.

Is the day of the blockbuster drug over?

No. That will not be the case. You will have diseases that are very prevalent, and drugs that are being used very broadly, and they will become blockbusters. You will also have drugs that are for specific diseases and patients, which may be smaller, but in speciality areas. You can't afford to launch a product in the general practitioner area that is not a blockbuster, because your launch costs and promotional costs are such that from an economics point of view it becomes a very difficult proposition. In speciality areas you can make money maybe with a $100-500 million (Rs 450-2,250 crore) drug.

"You can put in place all the elements, but there is no guarantee for success"

Novartis currently stands out from the rest of Big Pharma because of its higher R&D productivity. How has this happened?

It was a conscious strategy, but the inner confidence that we would succeed was never there. Because you never know. We can never read the future. You can put in place all the elements that you believe are essential: The people, the money, the technical resources, the skills, the continuous training, alliances with academia and with other partners... but there is no guarantee for success. You are constantly dealing with uncertainty. But having said that, you need to have people who are willing to bet their life that what they are doing is right. That's when you have programmes that move forward and succeed, but then you also have more programmes that move forward and don't succeed. It's a business with more failures than successes. It's just the fact and we have to accept it.

But of late Novartis' failures have been relatively less than those of the industry...

Yes. We had more approvals than anybody else in a number of years now. What did we do differently? I know a few things, but I don't know everything because I don't know competition so well... It (the success) is all about people and luck.

And a lot of money?

Yes, we spent a lot, but we don't spend dramatically more than the big companies. We are now #5 worldwide in the drug industry, we spend more as a percentage of sales than most others, but in absolute numbers Glaxo and Pfizer spend more. But you could also look at productivity by dollars, if you could do such a thing... Also, perhaps you cannot just look at the number of approvals; you also have to look at the eventual size of these products (once they hit the market). So if you ask me: What do you prefer-do you prefer 10 approvals with drugs that will reach $100 million (Rs 450 crore) in sales, or one drug that will reach $1 billion (Rs 4,500 crore). The answer is easy: Give me one with $1 billion. The economics are very clear: I will make much more money. With the 10 $100 million drugs, on the other hand, I will make no money. I will lose money. So you have to look at the size of the products eventually, you have to look at their number, and then, I would add, the impact they have had on medicine. If you have a number of drugs that change the way medicine is being practised, I would judge that as more relevant work.

After growing our marketshare for nine quarters in a row now-we are currently at 4.4 per cent marketshare-which is more than what we were pre-merger (Novartis was formed by the merger of Ciba-Geigy and Sandoz)-we are now investing in innovation. That's why we've moved our R&D headquarters from Basel to Cambridge (Boston), primarily because of the availability of scientists there. We have recruited 800 scientists in less than three years.

"Today, India's potential is not fully exploited because you have no IPR"

Do you see some significant research work coming out of India shortly?

I hope for it, but I haven't seen anything yet...There is a big chance that Indian companies will come up with relevant products. But today the potential is not exploited because today you have no IPR. So why should anybody who is not insane invest a lot of money in this country, for this country, from the innovation point of view, before you have IPR? Once you have IPR, the dynamics will change significantly because the rewards will be higher. So we will see companies shifting slowly towards more innovation-driven approaches, we will see the emergence of biotechnology companies, and I believe there are enough venture capitalists around (in India) to finance them.

Do you think that it is an imperative that innovation-oriented Indian drug firms should collaborate with their MNC counterparts?

It is absolutely thinkable that some Indian companies will do it by themselves, but it is enormously costly and very risky. If I were in the shoes of an Indian company, depending on the financials I have, I wouldn't perhaps try to do everything by myself in the beginning. I would choose a partner I believe to be trustworthy and reliable, and fair. As I move on I would learn more, would have more money in my pocket and then I would start to do things myself-without partners. It's a question of learning the process, and sharing risks and rewards.

When in China recently, did you actually make a statement that you were more optimistic about the Chinese market than India?

If I had not made that remark then, I will make it today! China is growing much faster, the Chinese government has moved, is moving and will move in a very determined manner to attract hi-tech industries and provide better access to healthcare to their population, and they are spending more of GDP on healthcare than India does, to my knowledge. So, as a market itself it is bigger, will grow faster, and is still significantly underdeveloped. There is also an increasing hope of IPR. Scientists too are easily available.

And when you compare China to India, what is it that you don't see? Or what is it that you wish would happen here, but isn't there?

The determination... to grow the economy, to develop healthcare, to increase spending way beyond 1 per cent of GDP... to make education compulsory-every child has to go to school-to improve hygiene and increase knowledge of prevention of disease. With that you have a positive impact on birth rates because infant mortality will decline. In western countries, between 1966 till today, infant mortality dropped by 80 per cent. What this does is that it automatically reduces birth rates. Because parents now know that their child will survive, and they don't need to have six-seven more children. If you have a social security system that takes care of the elderly, people will not feel the need to have more children as their only insurance against poverty. So there are lessons to be drawn from observing countries that have developed. Of course, India is a democracy, and so it is more difficult to move fast than in other systems, like in China. Post-2005, there has to be a dramatic change in terms of patent protection. There is no option; this is your opportunity.

Will that result in a dramatic increase in investments by Novartis?

I think yes, but don't expect it in 2005. One has to believe that there is a fundamental, paradigm change in the way India is handling hi-tech. That's important for brands, for software-look what happened in software. Once India saw the opportunity and promoted this industry, investments increased. That in turn attracts more skilled labour...Once you unleash the power of people who can make money, who sniff opportunities, who can be entrepreneurial, and if the framework is in place, you'll be surprised to see how many capable people exist.

India is exciting, but China grows faster than India. So China may attract more investments. But then compare India with Germany. The economy is larger now, but it grows much much slower. So we will do much more investments in India than in Germany. So the nature of our investments is all very relative.

But how optimistic are you of India as a market? Would you be less reluctant post-2005 to bring your latest products into the Indian market?

If there was proper IP, sure! That's no question. We are also impressed by the tremendous bio-medical and chemistry skills available here. Many Indians who had gone abroad are now coming back. We are also keen to strike R&D alliances, like the ones we have with Nicholas Piramal, Torrent and Biocon. So you could say that in India we will have an interesting mix of corporation and collaboration.

We see tremendous potential in the Indian market, especially after our (the executive committee's) tour of Jaipur, Agra, Fathepur Sikri, Ellora and Varanasi. We got a chance to see India in all its shades and colours. We see an emerging middle class of 150 million emerging, the economy is getting stronger, and India is set to be one of the three biggest economies of the world. We would like to be a strong player in that market. (Having said that), it's not the size of the Indian population that's really the attraction, but the pool of intelligent, skilled people that are available here.

You are planning to set up a third research centre. Will it be in India?

We want a research centre in Asia, but whether it will be India I can't say. It will depend on where we find highly-qualified people, respect for intellectual property, certainty about the legal system, reliability of the system, governments that are easy to work with and where labour costs are attractive.

What are your growth plans for Sandoz, Novartis' generics business?

We are not yet a global generics business, and we would also like to crack the biological generics market. Our ambition is to be #1 in generics and to develop complex generics products. We are looking for good acquisition targets, as greenfield capacities can be time-consuming. Teva (the world #1 in generics) is aggressively acquiring, so we can't take our time about it.

Do you see scope for more mega-mergers in the global pharma industry today?

Today, big mergers are not the way to accelerate growth. Whatever mega-mergers we've seen in the past were resorted to either to reach critical size or to lower cost pressures. In 1998, the top 10 companies had a 25 per cent marketshare; today they have 50 per cent, thanks to mergers and acquisitions. Sure, we need to look at opportunities, but then you need the courage to say "no", which often is more difficult that saying "yes". Mega-mergers will happen, but in a non-predictable way.