By Kiran Mazumdar-Shaw

The covid-19 crisis is going to upend every economic assumption that seemed valid a few months ago. It will lead to a re-examination of the current investment mantra of giving astronomical valuations to virtual companies that create intangible assets and provide aggregator services. The narrative that traditional asset-heavy companies are inflexible, slow-moving and somehow anachronistic in the digital age will be questioned.

An asset-light model has allowed many startups to scale up quickly. They have been rewarded with fancy valuations on the misleading premise that a lower share of physical assets deserves higher multiples.

Today, a small online pharmacy is valued several times a small pharmaceutical company. An online pharmacy that operates out of a single room with a few people and smart software may be working smart, but by over-valuing it, aren’t we starving a pharma company—which has to invest in research, development and manufacturing—of funds?

Ignoring manufacturing can be dangerous. The overvaluation of virtual businesses is coming back to haunt us. The covid-19 pandemic has led to worldwide shortages of personal protective equipment (PPE), surgical masks, gloves, diagnostic kits, artificial respiratory apparatus like ventilators, oxygen cylinders and other appliances. India needs around 38 million masks and 6.2 million pieces of PPE, according to media reports. In the US, the Strategic National Stockpile had just 30 million surgical masks and 12 million respirators in reserves.

The world is scrambling to source critical medical equipment because skyrocketing demand is outstripping production capacities. The current crisis is a direct fallout of flawed valuation models that dissuade businesses from investing in manufacturing capacity. The acuteness of the situation can be gauged from the fact that the Indian government has reached out to automobile manufacturers such as Tata Motors, Mahindra & Mahindra, Hyundai Motor, Honda Cars and Maruti Suzuki, asking them to collaborate with existing ventilator makers to raise production capacity.

Maruti is collaborating with AgVA Healthcare, an approved manufacturer of ventilators, to rapidly scale up production of ventilators to 10,000 units per month. Likewise, Mysuru-based medical equipment maker Skanray Technologies is partnering Bharat Electronics Ltd and Mahindra to ramp-up ventilator production to 30,000 per month.

Just-in-time inventory models that deter stockpiling have failed us in this hour of need. Surge-demand and binge-buying have collapsed the supply chain with dangerous consequences. Hopefully, the covid-19 crisis will lead to a reboot, bringing equilibrium in policies, business models and valuations.

India not only needs to invest in expanding manufacturing scale, we also need to inject funds in our science- and technology-based companies. That Pune-based molecular diagnostics company Mylab Discovery Solutions was able to develop a relatively cheap and more efficient home-grown test for the novel coronavirus in a record six weeks is proof of the huge scientific talent we have.

Biotech startups like Mylab need laboratories, manufacturing facilities, skilled talent and legal know-how. To fund such requirements, they are heavily dependent on private equity and venture capital firms.

Even though Indian biotech companies involved in drug discovery, vaccines, medical devices and diagnostics have proven their mettle globally, they face serious challenges in accessing capital. With just a handful of venture capital and private equity firms proactive, the bulk of the funding comes though government sources such as the Biotechnology Industry Research Assistance Council and department of science and technology. We need to step up private investment.

If we want world-class science, we need to pay researchers in the life sciences sector better. Currently, a research scientist in the biotechnology sector in India earns almost 40% less on average than a data analytics professional, according to publicly available data.

The covid-19 crisis should also lead to a re-prioritization of medical research in the West. While non-communicable diseases and personalized and precision medicine have cornered the bulk of research dollars, research in infectious diseases has languished. This will have to change.

Microsoft founder and philanthropist Bill Gates had correctly predicted in 2015 that the greatest threat to humanity was not nuclear missiles but microbes. If only the world had taken his warning seriously, we would have been well prepared to deal with covid-19 and had fewer fatalities.

Going forward, governments will need to ramp-up investment in healthcare, and scale up production of diagnostics, drugs and vaccines. The Coalition for Epidemic Preparedness Innovations, a global alliance that finances and coordinates the development of vaccines, is coordinating development work on a vaccine for covid-19. Funding for such initiatives needs to rise multifold.

India needs strong public health infrastructure not only to respond to crises such as covid-19, but to address challenges such as preventing chronic illnesses, controlling infectious diseases, predicting outbreaks, enhancing the capacity of front-line health workers, and ensuring the affordability of essential medicines.

Covid-19 is a wake-up call, and the world will do well to pay heed.

 

9 thoughts on “Covid-19 will topple our paradigm of economic value

  1. Absolutely true and well pointed out.
    While NCDs and POC hace been on top of commercial pipelines viz a viz treatment of IDs given the HC payer provider paradiagm, it is now more clearer as to which is more damaging in scale and impact both Health & Economical.

    Time goverments and private players globally wake up and change budgets.

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    1. The pandemic is a ‘black swan’ no one saw it coming an event that is repeating after 100+ years. Linking that and saying virtual companies are overvalued and not worth is not a worthy argument. As a business person one needs to understand the value creating/monetization and ignoring that fact is like saying – I am plant supervisor and I work 15hrs so I need to be paid more than the CEO who just sits in the office.
      A better level of insight and wisdom is expected from India’s business folks not just political positing.

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  2. I completely agree with you Kiran Mazumdar-Shaw down to every word very thoughtfully written.
    Hope it will open the eyes of the investors to invest in capital based sectors more so that we can better overcome such situations in future.
    Hope people will learn a lesson from current Covid crisis which will transcend & endure.
    Vinay Chawra, Bangalore

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  3. Though I am a big fan of eCom and faster turnaround time for supplies, but I completely agree that valuations of these companies are in bubble situation and these aggregators need manufacturers to supply them. Today they are scrambling for resources and supplies. So you are correct that whole disbalancing which happened in last few years where investors keep pumping more air in balloon will stop. SoftBank and others are already facing challenging times.. So lot of action is going to unfold..

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  4. I do enjoy the manner in which you have presented this specific matter plus it does present me personally some fodder for thought. However, because of what precisely I have witnessed, I simply hope as the reviews stack on that people today stay on issue and not get started on a tirade involving the news of the day. Still, thank you for this superb point and while I can not really go along with the idea in totality, I regard the viewpoint.

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