Management

Behind the Buzz

Going by the 'noise' levels, the biotechnology industry seems to be headed for a growth phase. But is this just hype and hard sell with no substance? And how will this impact the pharmaceutical industry? Arshiya Khan reports

"The reason why there is a buzz is because the world is transforming there are changes that are happening and there is much to be addressed. And I believe there are only two possibilities of our time that give us hope that we can still survive as a human race—biotechnology and advanced material research," says Dr Villoo Morawala Patell, Founder, Chairperson and Managing Director, Avesthagen.

Sample this—according to recent estimates, the biotech sector in 2006-07 grossed $2.08 billion (Rs 8,541 crore) in revenues, registering 30.98 percent growth, against the previous year's figure of Rs 6,521 crore ($1.45 billion), and is growing at almost 40 percent per year. This huge opportunity cannot be neglected, though it would be prudent to identify a niche area of operations, because as an industry it has a wide application.

Besides this, unlike the pharmaceutical industry, biotechnology includes all kinds of technologies based on biological processes, the design of new organisms, interfacing life and technology and management of ecology and environment. "From a trans-human perspective, it appears likely that with time the line between machines and living beings will blur and eventually vanish, making us part of a bionic ecology," feels Vijay Ambatti, Founder Director, Varda Biotech.

The beginning…

"VCs have not put in the effort to understand biotech and are being run by MBA graduates who are more busy comparing their pay packets than actually doing their job of promoting industry" - Dr Villoo Morawala Patell Founder, Chairperson and Managing Director Avesthagen

Indian biotech entrepreneurs traditionally started with manufacturing of vaccines and biotech enzymes. "In the beginning of the current decade, there were many pharma companies looking at biotech as a way of diversification. Almost all pharma companies in India now have some presence in the biotherapeutics sector in India," informs Chirag Mehta, Head (Project Management and Corporate Planning), Intas Biopharmaceuticals Private Limited (IBPL). And this is one reason why, today even small to mid-sized players in the pharma sector have entered or are planning to enter the biotech sector. As per industry estimates, there are over 325 companies operating in biotech arena. Nearly 40 percent of these companies operate in the biopharma sector, followed by the bioservices (21 percent), bioagri (19 percent), bioinformatics (14 percent) and bioindustrial sector (five percent). Coupled with this, the India advantage of the vast knowledge pool will certainly take India to an important destination in biotech.

Pharma's somersault

"It is more research driven than result driven stage at the moment. Once the stage reaches to launch level it automatically attracts more VCs. As they are at an initial stage, uncertainty and high capital involved makes them - wait and watch" - Vijay Ambatti Founder Director Varda Biotech

Biotech has mimicked the IT industry for some time. It was really interesting to see biotech industry gather momentum like IT, slow down due to lack of funding and then revive due to the 'innovation deficiency syndrome' in pharma. So is biotech the answer to this syndrome or is it just a newer, more nimble version of Big Pharma? "Yes, to an extent, as India is emerging as a key player in biogenerics," exclaims Ambatti. The domestic market sales from biogenerics (only recombinant biotech products) was estimated at about Rs 500 crore as many Indian companies are into both manufacturing and marketing of these products. Companies such as Bharat Biotech, Dr Reddy's Laboratories, Panacea Biotec, Shantha Biotechnics, Wockhardt, Biocon, IBPL, and Shreya Life Sciences have showed that they are capable of producing biogenerics in India. With the introduction of these biogenerics, there is a drastic drop in prices.

However, the pharma generic pipeline has become too competitive, profitability levels are coming down every day with the increase in domestic expenses and the devaluation of the dollar. Though it is making waves, will it fill the drought of innovation plaguing the pharma industry? Globally, biotech has already churned out lots of innovative molecules like Erythropoietin (EPO), Rituximab, and Embreal. It has its fair share of blockbuster molecules, so it can be an answer to the drought of innovation that has been plaguing the pharma industry, points out Utkarsh Palnitkar, Partner and Industry Leader, Health Sciences Practice, Ernst & Young.

However, Mehta partially disagrees, saying. "I would say that it partly helps, there is still a lot of innovation to be done in traditional pharma, and it just has to be managed in a better way." Meanwhile, Ambatti agrees with Palnitkar. As per the contemporary trend, the biotech industry is growing much faster. There are several biotech products in the pipeline, globally. And due the complex nature of the biotech products, it would help bigwigs to look at biotech products than pharma. Therefore, “As biotechs increasingly retain ownership of their developmental compounds and create more targeted blockbuster drugs, they will grow faster than pharma companies," predicts Ambatti.

On a strong note, Patell highlights the truth. "Classic pharma is at a dead end. The earlier hypothesis that there is one drug for all has failed. The role of genetics is playing a large role in drug discovery and the pharma companies have to either get there themselves and innovate using biotech tools or reach out to an acquisition mode."

Mehta gives another reason why pharma companies are focusing on biotech. "Firstly, traditional pharma companies have no choice but to have a game plan to enter the biotech sector. Innovative drug pipeline in pharma is drying up, patent regimes are getting stricter, and most of the new innovative drug development in the world is happening in the biotech area." Hence, this can be called not as a shift in focus area but a necessity to diversify business.

Secondly, biotech drugs, which are made out of living cell cultures, instead of simple molecules used to create traditional pharmaceuticals, are an attractive investment for Big Pharma for two reasons—the industry is fast-growing, and generic competitors cannot touch it. Niche products can sustain current growth line in times to come.

Thirdly, "biotech has the potential to help treat unmet medical needs and presents a different perspective of treating diseases. On a similar note, biotech has been successful in generating the maximum pipeline candidates over the past decade with increasing number of approvals," avers Palnitkar. Besides, pharma companies are facing the greatest challenge of plotting a long-term strategy that allows it to meet either new medical opportunities or emerging platforms. Therefore, pharma companies like Astra Zeneca, Aventis, Bayer, Pfizer, Merck, Ranbaxy and Dr Reddy's Laboratories are using bio-IT tools to expedite the drug discovery process. The thrust is also on bio-informatics, bio-pharma, bio-generics and therapeutic monoclonal antibodies that are attracting several established pharma companies.

After all the hype about the biotech sector, are investments showing proportionate returns? Mehta believes, "Investments in the biotech sector have a long payback period, especially if you have invested in assets to cater to overseas markets. The returns from India are not sufficient in the long run. We have to target Europe and North America for appropriate returns."

On the other hand, Ambatti feels that from a long-term perspective, "the future is not with curative medicines but with preventive medicines." He further elaborates by highlighting the fact that many Indian companies have been focusing on the biotech segment for the last two-three years and are going to step up their initiatives in this segment in the next five years. "The opportunities are not only in the domestic market, but also in the global market," he remarks.

The case in point here is that of Biocon, who entered into a joint venture with Cimab SA to manufacture Cimab's biotech products based on monoclonal antibodies and Nicholas Piramal's 60:40 joint venture with Allergan to manufacture their ophthalmology products in India, which use botulinum toxins.

Any company can invest in R&D to make new drugs. And if they have a windfall from a big successful product, then they will put that return (profit) on investment back into R&D. As it is risky to invest in R&D without considering that on the investment, there's going to be a return. Also there are no 'quick bucks' to be made in the biotech sector as it can be volatile and yields best returns over a few years, instead of immediate results due to a market buzz.

What is driving the biotech wheel?

India has clearly two advantages. One is definitely the cost factor and other is that India already has well defined guidelines for regulatory clearances for biotech products. This helps Indian companies prepare better than their counterparts when entering markets like Europe and North America in the future. A case in point is the Shantha-Merieux deal. Alliance Merieux, the French bio-industry major picked up a 60 percent stake in Shantha Biotechnics, with an eye to making Hyderabad its global hub for vaccine development. The 110-year-old Merieux Group from Lyon, France will leverage the R&D and manufacturing base of Shantha Biotechnics to broad base its range of vaccines for the Asian markets.

In the last few years things seem to be approaching an inflection point--the biotech sector in aggregate has grown significantly, with several successful global 'biotechs' (for example Genentech, Amgen, Genzyme, Biogen) having become bigger than most Big Pharma themselves, remarks Ambatti. Being in biotech barely makes sense if not from a global perspective, and smaller companies in the biotech sector have to learn to manage alliances with better established, international firms, to achieve efficient marketing and commercialisation. And this is the reason why the sector is witnessing alliances between biotech firms.

"Therefore, it is quite possible that biotech sector could eventually engulf the pharma sector rather than the other way round," warns Ambatti. As we can see, cross-fertilisation and inter-marriage is rapidly closing the gap between these sectors. Indian biotech will take time to mature in its research capability. Manufacturing is taking place in terms of joint ventures and alliances, he adds.

In India, healthcare biotech sector mainly comprises of vaccines and biotherapeutics. And the fact that first generation biotherapeutics are already or are close to being off patent in Western markets makes it a lucrative destination. Coupled with this, the low cost of innovation and industry friendly policies articulated by a proactive government have helped drive the growth story.

VC blow hot, then cold

The biotech industry has had its high and low phases. In the US and other countries venture capitalists (VCs) poured money into biotech once results started coming in. This was followed in India too. Then came a downturn in the industry, and as VC funding for biotech dried up in the West, Indian biotech start-ups also struggled for funds. By 2003, the global biotech industry was back in a growth phase and VCs started looking at the sector once again. In India the focus is much more on 'development' rather than 'research' in biotech. Seed financing is an issue due to myriad reasons. "A major reason often cited is the lack of alternative investment markets leading to limited exit routes for investors," believes Palnitkar. Plus the fact that in most of the cases, the size and scale of the investments are too small for the appetite of the VC players further compound the issue. On the same lines, Mehta believes that, "In India VCs have been pampered with the quick astronomical returns in other sectors like IT." Another reason is that most of the VC funds in India do not have expertise in the biotech sector and they look at the sector as an extension of pharma.

In addition, there is a longer wait period to exit from a biotech investment. Mehta wonders that though VCs are showing increasing interest, will this convert into easier funds flow, especially for start-ups? But Ambatti feels, "It is more research driven than result driven stage at the moment. Once the stage reaches to launch level it automatically attracts more VCs. As they are at an initial stage, uncertainty and high capital involved makes them wait and watch." On the contrary, Patell points out that "VCs have not put in the effort to understand biotech and are being run by MBA graduates who are more busy comparing their pay packets than actually doing their job of promoting industry."

Build up

No doubt the sector is buzzing, but it is still lacking attention. What is required is to simplify the biotech policy by making it industry and investment friendly, as it will help the interested international companies to invest in India (Invitrogen, Shreya, MWG Biotech, to name a few). Meanwhile, with the help of the state government and the burgeoning global biogenerics opportunity opening up (Europe, Australia), Indian players have started partnering with international firms (Biocon, Bharat) and companies are also shifting focus to biotech (Intas, Lupin). There is high growth opportunity in the segment. Government should encourage companies for research by giving more tax incentives and funding. Also, increase in public private partnership for boosting the growth is very important specifically to the biotech industry. However, for such partnerships to be fruitful to the industry the research standards at some of our institutes have to come up so the research can be applicable in the industry, believes Palnitkar. Besides this, the need for creating research facilities and capacity building for life science research can be bridged by encouraging collaborations between public and private institutions.

In recent years, there has been growing incentive for the private sector to make investments into biotech research and development. This has partly come about through the initiatives, put in place by DBT. All this coupled with proprietary (exclusive) technologies that will help bring about a revolution in personalised therapies would drive the future growth of biotechnology. Bringing more products to the market at an affordable cost will make a difference, such as genetically modified foods, recombinant protein therapeutics and also new drug delivery. Also selling the India brand in biotech area world wide, better government administration on programs, encouraging entrepreneurship, quality biotech graduates in the country and risk sharing by VCs, and a novel appetite to take on next generation products, will turn the wheel in favour of biotech.

What lies ahead?

Indian companies will take time to develop new biopharmaceuticals. They are trying to replicate the path followed by the pharma industry by first manufacturing generic biopharmaceuticals and then trying to invest on drug discovery as the business grows. Therefore as Big Pharma moves towards biotech, and biotech replicating pharma, it will certainly become interesting to see what the biotechnology landscape looks like in the next five to ten years.

arshiya.khan@expressindia.com