Strategic Management

Project Report

On

“Biotechnology Industry in India”

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Topic:India has huge opportunities in Biotechnology. Please elaborate how India Biotechnology firms are formulating and implementing strategies in India (Bio pharma, Bio services).

Introduction:The primary objective of the biotechnology and pharmaceutical value chain relates to the discovery, development and distribution of therapeutics and drug delivery mechanisms. In general, analysts and industry participants define the biotechnology industry as including firms that apply technologies to the life sciences.

Architecture:

Some commonalities and Points of difference:

Biotechnology Pharmaceutical Origins date back to the 1980s Origins date from the early 20th century Foundation built on modern scientific

method and mission to develop new drugs for humans and animals

Foundation built on modern scientific method and mission to develop new drugs for humans and animals

Generally innovative and risk taking Generally traditional and risk averse. Method of drug development –Biology

based Method of drug development –Chemistry

based

The rise of the Biotechnology industry during the late 80s can also be attributed to some of the problems that were plaguing the big pharmaceutical companies during the same time. Some of the problems that the pharmaceutical companies were facing included:

Industry was accused of dishonest marketing practices

Shoddy science and

Callous Pricing.

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Biotechnology

Medicine (Red Biotech)

Pharmaceutical Products

Services (Gene therapy, genetic

testing etc.)

Agriculture (Green Biotech) Bio-informatics Industry (White

Biotech)

Biotechnology on the other hand was the ‘new kid on the block’. It was looked at as a new comer, an industry that was accessible and it did not require the capital resources that would be required for a major pharmaceutical company ( e.g. Manufacturing outlay, R&D outlay, etc.)

The two industries, namely biotechnology and pharmaceutical firms compete in an industry characterized by the following:

Rapid technology change

Creation of new knowledge

There are firms which were characterized as biotechnology firms in the past and have increasingly been categorized with pharmaceutical companies in the later phase of their existence. As these firms i.e. a “once-biotechnology firms” have matured their activities, they have expanded to resemble more integrated pharmaceutical companies. Some notable examples include Millennium Pharmaceuticals, Genentech and Amgen.

The term, ‘medical’ biotechnology as an industry includes firms which are involved in cutting edge research and development of life sciences-related tools and equipment, some of which support drug discovery and development, and some others do not.

As per research undertaken ( Robbibs-Roth 2000), certain industry workers break the biotechnology into 3 tiers based on market capitalization. The traits of the different tires along with some examples are as follows:

Tier 1: Tier-1 firms which include companies such as Amgen and Genentech are some of the largest publicly traded firms, with market capitalizations above approximately US$800 million. These types of firms generally resemble large pharmaceutical firms, but they are differentiated from the same by their core technologies as well as their history which places them in the biotechnology category.

The other category of Tier-1 firms, such as Celera Genomics and Millennium Pharmaceuticals, are in much earlier stages of development as integrated firms, but the market believes their prospects to be quite good.

Tier 2: These firms range in market capitalization from approximately US$125 to US$800 million. Alliances play a strategic role in these types of firms as these firms enter into alliances with pharmaceutical and/or tier 1 biotechnology companies for their trials, distribution and marketing, etc. Most of these firms have successfully crossed the early stage challenges of proving the potential of their technology platforms and in majority of cases they have products which are at on or near market stage.

Tier 3: These types of firms have made it to the public markets and have gained enough success to achieve market caps between about US$20 and US$125 million. Some of these firms have promising technology platforms, but they are further away from being able to bring drugs to market.

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Existing Business Models:A business model is a description of how your company intends to create value in market place. It includes that unique combination of products, services, image and distribution that your company carries forward. It also includes the underlying organization of people and the operational infrastructure that they use to accomplish work.

A typical business model consists of three components – value proposition, value-chain structure and revenue generation. For biotechnology the business model serves to secure value from company’s proprietary technology and knowhow and is currently often heavily reliant on large pharmaceutical business (partners).

The relationship between a company’s position in value chain system and its ability to generate value is not linear due to 2 reasons:

Dynamic nature of industrial evolution due to rapid changes in technological environment Relationship between time spent in drug development and value generation is not linear

Models:

1. Vertical Models: FIPCO & VIPCO2. Product Model: FIDDO3. Platform/Technology Model: RIPCO 4. Hybrid Model5. NRDO model (No research, Development Only)

Buy a “discarded” drug from pharma & use their technology to revive it

NOTE: A lot of subjectivity is involved in classification of companies

[Different models varied according to their functionalities in the value chain]

Platform/ Technology Model: (rent/sell their technology)(Research Intensive or (Royalty Income) pharmaceutical companies)

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This model was developed in the years when there was relative lack of funds. Its main principle is exploiting technology; developing tools or technologies for use in different applications. The revenue is generated relatively quickly- cost as well as time and is earned through licensing fee, subscription fee etc. The critical success factors are value of technology, patent laws, technology obsolescence.

E.g.: Qiagen NV, Celera Genomics Group

Product Model: (technology is powerful enough to develop own products)(Fully Integrated Drug Discovery and Development)They offer products manufactured with new, own or already known technologies like vaccines, therapeutic drugs and diagnostic products. A contract is signed with a big firm wherein normally a part of earning is contingent on partner earning profit. The success factors are market size of new drug, time of development.e.g. Actelion Pharmaceutical, Celltech group Inc.

Hybrid Model:It combines the product and technology business models. Technology platforms are combined with services and the creation of products. It can be used to balance quick generation of revenue vs. larger value creation.

E.g. Reliance Life Science, Wockhardt

Vertical Model: (control the entire value chain to maximize value)

The first biotech companies had this model. Being present in every part of the value chain, the requirement of funds is very large. Last stage set backs (just before pushing the product in the market) are particularly harmful. Thus they maximize value as well as risk. They can exist in two forms:

FIPCO: Fully Integrated Pharmaceutical Company Model

They are actually present at all parts of the value chain: research, develop, and produce as well as market. Hence they require large amount of capital. Big companies which launch many drugs at a time and already have a large market to tap in cash from can practice this model.

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VIPCO: Virtually Integrated Pharmaceutical Company Model

They are actually not present at all parts of the value chain but carry out functions under their brand either through in-house capabilities or outsource if they don’t have the capability. The model is office based with small no. of employees and management playing an important part.

[Position of various models]

Resource Based View:This approach helps in understanding how a company’s resources drive its performance in a dynamic competitive environment. RBV combines the internal analysis of the company with the external analysis of the industry. RBV approach views the resources as asset and capabilities which can be of the type physical, intangible or organizational capabilities. Using the strategic resources available at hand, a biotech company can create a sustainable competitive advantage for itself.

Test of inimitability – As most the products made using biotechnology are patented and also needed very capital intensive technology to produce, it is difficult to imitate them. Hence the profit stream with existing products could be sustainable.

Physical Uniqueness – The patents are protected by legal ways and cannot be imitated as such.Path Dependencies – Biotech products are manufactured after extensive research and development. Hence these cannot be imitated in a short span of time.

Brand Loyalty – Some of the biotech products are big brands and has a customer segment which trusts and follows it. Hence competing or replacing such a branded product is difficult.

Casual ambiguity – With the kind of R&D incurred while developing such products, it is not very easy to disentangle of how such a product would be produced and how to re-create it.

Test of Durability - The patents are generally valid for a period of 17 / 20 years. Hence once launched a biotech product can provide sustained streams of profits for a long period with almost no competition.

Test of substitutability – The potential impact of the substitute products is very low as they are protected by patent and copyright laws.

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In order to maintain the above competitive advantages out of these products a company needs to continuously invest in its resources. They will have to be upgraded on a timely basis.

PESTEL analysis for Biotechnology sector in India:

Political In the recent past the regulatory supervision is increasing and the Government taking many initiatives to boost the growth of this industry. In India, we have Department of Biotechnology which oversees the activities in this domain. In terms of the regulations and rules, Ministry of Environment and Forest (MoEF) is the leading regulatory body. We also have the DNA Safety Guidelines (1990) which governs the restrictions on the potential harmful effect of the products developed through biotechnology. There is a Biotechnology Patent Facilitating Cell (BPFC) in place which fosters the research in this field and protection of the same via patents.

Economic 100% FDI is allowed in the biotechnology industry and the investment opportunities in India are very promising. There are venture capital funds in line to support more capital investments needed for research and development. Also Technology Development Fund (TDF) is devised to channelize the funds needed. Government has put Income-tax relief on all the Research and Development Expenditure. Apart from this, there is Customs duty exemption on capital equipment, spares, accessories and consumables imported for R&D. Also the excise duty is exempted for the indigenous items for R& D.

Social India being agriculture dominated country there is a high demand for AgriBiotech products, health care products, biodiagonstics and vaccines.

TechnologicalThere are good Facilities available for extensive clinical trials and research needed for the biotech sector. Still the technology is not as advanced as in some western countries but is now developing faster. There is very rich human capital available which can be employed in this sector.

Legal There are many laws and acts made in order to ensure that the biotech products do not hamper the well-being of the human population. Some of the important ones are – Recombinant DNA Safety Guidelines, 1990, Seeds Policy Act (2002), Food Safety and Standards Act, 2006, Plant Quarantine Order, 2003.

EnvironmentalIn order to control the impact of the biotech products on the environment and nature, there are certain laws in place. The most important ones are – The Environment (Protection) Act, 1986, Bio Safety Regulations.

Porter’s 5 Forces Analysis for Biotechnology Industry

Threat of New Entrants - LOW

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There is a very high entry barrier as a large capital investment is required for the Research and development to develop new products and their enhancement. For Specialized products there is not much competition but the generic drugs are at a bigger risk.

Power of Suppliers - LOWThey have very less bargaining power with the manufacturers of the biotech based products. Also they have very low power of expanding across the value chain to attempt to grow vertically.

Power of Buyers – LOWThe individual customers do not have much power with them to choose among the products or to demand a certain product. While the large customers like labs and hospital are in a little better position with respect to the bargaining power. Threat of Substitutes – LOW The Threat of Generic drugs is low to medium. The power lies in the hands of the company due to the Patent Protection. But there is small but still existing possibility of illegally production of patent protected drugs in the black market.

Competitive Rivalry – MEDIUM to HIGHThere are few big players in the market. But the level of competition is very high. Hence it is very tough to make a differentiation mark or be a clear market leader in any segment in this market.The bio-technology industry is divided into the following 5 segments:

1. Bio-Pharma: dealing with products are therapeutic or preventative medicines that are derived from materials present in living organisms, using recombinant DNA technology

2. Bio-services include clinical research and CRO along with custom manufacturing3. Bio-agriculture deals with hybrid seeds, transgenic crops, bio-pesticides and bio-fertilizers4. Bio-industrial application predominantly comprises enzyme manufacturing and marketing

companies5. Bio-informatics deals with the creation and maintenance of extensive electronic databases on

various biological systems; it is the smallest part of the current domestic biotechnology industryBio-pharm is the primary contributor to the revenues in the biotech sector, followed by bio-services at a distant second position. In terms of exports too, the trend is the same.

Some of the major players in the industry are Biocon, Dr. Reddy’s Labs, Serum, Panacea Biotech etc. We’ll be discussing Dr. Reddy’s and Biocon in detail.

Dr. Reddy’s Laboratories:Dr. Reddy's Laboratories (Dr. Reddy’s) is an integrated global pharmaceutical company. Dr. Reddy’s is engaged in the production and distribution of finished dosage forms, active pharmaceutical ingredients and intermediates.

Products and Services:

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4. Biosimilars and differentiated formulations5. New Chemical Entities (NCEs)

1. Global Generics2. APIs 3. Custom Pharma-Services

It specializes mainly in the global generics manufacture, and has minor stakes in the Biotech domain, with research dedicated to NCEs and Biosimilars. It follows the pre-competitive discovery federation model, like Merck, Glaxo Smithkline etc. Contrary to BioCon’s vertically integrated FIPCO model, it plays in the early-stage drug developer domain in the Biotech industry.

Strategic Alliances and current strategy:

As in case of most of the Pharma and Biotech companies, Reddy’s has a well-planned merger and acquisition strategy in place. The following delineates the same:

Commercial Partnerships:

They have a strong commercial presence in some of the largest and fastest growing pharmaceutical markets such as the US, UK, Germany, India, Russia, CIS, Romania and Venezuela. They have successfully in-licensed, co-developed, and acquired products with various partners in the US.

Contract/ Outsourcing Services

The Custom Pharmaceutical Services business has partnered outsourcing needs of Pharma-players worldwide. CPS provides integrated services to our partners, including extensive Chemistry & Process R&D expertise (including steroids, cytotoxic and hormonal APIs etc.)

Product Development Partnerships

Dr. Reddy's vertically-integrated product development platform includes an R&D team of over 950 professionals that develop products across the entire pharmaceutical value chain – Active Pharmaceutical Ingredients, Branded/Generic Formulations, Specialty Pharmaceuticals, Biologics, and New Chemical Entities.

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1984Incorporated by Dr. K. Anil Reddy. Went international in 2 years

1987First FDA approval for Ibuprofen API. Formulations business started

2000 Dr. Reddy’s established to carry out its drug discovery programs,

2003Dr. Reddy’s launched Ibuprofen, first generic product to be marketed under the “Dr. Reddy’s” label in US.

2010-11entered into an agreement with Cipla for exclusive marketing rights of a portfolio of OTC and prescription products in the Russian and Ukraine markets.Also, completed the acquisition of GSK’s US oral penicillin facility and product portfolio

Their present strategy in Bio-pharma products and services revolves around the vision of “Meeting unmet medical needs”. Their proprietary products business comprises NCE research, Biologics and Differentiated Formulations. With a highly advanced and integrated R&D infrastructure, scientists with diverse functional expertise seek innovative solutions to medical needs in the therapeutic areas of metabolic diseases, anti-infective and inflammatory disease. Their scientific capabilities span a wide range of areas, such as medicinal chemistry, analytical chemistry, pharmacology, genomics, proteomics, molecular biology, microbiology, toxicology, formulation and clinical development.

Opportunities for the company:

Increasing presence in growing Biosimilar market although entry of international pharma companies will further intensify the competition

Acquisition of GSK’s facility could allow Dr. Reddy’s entry into the US Favorable trends in Indian contract manufacturing industry could drive Dr. Reddy’s growth.

Biocon:Biocon is an integrated healthcare company that provides biopharmaceutical solutions to the pharmaceutical companies. It is primarily engaged in the discovery, development and commercialization of drugs.

The Drug-value chain: BioCon follows a vertically integrated FIPCO model, providing goods and services catering to every part of the drug-value chain:

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1978Incorporated in Bangalore

1994Creation of Syngene International: outsorced R&D in the pharma segment

2000 Cliengene, India's first CRO established

2004IPO offering

2010 Revenues of USD 501 million Profits of USD 61 million Market Cap of USD 1.6 billion Among the world's largest producers of statins and immuno-suppressants

Products and

Services

Biological products

Formulations

Customized manufacturing services

Pharma-research services

APIs

BioCon: Strategies and alliances:

Emerging trends in the Biotechnology Industry in India:1. Foreign Investment:•Pharma sector has become very attractive after the Product Patent Regime •FDI up to 100 per cent is permitted through the automatic route for manufacturers of drugs and

pharmaceuticals 2. Pharma companies investing in Biotechnology •Pharma companies have so far leveraged their manufacturing and generics market capabilities,

but the introduction of product-patented molecules have forced them to upscale their R&D expenses; however the productivity has been on the lower side because of increase in the cost of producing NMEs (New molecular entities).

3. Mergers and Acquisitions •Knowledge sharing-based growth mainly through M&As •Instead of developing products from scratch, companies acquire mid-to late-stage pipeline

candidates to avoid huge investments •Joint Ventures: Novozymes with Bangalore-based Sea6 (short-term, Clinigene with Seattle-based

Pacific Bio-markers (long-term) 4. Emerging Opportunities •Vaccines and Bio-active therapeutic proteins: huge population, Indian expertise in stem-cell

research, cell-engineering etc. •Agriculture: Potential to produce transgenic rice and several genetically modified (GM) or

engineered vegetables and hybrid seeds •Clinical trials: Suitable Indian population for clinical trials because of its diverse gene pools,

which cover a large number of diseases .

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BIOCON - MYLAN: 2009BIOCON - AMYLIN: 2009SYNGENE- ENDO PHARMACEUTICALS: 2010

Research partnerships/collaborations

BIOCON- IATRICa, 2008BIOCON- NEOPHARMA: 2007

Strategic Co-development venture

BIOCON - PFIZER: 2012BIOCON-ABRAXIS: 2007

Marketing alliances and commercialization

BIOCON - ISB: 2009 BIOCON- DEAKIN UNIVERSITY: 2007

Collaborative Institutional Research

Clinigene is focusing on conducting intense patient PK/PD studies in oncology, cardiology and respiratory diseases

Clinigene and Syngene to offer integrated drug development solutions to Pharma and biotech

IT infrastructure: LIMS to be installed in bio- analytical laboratories; obtaining GLP

Greater importance in the research areas of New Drug Discovery

Clinical Development of existing pipeline of Bio- therapeutics

Strategic Collaborations for speed and cost competitiveness in Drug-Discovery

Continue to strengthen R&D capabilities in the area of New Biotherapeutics

Exhibits:

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Fig. 1: Indian Biotech Sector Break-up (Revenues)

Source: IBEF report on Indian Biotechnology Industry

Fig. 2: Indian Biotech Sector Growth Rate (Revenues)

Source: IBEF report on Indian Biotechnology Industry

Fig. 3: Biotech segment Growth Rates (Revenues)

Source: IBEF report on Indian Biotechnology Industry

Fig. 4: Biotech segment Exports (%)

Source: IBEF report on Indian Biotechnology Industry

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Fig.5: Biotech sector expenditure allocation (USD mn)

Source: Department of Biotechnology Report

Fig.6: Biocon performance

Source: Biocon Annual Report Report

Fig.7: Indian Pharma industry’s R&D expense(USD mn)

Source: CRISIL Research

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Fig.9: Pharma Value Chain Fig.10: Biotech Value Chain (Biocon case)

Fig.11: Regulation in India: Biotech Sector

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Fig.12: Global Pharmaceutical Sales

Fig.14: Pharma vs Biotech Industry growth rates

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Fig.15: Biotechnology Industry Life cycle: A schematic diagram representing typical Growth cycle stages on an organization. A nonbiotech company (blue line) has a shorter birth stage, while a biotech company (black line) has a much longer growth stage due to various hurdles as discussed in the text. After maturity stage, an organization can either decline to death or it may rebirth (red line) as a result of M&A or floats

Source: Implication of life cycle theory in biotechnology industry

Uru Malik and Damian Hine

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Re

References:E & Y: Beyond Borders, Global Biotechnology Report 2011Journal of Commercial Biotechnology: Business Model and Investment trends in Biotech industry in Europe, Jane Frisken and James RutherfordPWC, Pharmaceutical and Life Science: Biotech reinvented: Where do you go from there?Biotechnology Business Model: An Indian Perspective, Viren KondeNature America Inc.: Business Models in BiotechReport on Biotechnology Sector – IBEF, November 2011Official websites of Biocon and Dr. Reddy’s“Implication of life cycle theory in biotechnology industry “- Uru Malik and Damian HineIndian Pharmaceutical Sector – CRISIL Research (Crisil.com)Indian Pharma 2015 – Unlocking the Potential of the Indian Pharmaceutical Market – McKinsey ReportPharmaceuticals & Biotech Industry Global Report — 2011 – IMAP Healthcare Report

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