In such a dynamic environment, are there any overarching future trends? At the risk of crystal ball gazing, we hypothesize that four trends relevant to pharmaceutical research should play out over the next ten years or so. In no particular order of importance, these are:
• a significant increase in required R&D spend of industry incumbents to develop nascent technologies, resulting in increasing focus on novel ways of containing R&D cost
• a greater chance of success and long-term value creation for players concentrating on downstream (closer to actual drug discovery and development, farther away from target identification) product-based research
• the global harmonization of IP laws; and
• increased focus on research collaborations between international companies.These trends and their implications for the fledgling Indian biotechnology industry are described below.
First, industry incumbents will need to increase significantly (in many cases, to double) their R&D spend to keep pace with new technologies. In a recent McKinsey article, Phillip Ma reported that “ [while]…the new biology has accelerated the pace of discovery of new targets…a fair degree of immaturity still characterizes many of the technologies… required to translate that into new drugs.” Development of these technologies will require significant incremental investments and effort from industry incumbents, academia and entrepreneurs at least for the next five years, and perhaps even ten years. As a result, global pharmaceutical spend on research, which grew from $7.6 billion in 1990 to $21.5 billion in 2000 (at a CAGR of nearly 11 percent), will likely continue or exceed that pace of growth for the next five to ten years. In addition, incumbents are also facing other pressures on their R&D spend. Incumbents will therefore look for more novels ways to contain their costs-to try to “do more with less.”
Second, among the industry players, there is likely to be a greater chance of success and long-term value creation for players concentrating on downstream product-based research. To explain what that means, it is important to understand two types of segmentation occurring in the industry today.
One type of segmentation relates to whether a company actually discovers drugs (a product-based play) or whether it develops tools and services that assist in drug discovery (a tool/service play). The other type of segmentation relates to whether a company conducts its product or tool activities upstream or downstream. This is where upstream research involves target identification (that is, determining whether a gene or protein causes disease and whether something can be done about it to cure that disease) and downstream research involves lead identification and validation for identified targets (determining how best to cure the disease-either through a chemical or a biological molecule or even via novel stem-cell therapy, and so on).
For these segmentations, our recent research has indicated the somewhat simplistic finding that downstream, product-based plays are likely to create more value going forward.
Third, there is likely to be increased harmony of global intellectual property laws, regulations, and quality. This is driven by the acceptance of WTO by a larger number of countries. By 2010, very few countries besides sub-Saharan Africa will be unregulated and all of the major markets will adhere to similar norms of IP and quality. This will allow easier collaboration across borders and greater homogenization of markets. Finally, research collaborations will go up significantly.
Companies have already expanded the degree of external alliances that they use to conduct research - this will further extend to countries across the world.
Opportunities for the nascent Indian biotechnology sector
Although Indian companies have historically adopted a manufacturing-intensive model, several companies have emerged in the last five years that are playing in other areas of the bio-pharmaceutical value chain. Going forward, most of the trends mentioned above are likely to have a positive impact in this fledgling sector. For example, the need for the development of new technologies will drive existing companies in the U.S. and Europe to work with whoever has the best technology or solution or discovery that can help them - regardless of the geographical location of the company. This will be further enforced by a trend for greater collaborations, the harmonization of IP laws, and a need for lower cost research. Therefore, we see an emerging series of positively enforcing drivers that should support biotechnology startups that tap India's talent-provided the startup is conducting cutting-edge work at low cost and adheres to the strictest IP norms.
Of course, the foundation on which all this is built is talent, and to a lesser extent the availability of clinical samples and homogenous gene pools. There are numerous examples of this already starting to happen. Dr. Reddy's Laboratories, although not a biotech startup per se, is conducting cutting-edge research in the discovery of small, chemistry-based molecules focused in the areas of diabetes, oncology, cardiovascular, anti-infectives, and pain. Utilizing a high-quality, highly entrepreneurial scientific team of about 200 people, they have already discovered and licensed three novel molecules to Novo Nordisk and Novartis for very lucrative up-front payments, milestones, and royalties. In fact, one of the molecules licensed to Novo Nordisk for diabetes (Ragaglitazone of NN622) is in Phase III trials and has a good chance of becoming the first molecule of Indian origin to be globally launched! They are believed to have at least 10 to 15 other molecules in their early stage pipeline - a pipeline that would be the envy of most biotech companies in the U.S. with research budgets that are generally an order of magnitude higher.
Similarly, there are other examples of companies tasting success in chemistry research (e.g. gvk biosciences and Aurigene Technologies), bioinformatics (Jubilant BioSys, Strand Genomics), clinical trials (Biocon), and manufacturing (Bharat, Shanta). To take another example, Jubilant BioSys is a new bioinformatics startup that has found a niche within this tough area. Starting less than a year ago, they have put together a team of almost 100 bioinformaticians, nearly a quarter of whom are PhDs and many more have advanced degrees in biology, chemistry, computer science or management. They are rapidly establishing a reputation in the curation and annotation of biological and chemical databases. For example, they have created a database with over 30,000 entries of patented molecules known to bind to kinases. This was painstakingly created by manually sifting through scientific literature and recording the information in a proprietary database. The uniqueness that Jubilant—and, perhaps, any fast-moving Indian company—can bring to bear, is the ability to tackle a meaningful scientific problem using high-quality, low-cost talent and relying on the increasing willingness of pharmaceutical companies to become customers because of obvious quality and cost advantages.
A recent McKinsey study tried to quantify the future impact of these well-observed trends. Our estimate was that in research services alone (that is, not including de novo research or clinical trials), Indian startups have the potential to capture between 5 and 15 per cent of the global outsourcing spend in selected areas like bioinformatics, structure-based drug design and synthetic/medical chemistry. This would result in profitable revenues of $2.6-2.7 billion by 2010. In fact, in addition to these numbers that reflect revenues through alliances and high-value outsourcing, the even more exciting areas of downstream de novo chemistry and biotechnology research would generate more intangible value in terms of IP creation.
Business models - sink or swim?
But the situation is not all good. Several very significant technical, governmental, and cultural challenges remain that threaten to derail the opportunity even before it takes off.
First, the jury is still out on whether Indian companies (with a few notable exceptions) can truly innovate. This uncertainty is fueled both by a perceived lack of the highest-quality scientific talent ("Aren't the best Indian scientists working at Merck and Pfizer, Harvard and Yale? Why should they join an Indian startup?") as well as the perception that Indian startups may not be able to develop scientific project management of the highest order. It is a fact that nearly a dozen Indian companies have expressed a desire to discover new molecules-three or four have actually tasted success. Moreover, Indian institutions have pockets of excellence but have stopped short of developing true scale and size in applied scientific knowledge as, for example, Israel's Weizmann Institute has achieved. They are also not known for seamless industry-academia collaborations, although several recent examples are promising (Strand Genomics was incubated by scientists from IISc, while the Center for Biotechnology in Delhi has been collaborating with GenoMed, a genomics startup incubated by Nicholas Piramal).
Second, the Indian government's attitude toward IP—buoyed by strong lobbyists—is, at best, ambivalent. The most recent drug policy, while nominally in support of IP, ended up so watered-down that it satisfied no one. This does not inspire confidence among potential alliance partners in the U.S., many of whom already carry 30 years of resentment due to Indian companies' reverse engineering practices. IP protection is inevitable and essential for value creation in Indian pharmaceuticals going forward. In that light, what is required is an unambiguous, visionary policy for the Indian government, followed by active lobbying and brand building designed to put to rest any residual fears that global pharmaceutical players may have.
Third, there are some crucial cultural obstacles. Silicon Valley entrepreneurs will recognize this best: startups require independence, money, patience, employee dedication, and an unremitting will-to-succeed. Many startups in India are incubated by capital sourced from industrialists or financial institutions which stifle the fostering of these all-important traits of a promising startup. Angel investors, who may elicit a more “silicon-startup” mentality, have been shy in picking Indian biotech as an investment area. Employees often do not own a share in the company and view it as just another job.
Can Indian companies successfully overcome significant barriers and thereby capture the tremendous value latent in the drug discovery arena? Can this become the next big wave of growth for international-Indian entrepreneurs, especially during a time of recession? We are cautiously optimistic that at least the wind is blowing in the right direction-the challenge will be for biotech startups to ensure that they align their sails carefully right from the start.
