Biotechnology Business Models: An Indian Perspective

Abstract

A typical business model consists of three components – value proposition, value chain structure and revenue generation. These components are used to give a general description of a business. The biotechnology industry is not really characterized by specific business models and neither is there one single model for success. The sector is not only characterized by an enormous diversity, but is also driven by innovations, which makes the prediction of future development rather difficult. The enormous flexibility of biotechnologycompanies is a strength that has helped them survive in times of economic difficulties. In years of crisis, companies have managed to reorient themselves, change their business plans, or even switch markets. Several Indian firms have focused their businesses on the development, manufacturing and marketing of biopharmaceuticals and providing services. The Indian companies appear well positioned to leverage their cost-effective manufacturing capabilities to corner some of the market share and compete on a global scale. This paper discusses the various business models and strategies adopted by the biotechnology companies that directed the growth of the biotechnology industry in the country based on the techno-economic dynamics and the key challenges faced by these firms.

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Biotechnology Regulations in India: Progress-so-far

India’s biotechnology regulatory system has experienced a number of changes since the Rules for the Manufacture, Use, Import, Export and Storage of Hazardous Microorganisms/Genetically Engineered Organisms or Cells 1989 (Rules, 1989) were first notified under the Environment (Protection) Act, 1986, including the elaboration of aseries of guidance documents published by the Department of Biotechnology (DBT) in 1990, 1998 and 1999. The extraordinary growth of the Indian biotechnology sector has significant implications for policy in the area of regulation, and two specific reports were commissioned by the Ministry of Agriculture and the Ministry of Environment and Forests to evaluate the regulatory framework for products of agricultural biotechnology and recombinant pharmaceuticals, respectively.

The 2004 Report of the Task Force on the Application of Agricultural Biotechnology chaired by Prof. M.S. Swaminathan recommended the establishment of an “autonomous, statutory and professionally-led National Biotechnology Regulatory Authority” (NBRA) that would have “two separate wings – one dealing with food and agricultural biotechnology, and the other with medical and pharmaceutical biotechnology.” The Report recommended that the “NBRA is essential for generating the necessary public, political, professional and commercial confidence in the science based regulatory mechanism in place in the country.”

The 2005 Report of the Task Force on Recombinant Pharma chaired by Dr. R.A. Mashelkar similarly supported the establishment of a National Biotechnology Regulatory Authority/Commission “providing a professionally managed single window mechanism for giving various clearances including biosafety issues.” A model for the NBRA was proposed that “would comprise of four wings namely: a) Agricultural products / Transgenic Crops; b) Pharmaceutical/ Drugs and Industrial Products; c) Transgenic Foods/Feed; and d) Transgenic Animals/ Aquaculture” and that “alternate models of how a National Biotechnology Regulatory Authority can be created also needs to be examined.” The Mashelkar Report additionally provided a series of recommendations to streamline the existing regulatory system for recombinant pharmaceuticals until the feasibility of establishing a NBRA could be evaluated.

In 2005, DBT published a draft National Biotechnology Development Strategy which elaborated a ten year vision for the future of biotechnology in India. Key policy recommendations and approaches to implement these were established through a process of multi-stakeholder consultations that focused on cross-cutting issues of relevance to allsub-sectors of the biotechnology community. Under the topic of regulatory mechanisms, the National Biotechnology Strategy recommended “a competent single National Biotechnology Regulatory Authority be established with separate divisions for agriculture products/transgenic crops, pharmaceuticals/drugs and industrial products; and transgenic food/feed and transgenic animal/aqua culture. The authority is to be governed by an independent administrative structure with common chairman. The inter-ministerial group will evolve suitable proposals for consideration of the government.”

The National Biotechnology Development Strategy was approved by the Government of India in November, 2007 after a two year consultation period with multiple stakeholders including concerned ministries, universities, research institutes, private sector, civil society, consumer groups, non-government and voluntary organizations and international bodies. As regards the regulation of biotechnology, the Strategy states that the NBRA will be established as an “independent, autonomous and professionally led body to provide a single window mechanism for biosafety clearance of genetically modified products and processes”. DBT has been given the responsibility to set up the NBRA and until such time as the NBRA is fully functional, biotechnology regulation will continue under the existing regulatory framework.

The NBRA will be an independent, autonomous, statutory agency established by the Government of India to safeguard the health and safety of the people of India and to protect the environment by identifying risks posed by, or as a result of, modern biotechnology, and managing those risks through regulating the safe development and deployment of biotechnology products and processes. GM foods are regulated by the Food Safety and Standards Authority under the Food Safety and Standards Act, 2006 (FSSA, 2006). Product safety, efficacy, clinical trials and market authorization of recombinant drugs are regulated by the Drug Controller General of India (DCGI) under the authority of the Drugs and Cosmetics Rules 1945 (Rules, 1945) of the Drugs and Cosmetic Act 1940. The NBRA would be responsible for the GM food safety assessment and any subsequent authorization of the GM food as safe, all other rules and regulations that pertain to food (e.g., conventional safety provisions related to adulterants, extraneous matter and unhygienic/unsanitary processing or manufacturing of food) would still apply to the GM food as regulated by the FSSA and any other authority in India. The NBRA will also be responsible for regulating genetically modified organisms with applications in human and veterinary health and a sub-set of products derived from these. This will include the regulation of recombinant biologics such as DNA vaccines, recombinant gene therapy products, recombinant and transgenic plasma derived products like clotting factors, and veterinary biologics but will exclude all other therapeutic proteins derived from recombinant organisms, which will continue to be regulated by the DCGI.

In order to establish and empower the NBRA, DBT is considering promulgating new legislation, “National Biotechnology Regulatory Act (NBR Act)”. Elements of biotechnology regulation are currently spread over multiple acts and some of these would be amended to establish and operate the NBRA. Drafting new legislation would provide an opportunity to consolidate and enhance the efficiency and effectiveness of biotechnology regulation, increase collaboration with state governments in this area, promote public confidence in the regulatory system, and facilitate international trade.

Biotechnology Business Models: Snapshot

Biotechnology companies definitely need a business plan to convey the winning idea while being coherent, comprehensive, rational and defensible. Many new biotechnology companies have learnt the importance of business models and sophisticated business plans the hard way. A typical business model consists of three components – value proposition, value chain structure and revenue generation. These components are used to give a general description of a business. The biotechnology industry is not really characterized by specific business models and neither is there one single model for success. The sector is not only characterized by an enormous diversity, but is also driven by innovations, which makes the prediction of future development rather difficult. The enormous flexibility of biotechnology companies is a strength that has helped them survive in times of economic difficulties. In years of crisis, companies have managed to reorient themselves, change their business plans or even switch market. Business models have to be continuously adapted to internal and external conditions. This means in practice, companies occasionally follow one particular business model in preference to others in order to adapt to prevailing financing mechanisms as well as to changing market demands.

On the road to success, many biotechnology companies have adopted several different business models in order to be able to successfully operate under national and international conditions. Although business models in the biotechnology sector are not homogeneous, they are roughly divided into the Platform, Product, Vertical, and Hybrid models based on the value chain structure of the biotechnology industry. Typically, the Platform-based companies develop a set of tools or integrated technologies and provide these for use in different applications. One advantage of this business model is that revenue is generated relatively quickly. In addition, cost and time-savings are made in relation to product approval. The Product or drug developing companies offer products manufactured with new, own or already known technologies. This includes classical items like drugs and diagnostic products, but also new groups such as tissue engineering products. In FIPCO (fully integrated pharmaceutical company) or Vertical business model, the drugs are developed up to end of clinical studies or up to approval, meaning that the creation of value is pursued as far as possible. On the other hand, VIPCOs (virtually integrated pharmaceutical companies) only have a small number of employees that are focused on a specific area; other business areas are outsourced to external partners. It is simply an office-based company, dealing exclusively with project management and outsourcing all steps along the practical value creation work, from ADME tests (absorption, disposition, metabolism and elimination) to animal experiments and clinical studies. Contract research or service companies offer their services on the basis of known technologies, in the form of contract research or contract production. The combination of these business models leads to what is known as ‘hybrid or dual models’ in which technology platforms are combined with services and the creation of products.

The entrance of domestically manufactured products into the marketplace and the local competition has benefited Indian citizens in terms of price reduction from that of the imported products. Looks like, Indian companies appear well positioned to leverage their cost-effective manufacturing capabilities to corner some of the market share and compete on a global scale. Several Indian firms have focused their businesses on the development, manufacturing and marketing of biopharmaceuticals and providing services. Multinational companies have already established a presence in India in areas such as equity participation, contract manufacturing, research relationships, joint product development, commercialization and manufacturing relationships, and product/technology in-licensing and out-licensing. In the context of the size and growth of the current Indian biotechnology market in relation to the global markets, it is clear that India promises great potential to become one of the most significant players on the global arena by 2010. However, the product development capabilities of India's nascent biotechnology sector and the strategies used by private firms to survive and grow are among the innumerable challenges related to operating in a developing world’s context. The Indian biotechnology industry like its global counterparts is dominated by the healthcare sector having its roots in the pharmaceutical industry. The important characteristics of Indian biotechnology business lies in examining their evolution, structure and growth based on their products, technologies and the services provided by them. Though there has been a slow transition to Product model by Indian biotechnology companies, India is still a generic market. To achieve global presence, Indian firms need to have product focus and should come up with blockbuster drugs. In conclusion, there exist boundless opportunities for pharmaceutical and biotechnology firms to find innovative ways of working together by leveraging the committed government support in terms of public-private partnerships.

The article on 'Biotechnology business models: An Indian Perspective' accepted by the Journal of Commercial Biotechnology, is available online at: http://www.palgrave-journals.com/jcb/journal/vaop/ncurrent/abs/jcb200852a.html.

Drug Pricing Strategies in India

1. Cost-based pricing:

The Indian cabinet ministry proposed to control the prices of 354 essential medicines by taking into account their cost of production. Today 1/4^th of Rs. 23,000 crores domestic pharma market is controlled. The ministry has not accepted the industry’s offer to lower the current prices of essential drugs by 5-10%, because the revised policy will prevent companies escaping price control by adding new ingredients to drugs and going out of the essential drugs list. Without such measures, drug makers may add vitamins and other unnecessary components, leading to risky irrational combinations besides defeating the purpose of price control.

The essential therapeutic drugs constitute the painkillers, antibiotics, psychotic drugs, cancer and HIV drugs. The companies making essential drugs are given 150% margin of production cost, whereas price controlled drugs are given 100% margin for the post manufacturing expenses.

2. Value-based pricing:

Biotech industry has been accused of the excessive prices that have been emphasized on the cost of R & D, years of lab and clinical trials, innumerable failures for each successful product and imperative to reward investor’s high risks with commensurately high rewards.

Cost-based justification of high biotech drug prices is based on 2 nontrivial problems. 1) Biotech companies do not base prices on the cost. 2) The industry is beginning to realize that it does not want public to think that the prices are based on the cost.

The price for new product must cover the incremental expenditures on manufacturing and marketing but there is no logic to quantify past expenditures on R & D. Rather, prices are based on what the market will bear. These prices may or may not reimburse past efforts and investments, but their social purpose is to encourage future efforts and future investments. The prices for today’s products finance research for tomorrow’s products either directly through the retained earnings of biotech firms or indirectly by enriching investors who remain attached to the sector rather than moving their money elsewhere.

So, biotech companies now promote the language of ‘value-based pricing’ for their products; which offers the virtue of honesty. With this, we need face these questions: How to define value in healthcare, how do we measure it? Or is it only about value and not cost.

The link between innovation and market-based pricing: Innovation in the biotech industry is created and driven by multiple factors: the existing market-based pricing, size of the biopharma companies’ R & D budget, level of venture capital investment and level of government intervention in market. The recent history has shown that threat of price control drives investors out and dries up the resources those researchers must have to develop tomorrow’s medical miracles.

Price Control of Biotech Drugs: Potential Impact on the Biopharma Industry

Life saving, less expensive biotech drugs, isn’t a good deal for consumers?

The large public outcry or critics about the biopharmaceutical drugs are very expensive and that the biopharma industry is so greedy in making profits. The prices are so high because of the labour intensive, long term process involved, from the hypothesis that a drug might work to actually getting it through the testing and approval and getting it on the market. It takes a lot of money to do that, and of course the drug companies do make a lot of money, but it’s a win-win situation, where they make a lot of money and we get these fantastic life saving drugs. The advancements that are being made are absolutely astonishing. Do we really want to kill the goose that lays golden eggs by putting in price controls? There has to be some incentives for the investors and the biopharmaceutical companies. Again, although a good idea, the drug companies invest so heavily on bringing a drug to market, ideally the market forces should dominate or decide the price of the drug.

Drug importation is a major obstacle. People buy drugs on the internet, from overseas to get it in low prices. These drugs are sold under the international treaty to price control countries with low prices. They are not supposed to be sent it back to the original countries from where they are innovated. Thus, buying drugs overseas introduces price control into the original country, which is undesirable.

Government should stay away from any issue concerning the price control of drugs. The biopharma industry needs to be innovative, creative, energetic and astonishing. A great deal of excited anticipation is required as to what kind of drugs will be coming up in the future. This is only possible, if the biopharma industry can operate in an environment where they can be profit incentive. Thus, Government control of science or negotiating Government purchase of drugs does not guarantee or encourage creating innovative drugs.

When we talk about price control, we are taking the oxygen out of the system. That might not worth the investment and that might stop breathing. Look around and ask a question, how many countries that have the price control system in place have actually innovated new drugs, and the answer is ‘basically almost none’.

Unlike Unites States, many developed countries like Canada or England or much of the Europe have price control systems for drugs. Let us not overlook the fact that more than 90-95 percent drugs are innovated in U.S. compared to the rest of the world comprising price control countries. The price controls presents a major disincentive to create a new medication.

With the Government’s intervention, if the health insurance companies like Medicare negotiates the drug prices with the biopharma industry? It’s a very bad idea. That would create a monopoly but in reverse. Basically, that would allow the largest purchaser of drugs to negotiate the prices with the sellers. This will force down the price of drugs. Although, initially sounds like a good deal to consumers, ultimately would create disincentives to drug companies to actually invest in innovative drugs.

Some might argue that, the Government agencies like research institutions are actively involved in discovering new molecular entities that are later licensed to biopharma companies. There is a huge difference in investing, marketing and profiting new approved drugs verses the basic research. In contrast, the pharma companies actually create the pharmaceutical product drug. The venture capitalists need to get repaid too for their efforts and contribution, don’t you think so?