The biotechnology market in India consists of agricultural biotechnology, industrial biotechnology, bioinformatics, biopharmaceuticals and biotechnology related services, with the last two being the main pillars of growth.

Biopharma leading the pack.

The biopharma sector leads the pack having generated 70% of the total industry’s revenue. Domestic firms dominate this sector, accounting for fourteen of the top twenty firms.

The biopharma sector is comprised of 130 companies involved mainly in the production of vaccines, therapeutic drugs, animal biologicals, statins and diagnostics. Vaccine production is the most profitable, with five of the top ten companies in the biopharma segment dealing primarily in vaccines.

Interestingly enough, even though there is a large domestic market for such products, the Indian biopharma sector is export-driven, with exports accounting for more then 58% of revenue in 2006.

Bioservice is another fast-rising segment in the Indian biotechnology industry, recording a growth of 70% in revenues in 2005-06. Bioservices mainly include clinical research and contract research organizations (CRO) and to some extent, custom manufacturing. There are 70 companies in the sector offering services in areas such as data management, clinical trials, site management, bio-equivalence, toxicity studies and knowledge process outsourcing for pharmaceutical companies.

Nascent attractiveness

The Indian biotechnology industry has become an attractive destination for foreign companies largely due to the increasing amount of governmental support. The budgetary allocation to the department of biotechnology has tripled in the last five years. The department’s budget is forecasted to increase further, as the biotechnology industry is expected to help India achieve an average growth rate of 9% during its current 11th five year country plan.

The Indian Government plans to follow the American biotechnology industry model, where governmental investment only accounts for 20% of the industry’s total funding. Hence, the government has come out with a list of incentives to attract foreign direct investment into the biotechnology industry. These incentives include a 150% weighted tax deduction on R&D expenditure; a three-year excise duty waiver on patented products; and 100% foreign equity investments in the manufacturing of all drugs (except recombinant DNA products and cell targeted therapies).

Currently the top three biotech hubs are located in Bangalore, Hyderabad and Pune. Bangalore today is the most popular choice for most biotech companies due to its highly developed infrastructure and networking options. More than half of biotech firms based in India can be found in and around Bangalore. Leveraging on a well-trained talent-pool, MNC’s such as Novo Nordisk and Reametrix have set up operations there. Indian Department of Biotechnology’s budget increases threefold over last five years.

India’s scientific knowledge pool stands at 3 million graduates, 700,000 post-graduates and 1,500 PhD’s. A comparison of several countries shows that these numbers are increasing in India annually at a faster rate than in other countries. India is estimated to add 690,000 graduates annually which is significantly higher than in China, Japan, the United States, or Europe.

Key Indian opportunities for outsourcing are available in bio-processing, drug discovery and in clinical research. The cost differential for drug discovery between the United States and India is around 75%. In India, a drug discovery process may be around USD 200 million in versus USD 800 million in the US. India has now become a key destination for outsourced biotechnology R&D. Clinical trials cost 30% less to carry out in India than in Australia and about 50% less than in the US.

On average for 2005, the starting annual salary for an Indian PhD biotechnology scientist in India with no experience was USD 15,000, whereas a counterpart in the United States or Singapore would cost around USD 80,000 and 64,000 respectively. However, the growing demand for talent against a short supply is increasing India’s labor costs. As a result, any cost advantage is dwindling fast.

Usual suspects

There are several complications that may arise as a result of operating in India. These include operational disruptions caused by worker disputes, interrupted power supplies, and antiquated transport infrastructure in many regions. Also animal rights activists, religious and cultural barriers may disrupt operations given the Indian reverence for certain animals such as cows, monkeys and snakes.

The main problems that foreign investors face include the presence of bureaucracy, corruption, the lack of precise ethical regulations and inadequate intellectual property (IP) protection and enforcement. The Indian biotechnology sector is governed by five central ministries and six state ministries which have created lot of red tape complications when it comes to ruling decisions and new product launches. A new product launch, for example, has to clear not only the district and state ministries but by also several national regulatory bodies.

Finally, there is a lack of IP protections to guard against corporate theft and copycats. In the past, many Indian biotech firms faced theft either from their employees, running away with vital product data, or by the hacking of their databases by external parties. In an industry where a single product can spell success, stolen ideas translate to millions of dollars. Although India has a proper English-based legal system, many employers are unwilling to take their employees to court due to the slow judiciary process. India has begun to tackle its copyright troubles with recent changes in intellectual property regulations. For example, there has been a restructuring of patent laws to focus on product protection rather than only process protection. This allows companies to patent their final product and as well as the processes that lead up to that product. This reduces the opportunity for copying and is the right start in the improvement of IP regulations in India.

Conclusion: Ignore India at your own risk

India’s biotechnology industry is on a roll. It has already a strong global presence, producing the fourth largest volume of products in the world. Revenues could increase to a formidable USD 25 billion by 2015. India’s vast pool of skilled manpower, huge patient base and relatively low costs drives many global biotech giants to partner, acquire or outsource to Indian companies. Likewise, some of the larger Indian companies have even begun acquiring foreign entities in the Unites States and Europe, to retail their products and expand product offerings.

The success of Indian companies in reducing the prices of drugs, has made most multinationals realize that it is now impossible to ignore India. A good illustration: Hyderabad-based Shantha Biotechnics, which offers a combination vaccine for Hepatitis-B for USD 2 per dose versus USD 5 per dose by MNC’s such as Chiron.

Major improvements are needed for India’s biotech industry to surge. First, there needs to be more protection and enforcement of intellectual property rights. Secondly, regulations to control the testing of products on unsuspecting patients need to be put in place. Lastly, the government needs to streamline all of the biotechnology activities under one body, to simplify proceedings and to create some transparency for investors in the industry.

Ivy Teh
Managing Director, Clearstate

The Chinese biotechnology industry offers immense potential for global companies due to its vast market place, low-cost pool of professional talents and extensive research and development infrastructure. In 2003, the Chinese biotech market was valued at USD 3 billion and is projected to reach USD 9 billion by 2010, growing at a CAGR of about 17%. The industry is one of the key areas for China’s high-tech competitiveness and is expected to account for around 7-8% of GDP by 2020. According to the Chinese Academy of Sciences (CAS) China is likely to become one of the top five countries in the world in terms of scale of biotechnology industry by 2020. The biotechnology market in China consists of agricultural biotechnology, biopharmaceutical, industrial biotechnology, biological resources technology, and environmental biotechnology – with agricultural and biopharmaceutical segments being the prime drivers of growth.

Bio-pharma and Agri-biotech leading growth

The biopharmaceutical industry, aided by strong government support, active efforts of biopharmaceutical companies, and a growing demand for prescription drugs, is a key contributor to the overall development of China’s biotech industry. In 2004-05, the Chinese biopharmaceutical market grew by 30.2%, accounting for 7.5% to the total pharmaceutical sales in the country and 7% of total global sales. Even though, China’s biopharmaceutical industry is still considered rather small in global scale, its rapid growth is poised to continue. Currently, China is home to more than 400 biopharmaceutical
companies as well as fast becoming one of the key outsourcing hubs for the sector in the world.

Agricultural biotechnology is the other key growth segment. China is second after the US in terms of investment in agricultural biotechnology and is continually increasing its investment in research and development in this sector. Currently, Agricultural biotechnology accounts for nearly 42% of the total government spend on biotechnology and about 37% of the total biotechnology market value. Growth in agricultural biotechnology will be fuelled by the increased need for food grains, with China expected to increase grain yield per hectare by 50-60% to cater to an increasing population. Rice, wheat, corn, cotton, soybean and canola crops are the main commodities expected to be genetically modified by 2010.

Government support creates flourishing environment for domestic players

China has been aggressively investing in biotechnology. Over the period 2001-05, the annual government investments increased significantly by 400% (CAGR of 200%) from USD 100 million in 2001 to USD 1.2 billion by 2005. This figure is expected to reach USD 8.8 billion in 2010 as the government intends to transform China into one of the leading biotechnology player in the world. According to the “2006-2020 National Medium and Long-term S&T Development Plan”, the government is expected to invest USD 111.8 billion or 2.5% of expected GDP, into overall research and development (all sectors) by 2020, with the development of biotechnology being considered the top priority over other industries.

China currently has around 2,500 modern biotechnology companies, more than 20 biotechnology parks located in Beijing, Shanghai and Guangzhou, and major research and development centers in Beijing, Shanghai, Xi’an, Tianjin and Nanjing. In addition, favorable policies related to taxes, finance, human resource have also created a favorable environment for the industry stakeholders as well as potential investors. In the future, the government is expected to encourage biotech companies to increase their capabilities for original innovations. China’s biotech companies are still largely generic manufacturers.

Howeverthis situation is changing as companies are becoming more active in innovating to compete in the global arena. The government is expected to strongly encourage this trend by taking serious measures to address IP shortcomings in accordance to TRIPS (Trade-related Aspects of Intellectual Property Rights) and to undergo various regulatory reforms in its healthcare system, product approval, pricing and taxation policies.

Cost arbitrage attracts foreign investors

China is a highly attractive market for international biotech companies keen to leverage on its low cost set up for manufacturing units and R&D, its large pool of low cost professionals, and a relaxed regulatory environment. International
companies (such as DuPont, Invitrogen Corp., Dragon Pharmaceuticals Inc, and GeneMedix plc) typically enter this market through joint ventures with local firms, setting up manufacturing bases in China, or outsourcing R&D to local firms. Till the end of 2005, China had about 750 R&D centers supported by foreign capital in the form of joint ventures.

Bridge Pharmaceutical Inc. which opened a research centre in 2006 employing 200 people, cited that its drug development cost is around 80% lower in China as compared to the US. Large international pharmaceutical companies like Novartis and Pfizer have also established research facilities in China primarily because of its low cost research talent pool, with the cost of research scientists estimated to be 5-10 times lower than in the US. However, the scope for outsourcing business in the biotech sector to China is still huge with global firms outsourcing less than 5% of their total requirement to China.

China trailing India?

While China is expected to dominate the global markets in the future, it is expected to face challenges from other Asian countries such as Singapore, Taiwan, Korea and India. Amongst these, India with its highly qualified researchers and vast market is expected to give China a run for its money.

India offers a huge market for biotech products and has advantages of low-cost technology (for clinical trials, R&D, molecule synthesis), reasonable cost scientists and researchers, a network of bioscience centres, and a strong IT infrastructure. The biotech work outsourced to India is in the form of contract research, clinical research, and research process outsourcing, which started in 2004. As China has focused on agriculture biotech products (BT cotton, rice crops), biotech protein drugs, and traditional Chinese medicine, India has achieved success in areas of enzymes, vaccines (recombinant Hepatitis B), diagnostics, and veterinary products (animal health products).

Both the Indian and Chinese governments are determined to build this sector and have put in place various investment-friendly measures to encourage growth. While the Indian government offers 150% weighted average tax deduction of R&D expenditure for recognized R&D facilities, the Chinese government provides biotech firms with around 2 year tax exemptions on profitability. This is followed by a 50% rebate on enterprise tax for the next 3 years which is usually extended for another 3 years. However, both countries are considered to be handicapped by poor IP laws. While India is perceived to have started improving its IP laws, China still lags behind. The Indian government has recently shifted its patent regime from a process based patent regime to a product based patent regime.

As both countries receive substantial attention from foreign players and have gained experience in various fields of biotechnology, there is a substantial potential for co-operation between them. For example, India can utilize the benefits of a relaxed regulatory environment in China for animal testing. Chinese companies on the other hand, can utilize the data management services of Indian companies to comply with international standards such as good manufacturing practices and good laboratory practices.

Lack of startups funding hurts growth

The biotech industry is comprised of government funded research centers, dominant domestic and international players, and small private companies established mainly by researchers who have returned from abroad. Typically, angel investors or venture capitalists that initially finance these smaller companies do not have a proper exit strategy to enter the capital markets resulting in a financial crunch in the later stages. Additionally, some of these firms are not financially prepared to raise funds through foreign capital markets where they have to adhere to international regulations such as the Sarbanes Oxley act, which in itself is an expensive process.

However, these companies can consider a mix of financing options overseas such as the Alternative Investment Market (AIM) in London, which offers capital for emerging-market companies. Increasingly, Chinese companies that felt frustrated by the lack of funding in China are turning to international sources of financing and advice. With the right mix of financing vehicles, they will have a better chance of seeing their innovations reach a wider customer base worldwide. The Chinese government is aware of funding issues faced by small and medium-sized biotech enterprises and has plans to implement policies to support and guide these companies on finance and grants.

More progresses in IP protection and enforcement required

A significant drawback in the Chinese legal system is that patents are granted to Chinese firms without thorough validation of originality, leading to copying of innovations. This has resulted in apprehension among the international companies and venture capitalists, affecting FDIs into the industry. After joining WTO, the government is perceived to have improved patent protection; however various IP regulations are yet to be implemented. The Chinese government may have to focus more on this aspect in order to grow this industry further.

The above raises the following further questions facing China’s biotech industry:

• Will weak patent protection and price control limit innovation commercialization in China?

• Is China the ideal Asia Pacific location for biotechnology R&D offshoring?

• What are the key criteria to evaluate when looking for clinical test outsourcer?

• How will the common usage of Traditional Chinese Medicine influence the Chinese biotechnology field?

• When will the Chinese biotechnology industry mechanism shift from government-controlled to market-driven?

• Will India overtake China in the field of biotechnology?

Ivy Teh is the Healthcare and Life Science global head at Clearstate. She has advised international biotech companies on market entry strategies, acquisitions, R&D outsourcing, competitive benchmarking and marketing strategies. She has advised firms like Roche, J&J, Siemens, Omron, Olympus, Baxter, Amgen, Boston Scientific, etc.

www.clearstate.com