India Transformed

by Rakesh Mohan

  Fortunately, in the late 1980s, the emerging success of the information technology (IT) sector had sown the seeds of venture capital funding in India. Narayanan Vaghul, the visionary chairman of the Industrial Credit and Investment Corporation of India (ICICI), started India’s first venture capital fund—the Technology Development Investment Corporation of India (TDICI, later rechristened ICICI Ventures)—with the primary objective of providing seed capital to technology-led start-ups. A chance meeting with Vaghul allowed me to attract venture funding from TDICI for my solid-state fermentation project. What was even more rewarding was that it was an equity and not a debt-funding institution. TDICI accordingly took a 20 per cent stake in Biocon in 1989 for Rs 1.15 crore. Biocon was one of the first recipients of venture funding in the biotech sector. This marked a turning point in our business as it enabled financial resourcing in an accretive way. We no longer had to worry about servicing debt.

  Government policymaking also reflected these efforts to foster venture capital and private equity as a source of risk capital for entrepreneurs and innovation. In 1996, the Securities and Exchange Board of India (SEBI) enacted regulations for venture capital funds that were replaced with regulations for alternative investment funds in 2012. This was conceived as a comprehensive legal framework to regulate venture funds, social venture funds, infrastructure funds, private equity funds, debt funds and hedge funds.

  Venture capital and private equity, which provided an alternative source of financing to a small number of entrepreneurial businesses in the 1990s, have poured over $100 billion into the Indian economy between 2001 and 2014.4

  In the early 1990s, however, the prevailing business ethos favoured low-risk ventures. So much so that when Infosys went public in 1993, its initial public offering (IPO) was undersubscribed because investors were unwilling to bet on an obscure IT services company. The IPO scraped through after Morgan Stanley, the investment banker, picked up 13 per cent of the company’s equity at Rs 95 a share. By 1999, however, Infosys’s share price had rocketed to Rs 8100, making it the costliest share in the market at the time.5

  The mushrooming of technology-led start-ups and small enterprises, fuelled by venture capital, nudged the capital markets into providing alternative avenues of exit. Several attempts in the past, such as the Over-the-Counter Exchange of India, initiated in 1990, had failed to take off due to deficiencies in the regulatory structure. The BSE IndoNext platform, launched in 2007, also failed to attract much market participation. In 2012, the Bombay Stock Exchange (BSE) launched the BSE SME platform and the National Stock Exchange (NSE) started its ‘Emerge’ platform to provide an alternative source of equity funding to small and medium enterprises (SMEs). It remains to be seen if they will sustain themselves. America’s Nasdaq has proved to be the only successful stock exchange for technology-led enterprises to raise capital. London’s Alternative Investment Market (AIM) has also struggled to build credible value, although in recent times a number of technology companies have listed on it at valuations comparable to those of Nasdaq. Biocon listed on the NSE and BSE in 2004, and commanded a billion-dollar market cap from the start, backed by a premium valuation resulting from its spearheading of a new technology sector—biotechnology.

  Sadly, Biocon’s triumphant debut on the bourses has barely encouraged other biotech companies to follow suit. Regulatory uncertainty and long gestational periods for the commercialization of biotech products have served as deterrents for investors.

  Department of Biotechnology: A Regulator and Promoter

  Up until the mid-1980s, Biocon was the lone biotech company pursuing a research-and-development (R & D)-led business where every research consumable had to be imported. Whilst the red tape for consumables was manageable, the hurdles at customs to import R & D instrumentation were steep and sometimes impossible to cross. Building Biocon as a company trying to compete in the global marketplace was painful and frustrating. However, it was a matter of time before I saw a few more biotechnology-based companies take root. Soon it was time for the government to take notice.

  In 1982, the government established a National Biotechnology Board with Dr S. Ramachandran as member secretary. The mandate was to identify priority development areas in the field. Soon after, the need for a separate department was felt and the government established the Department of Biotechnology (DBT) in 1986 with Ramachandran as its founder secretary.

  The setting up of the DBT was a decisive step towards creating a road map for biotechnology in India. As a pioneer in the industry, I was privileged to be invited to DBT’s task force. The focus of the first phase was on creating an academic ecosystem for biotechnology and thereby developing the required human capital to support this emerging sector. A number of departments of biotechnology were created at select universities: Anna University, Madurai Kamaraj University, Jawaharlal Nehru University and MS University. In addition, stand-alone institutions had also been created earlier, such as the Centre for Cellular and Molecular Biology (CCMB) in 1977 in Hyderabad and the Institute of Microbial Technology (IMTECH) in 1984 in Chandigarh.

  The DBT also initiated a regulatory framework for the biotech industry, promulgating guidelines for conducting research and developing products for commercial use. Recombinant technologies were the fulcrum of the regulations, which largely covered vaccines, genetically modified (GM) crops and biopharmaceuticals.

  In 1990, the government set up the Small Industries Development Bank of India (SIDBI) for the promotion, financing and development of micro, small and medium enterprises (MSMEs). SIDBI introduced low-interest debt instruments, which in today’s parlance are like seed funding, that helped companies like ours scale up. In fact, in 1998, SIDBI and the DBT set up a Rs 100-crore biotechnology development fund to promote entrepreneurship in biotechnology.

  The 1990s witnessed the mushrooming of a large number of small and midsized biotech enterprises across the country. As the industry grew, the DBT’s focus expanded to building industry–academia linkages that were critical to enhancing the sector’s value. Biotech clusters developed in Bangalore and Hyderabad, driven by academic centres of excellence such as the Indian Institute of Science (IISc) and CCMB respectively.

  The DBT mirrored the emergence of biotechnology in India, matching every inflection in its journey from a nascent sector to a sunrise industry. By providing specialized skills and financial and regulatory support, the DBT strengthened the bedrock on which the Indian biotech sector built a global, disruptive industry.

  Biotechnology and Its Disruptive Impact

  The disruptive power of Indian biotechnology innovation grabbed the attention of the world in the late 1990s when the Hyderabad-based Shantha Biotechnics introduced a recombinant hepatitis B vaccine at a fraction of the cost quoted by Western drug makers. Shantha Biotechnics, founded by an engineer, K.I. Varaprasad Reddy, in 1993, was committed to develop affordable vaccines for immunization against several life-threatening diseases. At the time, large multinational pharmaceutical companies held monopolies on the recombinant hepatitis B vaccine, which was priced at over $25 a dose and was thus unaffordable for most Indians. Shantha Biotechnics saw an unmet domestic need and invested in innovation that led to India’s first recombinant hepatitis B vaccine that cost less than $1 a dose. The company was acquired by Sanofi at a valuation of $784 million in 2009.

  Similarly, in 2004, Biocon introduced a recombinant human insulin developed indigenously through a proprietary fermentation technology at a price much lower than that of imported insulin. Today, several Indian companies have developed life-saving biosimilar drugs for cancer, diabetes and autoimmune diseases at world-beating prices.

  Biocon: The Transformational Years

  As a pioneering biotech enterprise, Biocon had to create the required ecosystem from scratch. We dealt with the infrastructural constraints of the 1980s by developing rather frugal home-grown innovations to scale up enzyme technologies which we managed to export successfully. Once the Indian economy opened up and t
he infrastructure improved, we focused on embracing cutting-edge technologies, creating a global scale in our manufacturing endeavours, and benchmarked our systems and strategies to the best practices globally.

  In 1989, Unilever acquired Biocon India’s Irish parent, Biocon Biochemicals, and merged it with its subsidiary, Quest International. Biocon, which had functioned as a bootstrapped entrepreneurial company, underwent a transformation. I immediately recognized the advantage of having Unilever, a global conglomerate, as a business partner. It was a unique opportunity to acquire the global best practices and build a ‘Made in India’ label for Biocon, which would become a byword for high quality.

  The economic reforms initiated in 1991 eased the norms for FDI which prompted Unilever to increase its stake and investment in our JV. This, I believe, was a critical inflection point in Biocon’s life cycle. Not only did we adopt international best practices in quality systems and financial reporting but also, more importantly, developed an understanding of intellectual property and patenting skills that catapulted us on to the world stage. By 1993, Biocon India had become the first manufacturing business within Unilever Plc to attain the ISO 9001 accreditation from Germany’s RWTUV.

  Towards the late 1990s, my entrepreneurial restlessness urged me to diversify our business by looking beyond enzymes. The logical progression was to find opportunities in biopharmaceuticals where we could leverage our fermentation and genetic engineering capabilities to develop high-value pharmaceuticals that would provide us with nonlinear growth opportunities. Unilever, however, did not share our diversification strategy and encouraged us to set up a separate entity to realize this dream. In 1998, Unilever unexpectedly announced that it had reached an agreement to sell its speciality chemicals business to another British MNC, ICI (formerly known as Imperial Chemical Industries). This change of control enabled me to buy out ICI. This resulted in Biocon becoming an independent entity in control of its own destiny. We merged our enzymes and biopharmaceutical businesses.

  Our biopharmaceutical journey was technology-driven. We leveraged our proprietary fungal enzymes platform to develop cholesterol-reducing drugs called Statins. We leveraged our genetically engineered technology based on a yeast—Pichia pastoris—to develop a recombinant human insulin. We licensed a mammalian cell-culture technology from Cuba to develop monoclonal antibodies for cancer and autoimmune diseases. Our broad strategic intent was to develop a biopharmaceutical model that addressed chronic diseases, specifically diabetes and cancer. We received our first US Food and Drug Administration (FDA) approval for Lovastatin in 2001—which laid the foundation for biopharmaceuticals.

  When we started our biopharmaceutical journey in 1998, 80 per cent of our business came from enzymes, with the balance being created by biopharmaceuticals, largely statins. By 2004, when we went public, the business mix reversed, with 80 per cent coming from biopharmaceutical and the balance from enzymes. This shift in revenues also led to the divestiture of our historic enzymes business in 2007. Novozymes, our Danish competitors, acquired this business at an innovation premium of 8X of sales, thus validating the IP value creation in our enzyme technologies. Ever since exiting the enzymes business, we have remained steadfast on the innovation path by balancing our biopharmaceutical strategy between biosimilars (generic versions of biologic drugs) on the one hand, and novel programmes on the other. We have commercialized two path-breaking monoclonal antibody drugs; Nimotuzumab for the treatment of head and neck cancer and Itolizumab for psoriasis. Other exciting novel programmes include Tregopil, an oral insulin in a tablet, and Fusion or bispecific antibodies for treating various aggressive cancers. Biocon is recognized as one of the highest R & D spenders in the country with an average of 12–15 per cent of its revenue accounting for it as compared to the national industry average of 5–8 per cent.

  Following on the heels of India’s software services, we also set up a research-services company called Syngene International in 1994 with an array of offerings to support global pharmaceutical, agri-biotech and nutritional companies’ research pipelines. This was timely as it coincided with India signing the WTO agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in 1995, which provided the comfort and confidence of IP protection that such a business required. Syngene grew rapidly over time to build up competence across the drug development value chain, from discovery to clinical outcome, and served eight of the top ten global pharmaceutical majors. In 2015, Syngene listed on the Indian stock exchange with a billion-dollar market capitalization.

  2005: A New Patent Regime

  The 1970s saw the Indian government enact a series of policies designed to end the dominance of foreign drug companies and foster self-reliance in basic drugs through local production. The rising protectionism resulted in the Patents Act, 1970, which abolished ‘product patents’ on food, chemicals and drugs to institute ‘process patents’ instead. Process patents allowed Indian companies to ‘reverse engineer’ or copy patent foreign drugs without fear of legal repercussions, as long as they employed a production process that differed from that used by the patent owner. The stated objective of the move was to foster the development of an indigenous Indian pharmaceutical industry and to guarantee that the Indian public had access to low-cost drugs.

  It was also in 1970 that the Drug Price Control Order (DPCO) came into being for the first time. The objective of the DPCO was to cap the profitability of a pharmaceutical business, thereby indirectly controlling the prices of drugs.

  The changes in India’s patent laws allowed the domestic industry to build considerable competencies and offer a large number of generic drugs legally in India at a fraction of the price of drugs sold in the West. India’s pharmaceutical industry grew and prospered in a highly regulated environment with government price controls.

  These actions laid the foundation for a highly competitive pharmaceutical industry. India’s dependence on expensive foreign drugs was sharply reduced and by 1990, local production ensured that the country was self-sufficient in the production of both bulk drugs and finished dosages.

  In 1995, India joined the WTO and acceded to amend its patent laws to meet obligations under the TRIPS agreement following a ten-year transition period. After decades of protectionism, the country decided to reintroduce the TRIPS-compliant ‘product patents’ in 2005. This amendment, in effect, made reverse engineering or copying of patented drugs illegal and granted patent holders a twenty-year monopoly, starting from the date of patent filing. At the same time, India introduced patent safeguards like compulsory licensing—allowed under TRIPS—to protect public-health interests. India’s progressive patent system facilitated a model of local production and entrepreneurship that allowed its generic drugs industry to contribute to improved access to life-saving drugs across the world. Many of India’s leading pharmaceutical producers increased their exports of generic drugs to the US and Western Europe, and entered into research and development agreements, mergers and acquisitions, and other alliances with foreign pharmaceutical firms.

  At the same time, the Indian pharmaceutical industry helped save millions of lives worldwide by bringing down the prices of essential therapies for HIV, TB and cancer by as much as 90 per cent.

  When India joined the WTO in 1995, its pharmaceutical exports were valued at less than $600 million. By 2005, its exports had grown to $3.7 billion and accounted for more than 61 per cent of the industry turnover. Today, the exports have swelled to about $15 billion and account for nearly 30 per cent of the generics sold in US and European markets.

  In the early years of liberalization, prior to India joining the WTO, that is, in the period between 1991 and 1995, FDI flows in drugs and pharmaceuticals averaged a modest $17.2 million per year and cumulatively amounted to just $68.7 million, with $50.5 million of that total occurring in 1993–94. With India’s entry into the WTO in 1995, FDI increased substantially. Between 1995 and 2005, in the course of India’s ten-year transition towards compliance with TRIPS requir
ements, these FDI inflows averaged $73.7 million annually, a more-than-fourfold increase compared to 1991–95.6

  I took advantage of this evolving liberal economic environment to partner with companies across the globe to establish synergies in research, development and marketing. We were able to grow rapidly through these partnering opportunities. These partnerships have been symbiotic and have enabled Biocon to create leading-edge capabilities as a strong development partner on the one hand, and have opened up global markets on the other.

  Within two decades of establishing the DBT, India became a biotechnology hotspot with the promise of becoming a high-value, low-cost innovator in bio-therapeutics, vaccines, enzyme technologies, GM crops and bioinformatics. By 2006, Shantha Biotechnics and Bharat Biotech had disrupted the MNC monopoly over hepatitis B vaccines not only in India but also all over the developing world with the help of the World Health Organization (WHO). Likewise, Biocon and Wockhardt broke the insulin stronghold that Novo Nordisk, Eli Lilly and Sanofi had enjoyed for decades. India’s growth mantra was ‘affordable innovation’, which resonated well at a time when Western drug makers were challenged with spiralling research and manufacturing expenditure that was driving up healthcare costs to unsustainable levels.