The economics of biotechnology

Biotechnology offers immense potential.  This year will be remembered as a significant landmark for providing an introduction to nature's book of life with the complete decoding of the human genome.

It was in 1953 that Watson and Crick discovered the double helix structure of DNA which was a major breakthrough in biology. The last 50 years has seen some truly amazing developments. We are on the threshold of a new era where basic sciences powered with nanotechnology and information technology can revolutionise the future of medicine.

This article will analyse the challenges faced in pursuing biotech opportunities, a brief review of India's biotech programme and further initiatives needed to put India firmly on the global biotech map.

Biotechnology industry has developed over the last three decades.  The simplest definition of the industry is that it deals with the application of biological knowledge and techniques pertaining to molecular, cellular and genetic processes to develop products and services.

The applications range from agriculture (genetically modified food, insect resistant fibre, food processing), industrial (biofuels, bioenzymes in pollution control) and medical biotechnology (diagnosing diseases, developing new drugs).

The economics of biotechnology is unique as the development of new biopharmaceutical products is uncertain, time consuming and expensive. It costs approximately $800 million to develop a new drug.  There is a ten to 12 year gestation period in the development of a drug.

Only 22 per cent of the drugs that go through clinical trials eventually get FDA (Food and Drug Administration, US) approval. Another layer of complexity is the growing interdisciplinary nature of biotech work with significant contribution from molecular biology, genomics, chemistry, chemical biology, computational science and engineering.

A quick look at the US will put this issue in perspective. Every year the National Institute of Health funds some 25,000 research projects. Researchers and scientists get around 5,500 patents in a given year.

Though around 400 medicines are in development, only 100 drugs have reached the market over the last 30 years.

The top ten drugs account for nearly all the sales. Biotech empowered by its ability to analyse the interactions at a cell, gene and protein level, promise us a future of personalised medicine. The pharma industry success has been based on a few blockbuster drugs.

So in some ways, biotech's success can limit market size and thereby reduce the return on the massive investment in development in the long-term. An ageing population in the West will increase the demand for new forms of diagnosis, prevention and treatment.

The harsh economic realities of biotechnology make funding decisions difficult. In the US, where both the financial capital and human capital for biotech are available, a noticeable shift towards venture funding has taken place.

In 1995 venture funding in the US biotech sector was $843 million and by 2002 it increased to $2.8 billion. Having been through the Nasdaq bubble in the early '90s, the biotech sector has been able to weather the dotcom crash of 2000.

The various stages of venture funding:  seed/start up stage (concept stage/production under development, less than 18 months), early stage (testing /pilot production, less than three years), expansion stage (product commercially available, significant revenues, not profitable) and later stage (product widely available, positive cash flows).

In 1995, approximately 44 per cent of the venture investments were targeted toward seed stage and early stage companies. The balance went to later stage and expansion stage companies.

By 2003 Q2, only 17 per cent went to seed stage and early stage companies but a massive 83 per cent was invested in late stage and expansion stage deals.

While there may be many reasons for the decline in funding for seed stage and early stage companies, one of the major reasons is the decline in risk appetite of venture capitalists.

Apparently these days VCs are more capitalistic and less venturesome. The economics of the biotech sector and relatively scarce venture-funding make the quest for building a biotech industry for a developing country like India a formidable challenge.

The Department of Biotechnology was set up in 1986 with the objective of spearheading the development of biotechnology in India and application to broad areas such as agriculture, healthcare, animal sciences, environment and industry.

Over the last 17 years, DBT has been responsible for over 5,000 research publications, 4,000 post-doctoral students several technologies transferred to industry and filings for US patents.

In 2002-2003, the department evaluated over 630 R&D research projects.

Some of the notable achievements are meeting the target for rice genome sequencing, molecular tools for detection of drug resistant strains of tuberculosis and transfers to industry of successful developments.

Given the meagre resources dedicated to the industry with the most promise in the 21st century, we really need to think through how we can create a vibrant biotechnology industry in India.  One of the few dedicated biotechnology venture capitalist in India is Jignesh Bhate, CEO of Idea2Solutions based in Hyderabad.

His primary suggestion is that government policy which is veering toward replicating the software services model for biotech industry in terms of setting up biotech parks etc is actually heading in the wrong direction.

His core prescription is to create a critical mass of manpower trained in biology with requisite technology skills that will attract foreign capital and overseas biotech professionals of Indian origin to return to India. There is no shotgun approach for success in biotech.

Given the state of public finances in India, it may be hard to get substantial increases in budgetary allocations. DBT has a very solid foundation and needs to target some of its spending carefully.  The first step is to concentrate on making biotechnology a popular specialisation and dramatically increasing the number of graduates over the next ten years.

As of now, we have around 130 students graduating with advanced degrees in biotech from various DBT sponsored institutions in India.  The next step is to identify successful scientists in various areas and foster technical collaboration among them to solve some specific problems.

A promising avenue is to pursue traditional Indian herbal medicine that works and establish a scientific basis for the mechanism involved. Also work on infectious diseases such as Tuberculosis and Malaria that affect much of the developing world, a population of around five billion people.

The low- cost drugs and vaccines developed in the research centres with DBT funding can be given to the private sector to market in other developing countries.

DBT must have a solid business development team that can explore the commercial viability of research done by DBT and extract value from the development.

By actively seeking some return on investment DBT can supplement its resource base.

As per 1997 census, in the US close to 200,000 people were employed in biotech and related industries (excluding pharmaceuticals). India probably has a few thousand working in this industry with an annual industry funding close to one or two start-ups in the US.

India cannot afford to be lax with an industry, which has so much promise for enhancing the quality of life, potential for wealth creation and more importantly for ensuring social justice in terms of welfare for the poor.

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