biotech: India’s new global pitch

23 July 2007
18 July 2007

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biotech: India’s new global pitch Ivy Teh
New elephant on the block
These are exciting times for the Indian biotechnology industry. The industry has doubled in
size within the last two years buoyed by a strong growth in biotech exports. In the year
2006-07, it passed the USD 2 billion mark in revenues and registered a 31% growth rate as
compared to the fiscal year of 2005-06. The Indian biotechnology industry offers immense
potential for investments thanks to its large marketplace, strong government support and
low-cost English speaking professionals. The industry currently has around 340 companies
which employ 25,000 technologists and the latter is expected to double by the year 2010.

As of the end of 2006, the industry accounted for just 2.8% of total global biotech revenues
but, according to the Indian Department of Biotechnology, the Indian biotech industry is
expected to grow to USD 5 billion by the year 2010. It will capture 10% of the global
market, generating close to a million jobs and investments of up to USD 10 billion. When
the industry reaches its targeted USD 5 billion by 2010-11, then it would have grown at
CAGR of 19 % from the current 2006 figures.

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.

Indian biotech industry to hit 5 billion in 2010

6
Revenue in USD Billions

0
2002-03 2006-07 2010(Forecast)

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Biopharma leading the pack.

The biopharma sector leads the pack having generated 70% of the total industry’s revenue,
recording sales in excess of USD 1.45 billion and enjoying a growth of 27% from 2005. The
sector has seen a few domestic giants in the making. Examples of dominate players
include The Serum Institute of India and, Biocon, which jointly command 27% of the
market. The Institute has increased sales by 40% between 2005-06. Domestic firms
dominate this sector, accounting for fourteen of the top twenty firms.

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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.

Biotech value contribution by sub segments in 2006

Biopharma leads the way
2% 5%

11%

13%

69%

Bioinfomatics Bioindustrial Bioagri Bioservices Biopharma

In November 2006, The Serum Institute entered into an agreement with Akorn US for the
exclusive distribution rights of rabies monoclonal antibodies. Other deals within the last
twelve months include: Reliance Life Sciences acquiring UK- based GeneMedix; Merieux
Alliance acquiring a majority stake in Shantha Biotechnics. (Shantha, which is the tenth
largest biopharma company in India, will become Merieux Alliance’s worldwide center for
prophylactic vaccine activities

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.

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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
180
160
140
USD Millions

120
100
80
60
40
20
0
2003-04 2004-05 2005-06 2006-07 2007-08

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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.

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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.

India tops estimated annual number of Science and

Engineering graduates
800,000
No of Graduates

600,000

400,000

200,000

0
Japan USA Europe China India

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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.

Mr Alon Gupta, the country head of life sciences and biotechnology for Yes Bank, also
noted that “the Indian biotechnology market doesn’t offer flexible exit options to investors”.

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.

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Access to capital wanted

In the year 2005-06, investments exceeded USD 400 million, an increase of 36% from
2004-05. A majority of these investments have come from multinational companies such as
Merck, Sanofi-Aventis, GlaxoSmithKline and Novo Nordisk. The three most common entry
methods are either through partnering or acquiring domestic firms or by simply relocating
Asian operations to India.

Investment into Indian biotech industry

Year Amount Invested (USD) Growth
2001-2002 124,168,000 101.5%
2002-2003 156,442,000 26%
2003-2004 209,411,000 34%
2004-2005 299,334,000 43%
2005-2006 406,503,900 36%

Despite global interest in the biotechnology sector, Indian biotech companies remain
starved for early-stage funding. Most global investment funds have yet to begin supporting
Indian start-ups.

Indian funds such as ICICI Ventures, APIDC, the N S Raghavan Foundation and Kotak
Private Equity are now beginning to step in, but examples of cash infusion are still few and
far between. Success stories usually only involve the cream of Indian biotech companies,
such as Biocon’s massive over subscription during its Initial Public Offering in 2004. The
reluctance of venture capitalists to invest in biotech reflects the nascent condition of the
industry in India. Only a handful of domestic firms have the size or the type of products to
attract serious international funding.

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.

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In evaluating the opportunities in India's biotechnology sector, many questions may arise,
such as:

▲ Is India the ideal Asian location for biotechnology R&D outsourcing?

▲ How significant are its cost advantages in relation to its low IP enforcement and ethical issues?
▲ How do foreign investors value a biotech acquisition in India?
▲ What are the unexplored areas of the industry that have yet to be capitalized?
▲ What is the level of Biotech automation and engineering development in India?
▲ How will regulations and bureaucracy hinder our objectives and what is the best way to deal with
this?

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Ivy Teh leads the global healthcare and life science practice at Clearstate. She has led
multiple regional and global advisory projects for healthcare multinationals. Ivy has also
worked extensively with Southeast Asian governmental bodies to promote domestic life
science industries, and she is a recognized thought-leader in the field of marketing medical
diagnostic equipment.

You may contact Ivy via email at: thinking@clearstate.com

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