Stephen M Sammut, Senior Fellow, Health Care Management, Wharton School, University of Pennsylvania and Visiting Faculty, Indian School of Business in an interaction with Shalini Gupta talks about the state of VC environment in India’s biotechnology sector
How has the VC environment in biotechnology fared over the last few years globally? What changes and trends do you see?
The venture capital environment has become difficult to describe. The absolute number of professionally managed venture funds that focus on biotech and healthcare has actually declined globally over the last few years, but at the same time, the availability of capital from angel sources has increased. The US investment from venture capital funds for biotech, medical devices and healthcare services during the first three quarters of 2014 exceeded $6.5 billion, a figure that compares favourably with recent years. For India, during the first three quarters of 2014, investments approach $1 billion for the same industrial categories, but this includes money invested by private equity funds and reflects mostly health services. While it would be extreme to say that biotech is an orphan in terms of venture financing in India, that wouldn’t be far from the truth. This situation is definitely a drag on the growth of India’s biotech industry. In the case of India, there are not many forces at work that are driving that number upwards.
Has funding in biotech increased vis-a-vis sectors such as IT? What role do you see big pharma playing here?
Investments from VC and PE funds in IT in India have been running more than double the investments in life sciences and healthcare. Given the preeminence of India IT you would expect there to be more of a gap. The two sectors are independent of one another but there is a need for more risk capital in both industries. With respect to the pharma industry providing more investment in Indian biotech, there have been a steady number of strategic alliances between European, the US and Japanese companies with Indian pharma and biotech companies, but there is need for these to occur more frequently and in larger amounts of financing.
Where does India stand? What are the opportunities and challenges?
Given the remarkable evolution of the Indian pharma industry over the last 40 years and the full range of capabilities that India offers in order to propel biotech, the pace of growth has been below the potential. There is the possibility of a more rapid acceleration of the biotech industry if a number of factors change. These are not solely related to available capital. There are issues related to the regulation of pharma, technology transfer, intellectual property and standards for clinical trials that directly impinge on the growth of the sector. Attention is needed on all of these factors.
Where does India stand on the biotech map globally? How do we compare to other emerging markets, particularly in South-East Asia? What capacities do we need to build yet?
In a paper that I co-authored in the New England Journal of Medicine earlier this year, we did a comparison of research funding trends on a global basis. While India’s public and private investment in 2012 reached $2 billion for life sciences, this paled in comparison to the West, which is no surprise. However, in the same year, the public and private investment in life sciences in China was $8.4 billion and $6 billion in Korea. Other Asia-Pacific countries spent an amount similar to India. There isn’t necessarily a correlation between the amount of funding and quality research, but there is obviously a funding gap between India and other Asian countries. As intimated above, there is progress underway in regulation, IP, tech transfer and clinical trials in these same markets. India needs to build capacity across the board.
Are the investors of today more interested in small biotechs vis-a-vis MNCs? What opportunity do they present? Are these small biotechs with promising products also coming out of markets apart from the US?
The investment community has been focused on the emerging biotech companies for several decades. The MNCs attract attention when a potential new block-buster is in development, but the main story is on the innovation brought to the scene by the biotechs. Tackling the global disease burden of both communicable and non-communicable diseases is the province of the biotech companies. By and large, the MNCs have effectively outsourced discovery and development of new medicines to the biotech industry and to some extent, to universities. Not so long ago, the US dominated the biotech scene, but this is changing rapidly. Biotech companies are now being built around university technology throughout the world, although we don’t see very much of that occurring in India, partially because there is a limited infrastructure to manage the process and a legal framework that must still be put into place.
Innovation is driven by entrepreneurs. What is the current level of entrepreneurship in biotechnology and pharma across the world? What are the enablers for a thriving entrepreneurial ecosytem? How do you see India when it comes to this?
In addition to entrepreneurs as drivers of innovation, we also have to look at universities, especially in biotech. Investors would rightly argue that experienced and proven entrepreneurs are still the scarcity that slows down growth of the industry. This is arguably true but at the same time, there are now upwards of 10,000 biotech companies globally, all with someone serving as founder and CEO. The talent still must mature, but there is an army of capable people committing themselves to the industry. The ecosystem is dependent on all the issues we’ve discussed so far: ample supply of smart capital, a sound and equitable IP system, a mechanism for reliable technology transfer, a regulatory framework suitable and flexible for new opportunities, and a clinical trials infrastructure. There are other factors, as well. There is a growing body of research that suggests that companies in countries with a base of early adopters and consumers with the capacity to buy new products will have a competitive advantage. This, of course, becomes entangled in the issues surrounding the pricing of medicines, but companies that have to rely on off-shore markets for sales at premium pricing have major strategic challenges. Finally, development of entrepreneurs through training and education, and a culture tolerant of risk are key ecosystem factors.
Tell us something about the project on global technology transfer with IFC and its pilot project focused on India. How do you see technology transfers playing a major role especially when it comes to making drugs more affordable and accessible to the masses? What would drive this in the future?
The IFC Technology Transfer Facility is playing a key role in promoting incubation of new ideas. I was actually involved in the conceptualisation of that programme a few years back. Technology transfer as a process will help stimulate the creation of new businesses and the expansion of capacity and industries, but I am not sure that there is a direct connection with the problem of medicinal access and affordability. The tech transfer process can certainly help bring new medicines for neglected diseases to the market. Theoretically, if these medicines are discovered and pioneered within the emerging markets, their development costs would be far less and therefore, the pressure on high prices in order to recover development costs would be less. But that isn’t necessarily a given. Access to medicines is an issue that is critical for humanity, but it is a complex problem that will require a multi-faceted set of solutions.
What is the future of biotech VC firms? Also, do you see more co-working spaces like Genspace in New York and the Open source Drug discovery network at CSIR, India, driving innovation in the future?
Personally, I am not so sanguine about the future of specialised biotech VC firms. There is a disconnect between the way that these funds are structured, how they must manage investments and the expectations of their own investors that are all misaligned with the realities and time frames of medicinal discovery and development. A new model will necessarily emerge. It may take the form of holding companies that are structured for longer time frames, or some other form, but I am not convinced that the model that has been in place for the last 40 years will serve us for the next 40 years. With respect to innovation, different approaches to open innovation and collaboration are certainly a necessity in future medicinal discovery and development. It is still too early to tell, however, whether structured programmes like these will have the translational research capacity and the organisational ethos to bring products through at least the early stages of development. The reality is that at some point, the funding and development of a new medicine will have to be assumed by a commercial entity that is focused on bringing the products to clinical reality and is rewarded in some appropriate way for doing so.