Bold and Bountiful

For Kiran Mazumdar-Shaw, fitting in was never an option. From pursuing a career in brewing, considered a male bastion, after her return from Australia in 1975 to leading India’s largest biotech company, the differentiated bets she has placed over the years has ensured that Biocon has emerged as a name to reckon with in the global biotechnology space. 

Mazumdar-Shaw set up Biocon in 1978 with an initial investment of Rs.10,000, after an accidental meeting with an Irish entrepreneur who wanted her to set up a company to manufacture enzymes in India. After two successful decades, Mazumdar-Shaw and her team at Biocon realised that the enzymes business had reached most of its potential and wasn’t growing as fast as they would like it to. The business dealt with specialty or niche enzymes and the global market opportunity was very restricted. So in 1998, Biocon decided to go beyond enzymes and foray into pharmaceuticals. The company had already developed much of the technology and intellectual property (IP) in enzyme manufacturing. Now, they wanted to leverage all they had done with enzymes in the biopharma business. “Biocon forayed into pharma by leveraging its capabilities derived from its long experience in manufacturing enzymes. Unlike other companies in India which were largely focused on generics made by chemical synthesis, we chose to build our drug development and manufacturing expertise around fermentation and recombinant technologies. We set ourselves apart by not following the small molecule ANDA strategy but focusing on more complex biologics, both novels and biosimilars, for chronic conditions like diabetes, cancer and autoimmune diseases,” says Arun Chandavarkar, joint managing director and chief executive officer, Biocon. 

The biotech pioneer even chose products that helped leverage its existing technology, be it statins, insulin, immunosuppressants or monoclonal antibodies. They were able to develop mycophenolate mofetil, an immunosuppressant drug used in organ transplants, through a novel enzymatic route as well as through a novel, solid-state fermentation technology, which got them an early entry into several regulated markets. Their proprietary solid-state fermentation technology also gave them first-mover advantage in cholesterol-lowering drug lovastatin in the US and Europe. Biocon eventually got out of enzymes when they sold the business to Novozymes in 2007 for $115 million.

Leveraging experience
Based on the expertise that they gained in developing antibodies, Biocon forayed into biosimilars in 2003. Biosimilars compete with biologics that go off-patent, and according to IMS Health, are set to make up 20% of the global pharmaceutical market in the next five years. Biocon has leveraged its core strength of fermentation technology to develop a wide portfolio of generic insulin and analogs, biosimilar monoclonal antibodies and recombinant proteins. These drugs delivered the same efficacy as the ones developed through chemical processes, but at a much lower cost. 

The chosen path, however, was not an easy one for Biocon. “I knew foraying into biosimilars would come with huge challenges. For one, there is a lot of regulatory uncertainty. Then you also have to make significant capital investments to build manufacturing scale, and only then can you create some global impact. Despite the challenges, it was clear that the company would only evolve on the basis of those bold bets. You cannot stay on the beaten path and be successful,” says Mazumdar-Shaw, CMD, Biocon. 

Indeed, most Indian companies have shied away from venturing into biosimilars given the high cost of development, the long gestation period and the regulatory pathway that still is evolving. For instance, while it takes about $3 million to $5 million to develop a generic drug, it costs anywhere between $50 million to $100 million to develop a biosimilar. Moreover, biosimilars require companies to carry out large clinical trials on patients to establish their safety and efficacy before the regulatory authorities can approve them. This drives the cost of development much higher. Generic drugs on the other hand can be launched after conducting bioequivalence studies. They do not require companies to undertake clinical trials.

Since the costs attached to developing biosimilars are so high and the time taken to develop them anywhere between six to eight years, it is critical to get the product development strategy in place. “Selecting the right molecule is very important. Apart from market size, it has to factor in the strength of the company or its partner in the concerned medical domain, intellectual property issues, complexity in the development of the molecule, costs and duration of clinical development, competition from existing players, potential pushbacks from incumbents and the changing nature of regulation,” says KV Subramaniam, president, Reliance Life Sciences, the biotech arm of Reliance Group. 

And Biocon has done just that, sticking to therapeutic areas where it can leverage its technical and manufacturing capabilities. At present, the company has a robust pipeline of ten biosimilars under various stages of development with an addressable market size of $60 billion and that treat diabetes, cancer and autoimmune diseases (See: In the pipeline). “We have invested about $750 million in both R&D and capital expenditure to develop this pipeline of drugs and we will be spending another half a billion to build manufacturing capabilities to serve the needs of our existing portfolio in the next couple of years,” says Siddharth Mittal, president - CFO, Biocon. The company has already invested $250 million in a manufacturing facility in Malaysia to manufacture human insulin and glargine (a long-acting insulin biosimilar). Commissioned during the last fiscal, the plant is likely to break-even in FY19. Biocon has already won a Rs.460 crore order to supply recombinant human insulin to the Malaysian health ministry and is awaiting approvals from other emerging markets as well. The company is also investing $200 million to build a manufacturing facility for injectables, monoclonal antibodies and vaccines on the outskirts of Bengaluru, slated to be commissioned anytime between 2020 and 2021. “We have always focused on creating global scale because only then you can create a significant impact. By achieving economies of scale we have not only expanded the access to these drugs but also made them far more affordable,” says Mazumdar-Shaw.

It has also planned a phase II expansion of its Malaysian facility with an investment of $200 million, but this would depend on the progress of its two analog insulins, aspart and lispro that are currently in the preclinical phase. “In biosimilars, we have to time the capacity expansion closer to the launch because we can’t have idle capacity sitting around since there are huge operating costs involved. We will start work on phase II in Malaysia once there is better visibility of launch in the case of our analog insulin,” says Mittal. 

The bright side is that because it requires sizeable investments both in research and in building manufacturing capabilities, there is limited competition and the price erosion is significantly lower. For instance, the price erosion can be as high as 90% in the case of generic drugs as compared to the price of innovator drugs, but the price erosion in the case of biosimilars is about 30-40%. “The pricing pressure in the US generics market is so extreme (and is likely to become even more so), that margins will decline further. Indian companies that are focused on low value generics will face a strategic challenge and will have to bring about a change in the business model. In comparison, Biocon is extremely well positioned in the less competitive biosimilars space,” says Jeremy Levin, independent board member, Biocon and former CEO, Teva Pharmaceuticals.

Clever tactics
In order to mitigate the inherent risks involved in developing biosimilars, Biocon entered into a partnership with Mylan in 2009 to develop, manufacture and commercialise a pipeline of biosimilars. They have about nine molecules, including the basket of insulin that was added in 2013. According to a report by Bank of America-Merrill Lynch, of the $100 billion biologic drugs that are going off-patent, Biocon’s pipeline has an exposure to about 60% of that opportunity. The four lead molecules that it is co-developing with Mylan, which will form the first wave of biosimilars that will be launched in developed markets namely the US and Europe, presents a $33 billion opportunity. These molecules are glargine, trastuzumab, pegfilgrastim (both drugs used to treat cancer) and adalimumab (used to treat various kinds of arthritis). “Mylan and Biocon brought complementary skills to the table. When we started out in 2009, Mylan had a strong commercial presence in the US. They knew how to navigate the IP landscape and they had the commercial infrastructure. We brought in product development, manufacturing capabilities and an emerging markets presence. The partnership is more about de-risking the development risks,” says Chandavarkar.

The company’s marketing application for pegfilgrastim, trastuzumab and insulin glargine has been accepted and is under review by the European regulatory authority, European Medicines Agency (EMA). The USFDA has given them target action dates in September and October this year for trastuzumab and pegfilgrastim by which time the regulatory body should decide whether to give its approval or not. Glargine is next for filing in the US and adalimumab is up for filing in Europe and the US.

Mylan signed a global patent settlement and licensee agreement with innovator company Roche for trastuzumab in March 2017. “The settlement is a big positive. With patent litigations resolved, trastuzumab can be launched with first-mover advantage in Europe and the US. We expect the EU launch in late FY18 and the US launch in June 2019 after the patent expiry,” says Surya Patra, vice president, PhillipCapital. According to him, the branded market of Herceptin, the brand name under which trastuzumab is sold, is $2.5 billion in the US and $7 billion globally. “By partnering with Mylan, they have mitigated the risks associated with biosimilars very well. It means failures that are fairly common in biosimilars are not as risky for Biocon and it is an exceptionally well-thought-out strategy. Biocon has also managed to get in early and in the biosimilars business, you need to be the first in the market because that gives you an unparalleled pricing advantage,” says Levin. While the costs of developing and manufacturing the drugs are being shared, Mylan has the marketing rights for developed markets and Biocon has them for emerging markets.

While they wait for regulatory approvals in the developed markets, Biocon has already started to sell glagrine and trastuzumab in emerging markets. The company has managed to have a significant presence in key emerging markets in Latin America, Commonwealth of Independent States (CIS) countries, Southeast Asia apart from India and its neighbouring countries. Almost all its biosimilar revenue of Rs.458 crore comes from emerging markets. The company, which has set itself a target of achieving revenue of $1 billion by FY19, says almost 20% of that will come from the sale of biosimilars. This means that, driven by product launches, the business will more than double in the next two years.  The company is also selling glargine in Japan, where it received approval last year. The fact that the company has managed to clear all the hurdles in a stringent market such as Japan gives it confidence that it should be able to do the same with Europe and the US.

The company is also investing in building a pipeline of novel biologics that include tregopil (a rapid-action insulin), itolizumab (used to treat psoriasis), siRNA (to treat rare ophthalmic and inflammatory diseases) and fusion proteins (used in treating cancer). “While the development of biosimilars requires a systematic approach right from designing the process to end-product development, it is critical to have knowledge of the disease when you are developing novel molecules. Many companies were looking at infectious diseases but we chose to go down the less trodden path. This is why we picked metabolic diseases, oncology and autoimmune diseases in whose treatment biologics are more effective,” says Narendra Chirmule, head of research and development, Biocon. Realising that a robust product pipeline will go a long way in creating a niche in the global biosimilars space, Biocon has consciously increased its R&D spend in the past of couple of years (see: Investing for the future).

While biosimilars will be the driving force of Biocon’s growth story in the next couple of years, its other businesses also play an important role in ensuring that the momentum is sustained. Today, the company’s small molecule or generics business is still the biggest earner for the company, bringing in about 40% of its overall revenue. While Biocon expects its contribution to come down to 30% by FY19 as biosimilars start to gain momentum, the business will continue to generate the much-needed capital to fund further investments in the biologics business. Similarly, branded formulations, which comprise about 14% of its overall revenue and have undergone some restructuring, will be an important sales channel for Biocon’s biosimilar and insulin products. Its contract research services arm Syngene is also Asia’s largest contract research organisation helping global pharma majors like Bristol Myers Squibb, Amgen, and Abbott Nutrition with the drug discovery, development and commercialisation processes. The company, listed as a separate entity last year, brings in nearly Rs.1,140 crore for Biocon (30% of overall revenue) and is expected to contribute $250 million to the FY19 $1 billion revenue target. 

High risk, high return
Biocon hasn’t always been an investor favourite. In fact, when Indian pharma companies were riding on their generic success and the market couldn’t get enough of them, Biocon hadn’t performed as well. Over the past couple of years, during the product development phase when there was a lot of uncertainty on the regulatory pathway and approvals, investors were a little wary. But that is changing now as Biocon is all set to reap the benefits of building a robust pipeline of drugs that are slated for launch in both developed and emerging markets. In the past one year, the stock is up more than 135%. 

According to analysts, the successful execution of its biosimilar pipeline will drive the company’s earnings growth over the next three to five years. “From a global perspective, we have one of the most diverse portfolio of biosimilars. While it is a high risk-high return opportunity, the stringent approval process will also act as an entry barrier as there are not going to be many players with the high-end capabilities needed to develop these advanced therapies for meeting patient requirements globally, and that extends our competitive advantage,” says Ravi Limaye, president, marketing at Biocon.

Mazumdar-Shaw and her team’s early bet on biosimilars has definitely helped the company create a niche for itself. Given the complexities involved in building a similar pipeline of products, it does give Biocon significant lead time to build upon the head start that it has. While the company will ride the first wave of biosimilars with Mylan, it is already looking at developing the second wave of biosimilars that will be off-patent in the next 10 years. 

While their small molecules and contract research services will continue to be stable businesses, biosimilars is definitely the fast-growing business (34% growth in FY17) that will drive Biocon ahead and, given its potential, could well overtake the other businesses in the next 5-10 years. To ensure that, Biocon will have to continue making significant investments in the biosimilar business. For now, Mazumdar-Shaw and her team are clear they are not going to shy away from making those differentiated bets. After all, that placed them in the driver’s seat in the first place.