Aurigene Discovery Technologies

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Aurigene Discovery Technologies
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Abstract
Describes the contract R&D venture of Dr. Reddy’s Labs, a major Indian
pharmaceutical firm. Hailed as “the new IT” in India, the biotechnology industry has
generated much excitement about its potential for generating foreign exchange as well
as employment opportunities. The case profiles the state of the Indian biotechnology
industry in 2002, and focuses on an attempt to replicate the successful IT off-shore
services model to biotechnology. Discussion issues pertain to the offshore services
model in R&D, corporate venturing issues, and the strategic challenges of building
high technology firms in the developing world.
Subjects Covered:
R&D outsourcing, Corporate ventures, Biotechnology
_____________________________________________________________________
© London Business School, August 2003. This case was written by Niraj Gelli (MBA ’03) &
Chakrapani Tummalapalli (MBA ’03) of the Indian School of Business under the supervision
of Prof. Phanish Puranam of the London Business School. It is meant to be used as a basis for
classroom discussion, and does not aim to illustrate adept or inept handling of administrative
situations, or purport to be a source of primary data. The Aditya V. Birla Center at LBS is
acknowledged for funding.
LBS reference
CS-03 -14
1
Aurigene Discovery Technologies
In early 2003, Dr. Norton Peet (CEO) and Dr. Swaminathan “Swami” Subramaniam
(COO) of Aurigene Discovery Technologies were going to make a presentation to the
board of Dr. Reddy’s Laboratories (DRL). DRL was one of India’s leading
pharmaceutical firms and had already invested $10 million in Aurigene, which was
structured as a wholly-owned subsidiary of DRL. Aurigene was to provide fee-based
R&D services to global pharmaceutical companies in drug discovery–related research
such as protein expression and purification, structure analysis, and drug design.
In the ’90s, Indian software firms had achieved spectacular successes by adopting a
business model that linked the low-cost, high-quality technical manpower in India to
profitable opportunities in the developed world. R&D outsourcing was considered by
many to be the next major opportunity for India’s technical workforce. In 2002, there
were already several firms in India that provided R&D services in areas like hardware
development, chip design, consumer and automotive electronics, and bio-informatics.1
Many argued that the life sciences provided opportunities for the success of a similar
business model, as the country had an inexpensive talent pool of highly qualified
scientists. Aurigene was among a handful of business ventures across the country that
hoped to succeed on a contract R&D model in biotechnology. Swami was going to
seek an additional $10 million in funding from DRL, and the presentation he would
make would certainly influence the decision. Swami wondered how he could make a
persuasive case for additional funding.
The Global Pharmaceutical Industry in 20022
With a pipeline of more than 1,000 drugs under development worldwide, the
pharmaceutical industry played an ever-increasing role in combating disease. In 2002,
the industry had over 98 new medicines in development for AIDS; over 400 for
cancer; and over 120 for heart disease and stroke. The US market accounted for 53%
of the total global pharmaceutical sales of $320 billion. Of this, nearly $40 billion
worth of drugs were estimated to go off-patent in the US market by 2005. In the past,
scientists relied on both tedium and serendipity to find candidate compounds that
might work against a disease, but technological advances had enabled researchers to
custom-design medicines. The hit-or-miss hunt for medicines in soil samples and
natural substances that could be active against disease had been superseded by
fundamentally new approaches such as genomics and proteomics, and analytical
techniques like high throughput screening.
The pharmaceutical industry could broadly be divided into prescription drugs,
generics, and bulk drugs. Creating and marketing a new prescription drug was a long,
expensive, and risky process. Exhibit 1 shows the various steps involved in new drug
discovery and development. On average, it took 10 to 15 years to develop a new drug.
Most drugs did not survive the rigorous development process—one estimate
1
Product majors shifting more R&D work to India; The Hindu, Business Line, June 19, 2002
Section adapted from Pharmaceutical Research and Manufacturers of America, 2002 Industry Profile,
PhRMA, Washington, DC, 2002
2
2
suggested that in the late ’90s, only 20 in 5,000 compounds that were screened finally
entered pre-clinical testing, and only one out of five drugs that entered clinical trials
was approved for use. By the end of the decade, declining R&D productivity and
lengthening drug development timelines had begun to put some pressure on the
margins of leading pharmaceutical firms.
The ’90s were also marked by the ever-increasing importance of biotechnology in
drug discovery. Biotechnology is the science and set of techniques for using living
organisms like bacteria, yeast, fungi, plants, and animal cells to produce substances or
to perform a commercial purpose.3 Biotechnology was a $50 billion global industry in
2001, with a collective market capitalization estimated at over $200 billion; nearly
5,000 firms worldwide engaged in biotechnology research and product development.
The majority of these were concentrated in the US and Europe. In the late 1990s,
biotechnology companies were entering into alliances with pharmaceutical partners in
unprecedented numbers. Between 1990 and 1998, the top 20 pharmaceutical
companies had invested approximately $21 billion in collaborations with
biotechnology companies, and between 1996 and 2000 the number of alliances had
increased to an average of 616 a year. These collaborations offered biotechnology
companies access to resources that they often lacked, such as regulatory expertise and
manufacturing and marketing capabilities. In return, pharmaceutical companies
gained access to emerging technologies, proprietary products, and the bright minds
behind them. Exhibit 2 shows the application of biotechnology to various stages in
drug discovery and development. This collaborative approach had proved successful,
resulting in biotechnology product sales of $39 billion and a growing pipeline of new
products4.
In 2002, the pipeline of prescription drugs derived from biotechnology was growing
faster than the traditional pharmaceutical pipeline. Pharmaceutical firms outsourced
more and more of their R&D budgets -- some estimated that as much as 25% of the
discovery-stage R&D budgets of large pharmaceutical firms found its way into small
biotechnology firms through various research partnership agreements. It was also
estimated that in 2002, 14 of the 55 blockbuster drugs marketed by the ten largest
pharmaceutical companies had been in-licensed from biotechnology companies, and
their revenues from in-licensed drugs as a proportion of their total revenues had
increased from 24% in 1992 to about 40% in 2002. 5
Clinical trials were also becoming increasingly expensive, as volunteers were
becoming harder to find in the developed economies of the US and Western Europe.
As with R&D productivity, large pharmaceutical firms had dealt with increasing
clinical trial costs by beginning to outsource the trials to specialist clinical research
organizations (CROs). The development stage R&D outsourcing market had grown
relatively sluggishly, from $5.4 billion in 1997 to $9.3 billion in 2001, though some
experts predicted that it would grow to $36.0 billion by 2010. In 2001, pharmaceutical
3
Biotechnology Strategies in 1992; HBS; 9-792-082
“Value Drivers in Licensing Deals,” Katie Arnold, Anthony Coia, Scott Saywell, Ty Smith, Scott
Minick, and Alicia Loffler, Nature Biotechnology, Nov 2002.
5
Pharmaceutical Research and Manufacturers of America, 2002 Industry Profile PhRMA, Washington,
DC, 2002
4
3
firms were outsourcing about 16% of their development budgets. The scope of
activities and research that were outsourced to CROs covered pre-clinical studies,
clinical studies, regulatory affairs, and filing services. 6
The high-level picture of the stages in drug discovery shown in Exhibit 2 is quite
coarse grained; target selection and validation, followed by lead generation and lead
optimization, followed by the early clinical candidate selection, could be broken down
into several levels that could potentially have 30 to 40 different activities. While the
sequence of activities itself was quite “modular” from a technological point of view,
there were a few stages which needed to be done together. For example, it would not
make sense to do only computational design and not do any medicinal chemistry, as
there were significant scope economies and exchange of tacit knowledge across these
stages. Instead, as Swami put it, “Access and control of intellectual property were the
two reasons why any company would like to be involved in most of the activities. If
the activities are split too much, if there are too many hand-overs, then the
traceability of who made the invention or who contributed what to the invention is a
lot more difficult and complex. Hence the agreement becomes very cumbersome and
complex. So typically companies would like to at least do those key processes which
make an agreement with another company much more manageable, in terms of
identifying who contributed what and how contributions can be evaluated. A key
driver behind the fact that companies choose to do a set of activities in-house is their
desire to control intellectual property.”
The market for generics -- which consisted of drugs that had gone off-patent -- had a
different dynamic. In the US, companies filed Abbreviated New Drug Applications
(ANDAs) with the Food and Drug Administration (FDA) to seek permission to sell
drugs that would go off-patent in the near future. A successful first-time approval for
a given product gave a generic manufacturer six months’ exclusive marketing rights
in the US, sufficient to earn margins of 30% to 90%. Once the period of exclusivity
ended, new competitors would enter rapidly and drive prices down to far less
profitable levels. Bulk drugs were essentially a commodity item, with competition
based primarily on quality and cost.
The Indian Pharmaceutical Industry
In the 56 years since India’s independence, the domestic pharmaceutical industry had
been shaped primarily by regulation. Initially, multinational companies (MNCs) had a
near monopoly on pharmaceuticals. They imported and marketed complete
formulations in India, mainly low-cost generics for the masses along with a few
highly priced specialty drugs. When the government increased pressure to deter the
import of finished products, MNCs set up formulating units in India, and continued
importing bulk drugs. In the 1960s, the government laid the foundation for the
domestic pharmaceuticals industry by promoting Hindustan Antibiotics Ltd (HAL)
and Indian Drugs and Pharmaceuticals Ltd (IDPL), two public-sector companies, for
the manufacture of bulk drugs. However, MNCs maintained their lead due to their
technical expertise, financial muscle, and ability to move innovations from other
6
Pharmaceutical R&D Outsourcing Strategies: An Analysis of Market Drivers and Resistors to 2010 –
Reuters Business Insights
4
markets into the domestic market. The high cost of basic research, coupled with the
sophisticated competencies required and a lack of financing options, deterred privatesector Indian companies from entering the market.
This state of affairs changed with the Indian Patent Act of 1970, whereby substances
used in foods and pharmaceuticals could no longer be granted product patents.
Process patents were granted for a period of five years from the date of grant or seven
years from the date of filing, whichever was earlier. Process modifications were far
easier to accomplish, and there was a rapid influx of domestic manufacturers. These
companies generally started with bulk drugs and gradually progressed into complete
formulations. Unlike the MNCs, who were constrained by their parent companies’
product range, local players could branch out to produce almost anything. The lack of
product patent royalties dramatically reduced the cost of local manufacture and helped
Indian producers to thrive. Shortly thereafter, the Drugs Price Control Order put a
ceiling on prices of certain mass-usage formulations. Since selling at such low prices
could cause discontent in their home markets, MNCs dramatically curtailed new
product launches, giving a further boost to the domestic Indian players. Under the
Foreign Exchange Regulations Act in the late ’70s, the MNCs were forced to reduce
ownership in their Indian ventures to 40%, or comply with certain export obligations
and keep their equity stake at 51%. Many MNCs curtailed the scope of their
operations, further strengthening the position of the local pharmaceutical companies.
In short, the Indian Patent Act and other laws had awarded the domestic market to the
Indian pharmaceutical companies at the expense of MNC drug majors. The Indian
pharmaceutical market now consisted of almost 20,000 manufacturers, about 100 of
which represented mid-size to large companies holding 20% of the domestic market.7
The total market size was estimated in 1999 at US $7.2 billion -- about 2% of global
pharmaceutical revenues. In volume terms, however, it ranked as the world's third
largest market. This discrepancy related to the low price of Indian drugs, averaging
around 10% of the price of comparable drugs in the US. The industry had grown more
than 10% annually for the last 10 years, well above the average industrial growth rate
of the Indian GDP. Pharmaceuticals was a net foreign exchange earner for the
country, with exports in 1998 amounting to about $1.2 billion. Initially, bulk drug
exports were far greater in value than the exports of formulations. Since 1995,
however, exports of formulations had overtaken exports of bulk drugs. 8
As part of the WTO agreements, India had agreed to start honoring product patents
from 2005 (Exhibit 3). While most believed that this agreement would eventually
change the shape of the drug industry in the developing world, some argued that
change would be gradual, at best. For one thing, India did not have trained patent
examiners to review applications, severely restricting its ability to grant informed
patent judgments. Not only must an examiner be fluent in patent law (a subject not
taught in Indian universities), he or she must also have deep medicinal chemistry and
biological knowledge to grasp the technical nuances of patent approval. Because of
7
Company sources
Credit Rating Information Services of India Ltd: CRIS-INFAC Pharmaceutical Industry Annual
Review
8
5
this, no one knew how long it would take before the WTO agreement would come
into full force.
Biotechnology in India
The National Biotechnology Board was established in India in the early ’80s9. This
became a full-fledged government department in 1986 and was renamed the
Department of Biotechnology (DBT).10 The department functioned as an apex body
for a network of government-funded research laboratories and degree-granting
institutions throughout the country. The Council for Scientific and Industrial Research
(CSIR) was a network of 40 research laboratories across the country. Eleven of these
were dedicated to research in biology and biotechnology, and these were generally
considered to be at the forefront of research. Though primarily dedicated to industrial
applications, some scientists in these institutes were conducting fairly advanced basic
research and routinely published their work in international journals and visited
leading research labs in the US and Europe. Poor funding conditions in the largely
government-owned university departments, and relatively better funding within the
CSIR system, had attracted some of the best basic researchers to CSIR. As a result, it
became the locus for a large proportion of the basic research in biotechnology in the
country, leaving a vacuum in applied research. “We are doing what the universities
should be doing,” said one senior scientist in the CSIR system. In 2001, the DBT had
created a policy document detailing a fairly ambitious vision for biotechnology in
India. The plan called for a focus on genomics and bioinformatics as cutting-edge
areas in which Indian scientists could compete effectively, in addition to
strengthening traditional biotechnology applications in agriculture.
It was estimated that there were about 160 biotechnology companies in India in 2002,
engaged in industrial and pharmaceutical biotechnology, with annual revenues of
about $150 million.11 By 2002, some established pharmaceutical firms, like DRL,
Sun Pharmaceuticals, Nicolas Piramal, and Ranbaxy, had begun investing in
biotechnology as they saw the shape of the future in the global pharmaceutical
industry. These firms had deep pockets and steady cash flows from their bulk drugs
and formulations exports. Some, like DRL, had also achieved considerable success in
the lucrative generics market in the US, and most had ambitions of transforming their
companies into research-based pharmaceutical firms. Even a non-pharmaceutical
company like the diversified Reliance Group had set up a subsidiary, Reliance Life
Sciences, that was among the 11 laboratories worldwide to be approved by the
National Institutes of Health in the US as a source of embryonic stem cell lines for
research. The RP Goenka Group had a similar venture in the offing.
Start-up firms like Shanta Biotech and Bharat Biotech, both located in the southern
Indian city of Hyderabad, had made the entrepreneurial opportunities in
biotechnology widely visible. Bharat Biotech owned the world's second largest
9
India and Its Big Leap Forward In Biotechnology; excerpts from "India Perspectives," August 1997;
Sipra Guha Mukherjee
10
http://dbtindia.nic.in/
11
CII Form Biotech Forum; Business Standard, February 7, 2003
6
hepatitis B manufacturing plant with a capacity of 100 million doses per annum, and
the largest contract manufacturing and filling facility in the Asia Pacific region for
any biological product. Established in 1996, Bharat Biotech had launched Revac-B in
1998, a vaccine for hepatitis B. Vaccines for hepatitis A, rabies, rotavirus, and malaria
were in the pipeline. The founder, Dr. Krishna Ella, was a life scientist who had
decided to return to India after several years in the US. Ella strongly believed in the
value of keeping abreast with the latest science, and he had committed Bharat Biotech
to a range of partnerships with research labs at home and abroad. Shanta Biotech had
developed India's first genetically engineered hepatitis B vaccine. Shanta had generics
like insulin and streptokinase, as well new vaccines against hepatitis C and hepatitis E
in its pipeline. Varaprasad Reddy, an electronics engineer by training, had founded
Shanta Biotech. Reddy was also preparing to offer contract R&D services in areas like
molecular cloning and antibody development, in addition to leasing out Shanta’s
facilities for production. Like Bharat, Shanta had an impressive list of research
collaborations with government labs in India and abroad. Both Ella and Reddy were
prominent in the business press as examples of technocrats and “bio-entrepreneurs.”
Both companies had developed manufacturing infrastructure to meet US FDA
standards. The success of the two companies had put serious pressure on hepatitis
vaccine sales margins of the Indian subsidiaries of multinational pharmaceutical
companies, as the Indian products were substantially cheaper. In a much-publicized
deal, Pfizer had signed an agreement with Shanta to market its hepatitis vaccine
globally.
Bangalore-based Biocon was an industrial biotechnology company that had been
among the early entrants into pharmaceutical biotechnology. Biocon and its
subsidiaries employed about 700 people and had revenues close to $4 million in 2002.
Like Bharat and Shanta, Biocon was privately held; 75% of the company’s equity
belonged to founder and CEO Kiran Mazumdar-Shaw and her family. Biocon had
begun to have some success with manufacturing generic products for cholesterol
reduction in the US market. The company had also succeeded in creating a new
platform technology for fermentation. The invention had won a US patent in 2000.
Biocon’s subsidiaries, Syngene and Clinigene, were created with the intention of
exploiting opportunities in contract R&D. Syngene provided services in the discovery
stages, while Clinigene focused on clinical studies. The diversity and density of
Indian patient populations was perceived to be a unique advantage for Clinigene to
pursue specialized clinical studies. Mazumdar-Shaw was well known to the business
press as a spokeswoman for the Indian biotechnology sector, and in 2003, had become
the first president of the newly founded Association of Biotechnology-Led Enterprises
(ABLE) that would represent the biotechnology sector just as NASSCOM (the
National Association of Software and Service Companies) had done for the country’s
software industry.12
Dr. Reddy's Laboratories: An Overview
Founded in 1984, DRL was a leading Indian pharmaceutical company that developed,
manufactured and marketed bulk drugs and formulations at affordable prices. In 2002,
12
Information on Bharat Biotech, Shanta Biotech and Biocon India is drawn mostly from secondary
sources.
7
it had revenues of $320 million, mostly from exports to 60 countries (Exhibit 8). The
company was named after its founder, Dr. Kallam Anji Reddy. DRL initially began as
a supplier of bulk “actives” to Indian drug manufacturers, but soon started exporting
to other less-regulated markets. This had the advantage of not requiring
manufacturing in FDA-approved facilities, for which certification was very costly and
time consuming. In 1993, DRL entered into joint ventures in Russia and the Middle
East, creating two formulation units. DRL exported bulk drugs to these formulation
units, which then converted them into finished products. Much of DRL’s early
success came in unregulated markets, which recognized process patents but not
product patents. This enabled the company to reverse-engineer patented drugs from
the developed world and sell them royalty-free in India and Russia.
By the early ’90s, using the expanded scale and profitability from these unregulated
markets, DRL had begun to focus on obtaining FDA approval for its formulations and
bulk drug manufacturing plants in the developed economies. This allowed its
movement into regulated markets such as the US and Europe. Reddy’s vision was to
eventually transform DRL into a “discovery-led global pharmaceutical company.”
Reddy had recognized India’s cost advantages early on. In his presidential address to
the Indian Pharmaceutical Congress (1992), he said, “Basic research is an arduous
task and is said to be expensive. The statistical data from Western countries are
frightening. It is estimated to cost anywhere between $100 and $200 million, but it is
my considered opinion that in the Indian context such an endeavor may be
accomplished within Rs 100 crore [about $30 million at that time] or so. Expenditure
of this magnitude is within the reach of some companies in India.” He set up Dr.
Reddy’s Foundation (DRF) to be the research arm of DRL in 1992. DRF filed its first
US patent in 1996.
By 1997, DRL was ready for the next major step. From being a bulk drug supplier to
regulated markets like the US and the UK, and a branded formulations supplier in
unregulated markets like India and Russia, DRL made the transition into generics.
The same year, DRF out-licensed a molecule for clinical trials to Novo Nordisk, a
Danish pharmaceutical company. By 2000, DRL had undertaken its first commercial
launch of a generic product with market exclusivity in the US, and in 2001, it became
the first non-Japanese pharmaceutical company from the Asia-Pacific region to be
listed on the New York Stock Exchange. Each of these achievements was pathbreaking for the Indian pharmaceutical industry (Exhibit 4 provides a list of
significant milestones in DRL’s history). Reddy felt that DRL was making significant
progress in moving toward its goal of transforming itself from a bulk drug
manufacturer to becoming a research-based discoverer of new chemical entities
(NCEs). In five to seven years, he hoped to transform DRL into a global researchdriven pharmaceutical company.
By 2001, the research arm of the firm, DRF, had managed to create nine NCEs that
were improvements on existing drugs in therapeutic areas like pain management,
hypertension, and diabetes (Exhibit 5). By the end of the following year, it had
managed to obtain close to 40 US patents and had about 215 employees. Instead of
committing to investing the enormous resources necessary for clinical trials, it had
opted to out-license some of the molecules to larger international players. This was a
8
routine practice at much smaller but similarly cash-constrained biotechnology firms in
the West. The licensor would receive milestone payments as the NCE crossed various
regulatory and clinical-trial hurdles.
DRL posted an income of Rs 34.4 crore (US $7.2 million) from drug discovery
activities in 2001-2002. However, by early 2003 the pipeline of nine NCEs had fallen
into some disarray as trials were suspended on three of them -- DRF-4848, DRF-3188,
and DRF-NPPC. While the first two were in the late pre-clinical stage, DRF-NPPC
had recently completed pre-clinical trials. DRF-3188 was to be used in treating
cancer, viral infections, and immuno-stimulation. DRF-4848 was an antiinflammatory, while DRF-NPPC was an insulin sensitizer. Of the nine NCEs listed on
the 2002 balance sheet, the company had also out-licensed two anti-diabetic
molecules to Novo Nordisk and one insulin sensitizer to Novartis. In July 2002, Novo
Nordisk announced its decision to suspend clinical trials on DRF-2725, citing
preliminary data from pre-clinical studies, which indicated the development of urine
bladder tumors in rats and mice. The company had yet to decide whether to carry out
further clinical trials. Soon after, Novartis also announced its decision to discontinue
further development of DRF-4158.
Setting up Aurigene Discovery Technologies
DRL management saw no reason that the R&D outsourcing opportunities being
exploited in other industries (such as software, hardware, and electronics) should not
also embrace the life sciences. After toying with the idea of setting up a new division
for contract R&D, DRL ultimately chose to float a separate company known as
Aurigene Discovery Technologies, with offices in Bangalore and Boston. Swami
believed there were good reasons for this decision. First, it would be a difficult
proposition for DRL to source business from competing players, as the firm had its
own drug discovery practice. This was critical in the Indian context, where there was
no provision for product patents in the immediate future. Second, a fast-growing
research boutique would necessitate an entrepreneurial culture that could not be
offered by a large, organization such as DRL.
Aurigene was floated as a 100% subsidiary of DRL late in 2001. The mission for
Aurigene was to become the preferred partner for drug discovery companies
worldwide. Aurigene aimed to provide high-end services by working on complex lead
molecules that could ultimately become the subject matter for intellectual property
filing. Aurigene aimed to provide comprehensive support for drug discovery through
its services in protein expression and purification, structural biology, structure-based
drug design, and medicinal chemistry. By working closely with the clients and
through a unique mix of talented people and computational and laboratory
technologies, the company wanted to offer a comprehensive platform for the rapid and
efficient exploitation of genomic data for drug discovery (Exhibit 6). While the idea
of contract R&D services in drug discovery was not new, and several firms with
similar business models already existed in the West (Exhibit 7), Swami believed that
the on-shore/off-shore combination was unique and would allow Aurigene to leverage
substantial cost advantages.
9
Peet, Aurigene’s CEO, operated from the firm’s Boston office. Peet had earned his
Ph.D. in natural products chemistry from the University of Nebraska and had done his
post-doctoral studies at MIT. Swami, the COO, headed the Indian facility in
Bangalore. After obtaining his medical degree, a Ph.D. from the University of
Pennsylvania, and a stint as a visiting scientist at the National Institutes of Health in
the US, Swami had chosen to return to India. G. V. Prasad, the CEO of DRL, was the
chairman of Aurigene’s board. Prasad had a B.S. in chemical engineering from
Illinois Institute of Technology and an M.S. in industrial administration from Purdue
University.
Aurigene’s Boston office was mostly staffed with local recruits. The lab spaces at the
Bangalore and Boston facilities were 200,000 square feet and 7,200 square feet,
respectively. The capacity available at the Bangalore facility was expected to generate
powerful scale-based economies. Although small, the Boston center had sufficient
R&D activity to prove its capabilities and credibility to US clients. However, many
clients preferred to visit the Bangalore laboratory before entering into a major
relationship with Aurigene. Based on the availability of resources, some of the
research work was initiated in Boston. As Aurigene built out its resources in
Bangalore, it hoped to move most of the work off-shore, where the cost advantages
would be significant. In cases where the client needed a quick turnaround or overnight
results, the Boston lab was a better choice. The Boston center also helped to address a
major concern of Aurigene’s potential clients -- the protection of their intellectual
property. The US presence bound Aurigene to the local judicial system.
Aurigene was exploring a range of payment structures from each of its clients. The
agreements differed according to the level of risk-sharing with the clients.
•
•
•
Up-front Payment: In the early stages, the company expected partial
funding for some of the R&D activities. This was followed by a
“contingent payment” mechanism at the end of every milestone
reached. Aurigene would not have any claim on the intellectual
property.
Pure Outsourcing Method: According to this agreement, Aurigene got
paid on a fee basis with no claims on intellectual property.
Discover & Share: In this method, Aurigene along with the
collaborating company jointly conducted research and agreed to share
the proceeds of commercialization as per a previously agreed-upon
formula. Aurigene was thus exposed to a higher risk in this model. If its
research succeeded in identifying or optimizing a lead molecule,
Aurigene would share the gains (50% or even more) with the interested
party.
The mandate to Aurigene from DRL was to position itself as a service company and
become profitable quickly. Hence, in the initial years, Aurigene would seek more upfront and fee-for-service payments and would assume a very small part of the risk.
The front-loading of the payments would help the company become revenue positive
and profitable much faster.
10
“DRL has provided the initial impetus for Aurigene, in terms of skills, talent, and
funding, and expects Aurigene to run as a stand-alone company and maintain its
independence,” remarked DRL CEO Prasad. Swami believed that Aurigene clearly
derived some advantages from its lineage. The assured funding commitment from
DRL enabled it to take a long-term approach. In addition, it was able to tap into
DRL’s expertise and experience to ramp up the operations in less than a year’s time.
DRL had also made a conscious effort to commit key human and intellectual
resources for the venture to be a success. The objective of the investment in Aurigene
was to create value in terms of IP, skills, and R&D infrastructure.
What was in it for DRL? According to Prasad, “If it was purely financial return, we
would not have invested in Aurigene.” Through Aurigene, DRL would have access to
R&D services using the latest tools of drug discovery. Few companies in India had
this expertise. Thus, Aurigene would strengthen DRL’s discovery pipeline. Swami did
believe that Aurigene faced a challenge in convincing customers that it was
independent of DRL, and that any intellectual property developed by Aurigene for its
customer would not be accessible to anyone else, including DRL. The two companies
had categorically refused to share people, resources, and knowledge between them
beyond the start-up stage. The official “no-poaching policy” corroborated this
philosophy. Both companies were operatively independent, with interactions taking
place only at the board level. However, Aurigene was mandated to make a formal
request to the board for any further capital requirements. Prasad agreed that in order
for Aurigene to succeed and attract more customers, it had to remain neutral: “If they
are not neutral it does not serve the purpose it has been created for.” DRL at best
would be a preferred customer with no additional rights or benefits.
Future Directions
DRL’s initial investment of $10 million had been used up to build the management
team and R&D facilities at Boston and Bangalore. Aurigene had come up with a fresh
request for additional funds to the tune of $10 million. This amount was intended to
be spent on scaling up the facilities and to sustain operations for the next two to three
years. With only one hour remaining until the board meeting, Swami wondered how
he could make a strong case for the additional funding. He knew that Prasad would be
asking him and the Aurigene board some tough questions: Had floating Aurigene as
an independent firm been the right decision? How was this model creating value for
DRL and its shareholders? Would the long-term payoff be strategic or financial in
nature? Was this a good time to bring in outside investors like VCs and other
pharmaceutical companies?
11
Exhibit 1– Drug Development: Time Invested and Success Rates
Compund Success Rates by Stages
Phase I
20-80 Helathy volunteers used to determine safety and dosage
Discovery [2-10 yrs]
Preclinical Testing
[Lab & animal]
Phase II
100-300 patient volunteers used to look for
efficacy & side-effects
Compund Success
Rates by Stages
5000-10000
Screened
250 enter preclinical testing
Phase III
5 enter clinical
1000-5000 patient volunteers used to
testing
monitor adverse reactions in long term use
0
12
Additional post
marketing testing
16
12 years
5 years
4 years
FDA Review and Approval
1 approved by the
FDA
Exhibit 2– Drug Discovery and Development: Time Invested and Success
Rates
Drug Discovery
Clinical Development
Product & Therapeutic Franchise
Drug Discovery
Problem
Definition
Target
Identification
Target
Validation
Lead
Generation
Target
Validation
Clinical Development
Preclinical
Pharmacology
Pilot
Prod.
Clinical
Trials
Regulatory Approval
Product & Therapeutic Franchise
Mkt. Scale
Manufacturing
Dist. &
Logistics
Marketing
Channel Support
13
CRM &
Feedback
Exhibit 3- Indian Patent Law History
THE CURRENT LAW
Indian Patents Act, 1970
allows only process patents
WTO REQUIREMENTS TRANSITION STATUS
Both process and product Product patent
patents must be available applications go into a
mailbox to be opened by
2005 at the latest
Duration of process patents is Duration of patents must Exclusive Marketing
5 years from the date of
be 20 years
Rights (EMR) for mailbox
approval or 7 years from the
patents can be granted for
date of filing, whichever is less
5 years
14
Exhibit 4 – DRL’s Progress since Inception
15
Exhibit 5: DRL’s NCE Pipeline
(Source: Company Information)
16
Exhibit 6 – Aurigene’s Business Model
17
Exhibit 7: Comparable Western firms with business models similar to Aurigene
Structural GenomiX Inc: http://www.stromix.com
Structural GenomiX, Inc. (SGX) is a drug discovery company utilizing a genomicsdriven, high-throughput structure-based platform to increase the efficiency and
effectiveness of the drug discovery process. SGX is headquartered in San Diego with
additional locations in San Francisco and Argonne, IL.
3-Dimensional Pharmaceuticals, Inc: http://www.3dp.com
3-Dimensional Pharmaceuticals, Inc. is a drug discovery company using
DiscoverWorksR, a proprietary drug technology platform, to reduce the cost and
improve the quality of drugs entering clinical trials. DiscoverWorksR uniquely
integrates High-Throughput Screening, Combinational Chemistry and StructureBased design for efficient drug discovery using targets from genome sequencing. The
company's internal research programs are focused on the discovery of orally active,
small-molecule pharmaceuticals for the treatment of cardiovascular disease and
cancer.
3DP uses DiscoverWorksR in its own drug discovery programs and to provide
discovery services to pharmaceutical and agrochemical partners.
MediChem Life Sciences
http://www.medichem.com/
(Acquired
by
DeCODE
genetics,
Inc.):
MediChem is a drug discovery technology and services company that offers a broad
range of integrated chemistry R&D capabilities to pharmaceutical and biotechnology
companies. MediChem provides drug discovery technology and services in areas such
as Proteomics, Combinatorial and Computational Chemistry, Medicinal Chemistry,
Biocatalysis, Chemical Process Development, Analytical and Separations Chemistry,
Chemical Synthesis and Scale Up
18
Exhibit 8 – DRL’s Annual Financial Statement’ 2002
19