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Biocon Final Case Questions
1. Would you start a pharmaceutical firm in India during the time frame the case is discussing? Why? Why not? What analysis led you to your conclusion?
2. Is the Indian CRO market attractive? Using Porters Five Forces framework explain your answer.
3. Does Biocon have a competitive advantage in the Indian market? Can it have one on a global scale? Can it climb the industry value curve consistently? Would you change its strategic approach? If so how?
08-081
November 4 2008
This case was prepared by Archana Kalegaonkar (MIT Sloan MBA Class of 2003) under the supervision of professor Richard
Locke and revised by lecturer M. Jonathan Lehrich.
Copyright 2008 Massachusetts Institute of Technology. This work is licensed under the Creative Commons Attribution-
Noncommercial-No Derivative Works 3.0 Unported License. To view a copy of this license visit
http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons 171 Second Street Suite 300 San
Francisco California 94105 USA.
Biocon India Group
Archana Kalegaonkar Richard Locke Jonathan Lehrich
Earn as you learn. For 25 years this unofficial philosophy had served Biocon well. Starting out in
the enzyme business in 1978 the Bangalore-based firm had gradually expanded into the
pharmaceutical industry. Expertise in manufacturing enzymes led to mass production of generic
drugs which in turn gave Biocon the experience to establish Syngene a subsidiary contract research
organization (CRO) serving the global pharmaceutical market. At each stage Biocon had built on
both its recently developed capabilities and the political biological intellectual and financial benefits
of the Indian environment to move into new areas of opportunity. By early 2003 Biocon had
parlayed earning and learning into a firm that boasted 800 employees and annual revenues of
US$75 million.
Yet the time had come to consider whether this growth model was reaching its limits. In the eyes of
Biocon India Groups Managing Director Kiran Mazumdar-Shaw Biocons newest subsidiary
Clinigene seemed an ideal way to capitalize on the companys technical strengths by offering
services in clinical trials. There was concern however that Clinigene could also be an enormous
distraction consuming precious resources in an area in which Biocon had little direct experience.
Moreover if Clinigene did prove profitable its very success could be a Pyrrhic victory: the subsidiary
could rapidly outgrow its parent and damage the companys hitherto collaborative culture. The
growth could even sidetrack Mazumdar-Shaw and Biocons directors into pursuing a possibly futile
dream of creating one of the only fully integrated drug discovery and development companies in
India. Yet if Biocon chose not to pursue the promise of Clinigene it might be trapped forever in the
brutally competitive generic pharmaceuticals market unable to tap its potential as an innovator.
Springboard pitfall or detour: Mazumdar-Shaw knew that the shareholders expected her to predict
Clinigenes and Biocons future correctly and soon.
BIOCON INDIA GROUP
Archana Kalegaonkar Richard Locke Jonathan Lehrich
November 4 2008 2
The Indian Pharmaceutical Industry
The Indian pharmaceutical industry had been shaped to a great extent by economic policies since
independence in 1947. Initially pharmaceutical multinational corporations (MNCs) from Europe and
the United States dominated the local market. In the 1960s Indias government established local bulk
drug manufacturers Hindustan Antibiotics Ltd. and India Drug and Pharmaceuticals Ltd. to compete
with the MNCs overseas bulk-drug operations for supplying local formulation plants.
In 1970 the government passed two regulations that affected the pharmaceuticals industry: the India
Patent Act (IPA) and the Drug Price Control Order (DPCO). The India Patent Act prohibited
product patents for any invention intended for use or capable of being used as a food medicine or
drug or relating to substances prepared or produced by chemical processes.1 As a result any drug on
the market could be reproduced without retribution. The Drug Price Control Order gave the Indian
government the authority to set prices for drugs sold on the local market.
Starting in its earliest days the industry experienced phenomenal growth. A combined bulk drug and
formulations output of 168 Rs. crore2 in 1965 grew to 19737 Rs. crore 35 years later an annual
growth rate of 15%. Roughly two-thirds of the output stayed in the domestic market which by the
year 2001 was also growing at 15% annually. The remaining one-third 6631 Rs. crore went to
the export market which had a 21% growth rate.3 By the beginning of the 21st century over 20000
pharmaceutical companies were operating in India.
Fueling these companies and their export market was the global pharmaceutical industrys trend
toward outsourced research development and manufacturing. Facing slimming pipelines and
escalating costs an average of US$800 million to bring a new drug to market major
pharmaceutical firms increasingly saw outsourcing as the best perhaps only way to boost speed
reduce problems faced during regulatory processes worldwide and cut costs by 30% to 35%.4
Revenues for clinical research companies worldwide in 2000 were estimated at $7 billion and
expected to grow at 30% per year.5
When choosing to outsource global pharmaceutical firms tended to focus on three areas of the drug
discovery and development value chain (see Exhibit 1):
Research and development (R&D). Drug discovery usually required considerable quantities of
particular molecules with which to experiment. A contract research organization (CRO) could
make target and even custom molecules to order.
Clinical trials. A drug typically went through four phases of clinical trials to determine whether
it worked consistently for a large population without toxicity or major side effects. (See
1 Intellectual Property Rights in India www.indiaonestop.com (April 2003).
2 1 crore = 10000000 Indian Rupees = approximately US$200000.
3 http://www.indiainfoline.com/sect/phfo/cu01.html; http://www.indiainfoline.com/bisc/thre.html.
4 Swati Chaturvedi Outsourcing in Pharmaceutical Industry Frost & Sullivan (2008) http://www.bionity.com/articles/e/49803.
5 Kiran Mazumdar-Shaw The Biotechnology Boom: Can India Meet the Challenge? speech to the Asia Society (March 13 2001).
BIOCON INDIA GROUP
Archana Kalegaonkar Richard Locke Jonathan Lehrich
November 4 2008 3
Exhibit 2.) A CRO might offer services in some or all phases including finding the patients
working with hospitals and doctors and managing the data.
Manufacturing. Once the drug was tested and approved it could be produced in bulk according
to the set formula and process. Manufacturing though not always simple tended to be the least
value-added of the three outsourcing areas and thus the most price-competitive.
By the year 2000 leading pharmaceutical firms were outsourcing roughly 25% of all their work in
these areas. 6
Increasingly the country of choice for outsourcing of pharmaceutical products whether finished or
intermediate was India. India had a large pool of English-speaking scientists and professionals who
were well-educated and well-trained. They were also cheap: a Ph.D.s salary in India averaged
approximately $15000 while the equivalent in the United States was closer to $100000.7 Indias
population was genetically diverse which provided researchers with easily accessible ethnic genetic
structures and a well-balanced group from which to recruit for clinical studies and to whom
companies could eventually sell their products.
Clinical trials services in particular were emerging as prime targets for outsourcing to India.
Clinical trials represented the most expensive part of the drug development chain: nearly 60% of total
development costs of which nearly 70% went to patient recruitment and medical personnel.8
Meanwhile the Indian government had recognized the tremendous growth potential of the medical
biotech industry and so had set up both internal and external supports to encourage the industrys
growth especially in the areas of R&D and biotech facilities.9 In 1986 the federal government
created the Department of Biotechnology within the Ministry of Science and Technology. Some
Indian states such as Karnataka had taken the initiative to build international-standard biotech parks.
In addition to building facilities for research and development business incubation and biotech
companies Karnataka also eased tax duty and lease obligations for residents of the biotech parks.10
Biotech was also beginning to attract venture capital funding although it remained the minority
source: 10% or about 300 Rs. crore of outside funding was believed to come from VCs compared to
40% from banks government sources and internal resources. Most Indian biotech and
pharmaceutical firms counted on organic growth or acquisition not outside funding to fuel any
expansion.
6 Mazumdar-Shaw op. cit.
7 http://lists.essential.org/pipermail/ip-health/2001-December/002504.html.
8 The Tufts Center for the Study of Drug Development cited in http://www.pfizer.com/research/clinical_trials/clinical_trials.jsp (October 2008); Chaturvedi
op. cit.
9 http://dbtindia.nic.in/overview.html (March 2003).
10 http://www.bangalorebio.com/docs/BiotechPolicyf.doc.
BIOCON INDIA GROUP
Archana Kalegaonkar Richard Locke Jonathan Lehrich
November 4 2008 4
The Biocon India Group
Biocon India was established in 1978 by Kiran Mazumdar-Shaw the Managing Director as a joint
venture with Biocon Ireland to bulk manufacture enzymes. Mazumdar-Shaw had begun her studies
planning to become a master brewer like her father an unusual occupation for a Brahmin family from
the alcohol-prohibiting state of Gujarat. But after graduate school when she found that the industry
wasnt ready for the first woman master brewer Mazumdar-Shaw turned to business opportunities
using fermentation processes to produce enzymes for various purposes. From a shed in an
undeveloped part of Bangalore she began producing mass papain and isinglass two enzymes that
used raw materials which were already abundant in India and necessary for the production of beer. In
1989 Biocon Ireland was acquired by Unilever. As part of Unilever Biocon began producing
enzymes for Unilevers food business. In 1998 Biocon India bought out Unilevers share in the
company and became an independent privately owned entity.
Biocon
Central to Biocon Indias success in its early days was its ability to recreate a fermentation process
that was dominated by Japanese companies in the early 1980s. Biocons Chief Scientist Shri
Suryanarayan visited Japanese factories to understand their methods for the solid state process of
fermentation and developed a pilot plant in 1989. By 1995 a second plant was required three times
the size of the original plant. During this time Shri and his R&D team built a unique and
subsequently patented fermentation reactor called the PlaFractorTM which greatly simplified the
fermentation process and created greater control thereby reducing waste and inefficiency.
It soon became clear that the capabilities and resources developed to produce enzymes could be easily
applied to the lucrative healthcare market. In 1997 Biocon India entered the $12 billion market for
generic statins a group of drugs targeted at lowering cholesterol. It launched Lovastatin in Canada
Mexico Eastern Europe and Southeast Asia. After Mercks patent on the drug expired in 2001
Biocon took the opportunity to sell in all countries. With Lovastatin and other statins Simvastatin
Provastatin Atorvastatin etc. Biocon became the first company to produce healthcare products
through solid state fermentation.11
Syngene
Meanwhile by the early 1990s Biocons scientists were developing significant abilities not just as
brewers or manufacturers but as chemical and biological researchers. In 1994 Mazumdar-Shaw and
her team therefore decided to convert that expertise into a new business Syngene. A separate
company within the Biocon India Group Syngene was the first Indian CRO to serve pharmaceutical
and biotech companies primarily international in the areas of synthetic chemistry molecular
biology and informatics. Syngene provided its clients with bulk volumes of target molecules
reagents and custom molecules for early-stage drug discovery and development. In the process
11 The World of Biocon BusinessWorld (December 2 2002).
BIOCON INDIA GROUP
Archana Kalegaonkar Richard Locke Jonathan Lehrich
November 4 2008 5
Syngene was building the skills and infrastructure to discover original molecules. Here again was the
earn as you learn philosophy a philosophy that helped foster a strongly collaborative culture
throughout Biocon India.
The Biocon India Culture and People
Biocon India prided itself that the cornerstones of its culture were openness trust and collaboration.
Visitors often remarked that everyone senior leaders key scientists lab employees constantly
walked in and out of the buildings and corridors discussing ideas and exchanging views with
colleagues from Biocon and its subsidiaries. Biocon valued its peoples accessibility and as Tara
Jayaram Head of Quality Assurance noted Kiran [Mazumdar-Shaw] encouraged us to collaborate
from the beginning and we are passing on the same corporate values to our people as we grow.
Chief Scientist Shri Suryanarayan took pride in being available by cell phone rather than hunkering
down in his office: This is how we at Biocon India find our opportunities.
Employees were encouraged to avoid hierarchies in the interest of doing the best job they could. At
[Biocon India] we work without hierarchies explained Jayaram. I dont need to go through layers
to reach the person that I need; that is not the culture we have here. It is perfectly acceptable and
encouraged in fact that people go directly to the person they need to reach without waiting for
permission approval whatever. This is how it was when I joined 15 years ago when we were only
43 employees and this is how it continues to be today.
A key element of the Biocon India open culture was trust among colleagues. Take away peoples
insecurities pointed out Mazumdar-Shaw and creativity and passion would flow. Shri Suryanarayan
estimated that it took an average of two years to strip away a new hires wariness and see him
fully embrace the collegial culture at Biocon. To ease and streamline this acceptance Biocon had
invested in both numerous creature comforts special transportation free lunch and snacks on-site
health checkups etc. and a strongly meritocratic hiring and performance management system. Performance
rewards were based not merely on an individuals achievement but on the performance of
her team so as to foster excellence and reinforce collaboration.
Thanks to its cultural and financial successes Biocon India had become a highly desirable place to
work allowing it to hire the best minds in the sciences. According to Nirupa Bareja Head of Human
Resources We want people with scientific backgrounds because it makes it much easier for people
to talk to each other. They are familiar with the jargon accustomed to scientific concepts and this
facilitates dialogue and fitting in. Importantly Biocon India Groups people were also businessoriented
typically coming from industry backgrounds (Novo Nordisk Astra Zeneca etc). Yet senior
managers were keenly aware that background and industry experience alone were not enough. As
Jayaram remarked I rejected a candidate that was exceptional in his scientific background because
he did not have the collaborative attitude that is so essential to Biocon.
BIOCON INDIA GROUP
Archana Kalegaonkar Richard Locke Jonathan Lehrich
November 4 2008 6
Clinigene
Emboldened by the strength of Biocon Indias culture and its two subsidiaries Mazumdar-Shaw and
her senior team developed a vision: to become a fully integrated drug discovery and development
company. The Biocon India Group already possessed or was developing the capabilities for
conducting research and development manufacturing pharmaceuticals and marketing its products.
Besides animal testing Biocons missing link in the traditional pharmaceutical value chain was the
ability to run clinical trials (see Exhibit 2).12
Thus in the year 2000 Biocon India launched a new subsidiary: Clinigene. Clinigene sought
ultimately to offer a broad range of clinical trial services recognizing that drug development could
span two different areas that consequently required different types of clinical studies. Generally
generic drugs required bio-equivalence and bio-availability (BE/BA) clinical studies to prove that the
generic drug worked as well as the off-patent original drug. But for new drugs much more elaborate
clinical trials had to be conducted.
In the few years since its launch Clinigene had focused not on organizing trials but on clinical lab
services BE/BA studies and partnership coordination with hospitals. As Chief Operating Officer Dr.
A. S. Arvind noted By building up capabilities in conducting BE/BA studies and clinical trials
Clinigene fills a key missing gap in the drug discovery and development value chain for Biocon.
According to Dr. Nadig Vice President of Medical Services the services contributed to Clinigenes
ability to conduct high quality clinical research from start to finish.
Yet launching Clinigene raised multiple concerns largely because it was not clear how soon Biocon
India Group would need its capabilities. Biocon India was still several years away from developing
its own drug molecules. Rather than put Clinigene on hold until in-house demand kicked in
Mazumdar-Shaw expected Clinigene to sustain itself with external clients in the CRO business. More
than two years after Clinigenes creation doubts remained about the risks it posed risks particularly
in market positioning culture publicity and ethics.
Market Opportunity
Clinical research in India was beginning to take off and was forecast to explode during the next
decade. Contract research organizations (CROs) were emerging as the key players in this market.
Lotus Labs for instance was growing at a rate of 100% per year and one study predicted that Indian
CROs would grow from 0.7% of the global market in 2002 to 20% in 2010.13 Within India CROs
based in Bangalore accounted for 2% to 3% of the total CRO activity in India which was estimated at
Rs. 250 crores in 2000 and were expected to continue to grow over the next few years.14
12 Animal testing was currently outsourced and there were good reasons to continue doing so. It required different capabilities and investments which were
very specific to the animals and from which it was difficult to leverage the resources for other activities.
13 BusinessWorld (October 14 2002).
14 Vijaya K. Bangalore: Jostling with the game of clinical research Expresspharmapulse.com.
BIOCON INDIA GROUP
Archana Kalegaonkar Richard Locke Jonathan Lehrich
November 4 2008 7
This high growth potential could represent significant opportunity for Clinigene to reap revenues as a
CRO player. On the other hand Clinigene would have to position itself carefully. Indian CROs were
focused primarily on serving the need for BE/BA studies in the market and although a few were
beginning to offer services in clinical trials some pharmaceutical MNCs were wary of outsourcing
such critical and sensitive tasks to a largely unproven Indian industry. Meanwhile foreign CROs
such as Quintiles and the in-house data management centers of big pharmaceutical companies such
as GlaxoSmithKline and Pfizer were focusing their efforts on serving higher-value needs of the
market particularly data management and Phase III clinical trials (see Exhibit 3). Clinigenes
current capabilities positioned it in the low- to medium-value segment of the value chain. Moving up
the value chain might be more profitable in the long run but would entail significant costs both
financial and cultural.
Organizational Culture
Mazumdar-Shaw and her team also recognized that Biocon India Group could end up a victim of
Clinigenes success. Were it to succeed in capturing a significant slice of a growing market
Clinigene could conceivably grow to a size that overshadowed Biocon and Syngene. Such aggressive
growth meant the diversion of time and resources. It also meant a large influx of new employees and
little time to inculcate the Biocon culture particularly the two years cited by Shri Suryanarayan.
New organizational designs and procedures might need to be introduced and enforced in a company
that prided itself on loose structures and casual hierarchies. Moreover the nature of clinical trials
required that much of the work be done in partner hospitals. Physically dispersed among trial sites
rarely able to wander the corridors or enjoy Biocons facilities the Clinigene employees could easily
end up disaffected or at least loyal only to Clinigene rather than its parent Group.
Publicity and Ethics
Clinical trials dealt with humans and thus carried significant risk to the CRO sponsoring the clinical
trial. Although rigorous and stringent conditions were imposed by the industry and government
bodies the risk still fell upon the company running the experiments. Furthermore this risk could
have multiple dimensions: financial losses from failed clinical trials and compensation to victims
ethical challenges for employees eager to achieve results and unsure where subjectively measured
good ethics lay and damage to reputation and even organizational survival if questions were
publicly raised about the companys impact on humans and society.
In the media Biocon India Group had enjoyed coverage ranging from quiet approval to fawning
praise. But if a Biocon subsidiary were to run clinical trials in India a developing nation with a significant
population living in poverty it could receive negative and destructive attention for the first
time. The issue of human participation in clinical trials never a simple topic grew far more complex
when the use of illiterate and arguably ill-paid subjects raised questions of patient consent and abuse.
In the United States for example any actual or perceived infringement of clinical trials ethics not
BIOCON INDIA GROUP
Archana Kalegaonkar Richard Locke Jonathan Lehrich
November 4 2008 8
providing informed consent preventing control-group subjects from seeking medical treatment etc.
frequently provoked references to the Tuskegee Syphilis Study (1932-1972) arguably the most
infamous biomedical research study in U.S. history.15 As some Clinigene staff had recently pointed
out clinical trials could easily become politicized particularly when a Western MNC used an Indian
company like Clinigene to test drugs on Indians for largely Western use. In its desire to grow into a
model firm a rare Indian example of a fully integrated drug discovery and development company
Biocon India Group might find itself accused of deliberately inviting neocolonial imperialism foreign
exploitation and subjugation to the West.
Seeing the Future
Mazumdar-Shaw was excited by Clinigenes bright prospects. Yet she also recognized the importance
of caution. True Clinigene was making money attracting clients and filling gaps in the
Biocon India Group value chain. But it also significantly increased the companys risks risks not just
of embarrassment or failure but of dangerously swift success.
If Biocon India Group were to grow then it needed to expand to Mazumdar-Shaw this seemed
certain. She could push Clinigene to get all the business it could even though it could end up
dwarfing the rest of the company and sapping the core culture. Alternatively she could ensure that in
the short term Clinigene only took business for services that were relatively safe albeit lower-value
and waited to run clinical trials until Syngene was ready to test its own original molecules. Perhaps
Clinigene was sidetracking the firm forcing its senior team to run a start-up all over again; if so the
simplest (though more immediately expensive) approach would be acquisition: buy a budding clinical
services CRO preferably one that would add expertise and client relationships but could be kept at
arms length from the Biocon culture. Earn as you learn had worked in the past. Whether the one
would soon sabotage the other: that was part of the future Kiran Mazumdar-Shaw now had to predict.
Study Questions
1. What are the advantages and disadvantages of starting and operating a pharmaceutical firm in
India?
2. Is the Indian CRO market attractive?
3. What is the best way for Biocon India Group to expand?
Case Write-up Question
What is the best way for Biocon India Group to expand and what factors should it consider?
15 http://en.wikipedia.org/wiki/Tuskegee_Study_of_Untreated_Syphilis_in_the_Negro_Male (October 2008).
BIOCON INDIA GROUP
Archana Kalegaonkar Richard Locke Jonathan Lehrich
November 4 2008 9
Exhibit 1 Typical Drug Development and Discovery Value Chain including Services of
Biocon India Groups Companies
* BE/BA: Bio-equivalence/bio-availability.
Source: Case authors.
R&D
Biocon/
Syngene
Animal
studies
Clinical trials
I-IV/
BE/BA*
Clinigene
Approval &
launch
Clinigene/
Biocon
Manufacturing
Biocon
Marketing &
Distribution
Biocon
BIOCON INDIA GROUP
Archana Kalegaonkar Richard Locke Jonathan Lehrich
November 4 2008 10
Exhibit 2 Clinical Trials in India
Phase Objective Status
Criteria for
Subject
Selection
Number of
Subjects
Duration
of Study
Cost in
India
compared to
US
I Determine
whether drug
has toxic
effects on
healthy
humans
Allowed only
for
molecules
discovered
in India
Healthy males
between ages
of 20-30 years
20-100 0.5-1 year <50% II Determine whether drug works and if there are any short-term side effects Allowed if Phase I trials are conducted in India Volunteers with indication A few hundreds 1-2 years <50% III Determine efficacy of drug over a large population and if there are any long-term side effects Allowed if Phase II trials are conducted in India Volunteers with indication and additional medical conditions A few hundreds to a few thousands 2-5 years <50% IV Test existing medicines in new dosages for effectiveness against other ailments/ conditions Can be conducted Volunteers with indication A few hundreds to a few thousands 1-2 years N/A Source: Study by Ernst & Young BusinessWorld (October 14 2002) 40. BIOCON INDIA GROUP Archana Kalegaonkar Richard Locke Jonathan Lehrich November 4 2008 11 Exhibit 3 Indian and Foreign Contract Research Organizations (CROs) in the Clinical Research Market Source: Case author interviews; study by Ernst & Young BusinessWorld (October 14 2002).
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