To me it appears that more evidence is in that the pharma/biotech value chain is modularizing, specialist firms are emerging and the industry footprint is going global. There have been 6 new R&D collaboration deals involving Indian firms in the last 3 months alone. How does this square with Prof. Gary Pisano’s view that the biotech sector lends itself better to vertical integration than to a Silicon Valley type ecosystem of independent specialists? I had started this discussion a few days back here.
Let’s look at the deals that are taking place first. They follow a pattern in which the small Western firm has the animal models and the Indian firm provides synthetic/analytical chemistry capabilities along with some clinical development. A good example of this would the partnership between the Bangalore based Connexios and the Danish firm, Rheoscience. The way this partnership works is that Rheoscience uses its animal model for obesity and diabetes to identify some gene candidates. Connexios then uses its molecular model for diabetes and obesity to throw up potential target molecules. These are tested first in the cell cultures of Connexios, later on Rheoscience’s obese rats before moving on to clinical trials if they are found good. Together they are able to look at more molecules and reduce the cycle time.
While the research collaboration deals are not new for the industry, the Indian firms are only now getting into the action. There were only 7 partnership deals involving Indian firms till mid-2006, and now another 6 have happened in the last 3-4 months. BusinessWorld India did a nice story about all this last week (see The New Drug Discovery Partnerships, free registration required) and mentions that many more deals are in the pipeline.
This brings me back to the original question – where is the industry going in terms of verticalization versus modularization of the value chain. Pisano’s contention is that the Silicon Valley network-of-firms model is not working due to “persistent uncertainty” (too high risk) and the need for cross-discipline integration. It’s clear that neither is the big pharma model going to deliver the goods. One alternative may be, as the Economist article that I referenced in my previous post suggests, venture philanthropies like Bill & Melinda Gates Foundation. These foundations have the discipline of VCs with the stamina of government initiatives. Could the other alternative be the cross-border collaboration model that seems to be emerging around Indian firms? By having a good division of work and lower cost structure, this model speeds up the process and reduces capital needs. Effectively this means that the risk has been lowered. Does this lower risk profile now make it a more viable funding option for VCs again?
Despite my interest, I am no expert in the biotech/pharma industry. While I can see the similarities with the software/wireless industries (that I know a lot more about), I can also see the differences. Take the India angle for example. In IT, India has either low-risk (though high margin!) IT services firms like Infosys and Wipro or has high-risk product firms like Tejas Networks. In the pharma/biotech sector, India has those two classes of firms - drug discovery services firms like GVK BioSciences and indigenous drug firms like Dr. Reddy Labs – but now also has risk-sharing based partnerships that I have covered here. In that sense the local ecosystem is already different from the IT mould. These are early days and it will be interesting to see how this ecosystem will grow and mature. I care about these issues out of natural curiosity but also because there is lots of money to make in India in this new sector.
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