Weak Dollar Good For Biotech: Outsourcing Trend May Reverse
By Cynthia Robbins-Roth
BioWorld Today Columnist
My morning ritual includes perusal of The Wall Street Journal, where I try to get a sense of the larger economic universe beyond biotech. In those pages, there has been much discussion of the dropping value of the dollar vs. foreign currencies and the potential impact on the U.S. trade deficit.
That got me thinking about the growing "trade" imbalance in our sector, as more companies and investors get excited about the opportunity to access cheaper labor and infrastructure by outsourcing aspects of R&D, manufacturing and maybe clinical trials to India, China and other low-cost providers.
In the past year, Merck and other biopharma firms have accelerated committing big bucks to collaborate or set up their own R&D centers in India, China and Singapore. U.S. biopharma firms are looking for ways to cut costs through outsourcing, and investors are all excited about participating in the next big thing.
Nothing stands still in this world, of course, especially not business and investing fads. But outsourcing isn't the real story here, any more than contract services was the full story of combichem or genomics companies. The service biz is just a means to an end - a more lucrative end, that is.
The Next Wave
What is really happening? Outsourcing is seeding the next generation of fully integrated pharmaceutical companies (FIPCOs) overseas, says Vivian Lee, of Aqua Partners (aquapartners.net).
As the biotech industry hits the 30-year mark, she sees an exponentially accelerating timeline for transformations in business strategy.
"It took a decade for the first wave of monoclonal antibody companies to move from contract production and service to FIPCO, five years for combichem and three years for genomics to go from being service- to product-oriented. Asian outsource providers are already moving away from service-only' models."
That means that companies not already generating a strong cashflow from outsourcing may be too late to catch the next growth wave.
Several companies in India and Singapore already have enough cashflow to think about leveraging into global activity, and China might not be far behind.
Lee sees India's Dr. Reddy's Laboratories ($546 million in revenues last fiscal year) and Ranbaxy ($1.1 billion in 2005 revenues) as the most globally visible firms at the leading edge of the evolution. Along with other Asian firms, they are setting up R&D facilities and using acquisitions to develop proprietary assets beyond the current biogenerics and new formulations.
Reliance Life Science is another of those new players. It was founded in 2001 by The Reliance Group, the largest private sector company in India (oil, gas, refining, petrochemicals and textiles), generating annual revenues of $24 billion.
Companies such as those can put their war chests to work building a life-science group that is designed to move up the value chain from biogenerics, drug delivery and contract clinical and manufacturing services into a global biotech powerhouse working in drugs and diagnostics, stem cell therapy, plant genetic engineering, biofuels and biopolymers.
In other words, they don't want to compete with Quintiles; they want to compete with Pfizer and Novartis.
Can't Keep Them Down On Farm
As the dollar drops against foreign currency and outsourcing successes drive up salaries and costs overseas, at what point does it become cost-effective to keep R&D in the U.S.? Or for foreign companies to set up their "outsourced" R&D here?
Big European pharma already thinks that is a good idea, hence their establishment of sizable research facilities in Boston and other U.S. locations.
Lee said that the emerging Asian biotech sector is starting to look to the U.S. as a key source of industry-savvy employees and collaborators. In other words, they see the U.S. as a great outsourcing opportunity.
As the Asian firms evolve toward their own version of Genentech, they are anxious to access proprietary assets, especially discovery-stage, that won't be home-grown for a while. Viewed purely as vendors by most, those companies are evolving into a brand-new market of potential co-developers, co-marketers, even investors for the global biotech sector.
We keep talking about the growing funding gap as private and public investors continue to shy away from the preclinical biotech opportunities. Companies, entrepreneurs and investors able to see Asian companies as more than a source of cheap labor stand to benefit.
If Asia becomes part of the buy-side, how does it get access to good deal flow and good in-licensing opportunities in the West? The same way the Europeans and Japanese did during the 1980s and 1990s - through consultants and bankers, and through co-investing with U.S. venture funds. That represents a much more enticing growth opportunity than yet another outsourcing deal.
Asia Can Replace U.S./European Partners
As big pharma does increasingly desperate deals (surely only desperation can explain Abbott's willingness to give Enanta $57 million up front for two preclinical candidates), many biotech execs might think they have this partnering thing in cruise control.
But those mega-buck, early stage deals are not likely to solve the problems of more than a handful of our companies. I'll bet that a majority of preclinical stage firms still find it challenging to close significant up-front deals.
Asian firms clearly are in the running to become that infamous "partner of choice." Dr. Reddy's, Ranbaxy, Reliant and other large Indian firms have been setting up partnerships with biotech firms around the world. They are getting to know many of the smaller biotechs by becoming the manufacturing partner - a great way to peruse the pipelines.
Bharat Biotech, of Hyderabad, India, started out providing quality contract manufacturing, added in biogenerics and novel formulations, and today is working on proprietary pharmaceuticals and vaccines. The firm recently cut a deal with Belgium-based ThromboGenics to in-license a Phase II thrombolytic in developing and some developed markets. Bharat will manufacture finished drug for all markets, and is responsible for the Phase III trials and getting the drug approved for market, initially in India. A similar March deal with Novavax encompasses a pandemic flu vaccine program.
And that whole biogenerics thing? While U.S. and European companies fight tooth and nail to block those products from the market (in some cases, while simultaneously setting up biogeneric divisions), Indian firms and others, such as Singapore-based Scigen are doing a whopping business manufacturing and selling biogeneric EPO, the various colony-stimulating factors and growth factors (G-CSF, EGF, FGF, HGH) and hepatitis B vaccines.
My suggestion? Stop fighting and ride the wave from the front of the board.
Robbins-Roth, Ph.D., founding partner of BioVenture Consultants, can be reached at email@example.com. Her opinions do not necessarily reflect those of BioWorld Today.
BioWorld Today December 18, 2006