Business Policy and Strategy

Business Policy and StrategyPart 1After studying the Biocon India case study, describe the strategic choices facing Biocon. What are the key factors to that decision?Please read the case study closely, with a focus on how informal groups within an organization can provide a structure to that organization.Please write an essay of complete and well composed paragraphs (250 word minimum for the entire essay) Be sure to use in text citation and provide references for your sources. Wikipedia is not a source.Part 2After reading the case study and other available information carefully, prepare a two page (double-spaced) essay addressing the following questions. When composing your essay, do not simply list the question and provide an answer, but rather compose a narrative essay that responds to the questions.What are the strategic choices available?Who are the key groups involved?Describe the relationships between the groups.What are the rewards available to expanding or growing Biocon India’s business?What are the risks?What is the primary structure (or lack thereof) that makes Biocon India distinctive?What threatens this structure?What is your recommendation to Biocon India? Cite references to material that you use in preparing the essay. Be sure to use in text citation and provide references for your sources. Wikipedia is not a source.Part 3Please write an essay of complete and well composed paragraphs (200 word minimum for the entire essay) where you identify a workplace or social organization you are familiar with and describe the key groups, structure, and relationships between the groups. How does the structure of the organization affect the way it makes decisions?Cite references to material that you use in preparing the essay. Be sure to use in text citation and provide references for your sources. Wikipedia is not a source.
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November 4, 2008
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 Group’s Managing Director, Kiran Mazumdar-Shaw, Biocon’s newest subsidiary,
Clinigene, seemed an ideal way to capitalize on the company’s 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 company’s hitherto collaborative culture. The
growth could even sidetrack Mazumdar-Shaw and Biocon’s 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
Clinigene’s and Biocon’s future correctly, and soon.
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 AttributionNoncommercial-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
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, India’s 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 19,737 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 – 6,631 Rs. crore – went to
the export market, which had a 21% growth rate.3 By the beginning of the 21st century, over 20,000
pharmaceutical companies were operating in India.
Fueling these companies and their export market was the global pharmaceutical industry’s 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 = 10,000,000 Indian Rupees = approximately US$200,000.
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).
November 4, 2008
2
BIOCON INDIA GROUP
Archana Kalegaonkar, Richard Locke, Jonathan Lehrich
•
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 $15,000, while the equivalent in the United States was closer to $100,000.7 India’s
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 industry’s
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.
November 4, 2008
3
BIOCON INDIA GROUP
Archana Kalegaonkar, Richard Locke, Jonathan Lehrich
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
wasn’t 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 Unilever’s food business. In 1998, Biocon India bought out Unilever’s share in the
company and became an independent, privately owned entity.
Biocon
Central to Biocon India’s success in its early days was its ability to recreate a fermentation process
that was dominated by Japanese companies in the early 1980s. Biocon’s 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 Merck’s 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, Biocon’s 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).
November 4, 2008
4
BIOCON INDIA GROUP
Archana Kalegaonkar, Richard Locke, Jonathan Lehrich
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 people’s 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 don’t 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 people’s
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 hire’s 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 individual’s 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 Group’s 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.”
November 4, 2008
5
BIOCON INDIA GROUP
Archana Kalegaonkar, Richard Locke, Jonathan Lehrich
Clinigene
Emboldened by the strength of Biocon India’s 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, Biocon’s 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 “Clinigene’s
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 Clinigene’s 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.
November 4, 2008
6
BIOCON INDIA GROUP
Archana Kalegaonkar, Richard Locke, Jonathan Lehrich
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). Clinigene’s
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 wou …
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