The Hepatitis B Tragedy
Over 100,000 Indians die every year from Hepatitis B infection [13]. About 40 million individuals are chronically infected, and 4% of the Indian population are carriers. As a serious liver infection, it is transmitted through exposure to infectious blood or bodily fluids, including during childbirth. By the early 1980s, the WHO recommended that every child be vaccinated for Hepatitis B, but inexpensive recombinant vaccines had not been developed. Merck and GlaxoSmithKline (formerly SmithKlineBeecham) had developed recombinant vaccines in 1986, and they held a monopoly with over 90 other patents covering manufacturing processes such as isolation and purification [14]. In the late 1980s, prices were as high as USD$23 a dose. Plasma-derived vaccines had been produced in India since 1981, but concerns arose around the capacity to produce large quantities of plasma-derived vaccines, and about their safety since they are derived from human blood [14]. With most Indian families living on USD $1 a day with multiple children and three doses required per child, vaccination was simply unaffordable [15].
An Engineer with a Cause
Dr. K.I. Varaprasad Reddy reported that he discovered the extent of the issue when he attended a WHO conference in 1992, and learned that what was needed was an inexpensive generic biotech vaccine. He felt that the vaccine would have to be produced in-country rather than imported. The Indian biotech industry at that time was focused on generic pharmaceutical products, and was not yet involved in innovative biotechnology [4]. Recombinant technology did not exist within the country [6]. When Dr. Varaprasad approached a Western firm for a technology transfer he was told that, essentially, "India cannot afford such high technology vaccines. India does not require vaccines. And even if you can afford to buy the technology, your scientists cannot understand recombinant technology in the least." Despite being trained as an electrical engineer with no biotech R&D experience and just an MBA, Dr. Varaprasad was motivated by this challenge and felt that the science was something he could delegate to an experienced team of scientists.
Building the Dream
With an idea in mind and strong convictions, Dr. Varaprasad began to seek capital for this new venture. Although he visited every major Indian bank, they were unwilling to fund early-stage start-ups with no revenue, and had little understanding of the biotech industry at large. But Varaprasad persisted, and raised $1.2 M USD by selling his father's properties, and seeking investment from family and friends. As Dr. Varaprasad himself had no experience in biological research, he contacted hundreds of expatriate Indian scientists, two of whom he persuaded to join him. Shantha was founded in 1993 with few resources, but much hope. As one of the scientists, M.K. Sudhir, stated: "If you ask me if I would go through it again, I would have to think twice. At that point, it was a missionary zeal. There was no precursor for this kind of product in India."
Shantha incubated inside Osmania University at Hyderabad, but the company was relocated because of perceived institutional politics. By 1995, Shantha had exhausted its initial investment and was on the verge of bankruptcy. Dr. Varaprasad fortunately found an unexpected ally in the Foreign Minister of the Sultanate of Oman, H. E. Yusuf Bin Alawi Abdullah, who wanted an affordable vaccine for his own citizenry. Oman injected $1.2 million USD in equity for a 50% stake in the firm, which allowed Shantha to move into a new facility at the Centre for Cellular and Molecular Biology in Hyderabad. This investment carried them forward to 1997 [See Table 1].
A Process Innovation
After four years of supporting his scientists, Dr. Varaprasad's patience paid off. In 1997, Shanvac-B, India's first home-grown recombinant product, launched at a price of about USD $1 a dose. The vaccine was produced in Pichia pastoris, a yeast system different from that used by the original inventors of the vaccine. Although at the time Pichia pastoris was being used for research purposes, Dr. Varaprasad was told by the manufacturers of the expression system that Shantha was the first company to use Pichia pastoris to produce a commercial product [16]. Its Shanvac-B process innovation earned them two process patents, a beneficiary of India's preferential treatment of process patents over product patents in its Patent Act of 1970 [17]. According to Dr. K. V. Sudhir, one of the pioneering scientists, "in hindsight... [it] was a major factor in us being so successful" because it led to better yields and more efficient purification compared to even multinational processes [16].
From Lab to Village
According to the annual reports of Shantha, analysts projected first year sales of only $100 000 USD given Shanvac-B's low price, but actual sales in 1997 exceeded $1.6 million USD. Shanvac-B was launched at around USD $1 per dose because, in Dr. Varaprasad's words "...my gut feeling [was], unless it is made for one dollar, nobody can afford this." But it was not a charitable act - net profit margins were reported to be around 20% [18].
Initial sales were financed almost entirely by the private-sector as the public health agencies in India did not have a mandated vaccine schedule yet, and most healthcare services were (and continue to be) provided by private healthcare. The price was a fraction of that charged by the competition [19], based on Dr. Varaprasad's desire to make the vaccine affordable to Indian citizens rather than charging what the market would bear. Consumption of vaccine increased from a few hundred thousand doses in early 1990s to over 30 million doses in November 2008 with increasing involvement of donor and public health agencies [20]. Prices in the Indian market reportedly dropped from about $15 to as low as $0.23 USD [6, 14].
Revenues exceeding $90 million USD in 2009 have validated Shantha's high-volume, low-margin strategy [21]. This rapid success was partly due to mentorship from a large multinational pharmaceutical for developing good manufacturing practices and regulatory acumen. Pfizer (New York, NY) was impressed enough with the quality that it agreed to co-market Shantha's Hepatitis B vaccine under the HepaShield brand in India in 2002 [6]. In 2000, Morgan Stanley and the State Bank of India Mutual Fund invested USD $10 million in a private round of equity raising to build manufacturing facilities.
A Tradition of Innovation
Shantha continued to employ process innovations for subsequent products. Its second product, interferon alpha 2-b (Shanferon), was also produced in Pichia pastoris reportedly marking the first time this molecule was produced commercially in yeast rather than the traditional bacterial system [22]. Shanferon was reportedly priced at Rs 300 ($USD 6.50), which was also substantially lower than the then imported price of Rs 1200 ($USD 26.00) [23]. Shantha was one of the first biotechs to produce erythropoietin in serum-free media, which quelled safety concerns regarding serum use in manufacturing [24]. In using these new processes, Shantha's scientists not only had to alter the method by which they produced their product, but also the entire purification process. Although it took additional time to develop good manufacturing practices that adhered to ICH-WHO norms, the decision to focus on process innovation right from the beginning led Shantha to become the first Indian company to be prequalified by the WHO [6]. The initial investment in quality control helped accelerate approval for its later vaccines: Shantha now has four vaccines that are WHO pre-qualified [25]
After Hepatitis B, Shantha started development programs for interferon alpha 2-b, vaccines for rotavirus, HPV, pneumococcal viruses and oral cholera, and set up a subsidiary in the United States to develop monoclonal antibodies for cancer indications [26, 27]. This was only made possible by Shantha's commitment to invest 12-25% of its profits back into R&D every year [28] - a number higher than its typical Indian compatriots, and an ambitious goal to keep new products coming onto the market every one or two years. "The criterion was simply to look at products that were relevant to India and the other developing country's needs," said Shantha's CSO Ashok Khar.
Shantha facilitated this pipeline expansion through not only home-grown efforts, but also partnerships with the US National Institutes of Health, Bill & Melinda Gates Foundation, John Hopkins University, and PATH [29]. By building a close relationship with the Center for Cellular and Molecular Biology (CCMB) and other Indian research institutes [30], Shantha has also benefited from access to local scientists and R&D ideas for novel expression vectors. For example, it worked with the International Center for Genetic Engineering in Biotechnology in New Delhi, India for novel kinase inhibitors for cancer with the potential for revenue sharing.
Its focus on innovation and quality to meet WHO prequalification standards led to a higher cost structure than its domestic competitors who did not meet these standards. In recent years, this has limited domestic sales. However, Dr. Varaprasad believes Shantha is able to compensate through greater access to international markets. This focus on innovation and quality was demonstrated when a multinational competitor ran a campaign that questioned the quality of its Hepatitis B vaccine [31]. A double-blind comparative study showed that Shanvac-B was equivalent or superior to the competitor's product on all counts - immunogenicity was found to be higher, side effects fewer, and seroconversion was high enough that only two doses of the vaccine were required in contrast to the three doses required by the competition [32].
Joined, but Not Beaten
The success of Shanvac-B was arguably an important step for the country's health technology sector. It provided a proof of concept that scientists working in India were able to conduct advanced biotech R&D. Since then, several companies have followed in its footsteps. There are now five Indian companies that produce the Hepatitis B vaccine [33], and as noted by Shantha's Executive Director Mr. Khalil Ahmed, "Everybody and their cousin have started a biotech company in India." The Indian biotech sector, which was almost non-existent in the early 1990s, is on track to generate at least $7 billion in annual revenues by the end of 2010 [34, 35].
Marketing proved critical to maintaining competitiveness. Shantha has a sales force of 175 people that market drugs directly to doctors using conferences and seminars to reduce mark-ups through distributors that were said to reach up to 200% by the time the product reaches the public. Although Shantha conducted vaccination and education camps to increase public awareness with regards to the importance of being vaccinated, Shantha's Executive Director Khalil Ahmed observed that Indian doctors felt that this is the "dirtiest thing companies could do, by selling cheaply to end-users." Given the respect that doctors command in India, Shantha executives felt having their support was critical. Marketing to physicians allowed Shantha to distinguish itself from the counterfeits and justify its premium. This was reflected by Pfizer's decision to purchase and sell Shanvac-B as a branded generic by leveraging doubts and concerns among Indians about counterfeit or low-quality drugs [6, 36].
As Shantha's reputation has grown, several emerging markets have engaged Shantha in R&D and clinical collaborations for recombinant vaccines. The International Vaccine Institute (South Korea) asked Shantha for help conducting clinical trials in Kolkata and co-developing its own new-generation oral cholera vaccine [37]. Despite recommendations from the WHO for use of these new vaccines in 2001, only Vietnam was locally producing oral cholera vaccines [38]. However, an analysis of this vaccine showed that for it to comply with WHO guidelines, the vaccine needed to be reformulated and its production technology modified. The one internationally licensed cholera vaccine, Dukoral produced by Crucell/SBL Vaccines, was too expensive at $18/shot in India. Following successful reformulation in early 2009, Shantha was selected by IVI to manufacture this new vaccine, and the price has since reportedly dropped to $2/shot [39]. Similarly, Shantha has partnered with Pediatric Dengue Vaccine Initiative (South Korea) to run a Phase I clinical trial for its dengue vaccine [40].
The French Attraction
Shantha's success led to international attention in 2006 when Merieux-Alliance (France) acquired a 60% stake in Shantha after the Omani investors sought an exit [41]. However, Dr. Varaprasad stated that he had no intention of ending up as a "glorified employee of a multinational company." Shantha insisted on maintaining its focus on providing affordable vaccines to the poor, and being able to retain its Indian characteristics such as the company name, management, and philosophies. The transition led to Shantha sharpening its focus on vaccines. Its monoclonal antibody development program wound down, and Shantha moved away from performing contract research services. Dr. Varaprasad warns fellow entrepreneurs in emerging markets to be aware of these challenges in striking a balance between health impact and firm value. He admitted that the transition led him to think about retiring, although he does concede that Merieux is focused on the welfare of Indians. "They don't want to take risks like an entrepreneur does."
The acquisition helped Shantha to further build its reputation internationally and open new markets. Almost 60% of Shantha's revenues came from exports at the time because the Indian Government had not added the Hepatitis B vaccine to its national immunization schedule. In 2009, the firm was awarded a USD$340 million UNICEF contract for pentavalent vaccines through 2010-2012, and in parallel, India adopted the vaccines for its immunization schedule at the recommendation of the WHO [42]. This access to international markets proved useful again in 2009 when rumors emerged that GlaxoSmithKline and other multinationals were interested in bidding on Shantha [43]. These rumors culminated in an announcement on July 27th, 2009 that Sanofi-Aventis had acquired a controlling stake in Shantha at a valuation of $784 million USD.