Indian vaccine innovation: the case of Shantha Biotechnics

For many years, Western investors were attracted by the prospect of outsized returns in the biotechnology industry. Amgen's initial investors received returns of almost 100 fold after only 3 years [1], while Genentech's patents generated hundreds of millions of dollar in royalties [2].

Even as early enthusiasm for biotechnology's potential commercial returns cooled in the West over the past decade [3], the globalization of biotechnology spurred the creation of a range of biotechnology companies in emerging markets. This select sub-set of the developing world including China, India, Brazil and South Africa experienced marked economic development over the last two decades, and now has significant scientific and financial capital under the stewardship of relatively stable political systems.

In India, an industry-led biopharma sector emerged, with large companies like Ranbaxy in the 1970s and 1980s leveraging recognition of process rather than product patents from the Patent Act of 1970 to rapidly expand and become internationally known for manufacturing generic drugs [4, 5]. However, India also has dozens of lesser known small to mid size innovative biotechnology companies, most of which have developed since 1990 [6, 7]. These companies have grown to play a pivotal role in ensuring access to medicines globally by serving as a low-cost source of global health innovation, particularly in the vaccine arena.

In this article, we describe and analyze the history and lessons of one of these vaccine innovators, Shantha Biotechnics. In late 2009, in a landmark deal for the Indian biotech industry, Shantha was acquired by the multinational giant Sanofi-Aventis (France) at a valuation of USD$784 million [8]. Founded by Dr. K.I. Varaprasad Reddy in 1993, Shantha was one of the first Indian biotechs to create a recombinant product, obtaining World Health Organization (WHO) prequalification for its Hepatitis B vaccine in 2002 [7]. Since then, the firm has grown to 750 employees and brought 11 novel products to market. In 2009, Shantha sold over 120 million doses of Hepatitis B vaccine to dozens of developing countries around the world, had revenues exceeding USD$90 million [9] and maintained a sophisticated pipeline of biologics including human monoclonal antibodies.

We begin by describing the history of Shantha's unique evolution from a start-up to a significant vaccine player, noting key challenges and decision points in the process with respect to financials, corporate strategy and health impact. We then analyze the Shantha case as a whole as an illustration of the globalization of healthcare R&D, to draw out key lessons for scientists, entrepreneurs, and policy-makers. The goal of this description and analysis is to accurately describe the case, and suggest observations and lessons that may be applicable to those who wish to start, partner with, or invest in R&D-intensive private-sector firms in emerging markets that tackle global health challenges.

This analysis is based on multiple site visits and face to face interviews with key members of the Shantha Biotechnics team over the past five years, as well as analysis of secondary material. Where not specifically noted or referenced, the report is based on these interviews.

We chose a combination of the case study and grounded research methods as the most appropriate ones to examine complex phenomena in context [10]. Shantha Biotech was chosen on the basis of being identified by previous studies as one of the first innovative Indian biotechs, and one of the few to be acquired by a large foreign pharmaceutical multinational company [8]. It was part of a set of fourteen case-studies focused on healthcare product development and investment occurring in India and Africa (see e.g. [11]). This particular case-study also builds on other case-studies of biotechnology innovation in emerging markets that our research group has published [6]. We have published a significantly abbreviated version of the case-study in another journal [12]

Interviewees were selected based on purposive sampling. We analyzed transcripts from semi-structured, face-to-face interviews that took place in Hyderabad with a total of 16 Shantha representatives on four separate occasions (January 2005, 2006, March 2008, October 2008). Interviewees included Dr. K.I. Varaprasad, Shantha's CFO N. Rajasekar and CSO Ashok Khar as well as Georges Hibon (a Director of BioMerieux Alliance). These were followed by email follow-ups with Shantha and BioMerieux executives in August-October 2009.

We also analyzed background documents on the Indian biotechnology industry from the peer-reviewed literature and news reports; books published by biotechnology industry and innovation academics; Indian and USPTO patents filed by Shantha, reports and presentations from the Government of India, World Health Organization, and World Intellectual Property Organization; institutional websites such as PATH, NIH, International Vaccine Initiative; and firm websites of Shantha, Sanofi-Aventis and BioMerieux. The firm was asked to fact-check the data derived from our analysis prior to submission to ensure it was up-to-date and accurate. Analysis of transcripts was supported by qualitative data analysis software ATLASti and NVivo. This study was approved by the Office of Research Ethics of the University of Toronto.

Our analysis based on interviews and the existing body of published secondary literature finds that Shantha's commitment to local health problems helped it to achieve its financial success. The late C.K. Prahalad identified the existence of a significant market among the lower-income populations of the world - the so-called "bottom of the pyramid" [44, 45]. While the market size is certainly large, the process of actually reaching these customers is difficult for large firms, let alone a small start-up with serious short-term financial concerns. It is a delicate balancing act between developing affordable health solutions for the poor and increasing firm valuation. While Shantha managed to achieve this balance-having provided affordable vaccines both domestically and internationally, while still being financially successful-questions remain regarding the degree to which it can continue to do so under foreign ownership, and the road to be followed by other biotechs in emerging markets with strong economic growth and stable political environments that wish to emulate its successful balance.

As one of the first innovative biotechs in emerging markets to be acquired for a significant valuation ($768 million USD) by a major pharmaceutical multinational, it remains uncertain whether Shantha will be able to maintain its low prices and commitment to the local health markets under foreign ownership. We outline several lessons for how these biotech innovators in poorer but rapidly developing countries such as India (whom we term Southern innovators in light of their traditional geographic location) might successfully achieve this balance between local health impact and financial returns.

First, Southern innovators should identify a therapeutic area where cost efficiencies can be achieved for reaching the base of the pyramid, and combine this with strong leadership skills [44, 45]. The idea that the poor are a sustainable and ideal initial market has been a common thread in previous studies describing successful Southern innovators, especially vaccine manufacturers including Indian Immunologicals and the Serum Institute [4, 6, 11].

Dr. Varaprasad recognized that expensive multinational recombinant vaccines had minimal market penetration, and had not tapped into the full potential of the vaccine. He realized that he could leverage India's homegrown scientists, the lower cost of labor, process innovation, and a low-margins business strategy to exploit this opportunity. Executing this insight ultimately depended on Dr. Varaprasad's strong management skills, and reflects why venture capitalists often emphasize the importance of the management team [46]. In spite of his electrical engineering background, Dr. Varaprasad was able to build a successful biotech. In fact, it may have been because Dr. Varaprasad was outside the mainstream that he was able to attempt something truly bold; he said: "A lot of scientists need reality checks... science is one part of the whole thing." Ultimately, his commitment to the local health needs, ability to build a strong R&D organization, and vision were key ingredients to Shantha's success.

Second, Southern innovators should persistently seek investments and partnerships from nontraditional and international sources. Domestic early-stage financing still remains scarce even fifteen years after Dr. Varaprasad created Shantha Biotech [6], especially given India's current stage of economic development, where manufacturing and service-oriented businesses have significant potential for high return on investment with relatively lower risk compared to pure R&D-oriented businesses. International investors from more R&D-intensive economies may be more receptive to investing in R&D-intensive start-ups than local investors, because such international investors have previously committed to and experienced such investments. This difficulty in finding financing is not entirely dissimilar to that faced by biotech innovators during the 1970s in the United States, who often had to bootstrap themselves from non-traditional angel and NIH financing (although these firms had the benefit of being preceded by semiconductor start-ups that established a critical mass of astute domestic tech investors, and liquid capital markets for such investments). Shantha was forced to grow in parallel and compete for financing with the nascent Indian IT industry during the 1990s, which offered much quicker returns.

Varaprasad was so passionate about solving the Hepatitis B challenge that he was willing to sell his father's own property. This commitment was evident to the Omani Foreign Minister and the local universities that provided free lab space. Dr. Varaprasad says that "We had a lot of sympathy from many institutions. 'These people are struggling. They want to do something on their own. No technology transfer from any country, and they want to do it on their own. Wonderful. And if they ask any help, let's do that.'"

Shantha embraced partnerships with not only research institutes such as the NIH, but also potential competitors in the form of a multinational pharmaceutical for regulatory guidance. These principles of collaboration among domestic and foreign competitors have been embraced through the founding in 2003 of the Developing Country Vaccine Manufacturers Network (DCVMN), whose members collectively supply over half of UNICEF's vaccines [47].

This focus on quality also led Shantha to recognize that for certain types of clinical trials, India's regulatory expertise was insufficient to conduct them at home [49]. For its monoclonal antibody trials for lung metastasis in melanoma, Shantha set up a San Diego-based subsidiary (Shantha West) for a reported $9 million USD in 2000 - only three years after the launch of Shanvac-B [50]. In silico development was conducted in San Diego, while wet lab work was conducted in India. Southern innovators should be realistic about capacity for home-grown manufacturing or clinical trials, and consider if it makes business sense. Approval processes in India can be slow, which has in the past resulted in uncertain regulatory processes [50]. Until recently India did not have clinical data protection as mandated by the TRIPS agreement. However, following the implementation of TRIPS, there was a significant inflow of clinical trial outsourcing to India due to its cost advantage and genetically diverse population [51, 52].

Fourth, Southern innovators should realize that integrated business models are still viable in developing countries, and are arguably critical for reaching the base of the pyramid. Before its acquisition, Shantha was a fully integrated biotech that would not invest in any products for which it did not have internal capacity to execute on a significant part of the project. In the developed world, a popular business model is to become 'virtual', whereby biotechs outsource their clinical trials and even early-stage work to contract research organizations (CROs) in both mature and emerging markets [52]. Such virtual biotechs rarely develop a sales force and other downstream capabilities.

This model may not make sense for firms like Shantha, because the risks of low quality and delays in outsourcing to another domestic firm are too great. By maintaining internal development capabilities, firms are able grow from retained earnings generated by contract research work and other revenues, as Shantha did. Marketing and downstream capabilities are also critical for Southern innovators to justify the premium of their drug to potential purchasers, and to distinguish their drug from counterfeits.

While the dataset discussed in this article is limited to a single Indian vaccine firm, there are a few other Indian biotechs that are following a similar trajectory including Bharat Biotech, whose rotavirus vaccine is currently in Phase III trials, Panacea Biotech, with over half a dozen single or combination vaccines against locally relevant diseases such as cholera, encephalitis and meningitis, and Serum Institute of India, which is the world's largest producer of measles and DTP vaccines [53]. Much like how Amgen and Genentech provided a pioneering model centred on recombinant manufacturing of known biologics for over a half-dozen biotech entrants in the United States, Shantha's pioneering integrated vaccine R&D model may prove applicable for biotech firms in emerging markets over the next decade.

Further case study research on firms like Bharat Biotech, Serum Institute of India and Panacea Biotech may prove useful to deepen the lessons generated from Shantha. Although Bharat has yet to be acquired like Shantha, Bharat's reported 2007/2008 revenue was only ~ $2 million USD less than Shantha's [23]. Another limitation of the generality of our study may be Shantha's large domestic market in India, which was similarly true for China and Brazil's domestic vaccine innovators. Vaccine innovators in smaller countries will likely have to seek international markets sooner, but this may still be a viable path to success, given that the majority of Shantha's sales occur abroad and that it faces intense competition in the local Indian market that has lowered profit margins.

Shantha's founder, Dr. Varaprasad, emphasizes the importance of Southern innovation [54]:

My strong claim is in developing countries these initiatives are necessary. Absolutely necessary. And if there was no such initiative, the Indian populace would have remained not using the vaccine, and consumption would have remained at 180,000 doses. Today it is possible. The government has not done that - we have created awareness. We have conducted mass vaccination camps, and we are giving it at 23 cents which made all people buy it from private doctors. 100 million doses are being consumed. Awareness is there, and the children are protected.

While initial focus on generics and contract research, as well as reduced patent protection for drugs, has allowed the Indian biotech industry to build expertise and capacity, without incentives and focus on innovation the industry risks falling into the trap of focusing on low risk and profitable drugs rather than important health challenges. As of early 2008, of the 424 home-grown Indian biopharma companies, only 57 (<15%) held US patents [55]. Among biotech firms, this study reported a total of 19 US patents filed from 2001 to 2010. Among these only 2 (11%) were characterized as 'product,' with 9 (47%) being process patents, and seven (37%) both 'product and process' patents and only one (5%), a design patent [55]. With the Indian government having adopted the WTO-TRIPS agreement that emphasizes product patents over process patents, Indian firms will be forced to innovate as they may be unable to afford the royalties to Western products while keeping their prices low [56].

It may become significantly more difficult for new Indian biotechs to emulate Shantha with the higher barriers to innovation for market entry, and existence of a large critical mass of competitors. In 2007, over 15 companies were found to be involved in the marketing of 50 brands for 15 different vaccines in the Rs 3053 crores ($USD 745 million) vaccine market [56]. The cost advantage that India has enjoyed is also diminishing. Home-grown innovative engines like Shantha remain critical; the Global Alliance for Vaccination Initiative (GAVI) continues to resist requests by countries with generic industries for supporting the transfer of patented vaccine technology [13, 57] Varaprasad therefore believes that the Indian biotechnology industry cannot afford to continue along the road of generics, or merely serve as an outsourcing shop for Western biotechs.

However, these fears concerning the inability of Indian biotechs to innovate and/or maintain domestic access may have been overstated as studies by GAVI following the implementation of TRIPS in 2006 revealed that all five major Indian vaccine manufacturers had novel vaccine projects for local markets [53]. Moreover, governments maintain the option to use provisions of the Doha Declaration on TRIPS, as well as protections within the TRIPS agreement itself to maintain access to new priority vaccines [58]. Technology transfer is continuing to occur through initiatives such as the Meningitis Vaccine Project, which oversaw the transfer of polysaccharide conjugate technology to local manufacturers, and the Developing Country Vaccine Manufacturers' Network (DCVMN) [59].

GAVI financing has also ensured low pricing by guaranteeing markets for suppliers - when it first began there was only one Haemophilus-influenzae type b (Hib)- containing vaccine available, while there are now four available with three manufactured in emerging markets such as India [53]. And even if prices of vaccines increased due to the need to absorb the increasing cost of innovation, studies show that vaccine introduction by governments often proceeds independently of moderate price differences, and rather depends on national prioritization based on disease burden, competing priorities, and ability to demonstrate meaningful health impact [59]. Moreover, over 95% of drugs that are sold in India are already off-patent, so even if product patents were to eventually raise prices of biologics, the impact would be minimal [56]. These results suggest that the changing intellectual property environment is unlikely to impede the ability for Indian vaccine manufacturers to innovate, or limit access to vaccines by governments.

The globalization of healthcare R&D activities has made it possible for some parts of the developing world to begin to innovatively solve their own health problems. The case of Shantha Biotechnics shows that a billion dollar biotech can be built not only in the developing world, but for the developing world. More critically, it may be an early sign of the shift of global healthcare R&D away from rich countries to emerging markets. A recent study found that not only do vaccine producers in emerging markets account for over 60% of traditional childhood vaccine doses globally, they now also account for over 20% of innovative products such as combination vaccines - and this latter fraction appears to be growing [53]. Indeed, increasing interest in emerging markets from multinationals, orphan drug-like legislation and innovation platforms reveal that both global health and global wealth might be pursued in parallel [60].

Shantha's affordable high-quality vaccines have already reached hundreds of millions of children globally. The open question that Shantha and Varaprasad have always struggled with is balancing the need for affordable solutions for domestic health needs with focusing on what will increase firm valuation. Governments in the developing world similarly struggle in finding the right balance to reward long-term domestic health innovation, while promoting cheaper solutions for the domestic health gap. The hope is that firm value will align with improving drug access and local health outcomes. Finding a happy medium will be challenging for healthcare innovators in the developing world, but Shantha has shown that it can be done.