Running India’s most prominent biotechnology company in a risk-averse investment environment is a constant balancing act for Kiran Mazumdar-Shaw, the founder, chairman and managing director of Bangalore-based Biocon. Mazumdar-Shaw has crafted a business model for Biocon that balances stable revenues from its drugs and research services with relatively higher-risk drug discovery programs. The company is focused on diabetes, cancer, immunotherapy, kidney diseases and cardiology, in addition to custom research and clinical research services. In January, Biocon announced revenues of Rs. 1,511 crore (US$308 million) for the first nine months (April-December 2011) of the current fiscal year. This is up 11.51% over that of the same period last year. However, its profit in those nine months fell 10% to Rs. 241 crore (US$49 million), which the company attributes to volatile licensing income. In a discussion with India Knowledge at Wharton, Mazumdar-Shaw talks about Biocon’s business hurdles and its roadmap to develop biotherapeutics for global markets. Biocon’s vision, she says, is to become India’s leading company for diabetes and cancer drugs.

An edited version of the transcript follows.

India Knowledge at Wharton: You feature in the press regularly. Time was when we had cricketers, film stars and others as celebrities, and not business leaders.

Kiran Mazumdar-Shaw: Young people need different types of role models. Entrepreneurs and business leaders make good role models. If we could in some way actually influence change, which is what my real focus is, it helps. I want certain things to change in this country. In my position if I can’t make that happen, then I am not leading.

India Knowledge at Wharton: What would you like to change in India?

Mazumdar-Shaw: Certainly our governance standards have to change. That’s the hot debate everywhere. What are we victims of today? It is bureaucratic unaccountability. I know how ridiculous bureaucracy can be and how much of a deterrent it can be to growth and progress.

I’ll give you an example. Look at what is happening in clinical trials, one of the biggest opportunities for India. Drug innovation in Western economies is really challenged because of the time and the cost of doing clinical development. There aren’t enough patients who can undergo clinical trials in Western countries. We [in India] have the patient population, the medical infrastructure and the investigators. This can be a huge business and a huge innovation hub for the world.

But unfortunately, NGOs [non-governmental organizations] and the media in this country are like The News of the World. They are such sensationalists. They don’t want to get into the facts of the case and want to make a big thing of small anecdotes here and there. And that has a big impact. They are saying we are a poor country, and that pharmaceutical companies will exploit poor people and it is unethical. We are saying there are GCP [good clinical practices] guidelines [and] informed consent and that companies are not going to pull people off the streets and put them into a clinical program without going through the proper procedure.

Clinical development in any part of the world cannot be 100% risk free, but there are enough regulatory safeguards built in to make sure people don’t suffer adverse effects in an undue way. If there are people violating that, penalize them, but don’t paint the whole industry with one black brush.

India Knowledge at Wharton: While you cope with those bureaucratic problems, the business environment worldwide for biotechnology is volatile, and that must affect Biocon, too.

Mazumdar-Shaw: There are very different business models being pursued in the U.S., which is the mecca of biotechnology, and in Asia. The U.S., which is home to the largest and most successful biotechnology companies, has focused on biotech innovators being funded entirely by VCs [venture capitalists] and the capital markets. What America has done exceedingly well is [that] it has allowed access to the capital markets for biotech startups. The capital markets there are willing to support biotech innovation and stick with it for years. Compare that to Asia, where innovation is high-risk and therefore not investor-friendly. Investors don’t want to invest in companies that are focused only on innovation. That is why we had to look at a very different business model.

India Knowledge at Wharton: More than five years ago, you told Knowledge at Wharton about developing a hybrid business model for Biocon, with one part focused on delivering outsourced research, clinical development and diagnostic services, and the other part focused on new drug discovery programs. How has that worked out?

Mazumdar-Shaw: The business environment [for biotechnology] in India is not enabling. When I set up Biocon in 1978, the environment was not just frugal but also hostile. There was no VC funding, very high-interest debt was available, and you needed a license for everything. I set up this company in those difficult conditions realizing that I had to be self-sustaining and create an island of excellence.

I had a couple of objectives when I set up Biocon. I was keen on innovating. The whole culture [at that time] was around re-engineered, low-cost technologies or licensing technologies. This was an opportunity for me to change that paradigm. Unlike most companies that treated R&D like a tax break, I wanted it to be integral to my strategy. [Biocon’s R&D spending in the first three quarters of its current financial year was Rs. 110 crore (US$22 million) — about 7% of its revenues.]

India Knowledge at Wharton: How does your business model allow for spending on innovation?

Mazumdar-Shaw: The model we chose was a hybrid model of low-hanging revenue-earning, low-risk and predictable business on the one side. The other stream is the slightly higher-risk and longer-stream business. [At present], our revenues come from the medium to low-risk businesses: research services, APIs [active pharmaceutical ingredients, which Biocon supplies to other pharmaceutical companies] and branded formulations. They are helping us generate enough cash to support our higher-risk businesses like our novel therapeutic programs [such as for oral insulin and psoriasis].

India Knowledge at Wharton: You have sharpened Biocon’s focus areas with key partnerships and along specific business lines. Could you walk us through those?

Mazumdar-Shaw: Over time, our business model has been refined further. Today we are looking at several verticals we want to pursue. In our insulins vertical, we partner with Pfizer. In the biosimilar mAbs [monoclonal antibodies] vertical we have partnered with Mylan. [Biocon and Mylan, a specialty pharmaceuticals and generic drugs company based in the U.S., are jointly developing biopharmaceutical alternatives to drugs going off patent.] Our next vertical is our branded formulations business, which is about building the Biocon brand in India and in some other markets in diabetes, cardiology, oncotherapeutics, etc. This business is growing very robustly.

The branded formulations market is dominated by Indian generic drug companies. Here, we have a differentiated strategy in that our divisions are anchored by biologics, and not by small molecule generics. Our diabetology division is anchored by insulins, and oncotherapeutics is anchored by our novel proprietary drugs. Every one of these segments is anchored by products we make and largely by biologics. We also have other generics in our portfolio where we compete with other companies.

We have a small molecules vertical which includes all our APIs — the statins, immunosuppressants, prostaglandins or the peptides we are coming out with. In our ‘novel programs’ vertical, we have oral insulin, cancer vaccines, etc. We also have our research services vertical, where we provide custom and clinical research.

India Knowledge at Wharton: How are you moving ahead with all these verticals?

Mazumdar-Shaw: Insulin is a global play with Pfizer. Here, we have to focus on developing these products for the regulated [developed] markets. For the emerging markets, we have a strategy where Pfizer can have early entry. Pfizer is going to market it; we are going to develop it and do the regulatory filings. [In October 2011, Biocon launched InsuPen, a device to deliver insulin.]

Our oral insulin is a novel play [different from the insulin partnership with Pfizer]. It’s a paradigm shift in the way you manage diabetes. Today, because insulin is an injectable, patients delay using it until the very late, advanced stage of diabetes. Early insulin use, which is very important, is not being advocated. Oral insulin has the opportunity to change that.

In biosimilar biologics, we have a global play with Mylan. Both companies are investing in taking it to the market. Biosimilars are extremely expensive to develop unlike small molecule generics. The regulatory requirements are steeper and more complex. Innovators are lobbying very strongly to make it very difficult and complex so that not too many people can spoil their party.

Generics now have become a commodity but biosimilars are not yet commoditized. Globally there are maybe 10 companies with the capability to develop biosimilars, and we believe we are one of those.

In branded formulations, we want to aggressively build the business. We have chosen three areas: autoimmune diseases, cancer and diabetes. We want to be the diabetes company in India in the next five years. And if our oral insulin becomes a reality, we will be. Our oral insulin launch will take three years — probably in 2015. We also want to be the cancer company of this country. In autoimmune diseases, we are developing drugs for psoriasis, rheumatoid arthritis, etc. Psoriasis, for example, has been treated with steroids or some ointment or phototheraphy. They have never used biologics, which is getting to the heart of the problem. If we are lucky we might be able to launch it in India in late 2012.

India Knowledge at Wharton: What is the market potential for each of your business areas?

Mazumdar-Shaw: The worldwide market for insulin is US$20 billion, and it is growing in double digits. The market for biologics going off patent in the next 10 years is much bigger. The non-generics space alone is worth upwards of US$50 billion; the entire market will be about US$100 billion. Our “novel programs” where we are developing oral insulin and drugs for autoimmune diseases are a multibillion-dollar opportunity. In cancer drugs, we have at least a US$1 billion opportunity. If you look at the value we can unlock with all these programs it is substantial.

India Knowledge at Wharton: What are the obstacles you face? Is access to capital one of those?

Mazumdar-Shaw: It is not access to capital. We are generating enough cash to fund our needs. We have also found that partnering is a very good option for us. Partnering has given us all the capital needed for development — we share the downsides and the upsides. I am cautious about taking the acquisition route that most companies find exciting. I don’t think acquisitions give you the returns you are looking for….Our business strategy is about leveraging the cost base in India to deliver innovation, because taking drug candidates to proof-of-concept in India is very affordable. You get to unlock huge value when you get to proof-of-concept.

India Knowledge at Wharton: That brings me to rising wage levels in India. How do you protect your arbitrage opportunity?

Mazumdar-Shaw: Yes, wages are rising. If you compete just on the basis of cost, that arbitrage opportunity is going to get obliterated very soon. Top-end talent is really expensive in India, and there is no difference in that cost between the U.S. and here. But the arbitrage opportunity exists in the lower-end talent, where India is between one-fifth and one-third cheaper. What I also find attractive in India is you can create R&D infrastructure at a much lower cost. When you look at drug innovation, 70% of the cost of drug development is for clinical trials; and early stage discovery research is 30%. Biocon can offer end-to-end services. It is integrated and not [just] a component play.

At Syngene [a Biocon subsidiary focused on custom research], the BMS Biocon Research Center [with Bristol-Myers Squibb] is one such integrated research hub. It is managed as a separate research hub for BMS. They already have two products in the clinic. The productivity and the R&D costs they are incurring for getting into the clinic is really, really attractive. That is the next play for Biocon’s R&D services. At Clinigene [another Biocon subsidiary, focused on clinical trials and regulatory filings], not only can we do discovery research but [we can] also take drugs into the clinic.

India Knowledge at Wharton: Enterprise value is something you would want to build as an entrepreneur. At some point, are you likely to look for a suitable partner or buyer for Biocon?

Mazumdar-Shaw: I don’t think that is an option for me. I am really sticking to my core. Right now I realize my research pipeline has not been valued. Once I unlock value through oral insulin, our drugs for psoriasis and rheumatoid arthritis, and others, I will start seeing huge values being unlocked and that will get reflected in our enterprise value.

Today it’s very difficult in India where investors are so used to a predictable business model, and where they don’t want to ascribe any value to innovation. It is very difficult for people to understand what our enterprise value is all about. [At present] my enterprise value hovers between US$1.6 billion and US$2 billion. Actually, it should be double that.

There is a hidden value in Biocon and I want to unlock that. That’s a value most biotech companies in the U.S. enjoy. Why does a small company in the U.S. enjoy a huge enterprise value today? Or, why does a loss-making company there have an enterprise value of a billion dollars? It is because of very interesting technologies they are developing. Biocon has many of that, but I have zero values being ascribed to those technologies. Today my oral insulin is valued at zero. I am not in this desperate hurry to create that enterprise value and get accolades and pats on my back. I am going to do it systematically. I want to educate this market about the value of intellectual property — that’s another influence change I want to achieve. I am very confident I can do it.