Biotechnology in Russia: hope dies last

Working on tabletsNatalia Anishchuk, Finance No. 22-2010

Five years of talking about the need to develop biotechnologies have not led to tangible results. Out of a couple dozen projects that have opened, only a few have been successful, many have died. But hope lives on.

The first biotechnology development program appeared in 2005. It was envisaged that in 2006-2008 pilot projects would appear in 5-7 regions and further on the increase. What is in practice? According to Olga Uskova, President of the National Association for Innovation and Development of Information Technologies, there are about a thousand biotechnological developments in Russia now. The association has 300 projects in its database.

But most biotech projects, even successful ones, are barely noticeable on the market. Someone died a natural death without finding an investor. Individual attempts at research activities with the aim of creating a particular drug can be considered the most promising. "The program was the first document describing the possibility of developing biotechnologies in Russia. It did not receive support and therefore was not implemented. But the document fulfilled its main purpose – the conceptual apparatus of the industry is fixed in it, there is an attempt to identify the main areas of development in which the flow of investments will go," says Irina Semenova, a leading expert and partner of the Advanced Research group of companies, who participated in the creation of the document.

BioengineersBiotechnologies can include any production in the technological process of which living microorganisms participate.

For example, such mundane ones as beer and cheese production. From the position of state interests, pharmaceuticals and agriculture are the most popular – as a source of biofuels. The problem is that biotechnologies cannot develop independently, basically they occupy an intermediate place in the production chain. "Manure exported to landfills, which cannot be used later due to soil poisoning, can be processed to produce biogas," says Irina Semenova. – I supply biotechnologies with enzymes and amino acids necessary for the production of feed and medicines." She believes that it makes sense to develop biotechnologies depending on the needs of the regions. "The raw material base of each region is different from the others. For example, agriculture is developed in Chuvashia in difficult natural conditions. It is impossible to abandon the production of low-quality grain because of the norms for the cultivation of the land. Processing of this grain with the help of biotechnologies can make Chuvashia not a producer of cheap low-grade raw materials, but a product with high added value. Or there are almost developed oil fields in Tatarstan. Biotechnologies will make it possible to extend their service life," explains Irina Semenova. – In addition, it is economically unprofitable to create a small plant, and the region does not have funds for a large one, then it makes sense to combine the efforts of several regions."
Although there are biotechnological projects that must be carried out at the federal level. Thus, the production of its own insulin meets the security requirements of the state. At the same time, it is the resistance of the federal authorities that sometimes hinders the development of innovation. For example, the leaders of the biofuel market are the USA, Brazil, and China. "In the West and in the USA, special laws have been developed obliging to add biofuels to gasoline," says Arkady Sinitsyn, Doctor of Chemical Sciences, head of the laboratory of the Chemical Faculty of Moscow State University. – The topic is promising, but it is very difficult to break through the Russian oil lobby, and therefore we are far behind."

"The author of the program was the Society of Biotechnologists. If it was adopted, control over the implementation, that is, the right to dispose of the allocated funds (150 billion rubles were required), would be entrusted to the expert community, and officials were not satisfied with this. And the program was not accepted," Olga Uskova explains. However, the rejected program gave impetus to the subsequent discussion. Parliamentary hearings were recently held to discuss the biopharmaceutical development program up to and including 2020, and a committee on biotechnologies was established in the State Duma. "It is premature to judge the effectiveness of the proposed measures. More importantly, the state's systemic interest in the industry is accompanied by increased attention from private Russian and foreign investors," said Andrey Vvedensky, Director of the Department of Programs and Projects and a member of the Board of the Russian Venture Company.

Just on the wayLike any industry, there are two ways to develop biotechnologies: create your own technologies or buy them abroad.

"The first option is long and expensive, especially since we are not just behind: there are no Russian biotechnologies on the background of the global market," Irina Semenova argues. "In the case of a transfer, they will not sell us modern technology and bacterial strains." What should I do? While the path is not selected, it will be determined by a new program.

Investments in biotechnology are a separate, specific chapter of the venture business. The development of any drug consists of preclinical and clinical stages of research, and the "clinic" is divided into three phases, in general, the process can take a dozen years. Early stages are characterized by a higher risk of failure than later ones. Therefore, the distinctive features of pharmaceutical investment are long payback periods and high risks. "According to statistics, 70-80% of clinical candidates do not reach the market," Oleg Korzinov, Director of Innovative Development at Chemrar Central Research Center, characterizes the risk order. It would seem that such conditions cannot attract private capital. "Many promising projects were closed when the investor realized that the pilot stage required additional investment and it was cheaper to stop working," says Irina Semenova. At the same time, business participation is necessary to create a competitive industry.

In the world, these features can be combined thanks to a layer of special venture funds with a project exit period of about 7-10 years. Usually, the foundation enters the project when the development exists at the test tube level, and comes out with the appearance of the first positive results in the first or second phases of the clinical stage. By this point, the capitalization (intellectual property and team) of the project grows tenfold, and the risk of failure decreases. And the foundation sells the project to a pharmaceutical company. Of course, this approach requires large amounts of investment, but the income, if successful, cannot be compared with other industries. In 2008, Proteolix raised $79 million from venture investors to conduct the second phase of clinical trials of a biopharmaceutical drug against autoimmune diseases and cancer, MacroGenics – $25 million to conduct the second and third phases of trials of an original drug against diabetes, and Link Medicine – $40 million for an unnamed late phase of development of a drug against autoimmune diseases.

One of the brightest investors in the sector is the Center for High Technologies (CVT) "Himrar". It focuses on financing drug development projects up to and including the second phase of clinical trials. "The third phase is less science–intensive and risky. The risk that the drug will not go on sale is not as great as in the first and second phases. Therefore, pharmaceutical companies are usually involved here," Oleg Korzinov explains. The center has about twenty own projects, half of which are currently at the clinical stage of research. Projects with the most optimistic development scenario have one or two years left before the third stage. In addition, CVT is a co–investor in some projects within the framework of a business incubator in the field of living systems created on the basis of the Center. For example, in 2007-2009, Himrar, together with the Federal Agency for Science and Innovation (Rosnauka), invested 95 million rubles on parity terms in a project for the preclinical development of anti-infective drugs. The right to research was won by the Yaroslavl company "Intellectual Dialogue". "For 2.5 years, they have developed a number of preclinical candidates, of which the most successful drug for the treatment of hepatitis C," explains Oleg Korzinov. Intellectual Dialogue is currently looking for an investor to complete clinical trials.

Support ElementState interest in biotechnologies, as always, is expressed in a peculiar way.

All projects with state financing are characterized by increased bureaucracy. "We have to draw up too many documents and report for every ruble invested, even for our own – extra–budgetary," says Oleg Korzinov. Financial assistance from the state abroad mainly takes the form of grants, contracting is common in Russia. "Contracts require the exact fulfillment of the specified indicators, and grants are more conditional and do not provide for 100% achievement of indicators," says Oleg Korzinov. But the appeal to grants turns into a troublesome nuisance. "The lion's share of the money they receive in recent months / years. To master them, you have to forget science and do administration," Arkady Sinitsyn complains. The management of state funds imposes strong restrictions on the permissible degree of risk. "Due diligence in our funds lasts up to a year or more," says Oleg Korzinov. – During the examination, the project can either "fail" or move to the next phase. For comparison, Western funds spend 1-2 months on evaluation."

Russian "pharmaceutical" legislation differs from foreign legislation by restricting the rights of investors. All intellectual property created under the state contract is the property of the contractor and the customer. In other words, all patents for medicines partially belong to the state. In international practice, in such cases, the State receives only an exclusive license. "This means that the state can exercise its right only in force majeure circumstances, for example during a war or an epidemic," explains Oleg Korzinov. – Of course, our conditions do not attract foreign investors, and similar provisions are being developed now." Various preferences in the form of preferential taxation are very selective. "Today, serious economic state support is provided for the development of technologies, at the stage of R&D, the organization is exempt from paying almost all taxes," says Olga Uskova. "But the process of technology implementation is not supported in any way." And that's right, says Andrey Vvedensky from RVC: "This way you can initially disorient the company and deprive it of competitive advantages."

Two venture funds specializing in the biotechnology sector have been formed with the participation of RVC. "To date, three projects have been invested by the Bioprocess Capital Ventures Fund (the fund's volume is 3 billion rubles) and one by Maxwell Biotech (3.06 billion rubles)," says Andrey Vvedensky. The total number of fund projects involving RVC is 21. Now the Russian venture company is finalizing the concept of a biotech cluster and plans to create a fund this year that will invest in both cluster service companies and biotech start-ups. "This investment direction is one of the most promising," says Andrey Vvedensky. – Now it is important to create an ecosystem of generation and growth of the largest possible number of biotechnological projects." 
Non-pharma

While technological breakthroughs are possible in pharmaceuticals, the situation is stable in other areas, and it is extremely difficult for new companies to break through, even in their own local market. For example, the Russian market of technical enzymes is controlled by the Danish companies Novozymes and Danisco. The share of the only Russian manufacturer Sibbiopharm is no more than 5%, although the quality of products is identical to foreign. "The laws of science are such that the quality of the same enzyme does not depend on the manufacturer," says Arkady Sinitsyn, Doctor of Chemical Sciences, head of the Laboratory of the Faculty of Chemistry of Lomonosov Moscow State University. "But large foreign companies have access to all ways to stimulate sales: to financially interest decision–making officials, or to take out partner buyers at conferences."

Theoretically, it is possible to create a successful production even in a divided market. Arkady Sinitsyn gives an example for the field of feed enzymes. The leader may be a project with a portfolio of 20-25 new enzymes for different industries, of which at least 5 are close to implementation. Each industry direction will require a separate scientific group. At the same time, the research stage lasts 3-5 years and costs about $ 20 million. For another couple of years, for the next $ 20 million, a plant is being built where all 25 enzymes can be produced. In addition, an aggressive sales team is required and it is impossible to close the "scientific" departments, the costs of which will account for about a fifth of all the costs of the enterprise. As a result, the payback period is at least five years after the opening of the plant, taking into account the gradual increase in the number of enzymes produced to 25. For comparison, the group of companies "Proferment" produces 6 drugs and occupies 13-15% of the market. "These are battles in deep defense," Arkady Sinitsyn comments.

Brains for saleThe most promising projects in Russia are those whose value consists exclusively in intellectual developments, there is no question of a finished product.

"There are few people left to invest in, there is a breakdown in science, it is extremely difficult to assemble a team to solve a certain problem. It is easier for people to buy and sell someone else's than to do their own," complains Arkady Sinitsyn. He sees the way out only in focusing on the direction in which something else can be done. "We need to gather the remnants of our forces into a fist and support them with financing," he believes.

I wonder what will happen to the projects when the time comes for production: will they remain in Russia? In June 2010, the RVC Seed Investment Fund approved investments in two projects: the Cardiomarker myocardial infarction diagnostic system and OncoMax – the development of a therapeutic monoclonal antibody for the treatment of kidney cancer. "The properties of early projects are such that in a year, if successful, the capitalization of projects can grow multiple times and require subsequent investment rounds," says Andrey Vvedensky. In the future, the project can both cover the needs of the Russian market and become in demand all over the world.

The state here could take care of creating a system in which it could retain at least the rights to its own market. For example, the size of domestic major players is quite sufficient to buy the rights to Russia from a small innovative company that has created a product with global priority and potential. According to Andrey Vvedensky, some Russian investors are ready to support companies at the stage of preclinical research, but nothing should deter the attraction of foreign partners. "One of the ways to enter global markets may be cooperation with a local foreign partner or investor," he explains. – In addition, do not forget about the role of "Big Pharma", which occupies the lion's share of the world market and determines trends. Therefore, cooperation with large foreign companies, whose experience will allow you to create a business ready to compete in the global market, can be beneficial already at the early stages. From the point of view of the interests of Russian investors, it is important to strategically accurately determine the degree and period of maintaining control over the company or intellectual property rights." In other words, it is desirable to leave control in the hands of a Russian resident directly or through affiliated persons.

It turns out that the location of future production on the territory of Russia should not be a prerequisite, except in cases that are related to ensuring state security. Although it is premature to talk about this stage now. "In a biotech project, as in any technology business, the team is important. The human and intellectual reserve in Russia is still high, and this should be used. Even if a foreign partner enters the project, the association with Russia will not disappear anywhere. The active involvement of specialists and investors with international experience will open previously locked doors for us, – Andrey Vvedensky justifies his point of view. – Our priority tasks are to ensure the flow of packaged projects that are interesting for venture investors, and to teach Russian teams to interact with qualified partners. Now the project teams are at the early stages, a little later – at the stages of the formation of companies."

According to industry experts, the development of domestic biopharmaceuticals requires at least 3 billion rubles in the short term, and in total – at least 7 billion rubles.

Portal "Eternal youth" http://vechnayamolodost.ru22.06.2010