The extent of regional concentration in the South African Biotech industry and its implication

The South African biotechnology industry is relatively young and still in its infancy when compared to the global market. The private sector is still in a developmental phase and many of the established firms are still receiving funding from public institutions. Further to this, the South African biotechnology industry is characterized by extremely high regional concentration with 78% of core biotechnology companies based either in Cape Town or Gauteng.

According to the National Biotech Survey (2O03), at the time, there were 106 biotechnology companies, including 47 identified as ‘core’ biotechnology companies, that is, the majority of their activities involved biotechnology: of these 37% were spin-offs from another enterprise; 34% were start-ups; and 29% were spin-offs from a research group.

The majority of spin-offs {66%) had resulted from existing enterprises and research groups and they subsequently set-up operational businesses in close proximity to their parent companies.

The South African biotechnology sector is made up almost exclusively of private companies, most of

which fall into the SMME category (i.e. comprising ten or fewer researches). During the National Biotech Survey 2003, the industry earned revenues of R369 million (USS61 million). To put this in perspective; in 2005, the US biotechnology industry earned $47.8 billion in combined revenue, with market capitalizations of $410 billion.

The above mentioned comparison is a sobering reminder of how small the current biotechnology industry in South Africa really is.

Although biotechnology has captured the popular imagination in South Africa, much as it has elsewhere in the world, it still struggles to attract large-scale risk financing and commercial support. This has meant that the industry has relied heavily on public support and funding.

As a result, in 20O2, the Department of Science and Technology (DST) setup several funding institutions in order to help develop the biotechnology industry. These institutions collectively made up the BRICS (Biotechnology Regional lnnovation Centres) and their mandate was to implement the

National Biotechnology Strategy: to ensure that South African Biotechnology is stimulated.

I am placing much emphasis on funding and these innovation centres because they are vital factors that have resulted in a high regional concentration in the South African biotechnology industry.

One such regional innovation centre was Cape Biotech Trust.

Cape Biotech (much like the other innovation centres) was tasked to support/stimulate the industry:

Cape Biotech’s aims were to invest in a regionally focused portfolio of projects for the development of a range of business and new product offerings. Cape Biotech also aimed to achieve this by operating and functioning as a ‘cluster development’ initiative in addition to being a funding body.

*Since then, Cape Biotech trust no longer exists and is now a component of the centralized Technology Innovation Agency (TIA).

So in addition to investing in projects, Cape Biotech Trust worked to create bio-economy intelligence, networks with members, markets the sector, manages small venture incubation and builds capacity.

Such cohesion yielded results. Supporting technology transfer, entrepreneurial development, the dedicated backing of local and provincial government and a sophisticated financial system; this regionally focused and collaborative strategy resulted in increasing the concentration of the industry by pooling biotechnolgy firm’s operations and intelligence together:

Cape Town had the highest concentration of biotechnology companies in South Africa. Subsequently, the Western Cape has emerged as the centre of the sector for the country. Gradually its potential as a global biotechnology hub is being realized. The city and province are home to more biotechnology research projects than anywhere else in the country and 60% of South African biotechnology start-ups approaching venture capitalists for funding originate in the Western Cape.

The region is attractive because of the strong fundamental and applied research community spread across six major tertiary institutions. There has certainly been evidence of geographical clustering of biotechnology R&D (research and development) performing firms. Again, not surprisingly it was noted that biotechnology R&D performing organizations are concentrated in Gauteng (16/50) and the Western Cape (8/50), which form the only significant clusters of activity.

Business sector biotechnology R&D is particularly concentrated in Gauteng, with eight of the 22 sample firms located in this province. These findings may be useful for policy formation: biotechnology clusters based on geographical proximity have been shown to be successful in utilizing collaboration networks, infrastructure and sharing a focused funding to substantially bolster R&D and commercialization thereof.

This clustering and high regional concentration in the biotechnology industry seems to be a natural and absolute means of establishing a thriving and sustainable biotechnology industry.

Joe Cortright, the economist and vice president of lmpresa Consulting co-authored a 2OO2 Brookings lnstitution report, “Signs of Life: The Growth of Biotechnology Centers in the US”. He and Heike Mayer studied the biotechnology industry in the 51 largest metropolitan areas in the United States and found that biotech is concentrated in nine areas that dominate research, patenting, venture capital investment and commercialization. Out of the top nine biotech metro areas, average NIH research funding in 2000 was $812 million, nearly eight times more than the $104 million average for the remaining 42 metro areas.

Venture capital investment from 1995 to 2001 in the top nine areas totalled an average of $957 million, compared to $527 million in the other areas.

By drawing valuable information from a developed and sustainable biotechnology industry such as the US, one can take a ‘snap-shot’ of what a developed biotechnology industry will naturally evolve into.

We can see that if the market was left “laissez faire”, a natural high concentration in the biotechnology industry will result. This is backed by a publishing on the ‘Mckinsey quarterly’, where they mention an advantage of being big and having a high concentration in the industry is that it provides a competitive edge in launching blockbuster drugs and thus increasing the number of bets a company can place on new technologies and also help complete the necessary trials more quickly. It also increases the companies’ desirability as a licensing partner. Moreover, the big companies also tend to back the most promising products, to key markets most quickly, and to deploy large sales forces to launch and market products most effectively.

In South Africa where the scarcity of funding and industry specific intelligence is a major inhibitor to the growth of the biotechnology industry, a high regional concentration allows for improved productivity. Also, the nature of the industry, which is complex and highly interdependent on other institutions (e.g. tertiary institutions), one can see how an industry such as the biotechnology industry will naturally develop and be focussed in particular regions where logistics are simplified and the company is surrounded by an established support group.

Most of the new biotechnology companies are spin-offs from other existing research or enterprises and it again makes sense for the new start-up to establish itself in close proximity to its parent company and previous trade networks. As for equality, firms of various size and level of establishment will benefit from a high regional concentration; either directly or indirectly. The South African industry is still comparatively small and the industry will do best if the underlying firms were to collaborate where possible and allow the exchange of useful resources in order to help make an impact on the global scale.