An Open Source Business Model, Can It Work?

In response to our various talks with various professionals throughout our project, we thought it we should consider the possibility of continuing with a standard business model. Below you will read through some potential business models which summarise the information we processed in response to these conversations.

Open-Source Tools to Enable the Market

Open-source research and development has revolutionized the technology sector and is quickly making its way into other markets, powered by its offers of new and unique ways to approach the monetisation of Intellectual Property (IP).

The open source design and characterisation of genetic sequences for protein manufacturing is gaining popularity, especially as the advent of accessible methods of DNA synthesis has removed the major technical barrier to reverse engineering the work of others. Organisations such as iGEM are evidence of this, as they showcase the work of researchers, whilst businesses such as AddGene provide simple sharing of DNA backbones for a fee. Similarly, focus on the downstream requirements of protein expression optimization is already entering the open-source market, expanding the tools available to synthetic biologists with small budgets. On the other hand, manufacturing plant design and optimisation often remains unobtainable, held as trade-secrets rather than patented. The technologies behind high-efficiency protein manufacturing are rarely shared between agents in the market. Improved transparency within this industry would be to the benefit of all.

We propose a radical model of pharmaceutical development, whereby investors may assist in the funding of both the development and set-up costs of a novel pharmaceutical, without the need of investing in a pharmaceutical company, via an open-source investment scheme.

Financial Tools
Potential investors that wish to contribute their funds to developing life-saving pharmaceuticals are currently forced to purchase stock in a major pharmaceutical company. We suggest that an alternative financial platform can be designed that offers investors the opportunity to fund the clinical trials of a novel open-source drug, pledging money alongside other potential investors until sufficient capital is obtained to proceed. In this scenario, rather than the return on IP contributing to a single pharmaceutical company's profit margin, it can instead be divided between clinical trial investors and the developer of the IP.

In this case, Return-On-Investment (ROI) must scale with the relative risk of the drug not completing clinical trials, however, this may still be significantly less than the ROI expected by public corporations. Furthermore, some legal protection would have to be established to prevent manufacturing of approved open-source drugs without a return contribution being made to the investors that helped get it approved.

An additional new financial tool could allow investors to direct their capital towards necessary manufacturing facilities for setup and GMP approval of new manufacturing facilities. These new “Open-source Factory” funds could be combined with public investment to better overcome the challenge of economies-of-scale. Just like the stock exchange and investment banks, the aim of these financial tools is to help the market respond more effectively.

Small-Medium Business

A more traditional approach for marketing insulin while utilising Open Source technology would be possible with sufficient capital. In our case, we propose a competitive advantage could be found through facilitating efficiency of distribution of Human Insulin and Analogues. [1] The global pharmaceutical distribution market is a maze of intermediaries, each adding a small profit margin to the final price. In this environment we suggest there is potential to utilise 21st Century online markets to improve distribution models. e.g. A click-and-mortar business that matches a diabetic’s insulin requirements to a specific wholesaler - cutting out all intermediaries and claiming a small portion of the profit margin.

Barriers to Entry

When considering the potential of starting up a company, we considered the current barriers restricting those from entering.

	Non-Financial Permeability /10	Expected Financial Cost ($US)	Scaling/Ongoing Cost?
Technical Barriers
Open-source creation of a biosynthetic organism	8	5000	No
Design and Engineering expertise required for fermentation/purification plant	8	10000	No
Open Source Development of an insulin pump	8	10000	No
Cost Barriers
Clinical Trials I-IV (for new analogue insulin)	8	~200 million	No
Biosimilar Clinical Trials (for new generic/generic analogue)	5	~100 million*	No
Fermentation/Purification Equipment and Testing (Small - Large Scale)	6	2 million - 200 million	Yes
Fermentation/Purification Plant (Small - Large Scale)	6	4 million - 400 million	Yes
	* Biosimilar clinical trials yet to have enough data to generate an average expense
Market Barriers
Enormous existing contracts between governments and pharmaceutical companies can be used to leverage significant pressure to use a certain product in PBS schemes.	5	USA, Europe, Australia; ~100m+ to disturb the status quo. For most developing nations, price/efficacy will be the major determining factor.	Yes
Economies of scale favours existing manufacturers. Any new market entrant would be vulnerable to a price war after investing significantly in setup.	6	^ See Fermentation/Purification Plant and Equipment Costs	Yes
Existing distribution systems are largely owned by competition	4	10 million + dependent upon strategic partnerships	Yes
Legal Barriers
Existing patents protecting analogue insulins	6	Litigation Risk	Possibly
Existing patents protecting insulin manufacturing optimisations	6	Litigation Risk	Possibly
Existing patents for insulin pump technologies	6	Litigation Risk	Possibly

Estimated Start Up Costs

	Company A	Company B	Company C
Building Related Expenses	4,000,000.00	200,000.00	1,800,000.00
Equipment + Installation	1,000,000.00	980,000.00	300,000.00
Engineering/Validation	1,000,000.00	250,000.00	900,000.00
Total ($CA)	6,000,000.00	1,430,000.00	3,000,000.00
Total ($US)	4,680,000.00	1,115,400.00	2,340,000.00
Annual GMP Compliance + Operating Expense ($CA)*	925,000.00	454,000.00	720,000.00
Annual GMP Compliance + Operating Expense ($US)*	721,500.00	354,120.00	561,600.00

Risk Assessment Matrix

Potential Risks for Our Model

Potential Risk	Risk Matrix
Price war from competitors	9
GMP failure, dangerous product	10
Escape/Release of GMO organism	2
Manufacturing Injuries	2
Insufficient Liquidity	8
Exclusionary contracts prevent entrance to certain markets	7
Cure for Diabetes	5
Superior Analogue enters market	6
Inefficient secretion pathway	6
Inefficient Purification	6
Local - High Australian Wages	2
Carbon Emissions Target	2
Nickel-Agarose Price Inflation	2
Electricity Inflation	2
Competitive advertising	2
Government overregulation	8
Economies of Scale	9
Natural Disaster	4
Manufactory Fire	4
Internal Corruption	4
Patent Infringement Lawsuits	3
High Employee Turnover	2
Export/Import Restrictions	8
Unforeseen Circumstances	5

What We're Up Against

The sheer scale of the insulin market (600m+ potential patients) allows economies of scale to play a major role in the competitiveness of individual players. Without enormous investment capital, any new manufacturing facility will be too small to make a significant impact on the insulin market and may be unable to produce at a low enough cost to survive. As such, if we were to choose to become insulin manufacturers - we would need enormous initial capital to have any impact on the market supply.

Large-scale Manufacturing Facilities
Expected cost: Minimum of US$100m for a medium-scale facility [2]
Research and Development of Single-Chain Insulin Analogues:
Expected cost: Upwards of $US50m for initial approval. Ongoing expense of 20-25% annual operating costs to ensure compliance. [3]

Team:Sydney Australia/Entrepreneurship