Why ain’t biotech IPOs happening in India?
Companies use IPOs to
raise money for expansion and growth. That was the story until the
beginning of 2008 when globally, the markets were red hot. All that
changed when the credit crunch set in, taking along with it the
interest in IPOs.
Five summers ago, Biocon, one of the most keenly watched life sciences
company in India then, went public. Its shares were oversubscribed and
the company received overwhelming response from the investors.
When the company listed on Indian bourses, it made Dr Kiran
Mazumdar-Shaw, founder of Biocon, a billionaire and for the first time
an Indian women became a dollar billionaire.
Between then and now, biotech IPOs in India have been almost nil.
Experts attribute this to the small size of Indian biotech companies
and low awareness amongst investors about companies.
IPOs in biotechnology started in the US when the stock regulator
allowed Amgen and Cetus to raise money from the public in the early
1980s. Today the US has the largest number of publicly traded biotech
firms while in Asia, with the exception of Australian companies, there
are few success stories. In others Asian countries, there are only a
handful of biotech companies whose shares are traded.
Companies use IPOs to raise money for expansion and growth. That was
the story until the beginning of 2008 when globally, the markets were
red hot. All that changed when the credit crunch set in, taking along
with it the interest in IPOs.
Wockhardt, one of India’s top tier pharma company and
hospitals chains too aborted its plans to list to raise money to clear
its debts after a bad market dampened its interests. The company later
sold its 10 hospitals chain to Fortis Hospitals, owned by the family
that previously owned Ranbaxy, India’s top pharma company by
revenues, for Rs 909 crore.
Analysts tracking the biotechnology companies believe that the
investors in India are “more cautious,” to invest
especially in biotech firms as it is better and easier to invest after
observing the proof of concept of the company, its clinical development
and launch of the product.
But that might change now. Avesthagen, a Bangalore-based biotechnology
company, with an interesting pipeline of products, is planning to hit
the stock market in March 2010. The company, promoted by Villoo
Morawala-Patell, aborted its IPO plans twice in 2008 and once in 2009.
Sujay Shetty, the Mumbai-based associate director, Pharma Life Sciences
Advisory, Pricewaterhouse Coopers (PwC) feels that last
year’s global meltdown coupled with financial turmoil in the
country weren’t conducive enough for the new IPOs to emerge.
“Money has been declining and investors are getting burnt. In
the US, the liquid market is well-established and the
eco-system is much developed, but in Europe and Asia, the eco-system is
different.” Further, he adds that it is difficult to churn
out money in biotech companies. In fact, the R&D is uncertain
in the life sciences sector, due to which the investors shy away from
The biotechnology industry on the whole has been severely impacted as
new investments are not coming in and valuations of the companies have
also plummeted. In such a gloomy scenario, earlier forecasts of the
Indian biotech industry becoming a $5 billion market and employing one
million people will be a challenge and difficult to meet.
Experts view that most of the regional biotech companies at present
have a business model based on private funding due to the long
gestation period, due to which investors shied away from this industry.
“Biotech companies are high risk, complex businesses. There
are hardly any benchmark for valuation because most of these have no
balance sheet and cash flow. US is a matured market and hence it works
over there but not here,” says Jigar Shah, investment
advisor, KR Choksey Securities, Mumbai.
John Powath, CEO, Inventive Business Partners, a Bangalore-based
company, believes that biotech companies are no stranger to risk. The
business of developing drugs is a high risk (and for those who succeed
high reward) undertaking and that’s the reason biotech
companies are not resorting to IPO.
Powath who earlier worked as a partner in Ernst & Young, says
that there is a lack of understanding of how this sector operators
amongst most public investors. “Typically, the funding is
required for R&D which may or may not be successful. Given this
risk parameter, investors are likely to stay away. Funding using the
IPO route for biotech companies make sense where there is one or two
blockbuster development and funds are required for production and
commercialization or have some sort of proven cash flow and
revenues,” says Powath.
“Most biotech companies’ revenues are typically
small and hence are not attractive enough for listing — which
is why we see strategic investor or VC funding as the preferred
According to Murali Nair, partner,Advisory Services, Ernst &
Young, typically, evolution of companies follow a path involving three
One, the basic idea is supported by limited capital from the promoter
or the Venture Capitalist (VC), secondly once the business develops to
a certain critical mass and can demonstrate a sustainable
model and management, the next growth phase is funded by a PE or group
of investors known to the promoters. And the third phase is when the
company goes for larger funding for expanding a business that has
already demonstrated a healthy top line, bottom line and sustainable
cash flow, and the business model is understood by a larger community.
IPO is a tool for funding at this stage.
“The US biotech industry has evolved in a similar way along
with government funding. However, in India, the crucial VC funding for
early knowledge business has sadly been lacking. Hence, there are only
a very few companies who today are in a stage to successfully conduct
an IPO. In addition, a general lack of understanding of biotech
business coupled with a perception of high risk has not helped the
industry in its early scale up,” says Nair.
Indian markets have always been highly sensitive towards cashflow and
any business which needs significant investments with a high risk
future cash flow potential does not lend itself well for IPO in India.
Nair says, “Biotech is a victim of this syndrome and I would
believe we need more of VC and private equity funding here than an IPO
considering the stage of business that is prevailing in
Whether or not that happens,biotechnology companies are keen to raise
money and will look up to Biocon or just about any other successful
listing of a biotech company as a beginning of end to a bad patch in
Anjana Pradhan and
Sanjeev Jain in Bangalore