• 8 October 2012
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PE Investments Soar

The life sciences industry witnessed 137 percent rise in PE investments this year. The surge in investments is encouraging and the trends indicate that a whole new breed of companies will emerge from India
The private equity (PE) investments in the Indian life sciences sector, during 2012 (from January to date), recorded 137 percent growth as compared to that during the last year. According to Venture Intelligence, a Chennai-based research firm, the health and life sciences industry received investments worth of $268 million till now in 2012 as as against $113 million from 12 deals in 2011. Of the 15 deals of 2012, top four deals account for $198 million. The $60 million investment from Equity Partners Fund in Avesthagen tops the table.

The surge in investments in the life sciences industry is attributed to the prevailing opportunities in healthcare, drug discovery space, medical devices, and personalized medicine space. Sharing her views on the opportunities, Padmaja Ruparel, president, Indian Angel Network, pointed out, “The abysmal state of healthcare in the country (till a few years ago) provided an opportunity to the entrepreneurs to address the unmet needs. Further, as the bottom of the pyramid comprises of almost two-thirds of population, it provides an opportunity to build products of global quality at Indian prices. This offers vast opportunities to create fast growing ventures, jobs, and wealth and also drive economic growth.”

Agreeing to the fact that there is an upsurge in investments in the life sciences sectors, Ashwin Raguraman, vice president, India Innovation Fund said, “I think this upsurge is also visible in other sectors such as ICT and further, it is not just the quantity of start-ups, but encouragingly a qualitative improvement in the start-ups and the maturity of their offerings that are emerging in these sectors.”

The reasons are common across these sectors. Raguraman elaborated, “There is an entire generation of individuals who went to the West to study and work and have returned in large numbers to India in the last five years armed with global outlook, practices and ideas. Many of them have ventured into entrepreneurship, as the opportunities offered by the large firms often don't measure up to their competence. There is also a new breed of entrepreneurs who are emerging from large corporate, with a deep domain understanding. They understand the gaps in the solution offerings and are willing to provide niche solutions. The third category, yet emerging, is a set of academics, who are converting years of research into business applications and building firms around them. This upsurge is encouraging and, with right enablers, can lead to a whole new breed of companies that will emerge from India.”

Cautious, but optimistic
This sector is currently very nascent and companies are still catering to basic needs. Clinical research and drug research are yet to take off. Ruparel is now confident that India will not only see many more healthcare companies sprout here in the next five years, but it will also move up this value chain. Healthcare, generally, is among the top three promising sectors that angel investors consider as an opportunity. The number of start-ups is gradually increasing. “The medical device companies attract the largest chunk of angel investments, far more than the pharmaceuticals, drugs and biotechnology start-ups. This sector is considered to be high risk and a high return one,” explained Ruparel. This space looks promising.

There are a good number of start-ups in drug discovery, platforms and the medical device sectors which are founded by world class entrepreneurs. “Nonetheless, the Indian market is still a few years away from maturity, and therefore what we are likely to see are global plays. The much touted reverse innovation paradigm is therefore constrained by the lack of an easily addressable domestic market. Further, the regulatory environment is nascent. While that may not be a concern in the short-term, it will in the long run hurt companies which are looking to expand globally,” added Raguraman.

Preferred funding instruments in biosciences
  • Asia is emerging as a hotspot for outsourcing with several opportunities for entrepreneurs. Scientists or executives who have been associated with the life sciences industry and worked in big pharma in the West have been returning to their homeland to take up challenging tasks and tap into the growing opportunities in their country of origin. These scientists or executives have been investing in new ventures from their pockets as seed capital along with support from their friends, angel investors, institutions, banks, and venture capitalists (VC). Looking at the requirement of the entrepreneurs, the venture capitalists or other financial institutions have been using different tools such as equity, fully  convertible loans, conditional loans, and mezzanine funding. In the Asian region equity, conditional loans and convertible loans are most preferred instruments by the venture community.

  • Nitin Deshmukh, who has invested in over 50 biosciences companies in India over the last 23 years, explained, “Direct equity, fully convertible shares /loans, conditional loans and mezzanine funding are most preferred instruments of investments in biosciences starts ups. In the case of direct equity, the VC comes in as a partner along with entrepreneur and will share risks of the business to the extent of the VC's investment and stake in the company. Fully convertible shares/ loans entitle the VC to convert the fully convertible shares or loans to equity at a specified conversion rate based on financial performance and within a specified period of time. Conditional loans are flexible loans which offer differential interest rates over a specified period of time with a longer moratorium period for repayments or a mix or debt (with low interest rate) and royalty on revenues on successful commercialization of the product. Mezzanine finance is a hybrid of debt and equity. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company based on certain financial performance/investment milestones.”

  • Besides these preferred instruments of offering capital to entrepreneurs, the Corporate VCs and a few select VCs offer funds to companies focused on discovery of new molecules. “Such Corporate VCs make investments only in early-stage small-molecule drug discovery companies. They help such companies with a potential drug target or new chemistry embark on a programme of drug discovery and/or lead optimization. In certain cases they selectively undertake co-development of a specific molecule with the company post either a successful phase I or phase II trial. There are instances  where they also license the molecule from the company after successful phase I or phase II. Such funding is very popular in the western countries mainly in the US and European Union, unlike in the Asian region,” he added.
The venture capital community is extremely jittery about the prevailing drug control regulatory system in the country where companies (involved in drug discovery and clinical research) are facing considerable delays of over several months and in some instances over a year in receiving regulatory approvals. “These delays have not just been for clinical trials but also for manufacturing licenses. These inordinate delays and lack of funding support are killing innovation and drug discovery business in the country significantly hurting the growth of the biotech sector. The concerned government agencies need to address these issues on a priority basis to bring back the investor confidence,” reiterated Nitin Deshmukh, CEO, Kotak Private Equity Group.  

According to Utkarsh Palnitkar, managing director, Pluripotent Capital, and executive Director, Centrum Capital, the primary challenge is in finding enterprises that can scale up in a reasonable period of time. “Valuation expectation of mature enterprises is another barrier to deal making. Finding viable exit routes is another problem. This is accentuated in the healthcare space, where individual units may show healthy profits and yet offer very limited exit options to investors given their individual size,” summed up Palnitkar.

Padmajaruparel “The medical device companies attract the largest chunk of angel investments, far more than the pharmaceuticals, drugs and biotechnology start-ups. This sector is considered to be high risk and a high return one”

- Padmaja Ruparel
president, Indian Angel Network
The healthcare and life sciences industry is reckoned to be the engine of India's economic growth. “There is a lot of interest that appears to be building in the global investor community in the Indian healthcare and life sciences sectors, and there is going to be a significant amount of capital that will follow the companies that manage to solve the challenges and develop a unique proposition applicable in a global context. Therefore the potential for strong exits is high, be it through secondary sales or through acquisitions,” said Ashwin Raguraman.

“ChrysCapital that made two investments in less than 12 months believes in the Indian life sciences story and will continue to make investments,” concluded Sanjiv Kaul, managing director, ChrysCapital Advisors.

Deal by Deal info on PE VC Investments in Life Sciences in 2012*
Company Amount (in $ million) Investors -- Date --
Aptuit Laurus 41.00 Fidelity Growth Partners Feb-12
Shasun Pharmaceuticals 10.00 OrbiMed Feb-12
Insightra 8.00 Aarin Capital Mar-12
Perfint Healthcare NA Norwest, IDG Ventures India, Accel India Mar-12
Shilpa Medicare 1.60 Tano Capital Mar-12
Sutures India 40.00 CX Partners Mar-12
Vardhman Chemtech 14.00 IndiaVenture Mar-12
Cura Healthcare 16.20 Peepul Capital Apr-12
Intas Pharmaceuticals 57.00 ChrysCapital Apr-12
Shantani Proteome Analytics 0.30 Blume Ventures, India Innovation Fund, Others Apr-12
Avesthagen 60.00 Equity Partners Fund May-12
Shilpa Medicare 3.50 Tano Capital May-12
Claris Lifesciences 4.00 Signet Healthcare Partners Jul-12
Consure Medical NA Indian Angel Network, India Venture Partners, India Innovation Fund Aug-12
Vyome Biosciences 3.60 IndoUS Ventures, Navam Capital, Aarin Capital Sep-12
*as on Sep 2012
Source: Venture Intelligence

Deal by Deal info on PE VC Investments in Life Sciences in 2011
Company Amount (in $ million) Investors -- Date --
Aizant Drug Research Solutions 5.00 Zephyr Peacock Jan-11
Cybele Herbal Laboratories JV 10.00 Pittsford Ventures Jan-11
Sandor Medicaids 2.33 Somerset Indus Capital Partners May-11
Imaging Super Consultant 1.50 Rajasthan VC Jun-11
Vivimed Labs 7.50 IFC Jun-11
Eris Lifesciences NA ChrysCapital Sep-11
Symbiotec Pharmalab 9.00 Franklin Templeton PE Sep-11
Vivimed Labs 26.00 NYLIM India, Kitara Capital Sep-11
Axio Biosolutions 0.24 GVFL Nov-11
XCyton Diagnostics 4.00 Fidelity Growth Partners Nov-11
Natco Pharma 4.50 Kotak PE Dec-11
Perfint Healthcare 8.00 Norwest, IDG Ventures India, Accel India Dec-11
Source: Venture Intelligence

Narayan Kulkarni (with inputs from Vipul Murarka)

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