• 7 October 2010
  • News
  • By Nayantara Som

Funding Drought

Despite the market showing signs of recovery post the global downturn, innovation in biotech is stunted with investors continuing to be tightfisted. Industry experts are concerned that the situation might get worse if corrective steps are not taken

In early 2000, Indian industry soothsayers had predicted the success story of the information technology (IT) and telecommunication industry replicating the success in biotechnology (BT) space. Venture capitalists and private equity (PE) investors had every reason to be bullish about this sector, considering that there was no dearth of ideas, coupled with the availability of a huge skilled talent pool. Over the past five years, India has seen a sizeable investment of over 4,600 crore ($1 billion) in this area, by both foreign and domestic players. The Venture Intelligence survey of leading private equity (including venture capital) fund managers, suggests a strong appetite amounting to over 9,200 crore (about $2 billion) in investments that have already been made in the healthcare and life sciences (HLS) industry, over the past five years.

In 2010, the tables have drastically turned. “Investments over the past one year have been negligible, and today, there is no money available for this sector, especially for early stage funding. Even if a company gets its first round of funding, my worry then becomes as to whether they have the ability to raise their second round of funding,” adds a well-known investor, heading a reputable funding firm.

Ironically, globally, life sciences remains the number one segment for investors, compared to other sectors. Findings from the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA), based on the data from Thomson Reuters, suggest that for all industries, US venture capitalists invested 21,620 crore ($4.7 billion) in 681 deals during the first quarter of 2010. Life sciences again captured the largest share at 5890 crore ($1.3 billion) in 160 deals. (though sector investment was down 26 percent; and 21 percent in deals, since the last quarter of 2009) Biotechnology, by the nature of the industry requires angel investments, and that is severely lacking in the country. In India, there are only a handful of VC/PE firms proactive in this space, while angel investors in this sector are close to zilch. Considering this situation, industry experts unanimously opine that if this persists, there will be a time when the concept of VC funding itself will dwindle away. “Major venture capitalist firms are already looking at the option of getting funds through strategic alliances,” comments Dr Nitin Deshmukh, CEO, Private Equity, Kotak Private Equity Group (KPEG), Mumbai.

“In the US and Europe, investors looking at the life sciences sector have an in-depth knowledge of the industry operations. In India, you will hardly find investors with such a profile”

-Dr Nitin Deshmukh, CEO, Private Equity, Kotak Private Equity Group (KPEG), Mumbai

Most attractive sectors for investments
  • Diagnostic Services
  • Medical Devices / Equipment
  • Hospital Chains
  • Wellness Products and Services
  • CROs
  • Medical Tourism
  • Dental Chains
  • Biotechnology
  • Alternative Medicine Chains
  • Telemedicine
  • Vaccines
  • Drug Discovery and R&D
  • Pharmaceuticals (generics)
Source: Venture Intelligence

Dead End In Funding

Until now, there have been mainly PE/VC late-stage funding deals in the life sciences sector, mostly in the pharmaceutical, and in domestic formulations which give quick returns. Investors-both VC and PE alike-are yet to understand the dynamics of the sector, because such investors typically have a finance background, with the end motive of getting return on investment (RoIs). “In the US and Europe, investors looking at the life sciences sector have an in-depth knowledge of the industry operations. They spend years studying and scrutinizing this sector; and it is most likely that there are multiple PhD holders in the team. In India, you will hardly find investors with such a profile,” says Ajit Mahadevan, partner, Life Sciences Practice, Ernst & Young.

Lately, there has been an awareness among investors on the need to educate themselves about the industry; but there has not been any drastic change in the mindset. “Investors take it for granted that the dynamics of the sector would be the same as the pharmaceutical sector. Biotechnology, on the other hand, is a complex sector, the time lines are longer, the risk is larger; and the expenditure is four times that of the investment in generics. That is when they take a backseat,” comments Mani Iyer, managing director, Iyers West Ventures Management.

The typical structure that the funding industry follows is not amenable for life sciences as the gestation period and scale up time line is much longer, and with inherent risks. “Specialist life sciences funds are still not able to understand and work their risk mitigation strategies; whether it is on the pipeline, the supply chain, the clinical trial stage, the product liability or the other regulatory risks. Thus, the time-to-fund is an issue,” adds Kapil Khandelwal, director and CEO, Makven Capital, a niche investment banking and advisory services firm.

Ideally in the past, a VC in India would fund a start-up to take the product/molecule up to a certain stage, and then license it to a mature pharmaceutical company. “The situation is tougher now, because the funds to take a product to phase I are unavailable. These VCs are now being replaced by large scale pharmaceutical companies. The problem with a pharma company funding a start-up, is the long time lines involved in raising that fund,” adds Mahadevan.
“Specialist life sciences funds are still not able to understand and work their risk mitigation strategies; whether it is on the pipeline, the supply chain, the clinical trial stage, the product liability or the other regulatory risks. Thus, the time-to-fund is an issue,”
-Kapil Khandelwal, director and CEO, Makven Capital

“In the US and Europe, investors looking at the life sciences sector have an in-depth knowledge of the industry operations. In India, you will hardly find investors with such a profile”
-Ajit Mahadevan, partner, Life Sciences Practice, Ernst & Young

Start-up companies face investors who are often uncomfortable with the dual challenge associated with new ventures and scientific/technical risks. In a market where funds have increasingly focused on low-risk growth capital opportunities, it is tough for investors to consider venture investments. “The key challenges to growth in HLS investments are, very few investors with an appreciation of the difficulties with R&D, low-risk appetite among Indian investors, besides, a paucity of experienced talent and entrepreneurs in the sector,” says Dr Jasmin Patel, managing director, Fidelity Growth Partners – India.

Tania Fernandez, director, India, Burrill & Company, gives the other side of the story. “The biggest challenge that the industry faces, is in recognizing what the next wave for the Indian life sciences industry will be. Just take a snapshot of the deals that are being done today, or over the past two-to-three years. They can, with some exceptions, be characterized as generics, CRAMS, pharmaceutical and hospital deals. We will have a fair amount of success in this space especially generics, but where do we go from there? So this should not be a question of what challenges does the industry face, in terms of financing, it should be a broader question. If all the capital goes towards these kind of deals, then what about the large number of struggling companies that are still trying to figure out how to get the business to the next level”.

Investment in Biotech and Pharma
98 total Investments worth $1266 million (2005-2010)
8 PE investments worth $137 million (Jan 2009-Aug 2010)
5 VC investments worth $16 million (Jan 2009-Aug 2010)
Source: Venture Intelligence

Funds and grants provided by the Indian government, mainly through DBT and DST, with philanthropic organizations like the Bill & Melinda Gates Foundation and The Wellcome Trust, have perhaps been the saving grace for start-up companies. Sujay Shetty, associate director Pharma Life Sciences Advisory–Corporate Finance, Pricewaterhouse Coopers, says, “The situation is such that other than government funding, there has been absolutely no funding available. Early stage VC funding is negligible. Presently, we see no change in the situation. Investor firms in India mainly look at matured funding. The nature of the sector is such that there is no angel funding available. In addition to this, the option of licensing, has not been explored by Indian companies.”

“The last few years have seen a compression of the funding in early stage ventures; and the risk and investment appetite to such ventures. The funding tap is just about opening up. However, till such time they are Yo-Yo (you are on your own)!” adds Khandelwal.

Status Quo for Most Investment Firms
Post the global downturn, markets have opened up, and companies might have reported decent quarterly performances; but in terms of funding initiatives into the sector, there have been no groundbreaking numbers in the past year. Dr Patel says, “There has been a very limited amount of investment that has gone into traditional biotechnology companies. Only three investments come to mind over the past year in the areas of serums and vaccines, informatics-driven drug discovery and genomics applications for therapeutics.” Investments have also been made in low-risk segments like diagnostics. Clean technology is another growing area of investment for investors. “Globally, in 2007-08, the total VC funding was around `32,200 crore ($7 billion); and this dropped to 27,600 crore ($6 billion) in the following year. Now there are signs of revival. Of this, biotechnology funding in India has been low, with VC/PE investment, touching a figure of 920 crore ($200 million) and 30-40 percent of that went into the biopharma industry,” says Mahadevan. Clearly, investor confidence in the sector has been stalled.

“The situation is such that other than government funding, there has been absolutely no funding available. Early stage VC funding is negligible. Presently, we see no change in the situation”
-Sujay Shetty, associate director Pharma Life Sciences Advisory–Corporate Finance, PricewaterhouseCoopers

Institutional Investors, VC Firms & Banks in BioFunding
  • AIG Investment Corporations
  • Acer Technology Ventures
  • APIDC Venture Capital
  • Baring Pvt Equity Partners (India)
  • BTS Investment Advisors
  • Carlyle India Advisors
  • CDC Capital Partners
  • Canbank Venture Capital Fund
  • Chrysalis Investment Advisors (I)
  • Eur India
  • e4e Labs
  • Frontline Ventures
  • Finish Development Fund
  • Netherlands Development Finance
  • G W Capital
  • Global Technology Ventures
  • GVFL
  • HSBC Private Equity Management
  • Henderson Global Investors
  • ICICI Bank TFG
  • Intel Asia
  • IDFC Asset Management
  • ICF Advisors
  • Infinity Technology Investments
  • Indian Direct Equity Advisors
  • IL&FS Investment Managers
  • Jumpstartup Fund Advisors
  • ICICI Venture Funds Management
  • 2iCapital (India)
  • Small Enterprises Assistance Fund
  • SIDBI Venture Capital
  • UTI Venture Funds Management
  • VIEW Advisors
  • Westbridge Capital Partners
  • Asian Development Bank
  • The Development Bank of Singapore
  • Schroder Capital Partners (Asia)
  • Standard Chartered Bank
  • GIC Special Investments
  • TDA Capital Partners
  • Temasek Holdings
  • Walden International Investment
  • Vertex Management
  • Warburg Pincus
Courtesy: Association of Biotechnology Led Enterprises (ABLE)
Presently, there are a handful of VC/PE firms in the country looking seriously at the life sciences sector-Kotak Private Equity Group (KPEG), ICICI Ventures, Nadathur Holdings, Venture East, Barring Private Equity, Evolvence India Life Sciences Fund, IDG Ventures India, Tata Capital, India Value Fund, Standard Chartered Private Equity, i2india Ventures, to name a few. A cursory glance will reveal that investment has not been significant post-2008, except for KPEG, which invested in Bharat Serums & Vaccines (BSV) in 2009 (OrbiMed Advisors also made an investment for an undisclosed amount in BSV); while Tata Capital Private Equity invested 46 crore ($10 million) in Intas Biopharmas. There are a number of ongoing discussions, but no concrete deals for funding have been implemented.
According to a report published jointly by Yes Bank and the Confederation of Indian Industry (CII), since 2006, only six investments worth 96.6 crore ($21 million) have been made in the medical device sector. Trivitron Group's ambitious venture of creating a technology park was financed by ePlanet Ventures and HSBC Private Equity, with a net investment of 50.6 crore ($11 million) in November 2007.

KPEG is a specialist Indian private equity firm of Kotak Mahindra Group, focused on helping emerging corporates and mid-size enterprises. Today, it has three types of funds namely, India Growth Fund I, India Growth Fund II and Venture Capital for Life Sciences. It has allocated about 460 crore ($100 million) in the life sciences sector. The firm started investing in biotechnology in 2000, with companies like Biocon, Avesthagen and Syngene in its portfolio. Later, KPEG also considered companies specializing in global manufacturing and services. Today, its current investments include Siro Clinpharm, Metahelix Life Sciences, VLife Sciences, Rubicon Research and Indus Biotech. “Our allocation for life sciences remains the same. We have invested in Bharat Serums & Vaccines last year. But otherwise, no other investments in the sector,” adds Deshmukh.

Venture East looks at providing venture capital funds and incubation funds. It was instrumental in providing early stage funding for start-up overseas companies looking at entering India, Evolva Biotech being one of them. In 2003, it was the first company to bring out biotechnology-focused venture capital fund. Investments include cross-border deals, drug discovery, biodiesel and healthcare infrastructure. This apart, in 1997, Venture East instituted the APIDC Venture Capital Fund which looked at investments in the pharmaceutical space.

Bangalore-based Nadathur Holdings (founded by NS Raghavan, founder & former joint managing director of Infosys Technologies), is another name that has made a considerable number of investments in the life sciences sector. In 2005, to focus on human health-related opportunities, the firm dedicated, from their portfolio, a specialized domain-specific platform in HLS. Thus far, it has invested over 230 crore ($50 million) through this platform, into ventures that target not only the supply side (R&D), but also the demand side (healthcare) of the value chain. Nadathur's portfolio ranges from agri-biotech and drug discovery, to healthcare services and hospitals. In 2007, the firm funded the bio-agri start-up, Metahelix to the tune of 6.5 crore ($1.4 million). Kotak Mahindra Private Equity Fund chipped in with another 5 crore (about $1 million). Nadathur Holdings and Kotak Mahindra also jointly invested another tranche of 16 crore ($3.5 million) in Metahelix. Other investments for Nadathur Holdings include Connexios Life Sciences, a drug discovery company, and Abexome Biosciences, a biotechnology company specializing in the production of recombinant proteins, antibodies and immunoassays. However, the number of deals in the sector by the firm has diminished since then.

ICICI Ventures made their investments in Arch Pharmalabs, Malladi Drugs, Bharat Biotech, I-Ven Pharma (Dr Reddy's Labs), RFCL, Metropolis, Perlecan, Avesthagen, Biocon, Medicorp, Intas Pharma and Swiss Biosciences between 2000 and 2007 -when the industry was in its 'sunshine phase' (except for Medicorp and Intas Pharma which was made in the 1990s). Post-2007, investments have diminished again.

“We primarily deal with very early stage (pre-seed and seed) investments, and we see a lot of discussion, but limited change in funding,” adds Deepam Mishra, CEO of i2india Ventures. The Bangalore-based firm is now looking at roughly 50-60 percent investment in healthcare, and the rest into clean-technology. “Specific areas of interest to us include diagnostics, medical devices, screening technologies, chronic care applications. Specific focus is to bring game-changing low-cost products for democratizing healthcare in India, as current technologies are mostly West-centric and hence available only to the upper end of the population,” adds Mishra.

Angel Investment
The concept of angel investment into the sector is at an all time low. “A biotechnology venture requires an ecosystem, and not just an idea. Unfortunately, that does not exist in India, and is the reason for few angel investors looking at this sector,” adds Mahadevan. This is where churning out innovation at the educational level, and having a strong industry-academia relationship, matters. Experts opine that the environment in the country is such that it does not encourage innovation, as well as angel investment. Even regulations for angel investments are vague.

Iyer believes that apart from ideas of entrepreneurs, initiative should come from angel investors. “It is not about the number of angel investors in the sector, what will ultimately matter, is the passion of these investors to understand the ideas, and make investments,” adds Iyer.

A strong industry-academia collaboration will make a world of a difference in attracting angel investments in India. While in the US and Europe, where the academia has a crucial role in the growth of the biotechnology industry, India sees both the segments working as two watertight compartments. In UK for instance, the strong nexus between industry and academia, has created a romping success for the industry. The biotechnology sector has a strong record of collaborating with universities to exploit the science base, and offers about 400 PhD studentships. Today, all the stakeholders in the region-which includes the industry, the academia, the NHS and the UK Government-have come together in the cross exchange of ideas, and to bring forth a conducive environment for businesses to thrive. This automatically attracts angel investments.

Iyer gives a feasible suggestion. “I would suggest we divide the processes in science, and have service centers (or specialized centers), each having its own specializations and technical expertise, distributed all over the country. Each center, by focusing its entire efforts on one specialization, will bring out a better output, because it will be backed by a strong team of highly skilled specialized experts. The investment required will be anywhere between 5-10 crore (about $1-$2.2 million), and this is where an angel investor will come forward. A PE will never look at projects in this investment range. These service centers can be interconnected to each other,” adds Iyer. This model has its advantages which includes a higher RoI, as they are highly specialized. Once the cash flow begins, these units can always spin out into an independent company.

Overseas investment
There have been a number of overseas firms who have, in the past, pitched in to make large scale investments into India; but till date, nothing concrete has shown up. Burill & Co, Fidelity International, HSBC, Orbimed, JP Morgan Private Equity fund, MPM Capital were all bullish about the Indian market.

The lack of understanding of the Indian market is cited as one of the prime reasons. “Such firms have not yet understood the market. They look at less risk and quick returns, which is not possible,” adds Shetty. In addition to this, liquidity is less in India, and exits are difficult.

“Foreign venture funds have had a couple of very difficult years, given the global economic downturn. Most have typically focused on existing portfolio companies and ensuring their success. Layer onto that, the geographic distance and relatively rich valuations seen in the Indian market, investors have tended to
either stay at home or look at China,” points out Dr Patel.

There have been some firms who have made decent investments back in 2007, MPM Capital invested 92 crore ($20 million) in Sai Advantium Pharma; and the firm also entered into an agreement with Reliance Life Sciences, under which Reliance Life invested in MPM Capital's newest fund, MPM BioVentures IV. The fund reportedly had a total corpus of 2,990 crore ($650 million). Last year, Manipal Acunova, the Bangalore-based 80 crore ($17.3 million) clinical research firm, had raised 30 crore ($6.5 million) from US-based OrbiMed, a global healthcare-dedicated investment firm, with approximately 23,000 crore ($5 billion)
in assets under management. Burill & Co is yet to find a partner.

“We are still looking for the right partner on the ground, in India, for our Burrill India Healthcare Fund. When that fund is up and running, there will be 690-920 crore ($150-$200 million) that is allocated to India. Not having that fund in place, however, has not impacted us, since we have continued to analyze the investment opportunities that the Indian life sciences industry offers; and will continue to invest in the region from our global funds,” says Fernandez.

Philanthropic Investments
A number of trust organizations and philanthropic institutions like The Wellcome Trust, Bill & Melinda Gates Foundation, have been putting in funds for research innovation and early stage development of products.

Earlier in the year, British Prime Minister David Cameron, announced a 320 crore (£45 million) partnership between the UK charity organization, the Wellcome Trust and the Department of Biotechnology in India; to support the development of new healthcare products in India. The agreement builds on the existing Wellcome Trust-DBT Alliance-a five-year 570 crore (£80 million)-initiative that seeks to strengthen Indian biomedical sciences, through a series of fellowship programs.

Other collaborations announced during the trip include: a 28.4 crore (£4 million) R&D agreement between the medical research councils of the two countries. The Department of Biotechnology and The Wellcome Trust, are each contributing 160 crore (£22.5 million).
Sector wise break-up of investments made since 2004
Sector No. of Deals Amount $M
Pharmaceutical 73 1249
Medical Devices 8 31
CRO 18 207
Biotech 22 70
Other 6 20
Source: Venture Intelligence

The Gates Foundation, for instance, has allocated grants to back tuberculosis (TB) and malaria research in India. The Gates Foundation would invest 4,600 crore ($10 billion) for the development of vaccines within the next 10 years. In addition, the Gates Foundation would support a couple of immunization programs, especially in the developing countries. The funding will target R&D of vaccines in diseases like malaria, HIV, AIDS and TB. For this, it has inked partnerships with the UNICEF, WHO, the Global Alliance for Vaccines and Immunisation (GAVI alliance) besides a couple of vaccine companies.

The Indian government is setting up some novel schemes for helping companies and entrepreneurs at all stages. Also, Public Private Partnership (PPP) model incubators and innovation centers are coming up, that provide low-cost entry platforms for new companies. i2India, for example, has started Technovate India, a government-supported innovation center, to help support start-ups, in their early stages. “Early-stage investment companies like ours are still rare. Hence, in addition to working with groups like us, aspiring entrepreneurs have to invest personal funds, along with government support, to get through the first stage,” concludes Mishra.

Nayantara Som (with inputs from Jahanara Parveen)

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