VC funding-making a difference

Biotech being an inherently risky business, many private funding agencies appear reluctant to supply cash. Here is a look at the current biotech financing scenario and the withering gaps in funding.

India might be a late entrant to the race but this has not stopped venture capitalists, private equity players and funding agencies being bullish about the Indian biotech industry. Over the past five years, India has been seeing a decent investment of over a billion dollar into this space both by foreign and domestic players. The Venture Intelligence survey of leading Private Equity (including Venture Capital) fund managers suggest a strong appetite adding to over $2 billion (about Rs 9,589 crore) investments that they have already made in the healthcare and life sciences (HLS) industry over the past five years. The report also goes on to mention that given the fragmented nature of both the hospitals and pharmaceuticals sectors, investors see clear potential for tapping into consolidation opportunities in partnership with growth-oriented entrepreneurs.
Says Kapil Khandelwal, founder and board member at Disease Management Association of India, and former vice-president of Healthcare and Life Sciences Business at Jubliant Biosys, “The investments into the Indian life sciences sector ranges from $150 million to $250 million (about Rs 719 crore to Rs 1,198 crore, respectively). The financing ranges from PE, debt to alliance funding. On the other hand, foreign financing is coming through the route of debt financing, PE funds, joint venture investment, drug discovery alliances, dndowments through academic medical research centers and/or NIH from the US, donations/social funds, other routes such as acquisition/divestments, in/out licensing are sought.” Other ways of funding also include annual development fees payment, R&D funding, equity, quids, milestone payments and royalties.
The year 2006-07 saw the maximum number of investments into the life sciences space, where about $150-200 million (about Rs 719-1,198 crore) worth of deals were signed, with Hyderabad-based Ocimum Biosolutions getting in investments worth $20 million (about Rs 95 crore) and four CROs seeing the exit route. It has also been observed by industry experts that among the top 10 areas of investments (across all sectors) by VCs and PEs in India- healthcare and life sciences features in this priority list.
Comments Dr Jasmin Patel, MD, Fidelity International, “Over the past five years, at least a billion dollar has been invested into pharma life sciences space which includes traditional
generic companies, biopharma, diagnostics, pure biotech companies and CRAMS.”

With sectors like IT and real estate reaching a saturation point, the number of VC and PE firms investing in life sciences has also seen an upward trend. Altogether, there are around 20 Indian as well as foreign VC firms which are active in the biotech space.
According to Dr Patel, there are five or six types of sources of funding for young biotech and venture capital companies. “The obvious one is VC funding because there's a high risk in a highly technologically driven company; VCs are comfortable in investing in such risks. In India, there are the PEs, and the growth capital players who are a subset of PE players who might not invest in a start ups, but they might invest in the next round. The first two are more of financially-driven investors,” he adds. He maintains that there are the strategic investors, who could be categorized as the 'big pharma companies'. These companies look at finances in their balance sheet, how can they mitigate their risk in the R&D portfolio, and then, take over another company. “They are a mix of a commercially driven, financially-oriented and R&D oriented investors. Funding is also done by government and NGOs who are not financially motivated but are driven more by public health or philanthropy. Their main aim is to foster biotech research by giving in loans and grants,” says Dr Patel.
Corpus funding by an academic institution, which is a popular phenomenon in the West, has not yet picked up in India. “Academic institutions in the west plays a potential role in providing seed capital like the Havard Medical School's Harvard Partners, Cleveland Clinic, Mayo Clinic, have endowments of over $6 billion (Rs 28,767 crore) from NIH, and industry from which they are successful in spinning off innovative enterprises. In India, universities do not have that capability despite the fact that some brilliant ideas and technologies are being developed there,” adds Khandelwal.

Sector influx of funds
Over the years, investor behavior towards this space has been moving on a whimsical route. Excitement to invest in this sector goes back to 2000, when the sequencing of the human genome project was first announced. Subsequently, that saw a spurt of investments in sub sectors like bioinformatics, clinical trial development and integrated drug discovery projects. Money rushed into the sector with the announcements of product approvals and companies rushed to go into IPOs. However, long gestation cycles, realization that biotech was an altogether different ball game from its pharmaceutical counterpart led to investor sentiment dying out.
Giving a global perspective, PriceWaterHouse Coopers' report mentions that in 2008, funding was seen to be stronger in seed/start up companies and early stages while it fell in later stages. The report further mentions that VC-backed human biotech companies drew 16.2 percent of financing, while early stages drew around 9.6 percent of financing. Therapeutic and diagnostic biologics brought in the maximum amount of VC investments into the space. Vaccines is another segment which has been attracting investors.
Deepam Mishra, CEO of i2india Ventures, says, “Early stage research driven innovation involves very high risk, but is highly rewarding. Areas in life sciences in which a lot of ideas are coming out are point of care diagnostics -the simple to use tools that can be made available even in small cities and towns. Other than that, regular areas like vaccines is an attractive area for investment.”

He believes that from the financial investment point of view, many diseases are not getting enough cash flow; they may be the country's need but not good money making propositions for private investors. Private money doesn't often go for neglected diseases.
i2india Ventures is also keen at novel imaging technologies. Mishra says, “A lot of work is happening in this field, the whole area of biological enzymes. Having enzymes to replace the industrial use of catalysts which are polluting, non-degradable and at times expensive is also attractive. There is a lot of interesting work going on in the area of bioseperation, biocatalysis and process chemistry.”
He further admits that although a lot of interesting innovations are happening in cell biology and molecular chemistry, most of them are very complicated and difficult to understand, therefore, not too many investments happen.
Giving the Indian overview, a Venture Intelligence survey report mentions that between 2004-08, around 40 percent of all PE investments went into the pharmaceutical sector, 24 percent into hospitals, 10 percent into CROs, 13 percent pure biotech while the remaining portion of the pie constituted sectors like medical devices, diagnostics and wellness.
Diagnostics, medical devices and the services sector today are posing to be lucrative sectors. Again, Venture Intelligence conducted a poll among private equity and venture capital firms during April-May 2009. Fund managers from over 60 firms participated in the poll. According to 87 percent of the fund managers polled, Healthcare and Life Sciences (HLS) should constitute at least 10 percent of portfolios of new funds being raised for investing in India. Investors chose diagnostic services, medical devices / equipment, hospital chains, wellness products and services and CROs as their favourite sectors for investments within the HLS industry. Other areas of interest include specialized chains in areas like diabetes, orthopedics, optics, geriatrics and psychiatric.
Mentions Dr Patel, “In India, the CRO businesses are very interesting because they have the potential to scale up and expand. Investors in China for instance invested in a lot of CRO deals, and have been successful. Innovation companies mainly those doing drug discovery business look lucrative but there are very few of them in India. Companies providing services, more consumer based services are interesting in addition to pharmacy chains and path labs.”
With a nosedive drop of real estate prices, infrastructural investments in biotech is another interesting area for investments. “With the downturn, there has been a sharp fall in real estate prices. We shall see return of investments in SEZs, biotech parks and health cities,” adds Khandelwal.
From a futuristic point of view, biosimilars is another area investors are cashing on. So far Biocon, Dr Reddys Labs and Lupin Pharma, are some of the prominent names successful in this field. Other prominent companies who have started initiatives in the field includes Glenmark, Cipla and Intas Biopharmaceuticals. The latest in the news is Cipla entering into a 50:50 joint venture with a Chinese company for bio-similars. The joint venture would be called Biomab. Cipla has said it was looking to bring out the JV's first product by 2010.
“The biosimilar segment in India continues to attract huge interest, intent and is intensely controversial. Most generic manufacturers are trying to actively get involved in it, either directly or indirectly. The flow of investments and investors will be to the successful ones that demonstrate the patience, resources and above all money to invest now, to show proofs and validation in order to gain in the future,” adds Khandelwal.
There have been options which was presumed to open up a world of opportunities but went bust towards early stages. Spinning out of R&D units for example, was mooted by pharmaceutical companies as the next big thing with Sun Pharma, Dr Reddys, Glenmark, Nicholas Piramal hiving out their units. But the failure of Percelan Pharma, a spin out of Dr Reddys Labs and the early backing out of ICICI Venture and CVS international turned the tables for investors. Nicholas Piramal was forced to hold back further plans of raising funds for Piramal Healthcare, its hived out R&D unit, because it failed to attract investors at its expected valuation. Hence, investors now have given the thumbs down to this model.

Activities of investment firms
There have been trigger factors in the Indian economy which had led firms put on their thinking caps, and start seriously looking at the life sciences sector. Agrees Nitin Deshmukh, CEO, Private Equity, Kotak Private Equity Group (KPEG), “Over a period, surely there had been some trigger factors in the economy which has led us to invest classic growth capital funds into this sector. In the 1990's, when capital was down, we thought of shifting our focus to non-capital sectors. Life sciences was one of them. Similarly, in the same period de-licesning came about which made us invest in companies like Sun Pharma and Neuland Laboratories. In 2005, there was the GATT policy which came up. This made us look at drug discovery, and healthcare was an upcoming sector.”
Kotak Private Equity Group (KPEG) today is a specialist India Private Equity firm of Kotak Mahindra Group, and is focused on helping emerging corporates and mid-size enterprises. Today, it has three types of funds namely, India Growth Fund I and India Growth Fund II and Venture Capital for Life Sciences. It has allocated around $100 million (about Rs 479 crore) into the life sciences sector. The firm started investing in biotech in 2000 with companies like Biocon, Avesthagen and Syngene in its portfolio. Later, it also looked at companies specializing in global manufacturing and services. Today, its current investments include Siro Clinpharm, Metahelix Life Sciences, VLife Sciences, Rubicon Research and Indus Biotech. “We have a 70 percent stake in Siro Clinpharm along with another investor,” adds Deshmukh.
Some of these companies have made impressive progress. Rubicon Research, which is into developing formulations has till date developed seven platform technologies which has been patented (which it further out licenses). It has also ventured into the field of OTC drugs. Indus Biotech looks into plant extracts wherein they extract molecules, isolate and purify them, and then take them through the NCE route. It is developing a Parkinson's drug wherein 40 patients were recruited in Mumbai while studies were done outside. Indus has also been given a fast track approval for a HIV drug. “Most importantly, it recently established that this drug was also active against the H1N1 virus for swine flu,” adds Deshmukh. Metahelix Life Sciences has product pipeline of Genetically Modified (GM) seeds in cotton, rice, cabbage, maize and tomato with specific traits like insect control, drought and salinity resistance. It is expected to be the first indigenous company to commercialize GM technology while Siro Clinpharm has emerged to be one of the largest Indian CROs, today.
Fidelity Fund Management, part of Fidelity International, is also cashing in on the life sciences sector. The amount of allocation for this sector was not revealed by the management. Dr Patel mentions, “We are actively looking at this sector. Out of a team of seven people, we have four members who are wholly focused on this sector.” But other reliable sources confirm that the allocation for this sector comes up to $12.9 million (about Rs 61.84 crore).
Some of the other firms who have invested into the sector include Nadathur Holdings and Investments, Actis Capital, HSBC Investments in Glenmark, Tamasek, New Bridge Capital, ChrysCapital in Matrix Labs, Claris Life Sciences has Carlyte Asia Pacific as their investor, Ocimum from IFC, Sai Advantium from ICICI Ventures, GVK BioSciences from Sequoia, Sphaera Pharma from Barring Equity and Cellworks from Artiman Ventures.
i2india Ventures, the Indian arm of Imperial Innovations, UK, the technology commercialization venture of Imperial College London, is a hybrid of a VC and technology/research comercialization company. It has been working in partnership with research and innovation centres, to create an ecosystem for early stage technology commercialization. In India, i2india has signed agreements and is working with leading institutions such as IITs, IISc, and has conducted over an year of field studies to understand the opportunities and challenges in this space.

Is innovation happening?
There is no dearth of funding into the biotech sector, but there are surely bottlenecks in terms of innovation, claim industry experts. “People say that there is not enough venture capitalists in India which is true. But that is because there isn't any innovation in India. To create an investment climate, one should look at investing in innovative ventures and make them successful so that, the cycle is broken,” adds Dr Patel.
A well renowned expert from the venture capital field, who does not wish to be named maintains, “I do not believe that there is no innovation at all. The problem here really is that the ideas are not maturing, and that, the business models are not sustainable. I would go to admit because we have a strong foundation in chemistry, and not the requisite structure for biotech.”
Above all, an important fact to bear in mind is that Indian scientists have their chemistry strong but are still lagging behind in biotech. Hence, generics was an easier option because it was easy to emulate and the returns were high. Agrees Dr Patel, “About 10 years ago if you were a young scientist who wanted to start a company, you would rather go in and start an API or generics formulation business because it was easier to do. The markets were there, risk was low, and the demand was huge so people would not be innovative in that sense. Innovation is not just about creating new drugs but about knowing and understanding things differently.”
Dr Rajeev Soni, president and COO, Premas Biotech, a start-up company funded by a VC based in UK, suggests, “The like-minded VC's and PE's should have to take some degree of risk and come forward to fund start-ups (of-course after complete due diligence), so that they can innovate and increase more opportunities for other entrepreneurs and VCs to join the game. In addition, detailed planning in terms of an executable business plan with respect to return on investment is often lacking from the scientists, who would like to be entrepreneurs which usually does not go well with most VC's/PE's.”

Gaps in funding
Barring a handful of firms which houses a dedicated team for life sciences and has allocated separate investments for this sector, there are may firms for whom the sector still remains in the periphery of their priorities. VCs have a limited understanding of life sciences due to the complexities involved. Also the long drawn gestation period in a product cycle is another reason for VCs and PEs being reluctant.
This is a stark contrast to their counterparts in the US and Europe, who have been majorly investing in life sciences. This is also because of a team which is made up of experts who have hands-on-experience in biotech. Firms in the US for example have a team which has an in depth knowledge of the industry, acquainted with the dynamics of the field, hence are able to channelize their investments. In India, there are firms headed more by financial investors than those with a scientific background. “The VC community needs to hire a few PhDs on their rolls and some patent attorneys. I don't think there is any true biotech VC fund in India,” says Dr Villoo Morawala-Patell, CMD, Avesthagen.
Says Deepam Mishra, CEO of i2ventures, “In India there are very few VCs who are biologists or PhDs. Most of them are business people and bankers. In the west, most of the VCs are biologists themselves. They have started a company sold a company, and then have become VCs. They are scientists turned venture capitalists. So there, the degree of comfort while investing is higher. That's the gap we are trying to fill-in in India. We bring the mix of very high technology understanding with PhDs at the same time we bring in investors who are experts in finances.”
Highlighting the challenges while investing in life sciences, he says, “Technical understanding is the biggest challenge. The other is that the research works happening in government research labs are not very well connected with the industry. The maturity of technology is lower, so the validation needs to be done a lot more after the scientists thinks he/she has finished the project.”
He adds, “I don't agree that there is a lack of innovation in the country. There are lots, they may be guided, unguided or unknown. Often scientists do not have enough interest in taking it to the market.”

Funding from government/NGOs
Apart from VCs and PEs, the Indian government along with a handful of NGOs play a potential role in funding biotech initiatives, especially R&D initiatives coming out of universities. The DBT's latest initiative-the Biotechnology Industry Partnership Program (BIPP)-could provide a fillip for research, more so, in the light of industry facing a credit squeeze following the meltdown.
Another initiative is The Biotechnology YES (Young Entrepreneurs Scheme). This is an innovative competition developed to raise awareness of the commercialization of bioscience ideas amongst postgraduate / postdoctoral scientists. The program is organized by the University of Nottingham, Institute for Enterprise and Innovation and Biotechnology and Biological Sciences Research Council.

Nayantara Som and
Jahanara Parveen

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