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Venturing into the unknown
The Indian pharma industry requires entrepreneurs to blossom.
Yet, there are few takers for their proposals. Nandini Patwardhan ascertains
why PE funding out does venture capital in India
 Companies
require funds at various stages—the start up, expansion, and maturity stage.
While finances are easily available for already existing businesses, entrepreneurs
find it difficult to secure funds through traditional sources for their dream
projects. More so, if their projects are in the pharma and biotech industries
as these are knowledge intensive sectors characterised by high risks, long lock-in
periods, but high and long-term rewards.
Less VC, more PE
The recent years have witnessed a decrease in Venture Capital (VC) funding in
the pharma and biotech space and an increase in Private Equity (PE). PE is the
capital acquired by a company to fund its expansion activities when a company
reaches the growth stage. Timmy Kandhari, Executive Director, PriceWaterhouseCoopers,
opines that 2005 has been a good year for the country with foreign institutional
investments crossing the $10 billion mark and amounts raised through IPOs aggregating
to $6 billion.
According to data from Venture Intelligence India, a division of TSJ Media,
Private Equity and Venture Capital firms invested US$2.3 billion in Indian companies
across 147 deals during 2005. Of these, the Life Sciences sector (including
Pharma and Biotech companies) witnessed investments worth $217 million across
13 deals. However, start-ups did not find favour among PE & VC investors
with SIDBI VC's $1.7 million investment in Bravo Healthcare, a Bombay-based
pharmaceuticals company, being the lone deal in this category within the Life
Sciences sector.
Sanjiv Kaul, Managing Director, ChrysCapital, explains, “The years 2004
and 2005 have been good for PE investments in pharma vis-à-vis VC. This
is because companies that are valued close to Rs 100 crore, want to take their
business to the next level of Rs 200-300 crore. For this they need a capex of
Rs 100-200 crore, which is raised through a combination of debt-equity balancing
and through PE investment.” Also, Indian companies excel in chemistry and
re-engineering. “With some $50-odd billion worth of drugs going off patent,
there was an opportunity for Indian companies to expand through the PE route,
and that is what they did,” explains Sehgal.
Entrepreneurs benefit from VC funding
in the following manner:
- Finance: The VC injects long-term equity finance, which provides
a solid capital base for future growth. The VC may be capable of providing
additional rounds of funding, required for future growth.
- Business Partner: The VC is a business
partner, sharing the risks and rewards.
- Mentoring: The VC is able to provide
strategic, operational, and financial advice to the company based on
past experience with other companies in similar situations.
- Alliances:
The VC also has a network of contacts in many areas that can add value
to the company, such as in recruiting key personnel, providing contacts
in international markets, introductions to strategic partners and, if
needed, co-investments with other venture capital firms.
- Exit: The
VC is experienced in the process of preparing a company for an initial
public offering (IPO) and facilitating in trade sales.
(Courtesy: IVCA)
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Venture capital matters
Venture capital refers to funds, provided by heavy risk takers who believe in
the high risk, high reward philosophy. Essentially, it is an investment in the
management of young, rapidly growing companies that have the potential to innovation
and possess entrepreneurial spirit.
VC is a term reserved for seed capital during the incubation and start-up phases,
while PE funds are utilised for growth and expansion, and also at pre-IPO stages,
where the idea is established and growth is planned.
VC is critical to a boom in any industry, because it supports the upcoming companies.
Small ventures that hold the potential to challenge the biggies, but do not
have the financial muscle, use VC to concretise their business. Venture capitalists
also bring with them the business expertise, experience and the networking that
small players do not have access to. VCs can assist the pharma and biotech space
by making funds available for various innovative research and technology intensive
projects that will otherwise die a premature death, or worse be executed by
competitors before we get around to it.
Nobody can ignore the importance of VC funding. So, why is the pharma and biotech
industry characterised by less of VC and more of PE investments?
| 1. Dr. Reddy's Laboratories raised $101
million in two deals to bankroll its generic drugs business and new drug
development. Citigroup Venture and ICICI Venture contributed $22.5 million
each and Dr. Reddy's contributed $7.5 million towards Perlecan Pharma's
initial equity capital.
2. The Medreich Group, a Bangalore-based contract
manufacturer, raised $24 million from Temasek Holdings to expand its Indian
manufacturing operations and make a foray overseas.
3. International Financial Corporation (IFC), private
finance arm of the World Bank made a $ 15 million equity investment in
Dabur Pharma to expand manufacturing facility and commercialise R&D.
4. IFC also provided $ 5 million in equity to Bharat
Biotech.
5. The $7.5-million second round raised by Bangalore-based
biotechnology firm Avestha Gengraine Technologies was an early-stage investment
by Development Finance Company & IFC.
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Disadvantage VC
There are multiple reasons for the lacklustre VC investment in the pharma and
biotech space in India. Sanjay Sehgal, Managing Partner at Singapore-based East
West Capital Partners, a private equity firm focused on investing in the healthcare
industry has a different perspective on the issue. He says, “It is a case
of taking the low hanging fruit, in short, doing the easiest thing.” In
case of companies that already exist, the risk associated at the start-up stage
is already taken away. So the probability of returns is much more on each investment.
The present scenario exemplifies the Catch-22 situation. “VCs may want
to fund innovative projects by entrepreneurs who might have some prior experience
and credibility,” opines Sowmynarayan, Senior Manager, Business Development
and Alliances at the Bangalore based, Strand LifeSciences. But no enterpreneur
will acquire experience until his first project takes off.
Here are some of the other factors that have resulted in decreased VC activity
in this sector:
VCs limitations: Industry experts are of the opinion
that spotting good early stage opportunities in India is a challenge as there
are not enough experienced or business savvy technoprenuers. Hence the VC has
to proactively identify entrepreneurs, help shape business ideas, and provide
significant handholding.
Risk averse: The Indian VC industry has become over
cautious, a probable outcome of the dotcom bust. With a view to minimise risk,
the Indian VC industry has adopted a safer late-stage or private equity investment
model.
Lack of IP: VCs blame Indian pharma for lack of IP.
Sandeep Singhal, Managing Director, WestBridge Capital Partners, states “The
pharma industry is knowledge-based industry, the sector is evolving everyday.
Once Indian pharma goes into the next stage of IP generation, there will be
significant interest in the sector.”
Lack of business perspective: If entrepreneurs themselves
will not take risks with projects in this sector, how can the VCs? In some cases,
entrepreneurs cannot come up with a convincing plan. “Not many business
plans stand the test of scrutiny,” says Kaul.
Lack of institutional research: VCs in America and
Europe have often funded research activities undertaken jointly between research
institutes and pharma and biotech majors. However, in India, the VCs state that
they have not been approached by any institutes so far.
| Understand market needs: You
need to understand the market needs before approaching a VC. “Solutions
have to be developed for existing problems. One cannot develop a solution
and then look for a problem. There has to be a balance between technology
push and the market pull,” asserts Sowmynarayan.
Business plan: VC investment is long-term
in nature and ranges from three to 10 years. To attract investment, a
comprehensive business that provides information on the planned product,
the market potential, the necessary talent pool and the required seed
capital, is crucial.
Zeroing-in on few VCs: Do your homework
on the VC firms you plan to approach; it is not a good idea to randomly
circulate your business plan. You need to study the particular investment
preferences set down by the VC firm. Often VCs have preferences for particular
stages of investment, amount of investment, industry sectors and geographical
location.
Networking: Networking is key. “We
talk at several conferences and seminars in the US about our company,
our successes and our future plans. That is the way we network. I don't
think Strand Life Sciences was actually sending business plans to ten
different VC firms. When you get into these networking discussions with
people, they realise the potential for investing in a company,” explains
Sowmynarayan.
The VCs perspective: Look at the issue from
the VCs perspective. “Normally VCs look at the management team, the
ownership structure, the promoters credentials, quality of the business
plan, the idea itself, the exit options, and whether they can add value
to the project by not just providing money, but also by leveraging their
networks and experience,” explains Sehgal.
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The way ahead
To reach a stage of success, entrepreneurs in this space need to be willing
to make substantial, long-term investments in much riskier projects than they
have done in the past. India needs a financial community with an appetite for
risk and willingness to fund innovation. “There is strong potential for
the biotech industry in India due to extensive biodiversity of plant and marine
life, large2 population, for rapid and low cost clinical trials and low-cost
skilled labour with skills in chemistry and manufacturing”, asserts Kandhari.
IFC has already invested around $110 million across 14 projects in the life
sciences sector globally, of which a significant portion ($43 million) is in
four projects in India.
“The pharma industry is now attracting attention because it is more easily
understood today. The Indian pharma sector is expected to be a billion dollar
industry over the next 10 years and WestBridge Capital Partners aims to be part
of this growth,” remarks Singhal.
Kandhari signs off by saying, “Venture Capitalists, who are willing to
take risks and promote innovation and growth in mid- and small-sized companies
and support their R&D investments and expansion of their markets and manufacturing
bases to other developing and regulated countries would participate in the biotech
revolution which is about to unfold in India”.
editorial@expresspharmaonline.com
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