The New Lure

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Venture capital (VC) funding in the Indian life sciences sector may be hard to come by, but there is no dearth of private equity (PE) funds chasing the sector.

Major players like ICICI Ventures, ChrysCapital, IFC, Apax Partners, Kotak Private Equity, JP Morgan Private Equity Fund, American International Group seem to be showing interest in expansion plans of drug companies over the last couple of years. And now they are also getting involved in core growth strategies of the drug companies by helping them with their acquisitions or fine-tuning their R&D roadmaps.

The life sciences sector attracted $450 million in PE investments last year alone as compared to $360 million in 2006. The BFSI and IT and ITeS sectors with investments of $3,979 million and $988 million respectively continued to be the favourite among PE investors during 2007. Life sciences is trying hard to catch up with investment of about Rs 15,000 crore expected between 2008 and 2010. Industry is confident that the funds will be raised from private equities and the capital markets.

The prevailing climate is good for companies that have already grown to early stage and mid size, says Avesthagen founder Villoo Morawala Patell. Investments are flowing into established business models—hospitals, medical retail chain outlets, pharmaceutical formulations, contract research, clinical research and medical devices manufacturing—which have profitable cash flows. “These have lower gestation periods on scale up and potential exit options as against VC investments which would fund start ups and early stage companies in drug discovery, new drug delivery systems, bio-therapeutic agents, monoclonal antibodies, etc which have negative cash flows for long periods,” says Nitin Deshmukh, CEO, Kotak Private Equity.

These investors bring more to the table than just money. The capital and expertise of private equity act as a catalyst for creating enterprise value. Therefore, the surge in private equity funding in the sector is not surprising, says Sanjiv Kaul, managing director, ChrysCapital. The life sciences sector in Asia and specifically in India is witnessing hectic activity and the beginning of what is seen as a rapid phase of growth. Indian companies are becoming aggressive on the global front and they need capital as well as business counsel. PE funds are looking for returns, which Indian life science companies can provide to them. “So, there is value created for both the PE player and the investee companies,” insists Kaul.