The New Lure

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is mostly in the form of capital gains arising from the increased valuations of the investee companies over a period of three to five years. At times, this could be extended to five to seven years. “Usually, they expect 40% returns at the minimum,” says Villoo Patell. PE players make their returns by divesting their investments at significant premiums over their initial investments to another investor or in the capital markets at a later point of time.

Investee companies also generate significant value from private equity investors in the form of capitalising on attractive business opportunities and leveraging on the PE firms’ global connections to get international business or strategic growth opportunities. They also make use of expert advice to streamline the financial structure and gain financial credibility among the investor community before going for an IPO.

Given the nature of the industry, businesses in the nascent stages of their life cycle in the life sciences industry face several more uncertainties compared to those in other industries such as IT or manufacturing. Therefore, the risk perception associated with a startup venture in life sciences is significantly higher. Also, the relatively longer gestation for returns makes venture capital investments in this sector relatively less attractive.

However, as companies in this sector begin to grow and demonstrate their ability to generate significant and sustainable commercial value, they come within the preview of private equity investors. Companies that have covered some distance in creating and capitalising on their core intellectual capabilities with a demonstrated track record have found it relatively easier to invite PE investments, says Utkarsh Palnitkar, head of life sciences practice at Ernst & Young (India).

Here’s a quick sampler. In a bid to build a global contract research organisation (CRO) with an ‘India backend,’ ICICI Ventures has invested $30 million in Radiant Research, a US-based CRO, with plans to follow up with similar investments in preferred geographies of South America, Eastern Europe and Asia Pacific. Radiant has over the years, conducted more than 8,000 trials. It is unique in that it provides CRO development services and conducts Phase II-IV clinical trials to its high bracket customers, which include the likes of Novartis, Merck, Pfizer, GSK, Lilly and Wyeth.