Indian biotech industry seems to have caught a flu. Global recessionary trends along with contraction of the biotech market are having a crippling impact on the niche sector, which till about the middle of last year, ranked among the top 12 biotech destinations in the world and the third biggest in Asia-Pacific in terms of the number of biotech companies.

Fears are being allayed in industry circles that India could fast slip from its earlier position.

Capital availability is the most critical factor for growth of the research and development (R&D) heavy biotech companies?big, midsize and small ones. Nowadays, funding has become a scarce commodity and an all-round contraction of the global biotech market, the US in particular, and the ongoing credit crunch along with risk-averse environment, has slowed down the growth of the Indian biotechnology industry.

Hiring is at an all-time low and a number of Indian biotech companies have put their expansion plans on hold and are adopting a wait and watch policy. With shrinking business, revenues are down too and some biotech companies have even reported a significant slowdown in the number of business-related enquires they have received compared to the same period last year.

Industry is concerned that Indian biotech sector?s ability to become a $5 billion industry and generate 1 million jobs by 2010 is far fetched and unrealistic and at best, will remain a distant dream. There are also fears that Indian biotech companies could become easy acquisition targets of big pharmaceutical companies. In short, the new environment has altered the competitive dynamics for the country?s biotech players.

According to Ernst & Young?s global biotechnology report, prolonged and systemic funding drought is placing the business model that fueled biotech growth for the past 33 years under unprecedented strain. In fact, capital raised declined sharply in 2008. Companies in the US and Europe raised $16 billion in 2008, a 46% decline from 2007. IPO funding fell 95% to $116 million.

?Global recession puts tremendous pressure on countries as corporates reduce spends. The Indian biotech sector has the potential to deliver $5 billion revenues by 2010 and $20 billion by 2020. However, we need to focus on creating a strong educational foundation in terms of higher and specialised education and on forging strong links between the industry and academia,? says Kiran Mazumdar-Shaw, chairman and managing director, Biocon.

Few, however, share her optimism. M Vidyasagar, executive vice-president, Tata Consultancy Services agrees that it wouldn?t have been long before the global recessionary trends affected the Indian biotechnology industry. ?The ability to attract funds has been seriously affected, both in India and abroad. I always felt that projections of 1 million jobs in biotech were utter nonsense. I think that one lakh jobs by 2010 is far more realistic than one million jobs. There simply isn?t enough business in biotechnology to sustain those kinds of numbers,? he adds.

?If the year that passed by brought forth the demise of public issues of several Indian biotech companies, the current year has been a witness to an era of far more turbulence and turmoil in the biotech world,? says Nitin Deshmukh, head of private equity, Kotak Mahindra Bank. He feels that along with the global market, the Indian biotech market has shrunk. ?Revenues of most of the biotech companies are down and funding is hard to come by. Mid and small biotech companies are suffering the most as they are cash-strapped and literally gasping for survival,? he reveals. After five years of accelerated growth exceeding an average 30%, Indian biotech industry?s growth rate slipped to 20%, registering revenues of $2.57 billion for the year 2008, according to industry experts. Last year, the total number of jobs created in the sector stood at a paltry 6,500, compared to 10,000 jobs that the sunrise sector used to generate every year.

The impact on the biotechnology world at large is far more dramatic than on India. This is because in advanced countries, the biotech industry is dominated by small to medium companies engaged in original R&D and discovery. These firms are finding that their funding is getting seriously squeezed. In the US, more than half of listed biotech companies have less than one year?s money in the bank. What this means is that they have just enough money to continue operations for one year, and if during that time they do not get some dramatic breakthroughs, they may have to close shop, because in the present climate, it is virtually impossible to secure further VC funding.

?Since listed companies are by nature more mature than unlisted companies, I would suspect that unlisted companies are in far more dire straits. Perhaps half of the unlisted biotech start-ups have six months? operational money and that?s it!? says Vidyasagar, who is also the president of Association of Biotechnology Led Enterprises (ABLE).

The area where maximum impact would be felt is on the financing front, says Anuradha Acharya, managing director, Ocimum Biosolutions. Those companies that depend on original R&D will surely feel the pinch if they haven?t already. In 2005, there were 35-40 private equity funds with interests in the Indian biotech sector; a number which swelled up to 200 by March 2008. Now, barely 50 private equity funds are present in the Indian biotech sector.

Analysts are quick to point the postponement of public issues of several Indian biotech companies, such as Avesthagen and Syngene. Last year?s aborted initial public offering (IPO) of the beleaguered Wockhardt due to a lukewarm investor response is still fresh in their minds. The biotechnology industry on the whole has been severely impacted as new investments are not coming in and valuations of the companies have also plummeted. In such a gloomy scenario, earlier forecasts of the Indian biotech industry becoming a $5 billion market and employing one million people will be a challenge and difficult to meet, feels Deshmukh.

Globally, there is an increasing trend of big pharmaceutical companies acquiring biotech companies?for instance, Roche acquiring Genentech, Eli Lilly?s acquisition of Imclone, Merck buying Serno and Astra Zeneca?s acquisition of MedImmune.

This is because biological therapies are seen as the new cash cows by the pharma industry and a number of large pharma companies are not very well positioned in this segment. Hence, acquisition of biotech assets is the only way to strengthen their biological portfolio.

?Pfizer?s takeover of Wyeth was also driven largely by Wyeth Biopharmaceutical portfolio,? says Joseph Manoj Victor, industry analyst (pharmaceutical and biotechnology), healthcare practice, Frost & Sullivan, South Asia and Middle East. If industry grapevine is to be believed,

GlaxoSmithKline and Sanofi-Aventis are seeking to acquire a majority stake in Hyderabad-based biotechnology company Shantha Biotech.

?Because the cost of bringing a new drug to market is so high, in reality, only the multinational pharmaceutical or biotech companies can afford to persist all the way until the end. Hence, biotech companies engaged in original R&D are looking for one of two options: Develop new molecules and out-license them, or get acquired,? informs Vidyasagar.

Despite the gloomy outlook, Indian biotech industry is bullish on the business opportunities coming their way in the form of increased outsourcing opportunities both in manufacturing and R&D. There is an ongoing global emphasis on affordable medication. This was emphasised in the recent introduction of ?The Promoting Innovation and Access to Life-Saving Medicine Act? in the US House of Representatives. Analysts feel this bill will allow the US Food and Drug Administration (USFDA) to approve affordable copies of biotech drugs. Indian biotech companies stand to gain much as it opens up the US market for biosimilars, which is an area that a number of Indian biotech companies are either in or are planning to get into.

Additionally, there has been a reverse brain drain with biotech specialists coming back in large numbers from the US and European markets. Hence, now is the best time to hire, if one wants to be a contrarian, because really good people are available and they are ready to return to India.

According to Victor, the Indian biotechnology companies will need to demonstrate capabilities to generate intellectual property rights (IPR) and innovative ideas along with the maturity to execute them. Biotechnology firms with promising pipelines could team up with publicly traded firms with plenty of cash reserves but weaker pipelines. ?Companies need not only generate revenues, but also monetise the assets. They should look at more public private partnerships and also join hands with non-profit organisations such as the Gates Foundation, Welcome Group etc to help fund projects that could be mutually beneficial,? he adds.

Even otherwise, 2009 will be a challenging year for the industry. Since biotech is mainly an innovation-driven industry, the capital required to drive this innovation will be hard to come by.

The slump in the equity markets has also affected the relatively larger biotech companies. Valuations are at an all time low and raising capital from the primary markets is almost impossible in the current scenario.

Already, it has become very difficult for biotech companies to generate funds. This is particularly true for small and medium sized biotech companies. The capital availability for such companies for a significant period of time will be less than what it would have been before the recession. This is mainly because biotech is by nature a high risk industry with a long return-on-investment period. Venture capitalists and private equity players are going to think long and hard before investing in small to mid size biotech firms in the present scenario. Therefore, companies will have to resort to cost cuts and increase productivity to survive these challenging times. We could expect similar trends to reverberate in the Indian biotech industry too.