The drug development plans of several of the country?s largest pharmaceutical companies such as Dr Reddy?s, Ranbaxy, Wockhardt, Piramal Healthcare and Sun Pharma could hit a roadblock with leading private equity (PE) firms growing increasingly wary of investing in the high-investment, high-risk business of research & development R&D. Over the last one year, these pharma companies have spun off innovative drug discovery into separate entities in the hope of roping in investors, including PE, owing to the high cost of taking a new drug from lab to market?estimated to cost between $800 million and $1 billion.
Stephen Arlington, leader of the global pharmaceuticals advisory services at PricewaterhouseCoopers, confirms that even global PE firms that are investing significantly in emerging markets are reluctant to enter the risky pharmaceutical R&D business. ?Clients feel it is too risky to invest in front-end research. When you invest in research, the rewards may be big, but so too are the risks,? he says. Arlington says that larger funds are likely to go into low-risk pharma businesses like contract research and custom manufacture.
Last year, a few PE players, including Fidelity International, Jacob Ballas Capital, Trinity and Sequoia Capital, had taken stakes in some Indian biotech and R&D outsourcing companies. But these were relatively low-risk areas. Some of the large PE funds were also expected to invest in the high-end research arms of pharma companies, but interest is now dwindling. Already, there is market buzz that ICICI Venture and Citigroup, which invested in Dr Reddy?s R&D outfit, Perlecan Pharma, are offloading their shares owing to the slow pace of the drug development process and the high capital involved.
Mahesh Chabria, partner, 3i India Pvt Ltd, says, ?Though the returns are attractive, the risk involved in pure R&D or the drug development business is quite high. Investors cannot be convinced into taking such risks. Also, the molecules developed by Indian firms are yet to successfully reach the final stages of development.?