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.
Typically, the gains that PE players expect from their investments, 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.
ICICI Ventures has also shown higher risk appetite by investing in Dr Reddy?s Laboratories? Perlecan Pharma. The capital committed is being used for funding R&D, clinical development and drug filing costs of four molecules. Already, Perlecan Pharma has in-licensed four new chemical entities (NCE) in the area of cardiovascular and metabolic disorders from Dr Reddy?s Laboratories. The company?s key objective is to advance the clinical development of NCE assets through Phase II and thereafter seek out-licensing, co-development or joint commercialisation opportunities.
ChrysCapital has invested $25 million in Mankind Pharma, a leading Indian pharmaceutical company. Buoyed by the funding, Mankind Pharma has registered strong domestic sales of its products like condoms, emergency contraceptives and home pregnancy kits. It is now aiming to achieve a turnover of Rs 1,100 crore by 2010.
Similarly, Ocimum Biosolutions, Hyderabad-based genomics outsourcing company, has raised $17 million from Kubera Cross-Border Fund Ltd, an India-focused investment company. The fund raised is largely to finance its recent acquisition of US-based Gene Logic?s genomic business. This is the second round of fund raising for Ocimum. In November last year, the company had raised $6.5 million from International Finance Corp.
Kotak Private Equity, which holds a majority stake in CRO major SIRO Clinpharm, has been exploring several opportunities in the CRO space globally. ?We have been looking at similar opportunities through VLife Sciences, a drug discovery company and Metahelix and agri-biotech company,? says Deshmukh. Other good examples of successful investments have been Sun Pharma (ICICI Ventures), Nicholas Piramal (Warburg Pincus), Apollo Hospitals (Apax Partners) and Max Healthcare (IFC).
Therefore, the message going out is loud and clear. Investment climate is optimistic and there is a growing belief that India could command a much more prominent position in the global life sciences industry across the value chain in pharma and biotech from basic research, drug discovery, and clinical trials to being a technology provider and manufacturing base, says Anuradha Acharya, founder and CEO, Ocimum Biosolutions.
That?s not all. Emerging segments like diagnostic chains, medical device manufactures as well as hospital chains are increasingly attracting investments from a variety of PE players. At a broader level, this trend in health care is often seen as a manifestation of the overall surge in private equity and also growing interest among private equity funds for Indian companies, which have a direct interface with the consumer. Some of the new targets and focus areas of private equity funds are pharmacy retail chains, health and wellness centres, spas, ayurvedic and herbal skin, slimming and beauty centres which are primarily consumer-oriented sectors, says Ritika Arora, healthcare consultant at Technopak.
Indian life sciences industry is at a take off stage with significant opportunities that surround it in the form of rapid globalisation, respect for intellectual capital and the need for smart and low cost innovations. One should also note that most of the private equity money that is floating in India is foreign money?global PE funds accounted for almost 70% of investments in Indian life sciences sector in terms of value last year. Investors are also willing to look outward for investments that add value to their portfolio companies in the long run. It is quite likely that we may see a sizeable number of outbound transactions happening from India in the private equity space. Indian companies need to display capabilities of building unique, significant and sustainable commercial value to get onto the PE bandwagon.