Venture Capitalists Bullish On Long-term Biotech Dream

Bangalore, May 26: | Updated: May 26 2002, 05:30am hrs
“It is easy to split an atom but impossible to discard a prejudice” the exasperation of Albert Einstein when confronted with more evidence on the validity of Quantum Theory aptly fits the biotechnology debate in the country and abroad. No other branch of knowledge industry seems to evoke so much passion among scientists, policy makers and activists as biotechnology. The macro-level scene is marked by the Vandana Shiva type activist evangelism and corporates like Monsanto hyping it as the next frontier of deliverance for the Indian entrepreneurship.

But the cat and mouse game of activism and corporate hype seems to have not made much impact at the micro-level with the biotechnology industry slowly but firmly getting its credentials established among the discerning bunch of investors and entrepreneurs. Yes, the contours of the script are not moving according to the wishes and fancies of the protagonists and opponents of biotechnology. The hype of replicating the success of IT in the sphere of biotechnology has been replaced with a more realistic assessment, especially by the venture fund fraternity.

Mrs Kiran Mazumdar Shaw, managing director of Biocon India, the country’s largest biotech firm, is concerned about the unnecessary hype. According to her, compared to IT, biotech ventures have certain inherent disadvantages such as higher entry barrier, high costs of invention, long time required to develop a product, investments etc.

A cross section of leading VCs in the country feels that the industry at present is passing through a period of consolidation. Speaking to FE Mr Vijay Angadi of the Bangalore-based ICF Ventures says the period between 2002-05 is going to be one of consolidation. But this does not mean that VCs are turning away from funding projects at present. Companies such as Strand Genomics or Gangagen getting funds shows that VCs are ready to fund projects with sound potential and scalability, he adds.

According to Mr Angadi, the current potential of VC funding for the Indian biotech sector is to the tune of $15 to 20 million per annum out of the total VC funding of $850 million per annum. Limited presence of large companies and multi national corporations, lack of infrastructure, especially incubation at research institutions, inefficient bridges with knowledge creation pools, few teams with international outlook and global experience etc are some of the issues of concern for the VCs.

According to Sumit Chandwani, head of private equity, ICICI Ventures “We are at a very nascent stage. However, the model we are following here is appropriate to this country. We have companies which are basically into contract research — these could be a component of drug discovery process, R&D services, clinical trials, proteomics. Then there is the bioinformatics side, which involves building applications for biotech needs.”

Darius Pandole, director, IndAsia Fund Advisors says, “Many of the deals are at a very nascent stage so we are not able to evaluate the scalability and sustainability of the model. Those that have reached a critical size are commanding huge valuations and these deals have set the benchmark for the sector. These deals have been valued at prices significantly higher than similar deals in other sectors so we are looking at the sector with some scepticism at this point.”

Pravin Gandhi co-founder of Infinity ventures prefers to “strike biotech deals jointly with investors having an operational understanding of the business. These companies have very long term success cycles and I can’t see these companies doing anything that will allow us an exit option in at least five to six years”.

According to Dr P Babu of Bangalore Genie Pvt Ltd, a company developing tools for biotechnology, “Biotech industry in India is in its infant stage and VC’s hesitate to invest as most of the projects by the Indian biotech firms do not satisfy them. Gestation period is another main reason.” But the scene will change in the next three to four years, Dr Babu says.

Dr BS Bajaj, chairman, All-India Biotech Association, southern chapter, says that both Indian and international VCs have evinced interest for funding BT projects in Andhra Pradesh. Shantha Biotechnics executive director Khalid Ahemad also expresses the same opinion. “Because of the number of life science research institutes in Hyderabad and the NRI companies involved with life sciences, based from the state, there is a potential to develop biotech firms in the state. Shantha Biotech has got a funding of Rs 21 crore from the Technology Development Board some years ago.”

According to Mr Utkarsh Palnitkar, partner, Ernst & Young, VCs are showing more enthusiasm now for the biotechnology sector. They have realised that it would be a mainstay of the growth and would provide good return on investment. VCs like ICICI VC, Warberg Pincus are keen to invest in the state biotech sector. “We have been negotiating with some domestic and overseas VCs for funds between $-1 million to $5 million for some of the Hyderabad-based companies,” he adds.

The Andhra Pradesh government has taken the initiative to set up a dedicated venture fund with an estimated corpus of Rs 90 crore. The government will provide Rs 15 crore towards the corpus and the rest by the APIDC-Venture Capital.

The trend clearly shows that VCs have a bullish view on the long-term perspectives. The rich talent pool and pro-active measures by some state governments will help in sustaining such perspective. VCs are also eagerly waiting for the first IPO of Biocon India Ltd, slated to take place sometime in the year.

Biotechnology opens opportunites in areas like pharmaceuticals, agri-biotech and human genomics. Take for instance the pharma sector: according to industry sources by year 2005, over $5 billion worth of biological drugs (at patented drug prices) are expected to go off-patents. Though biotechnology products constitute 5 per cent of the $400 billion global pharmaceutical market, several bio-tech products have already become blockbusters with sales of over $1 billion.

The most useful therapeutic drugs which have emerged from biotech research are proteins, enzymes and antibodies and the combined sales of these drugs in 2000 stood at around $20 billion. Currently, there are at least 438 new biotech drugs in the pipeline, of which 34 are antibodies which have already completed phase II clinical trials. There are at least 175 new biotech medications under development in therapeutic area of cancer and another 39 in the area of infectious diseases.

Indian biogeneric pipeline is in an evolutionary phase. While Hepatitis B provided the first wave of growth, too many players entering the field lead to a substantial drop in price realisation. A similar trend is being witnessed in case of Interferons for cancer and human insulin for diabetes.

For the Indian companies, biogenerics is evolving along the same lines of the traditional pharmaceutical sector, which is also rooted in reverse engineering for the domestic market. From the domestic market, pharmaceutical companies graduated to other emerging markets, and then to developed markets.

[With inputs from Priya Srinivasan (Mumbai), Kavita Alexis (Bangalore), R Ravichandran and BV Mahalakshmi (Hyderabad) and Sanjay Sardana (Delhi)]