Kapil Khandelwal QuoteUnquote with KK www.kapilkhandelwal.com

1. n Cover Story n
VC funding—making
a difference
Biotech being an inherently risky business, many private funding agencies appear reluctant to
supply cash. Here is a look at the current biotech financing scenario and the withering gaps in
funding.
I
ndia might be a vate Equity (including for tapping into consolidation oppor-
late entrant to Biotech Venture Capital) fund tunities in partnership with growth-
the race but this
has not stopped Innovation managers suggest a
strong appetite add-
oriented entrepreneurs.
Says Kapil Khandelwal, founder
venture capital- ing to over $2 billion and board member at Disease Manage-
ists, private equity players and fund- (about Rs 9,589 crore) investments ment Association of India, and former
ing agencies being bullish about the that they have already made in the vice-president of Healthcare and Life
Indian biotech industry. Over the healthcare and life sciences (HLS) Sciences Business at Jubliant Biosys,
past five years, India has been seeing industry over the past five years. The “The investments into the Indian
a decent investment of over a billion report also goes on to mention that life sciences sector ranges from $150
dollar into this space both by foreign given the fragmented nature of both million to $250 million (about Rs 719
and domestic players. The Venture the hospitals and pharmaceuticals crore to Rs 1,198 crore, respectively).
Intelligence survey of leading Pri- sectors, investors see clear potential The financing ranges from PE, debt
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2. n Cover Story n
to alliance funding. On the other
hand, foreign financing is coming
through the route of debt financing,
PE funds, joint venture investment, “The VC community needs to hire a few
drug discovery alliances, dndowments PhDs on their rolls and some patent
through academic medical research attorneys. I don’t think there is any
centers and/or NIH from the US, dona-
tions/social funds, other routes such as true biotech VC fund in India.”
acquisition/divestments, in/out licens- —Dr Villoo Morawala-Patell, CMD, Avesthagen.
ing are sought.” Other ways of funding
also include annual development fees
payment, R&D funding, equity, quids,
milestone payments and royalties.
The year 2006-07 saw the maxi- which are active in the biotech space. philanthropy. Their main aim is to
mum number of investments into According to Dr Patel, there are foster biotech research by giving in
the life sciences space, where about five or six types of sources of funding loans and grants,” says Dr Patel.
$150-200 million (about Rs 719-1,198 for young biotech and venture capital Corpus funding by an academic in-
crore) worth of deals were signed, with companies. “The obvious one is VC stitution, which is a popular phenom-
Hyderabad-based Ocimum Biosolu- funding because there’s a high risk enon in the West, has not yet picked up
tions getting in investments worth $20 in a highly technologically driven in India. “Academic institutions in the
million (about Rs 95 crore) and four company; VCs are comfortable in in- west plays a potential role in providing
CROs seeing the exit route. It has also vesting in such risks. In India, there seed capital like the Havard Medical
been observed by industry experts that are the PEs, and the growth capital School’s Harvard Partners, Cleveland
among the top 10 areas of investments players who are a subset of PE play- Clinic, Mayo Clinic, have endowments
(across all sectors) by VCs and PEs ers who might not invest in a start of over $6 billion (Rs 28,767 crore) from
in India- healthcare and life sciences ups, but they might invest in the next NIH, and industry from which they are
features in this priority list. round. The first two are more of finan- successful in spinning off innovative
Comments Dr Jasmin Patel, MD, cially-driven investors,” he adds. He enterprises. In India, universities do
Fidelity International, “Over the past maintains that there are the strategic not have that capability despite the
five years, at least a investors, who could be fact that some brilliant ideas and tech-
billion dollar has been categorized as the ‘big nologies are being developed there,”
invested into pharma Biotech pharma companies’. adds Khandelwal.
life sciences space These companies look
which includes tradi- Innovation at finances in their Sector influx of funds
tional generic compa- balance sheet, how can Over the years, investor behavior
nies, biopharma, diagnostics, pure they mitigate their risk in the R&D towards this space has been moving
biotech companies and CRAMS.” portfolio, and then, take over another on a whimsical route. Excitement to
With sectors like IT and real es- company. “They are a mix of a com- invest in this sector goes back to 2000,
tate reaching a saturation point, the mercially driven, financially-oriented when the sequencing of the human
number of VC and PE firms investing and R&D oriented investors. Funding genome project was first announced.
in life sciences has also seen an upward is also done by government and NGOs Subsequently, that saw a spurt of
trend. Altogether, there are around who are not financially motivated but investments in sub sectors like bioin-
20 Indian as well as foreign VC firms are driven more by public health or formatics, clinical trial development
and integrated drug discovery projects.
Money rushed into the sector with the
announcements of product approvals
and companies rushed to go into IPOs.
However, long gestation cycles, reali-
“The like-minded VCs and PEs should zation that biotech was an altogether
take some degree of risk and come different ball game from its pharma-
forward to fund start-ups (of-course ceutical counterpart led to investor
sentiment dying out.
after complete due diligence) so that
Giving a global perspective, Price-
they can innovate and increase more WaterHouse Coopers’ report mentions
opportunities for other entrepreneurs that in 2008, funding was seen to be
and VCs to join the game.” stronger in seed/start up companies
and early stages while it fell in later
—Dr Rajeev Soni, president and COO, Premas Biotech. stages. The report further mentions
that VC-backed human biotech com-
panies drew 16.2 percent of financing,
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3. n Cover Story n
while early stages drew around 9.6 percent of financing.
Therapeutic and diagnostic biologics brought in the maxi-
mum amount of VC investments into the space. Vaccines is
another segment which has been attracting investors.
Deepam Mishra, CEO of i2india Ventures, says, “Early
stage research driven innovation involves very high risk,
but is highly rewarding. Areas in life sciences in which a
lot of ideas are coming out are point of care diagnostics
—the simple to use tools that can be made available even
in small cities and towns. Other than that, regular areas
like vaccines is an attractive area for investment.”
He believes that from the financial investment point
of view, many diseases are not getting enough cash flow;
they may be the country’s need but not good money making
propositions for private investors. Private money doesn’t
often go for neglected diseases.
i2india Ventures is also keen at novel imaging technolo-
gies. Mishra says, “A lot of work is happening in this field,
the whole area of biological enzymes. Having enzymes to
replace the industrial use of catalysts which are polluting,
non-degradable and at times expensive is also attractive.
There is a lot of interesting work going on in the area of
bioseperation, biocatalysis and process chemistry.”
He further admits that although a lot of interesting
innovations are happening in cell biology and molecular
chemistry, most of them are very complicated and diffi-
cult to understand, therefore, not too many investments
happen.
Giving the Indian overview, a Venture Intelligence
survey report mentions that between 2004-08, around 40
percent of all PE investments went into the pharmaceutical
sector, 24 percent into hospitals, 10 percent into CROs, 13
percent pure biotech while the remaining portion of the
pie constituted sectors like medical devices, diagnostics
and wellness.
Diagnostics, medical devices and the services sector
today are posing to be lucrative sectors. Again, Venture
Intelligence conducted a poll among private equity and
venture capital firms during April-May 2009. Fund manag-
ers from over 60 firms participated in the poll. According
to 87 percent of the fund managers polled, Healthcare and
Life Sciences (HLS) should constitute at least 10 percent of
portfolios of new funds being raised for investing in India.
Investors chose diagnostic services, medical devices / equip-
ment, hospital chains, wellness products and services and
CROs as their favourite sectors for investments within the
HLS industry. Other areas of interest include specialized
chains in areas like diabetes, orthopedics, optics, geriatrics
and psychiatric.
Mentions Dr Patel, “In India, the CRO businesses are
very interesting because they have the potential to scale
up and expand. Investors in China for instance invested in
a lot of CRO deals, and have been successful. Innovation
companies mainly those doing drug discovery business
look lucrative but there are very few of them in India.
Companies providing services, more consumer based
services are interesting in addition to pharmacy chains
and path labs.”
With a nosedive drop of real estate prices, infra-
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4. n Cover Story n
structural investments in biotech is
another interesting area for invest-
ments. “With the downturn, there has “In India there are very few VCs who
been a sharp fall in real estate prices.
We shall see return of investments in are biologists or PhDs. Most of them
SEZs, biotech parks and health cities,” are business people and bankers. In
adds Khandelwal. the west, most of the VCs are biolo-
From a futuristic point of view,
biosimilars is another area investors
gists themselves.”
are cashing on. So far Biocon, Dr Red- —Deepam Mishra, CEO, i2ventures.
dys Labs and Lupin Pharma, are some
of the prominent names successful in
this field. Other prominent companies
who have started initiatives in the
field includes Glenmark, Cipla and put on their thinking caps, and start made impressive progress. Rubicon
Intas Biopharmaceuticals. The latest seriously looking at the life sciences Research, which is into developing
in the news is Cipla entering into a sector. Agrees Nitin Deshmukh, CEO, formulations has till date developed
50:50 joint venture with a Chinese Private Equity, Kotak Private Equity seven platform technologies which
company for bio-similars. The joint Group (KPEG), “Over a period, surely has been patented (which it further
venture would be called Biomab. Cipla there had been some trigger factors in out licenses). It has also ventured into
has said it was looking to bring out the the economy which has led us to invest the field of OTC drugs. Indus Biotech
JV’s first product by 2010. classic growth capital funds into this looks into plant extracts wherein they
“The biosimilar segment in India sector. In the 1990’s, when capital was extract molecules, isolate and purify
continues to attract huge interest, down, we thought of shifting our focus them, and then take them through
intent and is intensely controversial. to non-capital sectors. Life sciences the NCE route. It is developing a
Most generic manufacturers are trying was one of them. Similarly, in the Parkinson’s drug wherein 40 patients
to actively get involved in it, either same period de-licesning came about were recruited in Mumbai while
directly or indirectly. The flow of which made us invest in companies studies were done outside. Indus has
investments and investors will be to like Sun Pharma and Neuland Labo- also been given a fast track approval
the successful ones that demonstrate ratories. In 2005, there was the GATT for a HIV drug. “Most importantly, it
the patience, resources and above all policy which came up. This made us recently established that this drug
money to invest now, to show proofs look at drug discovery, and healthcare was also active against the H1N1
and validation in order to gain in the was an upcoming sector.” virus for swine flu,” adds Deshmukh.
future,” adds Khandelwal. Kotak Private Equity Group (KPEG) Metahelix Life Sciences has product
There have been options which today is a specialist India Private Eq- pipeline of Genetically Modified (GM)
was presumed to open up a world of uity firm of Kotak Mahindra Group, seeds in cotton, rice, cabbage, maize
opportunities but went bust towards and is focused on helping emerging and tomato with specific traits like
early stages. Spinning out of R&D corporates and mid-size enterprises. insect control, drought and salinity
units for example, was Today, it has three resistance. It is expected to be the first
mooted by pharmaceu-
tical companies as the
Biotech types of funds namely,
India Growth Fund
indigenous company to commercialize
GM technology while Siro Clinpharm
next big thing with Sun
Pharma, Dr Reddys,
Innovation I and India Growth
Fund II and Venture
has emerged to be one of the largest
Indian CROs, today.
Glenmark, Nicholas Capital for Life Sci- Fidelity Fund Management, part
Piramal hiving out their units. But ences. It has allocated around $100 of Fidelity International, is also cash-
the failure of Percelan Pharma, a spin million (about Rs 479 crore) into the ing in on the life sciences sector. The
out of Dr Reddys Labs and the early life sciences sector. The firm started amount of allocation for this sector
backing out of ICICI Venture and CVS investing in biotech in 2000 with was not revealed by the management.
international turned the tables for in- companies like Biocon, Avesthagen Dr Patel mentions, “We are actively
vestors. Nicholas Piramal was forced and Syngene in its portfolio. Later, it looking at this sector. Out of a team of
to hold back further plans of raising also looked at companies specializing seven people, we have four members
funds for Piramal Healthcare, its hived in global manufacturing and serv- who are wholly focused on this sector.”
out R&D unit, because it failed to at- ices. Today, its current investments But other reliable sources confirm that
tract investors at its expected valua- include Siro Clinpharm, Metahelix the allocation for this sector comes
tion. Hence, investors now have given Life Sciences, VLife Sciences, Rubicon up to $12.9 million (about Rs 61.84
the thumbs down to this model. Research and Indus Biotech. “We have crore).
a 70 percent stake in Siro Clinpharm Some of the other firms who have
Activities of investment firms along with another investor,” adds invested into the sector include Na-
There have been trigger factors in the Deshmukh. dathur Holdings and Investments,
Indian economy which had led firms Some of these companies have Actis Capital, HSBC Investments
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5. n Cover Story n
in Glenmark, Tamasek, New Bridge biotech sector, but there are surely
Capital, ChrysCapital in Matrix Labs, bottlenecks in terms of innovation,
Claris Life Sciences has Carlyte Asia claim industry experts. “People say
The year 2006 Pacific as their investor, Ocimum that there is not enough venture
from IFC, Sai Advantium from ICICI capitalists in India which is true. But
saw the maximum Ventures, GVK BioSciences from Se- that is because there isn’t any innova-
quoia, Sphaera Pharma from Barring tion in India. To create an investment
number of Equity and Cellworks from Artiman climate, one should look at investing
investments into the Ventures.
i2india Ventures, the Indian arm
in innovative ventures and make them
successful so that, the cycle is broken,”
life sciences space, of Imperial Innovations, UK, the
technology commercialization venture
adds Dr Patel.
A well renowned expert from the
where about Rs 719- of Imperial College London, is a hy- venture capital field, who does not
brid of a VC and technology/research wish to be named maintains, “I do
1,198 crore worth of comercialization company. It has been not believe that there is no innovation
working in partnership with research at all. The problem here really is that
deals were signed, and innovation centres, to create an the ideas are not maturing, and that,
ecosystem for early stage technology the business models are not sustain-
with Hyderabad- commercialization. In India, i2india able. I would go to admit because we
based Ocimum has signed agreements and is work-
ing with leading institutions such as
have a strong foundation in chemistry,
and not the requisite structure for
Biosolutions getting IITs, IISc, and has conducted over an biotech.”
year of field studies to understand Above all, an important fact to
in investments worth the opportunities and challenges in bear in mind is that Indian scientists
this space. have their chemistry strong but are
about Rs 95 crore. still lagging behind in biotech. Hence,
Is innovation happening? generics was an easier option because
There is no dearth of funding into the it was easy to emulate and the returns
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6. n Cover Story n
were high. Agrees Dr Patel, “About 10
years ago if you were a young scientist
who wanted to start a company, you
would rather go in and start an API or
generics formulation business because
it was easier to do. The markets were
there, risk was low, and the demand
was huge so people would not be in-
novative in that sense. Innovation is
not just about creating new drugs but
about knowing and understanding
things differently.”
Dr Rajeev Soni, president and COO,
Premas Biotech, a start-up company
funded by a VC based in UK, suggests,
“The like-minded VC’s and PE’s should
have to take some degree of risk and
come forward to fund start-ups (of-
course after complete due diligence),
so that they can innovate and increase
more opportunities for other entrepre-
neurs and VCs to join the game. In
addition, detailed planning in terms
of an executable business plan with
respect to return on investment is
often lacking from the scientists, who
would like to be entrepreneurs which
patent attorneys. I don’t think there He adds, “I don’t agree that there
usually does not go well with most
is any true biotech VC fund in India,” is a lack of innovation in the country.
VC’s/PE’s.”
says Dr Villoo Morawala-Patell, CMD, There are lots, they may be guided,
Avesthagen. unguided or unknown. Often scientists
Gaps in funding
Says Deepam Mishra, CEO of i2v- do not have enough interest in taking
Barring a handful of firms which houses
entures, “In India there are very few it to the market.”
a dedicated team for life sciences and
VCs who are biologists or PhDs. Most of
has allocated separate investments
for this sector, there are may firms for
them are business people and bankers. Funding from government/NGOs
In the west, most of the VCs are biolo- Apart from VCs and PEs, the Indian
whom the sector still remains in the
gists themselves. They have started a government along with a handful of
periphery of their priorities. VCs have
company sold a company, and then NGOs play a potential role in funding
a limited understanding of life sciences
have become VCs. They are scientists biotech initiatives, especially R&D
due to the complexities involved. Also
turned venture capitalists. So there, initiatives coming out of universi-
the long drawn gestation period in a
the degree of comfort while investing ties. The DBT’s latest initiative—the
product cycle is another reason for VCs
is higher. That’s the gap we are trying Biotechnology Industry Partnership
and PEs being reluctant.
to fill-in in India. We bring the mix of Program (BIPP)—could provide a fillip
This is a stark contrast to their
very high technology for research, more so, in the light of
counterparts in the US
understanding with industry facing a credit squeeze fol-
and Europe, who have
been majorly investing Biotech PhDs at the same time lowing the meltdown.
we bring in investors Another initiative is The Biotech-
in life sciences. This is
also because of a team
Innovation who are experts in fi- nology YES (Young Entrepreneurs
nances.” Scheme). This is an innovative com-
which is made up of
Highlighting the petition developed to raise awareness
experts who have hands-on-experi-
challenges while investing in life sci- of the commercialization of bioscience
ence in biotech. Firms in the US for
ences, he says, “Technical understand- ideas amongst postgraduate / postdoc-
example have a team which has an
ing is the biggest challenge. The other toral scientists. The program is organ-
in depth knowledge of the industry,
is that the research works happening ized by the University of Nottingham,
acquainted with the dynamics of the
in government research labs are not Institute for Enterprise and Innova-
field, hence are able to channelize
very well connected with the industry. tion and Biotechnology and Biological
their investments. In India, there are
The maturity of technology is lower, so Sciences Research Council. „
firms headed more by financial inves-
the validation needs to be done a lot
tors than those with a scientific back-
more after the scientists thinks he/she Nayantara Som and
ground. “The VC community needs to
has finished the project.” Jahanara Parveen
hire a few PhDs on their rolls and some
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