‘With sector-specific VC funds, biotech companies will have wider fund-raising options’

Nitin Deshmukh is all set to lead the biotech sector in India by accepting the challenging job as the Director General of ABLE (Association of Biotechnology Led Enterprises) since mid-June 2003. This is in addition to his responsibility as Director of SEAF (Small Enterprise Assistance Funds) a US-based Venture Capital Fund which he joined in June 2003. In the context of exciting synergies, leading Indian biotechnology companies recognised the need for a forum that would represent the country’s unique biotech environment. It is a forum that would generate a symbiotic interface between the industry, academia, government and research bodies and also domestic and international investors. Prior to joining SEAF, Deshmukh was Director-Private Equity and the founding member of the India team of Dresdner Kleinwort Capital when it started its operations in India in June 2001. He also served as chief of Private Equity Investments at ICICI Venture and was a part of the founding investment team of ICICI Venture and a member of investment committees of various funds and brings over 14 years experience in venture capital investing. Some of the deals initiated by Nitin in the pharma sector included Sun Pharmaceuticals, Morepen Laboratories, Intas Pharmaceuticals, Ajanta Pharma, Medicorp, Biocon, Syngene, Advanced Biochemicals and Avestha Gengraine. Nitin, a MBA from Bombay University, worked with Cipla in various technical and management positions. He earned his Masters Degree in Pharmaceutical Technology from UDCT, Bombay, where his research work led to a patent filing on machine design for manufacture of Novel Drug Delivery Systems. He also completed the Post Graduate Programme in Pharmaceutical Technology at the University of Ghent, Belgium. In an exclusive interview with Vijaya K, Desmukh spoke on the challenges ahead of biotech sector in attracting large scale VC funding. Excerpts:

Funding has been a constraint for the growth of biotech sector. Elucidate.

While larger players in the pharma and the biotech sector like Dr Reddy’s subsidiary Aurigene, Biocon, Astra Zeneca and others have increased their investments in biotechnology through cash accruals and term lending sources, some of the younger companies like Strand Genomics, Avestha Gengraine, Gangagen, Lotus Labs and Metahelix and others have been able to attract additional funding from angel investors and new as well as their existing Venture Capital (VC) investors.

While I am sure the funding could have been better and more widespread among other young companies that have been founded in recent times, these recently founded companies have however been receiving significant seed funding support from the Central Government under the Programme Aimed at Technological Self Reliance (PASTER) of DSIR or under the Technopreneur Promotion Programme (TePP) jointly operated by DSIR and DST as well as under Home Grown Technology (HGT, Mission Projects and Technology Vision 2030 implementation projects of TIFAC. Some of these companies facing challenges in larger funding from VC’s are evolving tighter business models where the funding is primarily coming from three sources- government schemes, banks and advances from customers collaborating with them.

With the increasing robustness of business models and the formation of sector specific VC Funds supported by various state governments all biotech companies will have a wider fund raising options in the near future.

Is it true that VCs aren’t coming forth to fund the biotech sector?

Biotech companies in the state and elsewhere have infact selectively received good support from VC’s and angel investors. These include Shantha Biotech, Biocon, Syngene, Bangalore Genei, Avestha Gengraine, Strand Genomics, Metahelix, Lotus Labs, Advanced Biochemicals, Silico Insights, Genome Designs, and others. Many of these have received funding in the last three years. So I do not fully agree that VC’s are not forthcoming to fund the biotech sector.

Yes, while the amount of investment as a percentage of total VC funding is very low, I feel there will be increase in this percentage as they see more companies demonstrating high level capabilities. Further, the investment perspective on this sector could change dramatically as we see some product announcements, strategic relationships with major pharma players, some successful IPO’s and profitable strategic exits happening for the VC’s in this sector.

How do we encourage Venture Capital investments into the sector? What are the hindrances?

Life Sciences as a sector is characterised by factors which tend to pose the most challenges in building successful businesses - like long unpredictable capital requirements, long product development cycles/ gestation periods, uncertainty about regulatory environment, rapidly changing market forces, etc. Having said that biotech continues to be an important sector of the knowledge economy across the globe. The biotech sector in fact showed extraordinary resilience in attracting the highest Venture Capital Funding in the US in the year 2003 at USD 4.7 bn accounting for 22 per cent of all Venture Capital investing, up 13 per cent as compared to 2001 and was the highest proportion of total Venture Capital in seven years.

Venture Capitalists in the US are following a strategy of Life Cycle Investing - balancing investments in start ups and early stage companies with expansion and later stage funding. In India, since we do not yet have a mature biotech portfolio segment, we see VC’s investing very selectively in early stage companies and not increasing that portfolio significantly.

This trend will continue for some time until we see more maturity in the biotech portfolio. We will therefore have the challenge to attract large scale VC funding into the sector. To meet this challenge, we will have to look at alternate funding models like those followed in Israel, Australia and Canada where the state funding agencies partner with reputed VC Funds to finance equity/ quasi equity on an equal partnership basis. This model will serve to share the risk between two partners, reduce financial exposures for both partners, allow the Government to avail of VC Fund’s techno-financial evaluation skill sets.

Secondly, we will have to encourage the evolution of the Corporate Venture Funding model where larger pharma players in the country should consider launching VC Funds. In an industry that is innovation driven, there are many good ideas that any one company can pursue and such funds can help find creative ways to find out what’s going on in the world around them. Until some of these things happen, the onus will continue to be on the young biotech companies to reorient their business models so as to have a mix of services and development of IPR.

The services model involving outsourcing research services is akin to the software development and is the immediate low hanging fruit for the Indian biotech companies to go after. But while doing this, skill sets and Research and Development capabilities must be developed. A de-risked model like this will certainly attract VC’s in the short term. The biotech companies should however not lose sight of innovation. The low cost of innovation is the competitive strength of India.

How do you see the growth of biotech sector in Karnataka?

Karnataka continues to play a key role in the growth of the biotechnology sector in the country recording a significant increase in addition of new companies in the state as well as the overall revenues. As per the figures released by the state’s Vision Group on biotechnology, 22 new companies set up their operations in Karnataka in last one year alone. The total revenues for the sector grew from Rs 750 crores in 2001-02 to Rs 1400 crores in 2002-03 while exports also saw a jump from Rs 250 crores to Rs 525 crores.

On setting up Seed Fund initiatives by state governments.

Seed Fund initiatives for biotechnology from Central as well as State Governments is the need of the hour and the Government of Karnataka’s announcement at Bangalore Bio 2003 is a proactive step in the right direction. The State Vision group on Biotechnology with active support of the Government of Karnataka has already initiated setting up of a Biotech Park for promoting and incubating biotech companies as also the formation of Karnataka Biotechnology Development Council (KBDC) to initiate a Seed Capital fund for Biotechnology. A sizeable Seed Capital Fund will go a long way in encouraging entrepreneurship in the State as well as providing opportunities for the VC’s to get interested in the sector in a more pro-active manner.

Is SEAF launching funds for India? How is this fund expected to support the growth of the life sciences sector in the country?

SEAF is putting together a USD 40 mn VC fund for India. The fund will have Life Sciences as one of the focus areas for investments in the country.

As director general of ABLE, what are your initiatives to lead the growth of the biotech sector in the country?

ABLE as you are aware was recently formed body of association of Biotech companies founded by Dr Reddy’s Laboratory, Shantha Biotech, Biocon, Jubilant Organosys, Strand Genomics, Maharashtra Hybrid Seeds and Avestha Gengraine. This association launched at the Bangalore Bio 2003 in April has rapidly expanded through membership across the country.

ABLE intends to work as a policy group to interact and partner with the Government and Policy makers to determine policies that would help the growth of the industry.

The key issues that will be taken up with some priority are Intellectual Property Rights & Data Exclusivity, Regulatory affairs and Encouraging investment into the sector.

ABLE at it’s first meeting in June completed the formation of the Executive council where we now have the president - Kiran Mazumdar Shaw, four regional vice-presidents- Varaprasad Reddy (South), Rajesh Jain (North), Raju Barwale (West) and Dr Anil Ghosh (East). We have regional co-ordinators identified for various cities/ regions who would drive the interests of ABLE in these various regions along with the vice-presidents.

The Association’s general secretary is Vijay Chandru and the treasurer Dr Villoo Patel. Similarly, we have additional members of the Executive Council co-opted from different parts of the country and we have also formed special interest groups for Agri Biotech

(Dr K K Narayanan), Pharma Biotech (Dr Krishna Ella), Industrial Biotech (Dr P Babu), Research Services (Dr Swaminathan Subramaniam) and Bioinformatics (Dr Pravin Kini) all headed by experts and having special invitees again from different regions of the country.