labels: biotechnology, investment - general
VCs say they’re bio shynews
Praveen Chandran
09 October 2002

Mumbai: Venture capitalists (VCs), who have been looking for lucrative proposals in the Indian biotechnology segment for the last two years, have failed to navigate the potholes in their investment path — unrealistic valuations by Indian biotech firms and the long gestation period for investment returns.

During the last year, VC funds neither picked up stake in an Indian biotech company nor sponsored any basic research and development work. While the global market for the biotech sector is estimated at $250 billion, the Indian segment posted sales of just $1 billion in 1999, despite growing at 20 per cent. This turnover is expected to triple to $3 billion this year.

V V L N Sastry, a leading biotech industry analyst, says: “There is a strong mismatch between the expectation of the biotech firms and the valuation offered by the VCs. Besides, the current domestic as well as international market atmosphere has forced the VC funds to review their investments programme in the Indian biotech sector.”

According to a biotech survey on Karnataka, though the total project investments exceeded Rs 1,000 crore in the last two years, the sector could only attract VC funding to the tune of Rs 100 crore, mostly comprising small start-ups funded with monies ranging from $1 million to $5 million. The principal VCs accounting for this Rs 100 crore were Global Technology Ventures, ICICI Ventures, ICF Ventures, Nadathur Holdings and UTI Venture, besides Small Industries Development Bank of India (SIDBI).

A senior industry analyst says that during 1999-2000, Monsanto had picked up a 26-per cent stake in Maharashtra Hybrid Seeds Company for over five times its total business valuation. In the same period, Agrevo (now Aventis CropSciences) had picked up a minority stake in Pro Agro for nine times its total business valuation.

In 2000-01, ICICI Ventures picked up a 10-per cent in the Bangalore-based Biocon for Rs 25 crore. The total valuation given to the company’s business was just Rs 250 crore. During the same year, Morgan Stanley and SBI Mutual Fund picked up a 6.77-per cent stake in the Hyderabad-based Shanta Biotechnic for Rs 50 crore.

Similarly, the Bangalore-based Avastha Gengraine Technologies offloaded 33-per cent stake to ICICI Venture for just Rs 7 crore. However, in 2001-02, the VCs totally stayed away from investments in the biotech sector.

A leading US-based VC fund backed out after picking up a 20-per cent stake in Bharat Biotech due to differences of opinion on valuation. The company had projected a valuation of Rs 1,000 crore, but the VC’s projection was only Rs 600 crore. Last year, Shanta Biotechnic, too, initiated its second-round funding, but failed to attract any investments. Though the company offered a low price of Rs 225 per share, there were no takers.

According to a recent survey carried out by the Confederation of Indian Industry, banks still remain the major financing source of biotechnology. SIDBI and ICICI Ventures have committed about 35 per cent each. Internal funding by individual companies is still insignificant and accounts for only 10 per cent.

Rabo India Finance senior manager Alok Gupta says the long gestation period involved in the biotech industry has made VC firms hesitant to invest in biotech firms. “The absence of the proper regulatory mechanism and the Intellectual Property Rights legislation have made VCs stay away from India.”

Says Subhash Reddy, the vice-president of the California-based $125-million e4e Fund: “VCs cannot fund projects taking the discovery route because of their long gestation periods. VCs have apportioned $15 million to finance Indian companies, and now there is a dearth of ‘patience capital’ among VCs. VCs, who cannot simply lend money and wait for returns, must generate returns of nearly 25 to 30 per cent compounded year-to-year to satisfy their investors. While VCs can wait for projects that have a gestation period of five to seven years, they cannot wait for projects that may take 17 years.”

Sartorius India chief executive officer Cherian Philip says the real value creation comes only if the company addresses issues head on. “If it cannot convince the VCs, it will not get the money.” Indasia Fund Advisors chairman Pradeep Shah says VCs are ready to fund biotech projects of companies who have large marketing and distribution networks and strong R&D pipelines. A senior official with ICIC Venture says VCs face the problem of funding for life projects that will take seven to eight years for fruition.

One aspect is vivid. There is a clear mismatch between VC funding and biotech initiatives, specially start-ups.



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VCs say they’re bio shy