The Art & Science of Valuation in the Biotechnology Marketplace

A company’s value lies in its potential to generate a stream of profits in the future and it is the criteria that matters most to the investors. Almost all valuation exercises are thus based on assumptions or educated guesses as to what a company’s future would be down the line meaning what important milestones to be achieved and what timely strategic decisions to be taken. These assumptions are grounded by three fundamental factors: first, the state of the market targeted by the company; second, the principle elements of a company’s science and technology; and third, the ability of management to deliver on the business plan.

Valuation is essential for the most crucial steps of a biotechnology company. The value of biotechnology companies is driven by anticipated future product and revenue streams, or by the impact that a technology platform is expected to have on the value of assets. The amount of money at stake justifies and requires a careful and thorough valuation. Biotechnology companies face the need for valuation at various stages: fund raising, license contracts, initial public offerings, and mergers and acquisitions. Quantitative financial evaluation of biotechnology investments is not an easy task. Biotechnology companies are typically dealing with innovative yet uncertain technologies and drug development candidates. The applications and the impact of a technology are often not clearly defined, and new drug development targets are not validated. However, financial evaluation and risk analysis are essential for investors as financial indicators and definite value propositions to fund biotechnology operations, and to the senior management of biotechnology companies needs to understand the risk and expected financial impact of their projects for prioritization and maximization of company value and while establishing technology partnerships and licensing agreements, the involved parties need to understand the financial value generated by a deal, and to ensure market-conformity and fair deal terms. The determinants of value in the biotechnology industry are expected cash inflows from marketed assets, R&D and market uncertainty, cost and speed of development, and strategic opportunities arising from technologies and projects.

Although, a company can have as many values as the number of different people evaluating it, every valuation starts with a systematic and rigorous testing of a company’s artistic hypotheses such as economic, technological and managerial abilities in combination with the following three scientific approaches:

Discounted Cash Flow or Net Present Value

The most common approach to primary valuation is the discounted cash flow (DCF) method, whereby a company is valued at the present value of the future cash flows it will be able to generate. The same approach is also called as net present value (NPV), or risk-adjusted net present value (rNPV) or expected net present value (eNPV). The idea underlying this method is to compare revenues and costs. If income exceeds expenses, then the project is profitable and the company should start or continue the project. But if, different cash flows do not occur at the same time or have the same likelihood, then adjust the cash flows for their time difference by discounting them and for their likelihood by multiplying with their probability to occur.

These methods are conceptually robust but can prove difficult to implement in high uncertainty environments, such as those of early-stage biotechnology firms. Typical problems include highly uncertain and distant positive cash flows, a business model based on many assumptions and a difficult risk profile of the company. Therefore, in principle, what is needed is to estimate the expected future cash flows of the business and to discount back to the present all these future cash flows, using a discount rate consistent with the level of risk in the project. In practical terms, there are some difficulties in implementing this approach as to projecting performance for several years into the future is a process considered as too speculative to be useful, then selecting a forecast for the future cash flows is purely arbitrary and questions the residual value of the business at the end of it, and obtaining an appropriate discount rate for an early-stage, privately held company presents difficulties too.

Comparable market data valuation

The comparable method is also known as a ‘secondary’ valuation method because it uses the market value of comparable companies or transactions as reference points. The method relies on available key figures, such as earnings, sales, number of employees, and R&D expenditures, etc to estimate value. In a sense, secondary valuation makes the assumption that these comparable companies have been properly valued, and can serve as benchmarks when assessing a company.

A comparable valuation for a biotechnology company of interest is based upon a financial investment into a comparable company. Based on the information, the ratios such as price/revenue, price/employee and price/R&D can be calculated and used to estimate the value of the company of interest. These ratios are used because they have a direct or indirect impact on the valuation. It makes more sense to use earnings or cash flows as the ultimate basis of comparisons across firms. Unfortunately, most early-stage companies, as development entities, tend to burn more cash than they generate, and usually have negative earnings as well. Comparing losses or cash burns would obviously lead to speculative valuations. The amount spent on R&D, the number of employees for a company and the level of revenues that can be generated are seen as better indicators of future performance.

Real Options Pricing Model

Real options valuation is primarily based on the investments and financial options. An option is the right but not the obligation to buy or sell an asset at a prefixed price until a certain expiry date. Some investments can be modeled as options. For example, a company with Phase III trial compounds, where the results are expected in 30 months. If the results are positive, the company has the option to file a new drug application (NDA) and then launch the product. However, the company will do so only if the expected sales exceed the costs necessary to bring the drug to market. The costs of clinical Phase III correspond to the purchase of this option. Equally, with the costs of clinical Phase II the company buys the option to acquire the above-mentioned option after a successful trial. The investment for clinical Phase I is then the price for an option on an option on an option. In finance, these options on options are called iterated compound options, nested options or multi-stage options. The companies exercise the options only if the necessary investments (the costs of the subsequent phase or the launch costs) are less than the value the company gets in return. The launch costs are the option fee to launch the drug. In return, the company gets the sales revenues of the drug.

“Price is what you pay. Value is what you get.” -- Warren Buffett

Consolidation Strategies of the Biotechnology Companies

In the current market, the biotechnology industry is undergoing a period of dramatic change, a change that necessitates the creation of new business models. Consolidations are on the rise and it might be a solution to many of biotechnology’s problems. Therefore, the question, what drives mergers and acquisitions (M&A) in the biotechnology industry needs to be answered.

Biotechnology mergers and acquisitions can help the industry’s fully integrated players to increase in size and market value, boost the emerging companies’ efforts to reach full integration or allow the start-ups to survive cyclical financial crises. M&A in the biotechnology sector (including inter-sector deals between the pharmaceutical and biotechnology companies or intra-sector deals within the biotechnology sectors) serves three main purposes, where one company acquires another in order to increase pipeline productivity and innovation or aid the transition to become full integrated biopharmaceutical company (FIBCO) or a company merges equally with another to support product development, market expansion or sustainable profitability.

The dramatic situation has brought down valuations and dried up access to financing, for many biotechnology companies. However, for the leading pharmaceutical and biopharmaceutical companies that still have access to capital; the ongoing crisis is an opportunity to acquire valuable additions to their own product portfolios and technological base. Subsequently, as the industry under pressure needs to demonstrate sustained profitability and increased shareholder’s value; the acquiring process becomes eminent to boost its specialization. These deals are either within the same sector from which the acquirer increases its product pipeline or technological capabilities within a niche market or the deals in which the acquirer adds a new business unit to its supply chain, thus enhancing its internal capabilities, or in order to achieve diversification (which would be difficult during a crisis period), the acquirer gains a new business outside its current portfolio.

Pharma-Biotech Consolidations (Transactions: mostly acquisitions)

While the leading pharma or biotechnology sectors have managed to maintain stable growth performance, the consolidations have been unavoidable as a means to accelerate productivity and revenue growth, identify profitable areas and attend global focus. The deals mostly comprise of licensing agreements or joint ventures in the first place. Direct acquisition is usually considered at a later stage, as experts believe, that might affect the R&D productivity of the innovative company. Usually the drivers for the licensing agreements or mergers are in the first place. In many cases, successful acquisition of the target company occurs with the companies in alliances, in such a way that productivity is left intact. While the major pharma players acquire significant research knowledge or attractive product pipelines they also allow the biotechnology player to grow its talent and unique business independently to maintain the higher productivity of this sector. The fully integrated companies acquire emerging mid-size biotechnology companies that carry strong research and drug development capabilities but that are not able to market their own products.

In short, the strategic rationale for the pharma-biotech consolidation is to i) Strengthen product pipeline through acquisition, ii) Strengthen technology platform, and iii) Target company’s’ features should include products with clinical proof of concept, strong intellectual property capabilities and good value for money.

Biotech-Biotech Consolidations (Transactions: mostly mergers)

Regardless of innovative companies’ characteristics, to maintain sustained profitability and to protect shareholder’s value in the highly competitive environments, the emerging biotechnology companies need to increase in size and reach, which includes both revenue and asset growth, and that fuels the merger activities among themselves. A consolidation within the emerging sector brings the firms closer to full integration and potentially to sustainable profitability. The goal is to expand the technological reach of a company’s product portfolio, thereby lowering the level of risk resulting from operating in a small number of markets. Despite coming closer to sustainable profitability in the long term, the emerging sector is likely to face significant challenges related to manufacturing or regulatory complexities. However, the demand for bio-services sector in the hard financial times and subsequent consolidations might become a cure for the declining market values.

In short, the strategic rationale for the biotech-biotech consolidation is to i) Build critical mass and increase value, ii) Achieve reasonable degree of integration along value chain, iii) Resolve financing issues, iv) Resolve capability issues, and v) Create exit opportunities.

In conclusion, the consolidation wave hits all the players that are unable to secure either enough funding to grow their technological platforms or expand their customer base. However, it would also be interesting to know if some types of alliances make more value than others, for example multiple target or product deals with a single biotechnology company vs. smaller alliance deals with several companies.

Strategic Financing Models of the Biotechnology Companies

“Life science startups are the only companies that are forced to define their corporate strategy as a function of their financing rather than to gather financing in accordance to a previously well-defined corporate strategy.” -Steven G. Burrill, Annual Report on the Life Science Industry

Besides having the essential elements like innovative science, solid management team, strong intellectual property and ingenious marketing strategies, the success of any biotechnology company largely depends on how the strategic financial models are structured into the business plan. After all, questions pop-up like, who are these financing sources; how much do they give; how much do they take; when and how to approach them; and the current trends in financing biotechnology firms. A thorough knowledge of all financing opportunities is critical to succeed in the biotechnology business.

This write-up is also to encourage readers to add examples in each category of the financing partners for the biotechnology industry, without which it’s incomplete to conclude. Comments or suggestions to virenkonde at gmail dot com. Thanks!

1. Venture Philanthropists are a network of wealthy individuals or not-for-profit foundations which provide non-dilutive initial capital along with mentorship, disease knowledge, patient access and an understanding of the end market that few traditional VCs can offer. Government provides small amount of non-dilutive grants, while research is still in the laboratory. Technology Transfer Offices are part of the academic institutes which provides small amount of non-dilutive seed capital along with help in the IP processes such as out-licensing deals of technology or a lead molecule. Although, these funding sources are available at an early stage of drug development, they are not always efficient.

Do you know of any wealthy individuals, non-profit foundations, government grants or licensing deals out of the university spin-offs that have contributed to the growth of life sciences-based industries?

2. Angel Investors are wealthy individuals or groups usually from industry itself interested in high returns on investments. They provide small to medium capital with mentorship, creditability, and network of contacts. However, they are assembled into a closed circle and sometimes hard to reach. A typical Angel Investor will demand a larger share of the company as they are interested in the company’s management activities. However, you might actually benefit from their experience and advice. Most angel investors are in for a single round of investments and they aren't repetitive investors.

Do you know of any angel investors or their associations that have contributed to the growth of life sciences-based industries?

3. Venture Capitalists are investors with mostly industry background which also demand a fair amount of control over your operations and decision-making. However, they also rally around the business, helping with management, promoting it and providing contacts, and to protect their investment. Most VCs usually commit for two or more rounds but may expect a greater return on investments as a result. They provide management expertise and creditability; however they only finance 1:100 opportunities and seek early exit. The success of both the angel and VC investor is their ability to gain liquidity via a timely exit either through an IPO or the company being sold.

Stages of Venture Capital Financing

Early Stage or Seed Funding usually knocks on the door when the company holds innovative project combined with a compelling business plan (and maybe an angel on board). Clinical discovery stage with strong IP is certainly a good start.

Start-up or Round I Funding comes with demonstrated efficiency by the business-driven strong management team which has contributed towards significant progress since the inception of the company. This stage is indicated by the path from discovery to lead optimization or rise of the first molecules from a technology platform.

Expansion or Round II Funding is for the demonstrated significant milestone achievements that are close to generating revenues (out-licensing, partnering, etc.). For example where new drug IND is filed and ready to go to clinical trials or it is already in Phase I clinical trials.

Mezzanine or Round III Funding is similarly for the demonstrated excellent milestone achievements with completed some strategic alliances with a clear exit strategy. For example a couple of pre-IND, IND and Phase I/II compounds and company is close to acquisition or IPO.

Bridge Loans provide some cash before an IPO (in advance of about 6-12 months).

Do you know of any VC investors or their associations that have contributed to the growth of life sciences-based industries?

4. Although equity is the main source of sustenance for biotechnology companies, Venture Debt Financing is a layer of capital that is becoming increasingly important. Securing loans early on can ease financial worries down the road for biotechnology startups. For example, equipment financing is the practice of using a firm's equipment as collateral to receive cash. Biotechnology companies can benefit greatly by using their equipment to secure debt financing. It gives them an extended cash runway and more time to negotiate their next equity round. Cash is king at every stage of growth for a life science company, and it is the fuel that drives the development of products in the pipeline.

Venture Leasing provides financing in return for equipment lease payments, whereas Venture Lending is an alternative to traditional lending from financing institutions. The main purpose is to enhance existing funding round with no equity dilution, it acts a bridge between financial rounds which contribute towards financial “buffer” and credibility. Thus, venture debt financing can extend cash runaway without eating-up equity.

Venture debt is available at every stage of the company’s growth. Venture leasing is available for start-ups that are VC-backed and needs money to buy large assets. Lease payments are made on the fixed assets as collateral. Venture lending is a available for large companies that are close to raising capital, with strong management team and support of the investors with variable and fixed asset (IP, receivables, etc.) as collateral.

5. Investors offering cash in exchange for the license royalty payments are categorized under Royalty Financing. These investors also fund future research, product development, product acquisitions, and product launch costs which minimizes dilution. The transactions can also be customized by delaying out-licensing deals and diversifying the risk.

6. Funding a Public Company comprises of Initial Public Offering (IPO), Private Investments in Public Equities (PIPE) and Follow-On Public Offering (FOPO) entities.

Initial Public Offering (IPO) is a regulated process by which a public company issues public shares for the first time in the market. This helps provide capital or an alternative to acquisition or reimbursement of venture debt for the company. Major shareholders control the company, however it is very sensitive to market conditions as stock prices are very milestone sensitive and affected by n number of factors. It is a combination of factors that makes a stronger and successful IPO in the biotechnology industry. The factors that indicate the strength of an IPO are Market timings, Company credentials, Management team and its track record, Prior investors and amount of investment prior to IPO, Quality of underwriters, Stage of product development (outstanding phase III data, good phase II results and persistent phase I compounds), and Deals with Major pharma companies (a licensing deal is good and a licensing deal with an equity investment is still better).

Do you know of any company in the biotechnology industry that has gone public recently?

Private Investments in Public Equities (PIPE) are a small group of investors buying common shares of a public company at a discounted price. This provides capital although it is not a lengthy process like IPO or FOPO as it can be done quickly by Investment Banks and it is not very market sensitive. However a large amount of securities are being offered to a limited number of investors that might want to play an active role in the company.

Follow-On Public Offering (FOPO) is an offering of shares to the public after the company has already gone through an IPO. This provides capital, however it can be interpreted as a “red flag” indicating that the company is strapped for cash.

7. Strategic Alliances such as Mergers & Acquisitions (M&A), Licensing Agreements, Partnerships or Collaborations etc. are the variation of different deals in order to in-license or out-license, co-develop or co-market products. This provides capital, products, access to expertise (contract research and manufacturing services, sales, and marketing, etc.) however it requires planning, vision and a detailed strategic approach.

Do you know of any strategic alliances that have occurred in the life sciences sector recently?

Indian Bio-Scenario in the Current Economic Meltdown (Q408-Q109) - Part III

The analysis of Indian Bio-Scenario in the current economic downturn is based on the opinion of industry experts, analysts, and market news and it is divided into three parts. Part I discusses about the current investment trends in the Indian biotechnology sector; Part II talks about the current business trends of the Indian biotechnology industry; and Part III provides strategies to improve the current Indian biotechnology scenario.

Part III. Strategies to improve the current Indian biotechnology industry scenario

1. Following the recent economic downturn in the private and public equity markets, many biotechnology start-ups are now under considerable pressure. In this environment, the struggling start-ups should secure financing as their valuations are being trimmed by investors. In order to survive, these firms should adjust their business models to satisfy the existing as well as future investors, enter alliances to decrease their cash burn and consolidate with external assets to build the critical mass internally.

2. The Indian biotechnology companies will need to demonstrate capabilities to generate IPR and innovative ideas along with maturity to execute them. Biotechnology firms with promising pipelines could team up with publicly traded firms with plenty of cash reserves but weaker pipelines. In other words, companies having a richer pipeline but not the cash to get any of your products to the market, should pursue long-term partnership deals with more mature biotechnology or pharma companies that have significant cash reserves and complementary clinical assets.

3. Companies need to not only generate revenues, but also monetize the assets. Companies with products reaching the clinic pursue the ‘specialty investors’ for financing against existing or future revenues associated with specific clinical development programs. Moreover, demand by the major pharma firms for the innovative technologies developed by biotechnology firms remains strong. Although not easy, reassessing the firm’s long-term objectives (business models) and planning to reposition for long-term success by refocusing both on the further development of their drug discovery platforms and on various downstream clinical development projects would be a good strategy.

4. Companies needing short-term liquidity should first seek support from existing private investors—an option that, surprisingly, companies today often overlook. Existing investors already have a stake in a firm’s future. In addition, bringing in new investors during periods of financial crisis usually comes at a comparatively high price to existing investors in terms of the dilution of their equity. Therefore, existing investors have an interest in providing short-term cash infusion to give managers time to get their act together and reposition their firms.

5. Companies should exploit the growing number of funding opportunities outside the commercial sector. Apart from enhancing your cash position and credibility in the marketplace, funding from the government or charities generally comes with the added benefit of not diluting equity. Companies should approach nonprofit foundations such as Wellcome Trust, Gates Foundation, particularly if the company’s portfolio is in a therapeutic niche area not served by the major pharmaceutical companies.

6. Indian companies can ensure greater access to US/EU markets by locating some of their research operations. Finally, the wave of consolidation (M&A), partnerships, licensing agreements etc. is might be able to weather the current economic slowdown and would face less competition in the future. In fact, these trying times would force companies to be more disciplined, strategic, and resourceful. They should also look further for financing and potential partners. The United States may no longer be the market of choice. Therefore, Indian pharma companies should be ready to grab the opportunities available in the CIS (Commonwealth of Independent States, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan) markets.

7. Finally, Indian government is taking certain countermeasures to eliminate or reduce the effect of recession (economic slowdown) for a turnaround. In November, the Indian government unveiled a national strategy for biotechnology (NBDS), supported by a $1.6-billion commitment over the next five years that includes the incentives to promote R&D investment from foreign equity investments and foreign direct investments (FDI). It calls for 1/3rd of the government’s research budget to be spent on biotech—a 450% increase over the previous five years—in partnership with private sector funding. Under NBDS, the government is establishing a National Biotechnology Regulatory Authority (NBRA) - multi-regulatory structure for GM crops and human health products. It is extremely advantageous for the biotech industry to have a meaningful regulatory pathway, before product development as it would remove uncertainty in terms of both timelines to market and possibility of obtaining final product approval.

Building sustainable business models would be a key to the success of this industry.

Please feel free to post your comments or write to virenkonde at gmail dot com for your suggestions!

Indian Bio-Scenario in the Current Economic Meltdown (Q408-Q109) - Part II

The analysis of Indian Bio-Scenario in the current economic downturn is based on the opinion of industry experts, analysts, and market news and it is divided into three parts. Part I discusses about the current investment trends in the Indian biotechnology sector; Part II talks about the current business trends of the Indian biotechnology industry; and Part III provides strategies to improve the current Indian biotechnology scenario.

Part II. Business trends of the Indian biotechnology firms today

1. Spinning-off R&D or bio-services sector into a separate entity

Major biotechnology and pharma companies are spinning-off their R&D into new companies to drive contract research, which analysts say can help attract investors into the low cost drug development and delivery sector. The current financial crisis has not had much effect on major biotechnology companies like Biocon, which plans to increase its investment in R&D in the next fiscal year to keep pace with increased orders from multinational firms. Biocon is spinning off its R&D division into a separate company. Currently, Biocon is getting the formulation done on contract basis but looks forward to set up a dedicated greenfield facility to manufacture tablet formulations. Formulations are a growing business and thus investing in it. This segment accounts for about 10 per cent of Biocon’s revenues but could yield up to $20M. Ranbaxy recently announced plans to spin off its R&D unit. Pharma majors, including Sun Pharma, Wockhardt, Orchid Research, Glenmark Pharmaceuticals, and Nicholas Piramal have all announced similar plans. India is betting its lower costs and talent pool will give it a leg up in the global pharmaceutical market in the coming years. Merck turns to Ranbaxy for $100M R&D effort, five-year pact to develop new anti-infectives. This new deal signals an ongoing effort by big pharma companies to reduce their expenses by shifting development programs into China and India. Eli Lilly has also aggressively pursued an Asian strategy for its R&D work as well. Genzyme to set up R&D centres in India. The company currently markets two drugs in India while some others are being examined for regulatory approval. Although the company’s drugs are not patented in India, the company says it will not have competition in India since their products are highly complex biotech drugs which will not be easy for generic companies to develop.

2. Consolidations (Mergers, Acquisitions), Agreements, and Partnerships on the rise

The industry is also grappling with global meltdown, where it has paved way for a lot of joint ventures and collaboration in the sector. The mergers & acquisitions, licensing agreements and partnerships by Indian companies are on some reasonably attractive terms: Indian companies are looking to acquire a few overseas companies with good marketing, manufacturing, distribution, and clinical trial capabilities or to enter into US market, companies merging with equals and keeping products that sell and getting rid of products that don't make sense, major companies buying big and small companies, and consolidation amongst small and medium sized firms. The collaborations are being looked upon as means to bring down the cost of developing products to make the entire process quite affordable. The scenario looks favorable for the Indian biotechnology firms as industry experts say, they should focus on acquiring biotechnology units in foreign countries like the US, where global meltdown has led to fall in their valuations. Moreover, competition is tightening, meaning consolidation is inevitable. There might be more acquisitions as the industry has begun consolidating. Many biotechnology companies started during or after the dotcom doldrums are now in merger and acquisition mode to either exit or build on existing expertise. The future looks bright for the industry and industry experts feel that Indian firms must focus on buying overseas biotechnology units in countries like the US, which are seeing plunging valuations due to the global meltdown. Major pharma companies have traditionally been cash-rich and therefore relatively debt-free over the years. Therefore, the smaller biotechnology firms with lower valuations are now good acquisition targets for these major pharma companies – even in the current recessionary period.

Major pharma companies like Ranbaxy, Cadila Healthcare, Lupin, Wockhardt, Dr. Reddy’s and Intas etc., are diversifying into biotech, But because India’s track record is in generics, many firms lack the experience of taking a new biological entity all the way to regulatory approval. Now, to remain in high gear as well as move higher up the innovation food chain, companies are turning to strategic growth. The Indian life sciences industry gained technology largely through acquiring western companies and joint ventures with these companies. Acquisitions represent a long-term strategy for companies wanting to break in to new markets, add new technologies and skills, and gain size and scale. Besides hiving off their R&D arms into separate entities to de-risk research, Indian pharma companies are interested in acquiring good biotech products and business models to spruce up their pipeline.

India seems to be taking the necessary steps to lay a fertile field for increased global biotech activity. Indian biotech companies are also growing by looking further a field through acquisitions, joint ventures and collaborations. Biocon establishes EU presence with acquisition of marketing & distribution co. AxiCorp GmbH (Ger). Dr. Reddy's will acquire a portion of Dowpharma Small Molecules UK business. Avesthagen has made four strategic acquisitions, largely to ramp up its manufacturing and marketing capabilities. Ocimum Biosolutions, a life sciences R&D enabling company, bought Maryland-based Gene Logic for $10 million. Serum Institute Ltd., picked up a 14% stake in Lipoxen PLC, a biopharmaceutical company specializing in the development of differentiated biologicals, vaccines and oncology drugs. Lipoxen has raised £2.6 million in new funds from the Serum Institute through a subscription agreement and associated warrant agreement. Intas Biopharma acquires Biologics Process Development (US) to facilitate entry to US market. RFCL Limited acquired Wipro Biomed, a division of the software major Wipro Technologies to propel it into the fast-growing in vivo diagnostics market, fully automated clinical chemistry, and hematology sectors. Ranbaxy Laboratories, aquired Hyderabad-based Zenotech Labs since Zenotech has a strong pipeline of biotech and specialty drugs, whereas Ranbaxy rules the market in generics.

Ranbaxy signs licensing agreement with Debiopharm, a Swiss biopharma co., to market its New Chemical Entity (NCE). Wockhardt takes huge strides towards In-licensing and collaborative agreements with UK based Sinclair Pharma to market a range of dermatology and dental products. Foreign companies entering Indian market through acquisitions or licensing agreements. Advinus Therapeutics Partnership with Genzyme (US): Collaboration to develop oral compounds to treat malaria in at-risk populations. Panacea Biotech Ltd -Alliance -PharmAthene, Inc (US): Strategic alliance for vaccine development & commercialization; Panacea takes equity stake in PharAthene. Jubilant -Joint Venture -Eli Lilly & Co (US): JV pharma/CRO collaboration for drug discovery.

3. Strategic alliances to allow foreign companies to enter Indian biotechnology market

From the perspective of western firms, the implementation of TRIPS in India (a shift from Process Patents regime to Product Patents regime; Patents [Amendment] Act, 2005) may encourage them to introduce new brand drugs because such products can establish monopoly under the patent protection - a situation not possible since 1970. This does not mean, however, that high-priced, western-manufactured products can be directly shoehorned into the Indian market. Though TRIPS gives exclusive rights to Western companies to market their brand products in India - eliminating competition from local companies that copy inventions - these multinationals are unlikely to benefit from selling their products at high prices because Indian consumers simply cannot afford the high costs of drugs developed and manufactured abroad. Therefore, it will be necessary for Western and Indian companies to enter into strategic alliances so that novel drugs can be manufactured under license for local consumption. Such alliances will lead to a win-win situation for all, both biotech companies and the public. Thus, the impact of TRIPS on either the commercial strategies of foreign companies or their strategic alliances with Indian companies will be used in making foreign investment decisions.

In an ideal situation, this would motivate Indian firms to invest in the creation of innovations and become primary innovators and would be less inclined to invest in the re-engineering and marketing of drugs already protected by pre-existing foreign patents. The Indian government’s substantial investment in patent infrastructure, together with recent modifications to Indian patent laws, reflects the country’s commitment to adhering to the principles laid down by the World Trade Organization’s (WTO, Geneva) agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). For India’s biotech sector, however, a stronger patent system is unlikely to be sufficient to spark a boom of innovation. Indian companies simply cannot compete with the financial resources at the disposal of their Western counterparts. TRIPS implementation essentially signals the initiation of a race that is unfair.

A potential best-case strategy is evident from the Daiichi-Ranbaxy, transformational deal. To enter the Indian biopharmaceutical market or strengthening a current presence is to merge with one of the larger Indian generics companies, thus entering the Indian market from the low end and high end simultaneously. This approach removes a significant generic competitor for newly launched products in the Indian market, provides entry into all tiers of Indian healthcare, and, depending on the company size, and offers worldwide generic distribution and access to highly qualified, cost-effective Indian R&D staff. As a first test of this model, future results of the recent acquisition of Ranbaxy by Daiichi Sankyo, Japan will provide insight into possible success.

4. All-time-good domestic-demand-driven biotechnology market opportunity

However, even as global markets are non-growing for many Indian players, domestic healthcare markets prove to be an anchor with steady growth at a volatile time. Domestic market proved to be an anchor for Indian Pharma in a time of a global slowdown. The companies like Piramal, Lupin, Cipla, and Ranbaxy are strongly focused on local segments and managed to stay firm in the falling markets. Therapeutics remain the thrust in Indian R&D, with human insulin being the most common area of research. Plasma proteins are an emerging market in India. Over 100,000 people in India suffer from haemophilia (25 per cent of the world’s haemophiliac population). India has been sourcing plasma proteins from MNCs such as Baxter. There is Market potential for manufacturing plasma proteins locally and indigenously. mAbs is a fast-growing market-especially in oncology and auto-immune diseases. India has 3 million cancer patients and 700,000 new cases every year.

Please feel free to post your comments or write to virenkonde at gmail dot com for your suggestions!

Indian Bio-Scenario in the Current Economic Meltdown (Q408-Q109) - Part I

The analysis of Indian Bio-Scenario in the current economic downturn is based on the opinion of industry experts, analysts, and market news and it is divided into three parts. Part I discusses about the current investment trends in the Indian biotechnology sector; Part II talks about the current business trends of the Indian biotechnology industry; and Part III provides strategies to improve the current Indian biotechnology scenario.

Part I. Investment trends in the Indian biotechnology sector

It is considered that, the worldwide financing environment in 2009 will be extremely challenging. Capital markets in India might remain turbulent during the first half of 2009 although in the second half of the year the capital markets might stabilize and biotechnology sector might benefit from this. Keeping fingers crossed! The biotechnology industry is mainly dependent on private equity and venture capital funds. Hence the after effects of the global meltdown could be observed over a period of few months. Experts from financial institutions and analysts have varied opinions about the inflow and outflow of monetary funds into the industry.

It is believed that, start-up health care and drug technology firms would be struggling to attract funding as venture capital and private equity firms shy away from high-risk projects with long gestation periods in the wake of the global economic downturn. Also, the lack of confidence in riskier projects might lead venture capital and private equity firms to shift their focus to established companies to take advantage of their current low valuations. Investors can gain from the low valuations, but only if they are able to identify technologies that can give significantly big returns after taking the high risk and waiting for long. Innovation in the pharma and biotechnology space is going to be impacted heavily owing to lack of funding from venture capital and private equity companies. However, some believe that, as far as the global meltdown is concerned, the early stage companies would not be affected because they are not much dependent on market dynamics from the beginning. If companies really need to attract investment funds, they need to have some very good science and promoters should have a good track record. New funding is going to be tough for start-up companies now, unless the entrepreneurs are ready to either grossly undervalue their companies or ensure easy exit options. Nobody can predict which companies with “out-of-the-box business models” would be favored, but it appears that several global investors are evaluating Indian biotechnology startups’ intellectual property assets. While more mature companies may wait till their valuations improve, younger companies will continue to raise funds through the private equity route. Companies that planned to launch its IPO last year left scouting because of the lack of funding to support its product pipeline due to the downturn effect. The capital availability for small-to-mid size development stage life sciences companies will lag the broader market and these industries will remain under funding-pressure for a significant period of time.

Some industry experts believe that there won’t be shortage of funding coming in for bio-services-led businesses in India. Experienced entrepreneurs trying to set up companies [CRAMS (clinical research and manufacturing services) and CROs (clinical research organizations)] in India might find it easier to get funding. The risk capital is going to be very hard to find. For the supported bio-services-led businesses it’s not really risk capital because it’s fairly low risk. So, a lot of capital would be flowing into the services businesses. They are going to find it very interesting because there is a natural hedging opportunity for them because companies are looking for more affordable ways. It might be more difficult to get funding for a newbie entrepreneur who is trying to get into the CRO space. On the other hand, some experts are of the opinion that, far from registering a robust growth- as was being projected earlier- there are also fears of a dramatic fall in the number of clinical trials being outsourced to India. If the recessionary trends do not subside, there could be an impact on clinical trials and data management projects coming towards India. There is a growing perception that expenditures on clinical trials will be significantly lower. This is because pharmaceutical and biotechnology companies of all sizes in the US and European markets are trimming their portfolios, making tough decisions on compounds in the pipeline. Only few would receive continued investment. Only the time would decide, if the projections on the Indian clinical trials market to become $1 billion by 2010, as projected.

In the last year or two the capital has been flowing into discovery- or innovation-led businesses and that might dry up. The venture capital or private equity investors would be highly reluctant to fund any risky business. So innovation companies are going to find it difficult because they are going to need the next round of funding and the private investors are not going to support companies with even phase I clinical data. They know that, even when the potential drug candidate goes to phase II or III, it may fail. So they won’t have the risk appetite to fund these companies. The incremental investments once over phase I clinical trials are also huge. So this financial funding crisis is going to remain for some time. There might be very innovative companies being acquired for a very low valuation or they will fold up because no one is investing in them. If they are working on something unique, big pharma companies might step-in. Many companies in biotechnology sectors have used external sources of financing to fund their research efforts and to enhance or support their claims to being ‘profitable’. However, with banks and financial institutions collapsing and the need for liquidity to manage their own businesses being amplified; the lending process has come to an abrupt halt or is being managed at much higher interest rates. Thus, those companies that have already worked up large debts are under pressure to return these as quickly as possible or have to sustain these debts at much higher interest rates – this situation is threatening the very existence of these companies.

The regulatory requirements of the life sciences sector is the biggest hurdles because the gestation timelines are long, the predictable outcome matrix is not very favorable and that’s why it makes it very high risk. Therefore, when investors talk about return on investment (ROI) in this kind of economic downturn, they don’t want to invest in these types of uncertain sectors. A new council to help coordinate efforts between academics and biotechnology companies and a new regulatory body has been created by the Indian government. India has a shortage of trained regulators, but the FDA/USA has stepped in to help train personnel in India. There are recent reports of the opening of US HHS/FDA offices in New Delhi and Mumbai to improve safety and quality of the biotechnology products, which will facilitate the smooth flow of trade. Through these offices, these HHS/FDA personnel will provide technical advice, conduct inspections of facilities that export to the U.S., and work with Indian government agencies and the private sector to develop certification programs to allow the efficient flow of safe HHS/FDA-regulated goods between the U.S. and India.

Private equity companies might consider companies following de-risking strategies. They might be interested investing in medical devices, drug discovery, and diagnostics. Diagnostics for instance has a lot of prospects for potential growth in the future because of a lot of innovation churning up. Govt. is planning a new legislation on medical devices to regulate the quality of medical equipment being marketed in the country. The new regulation will help standardization of the quality of medical devices manufactured in India. Because of the fact that, most of the medical equipments in India are imported and the medical devices industry in India has not grown much, the government is working on medical devices legislation, in order to standardize the quality of Indian manufactured medical devices.

The biotechnology sector might be struggling a lot, not just in India but globally, in terms of investment in innovation. With the current liquidity crisis, the government has stepped in to support research. And that’s where the government’s initiatives [like, SBIRI (Small Business Innovative Research Initiative) as an early stage support scheme, and Biotechnology Industry Partnership Programme (BIPP), as a later stage support scheme to concentrate on big science, big innovations, where governments job would be to reduce or cover the risks] are for rescue, filling the funding gap. The government has approved the proposal under BIPP, which is an advanced technology science scheme envisaged as a government partnership with industries for high risk discovery and innovation. An investment of US$ 73.24 million budgeted under the 11th Five-Year-Plan will be made for the programme. Also, under the new legislation, the country's Department of Biotechnology would be setting aside 30 per cent of its annual budget to fund public-private collaborations on new drug development. That’s how governments all across the World will have to fund innovation at least until times are better.

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