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