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Insight & Intelligence : Jan 31, 2013
No Passage to India
Private investment dearth clouds the future of the subcontinent’s fast-growing biopharma industry.!--h2>
India’s biotechnology sector can boast of lower-than-Western costs, well-educated workers, and strong contract manufacturing and pharmaceutical exporting segments, anchored by generic-drug giants like Biocon, Dr. Reddy’s Labs, and Ranbaxy Laboratories.
Those and other advantages, however, are increasingly being overshadowed by the sector’s inability to attract significant amounts of private investment, largely due to investor skittishness following government actions taken in recent years. That reluctance could hamper biopharma growth in India long-term absent answers from New Delhi and industry leaders.
According to VCCedge, India saw five private equity or venture capital deals in biotech, totaling $67.08 million. Itero Biopharmaceuticals, a developer of protein therapeutics, saw the largest investment last year, a $21 million infusion by Biotechnology Venture Fund. Next highest was the $17 million invested by Kubera Partners’ Kubera Cross–Border Fund in Ocimum Biosolutions, a provider of genomic outsourcing services.
Indian biopharma investment fared better than in 2011, when no investment activity was recorded, though worse than 2010, which saw four deals totaling $19 million. Going back five years, India has seen exactly 11 private equity deals totaling $43 million, and eight VC deals worth a combined $55 million. That’s an embarrassment in a nation that actually drew $1.1 billion in total venture capital in 172 deals last year—only to see nearly all the money go to IT, e-commerce, and consumer goods startups.
“Investments in India’s life sciences sector have seen a southward trend since 2010 primarily because of policy-level changes introduced by the government of India,” Nirav Kothary, svp, industrial services with Jones Lang LaSalle India, told GEN on January 25.
The most problematic change, Kothary said, was the introduction of an 18.5% minimum alternate tax in erstwhile tax-free special economic zones (SEZs).
“This has led to uncertainly in investment in more than 2,000 hectares of proposed SEZ space spread across the country in the life sciences sector (pharma and biotech). Since then, industry and private investors has been taking very cautious steps of investment in the sector.”
The private investment drought contrasts with overall sector growth for Indian biopharma. In the year ending March 31, 2012, India’s more-than-300-company biopharma industry generated combined revenues of INR 20,441 crore ($3.8 billion), 18.5% above 2010–11, according to the 10th annual BioSpectrum–Association of Biotechnology Led Enterprises (ABLE) survey. Domestic drugmakers comprised 62% of that due to rising biologics sales, followed by service providers and agri-bio companies.
But the past decade’s compound annual growth rate of 12.94% was less than half the 27.25% CAGR seen during the first three years, 2002–05.
“We require an innovation ecosystem that provides access to risk capital,” Kiran Mazumdar Shaw, chairman and managing director of Biocon, one of India’s largest biopharmas, wrote in a column published January 4 in The Economic Times. “We also need special listing norms for innovation-led biotech companies through a secondary stock exchange that allows access to capital markets.”
Filling The Gap
Biocon and other large Indian-based biopharmas have stepped up their R&D spending to fill India’s gap in private biotech investment. While many big biopharmas in the U.S. and Europe have been cutting back on internal research costs, Biocon spending on R&D has climbed 36% overall over the past five years, to INR 879 million ($16.3 million) in 2012, from INR 646 million ($12 million) in 2008. Sun Pharma overall R&D spending jumped nearly 50% over five years, to INR 4.253 billion (about $79.1 billion). At Dr. Reddy’s Laboratories, R&D spending rose 76% to INR 5.813 billion ($108 million). Percentages of revenue set aside for R&D range from 5% to 10% for the Indian biopharma giants.
“They are not far from catching up with the average 15% spent by Western pharmaceutical companies,” according to Jones Lang LaSalle’s just-published Life Sciences Cluster Report 2012.
Last summer, the public-private Export-Import Bank of India agreed to administer the INR 2,000 crore ($371.7 million) set aside by India’s Commerce Ministry for biopharma sector development. A venture capital fund for R&D investment is expected, but is still the subject of talks between officials from the government and Exim Bank.
ABLE, which is India’s biopharma industry group, is looking for more help from the public sector.
“Economic burdens exist on this emerging biotechnology industry, which lacks support from financial institution such as banks, private sectors, angel investors, and venture capitalists,” ABLE concluded on December 26, in a statement detailing its expectations for the national “Union Budget” that Prime Minister Manmohan Singh is expected to unveil late next month. “Fiscal and financial incentives from government are needed for its progress and growth.”
According to Kothary, India appears ready to welcome at least foreign direct investment in the domestic pharmaceutical sector. The country’s finance ministry has approved roughly INR 180 crore ($333 million) in investments by foreign companies, following a government decision to permit foreign investors to own up to 49% of established Indian firms. Foreign investors may start a company in India once they have obtained approval to get a share of a domestic drug company, on the condition that they won't stop making the lower-cost drugs they currently produce, and that they will keep investing in R&D with Indian partners for five years.
Significant foreign deals include Abbott Laboratories buying Mumbai-based Piramal Healthcare's Indian business for INR 20,348.4 crore ($3.7 billion) in 2010 and Daiichi Sankyo gaining controlling interest of Ranbaxy for INR 22,974.0 ($4.2 billion) in 2008.
Touched by an Angel
Around the same time it was appealing for government help, however, ABLE took a more positive step toward addressing the lack of private investment. The group announced creation of its own national initiative to boost precommercial “angel” capital. ABLE’s entrepreneurship committee created the Biotech Angel Network, which seeks to make investments of $1 million to $2 million in fledgling biopharmas.
“Our idea behind the initiative is to find investors or HNIs (high-net-worth individuals) with money as well as knowledge on biotech industry—such as promoters of pharmaceutical companies, expatriate Indian scientists,” committee chair Viren Mahurkar, executive vp & head-healthcare investment banking with ICICI Securities, told the Business Standard.
Government help will be crucial, ABLE argues, if Indian biopharma is to grow into a $100 billion industry by 2025 as predicted, at annual growth rates of 25% to 30%.
That would be the level of heady growth seen a decade ago, but far less likely now as other emerging nations—especially China—build up their biopharma industries. The only hope industry and government leaders have of coming even close to that sort of high growth is for the Union government to encourage private investment in biopharmas, through incentives like reduced taxes (if not the zero-tax of the old SEZs) and more predictable regulation.
Not to mention fewer antipharma practices like compulsory licensing of patent rights held by global biopharmas to domestic generic drugmakers. The industry shuddered a year ago when Bayer was forced to license its cancer drug Nexavar to Natco Pharma, which was able to sell the drug at a fraction of Bayer’s roughly $5,500 a month cost. The decision was popular in India, where more than one-third of population lives below the poverty line—but actions like those can also backfire by scaring off biopharma investors, who now have many other choices when it comes to nations with drugmakers to invest in.
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