The biotechnology sector has significantly expanded the horizons of modern medicine – an industry that is characterized by innovation. While the pharmaceutical segment of this industry is struggling with rising R&D costs and declining number of new product launches, the potential of biotechnology is unfolding fast.
Global sales of biotechnology drugs crossed the $ 100 billion dollar mark in 2008 with several drugs achieving blockbuster status (annual sales in excess of $ 1 billion). The sector has been growing in excess of 15 per cent over the last several years outperforming the pharmaceutical sector by a wide margin. Such strong performance evokes interest from the investment community especially since the industry has not yet evolved completely. The pharmaceutical segment which is more mature has offered several cycles of wealth creation for entrepreneurs and investors alike. Investment themes have ranged from investing in drug discovery based start-ups in the US to outsourcing and generic based models in India/China. The biotechnology segment is also expected to evolve in a similar manner and companies are already changing business models in anticipation.
How does then India play a role in this segment and what investment opportunities would be available to Private Equity (PE) funds ? Biotechnology in India is increasingly perceived to be the next growth opportunity in generics. It is estimated that 24 per cent of global biotechnology sales is from drugs that have already come off patent but are still immune from generic competition as regulation enabling launch of such generics (referred as bio-similars) is lacking. This is expected to change over the next 10 years with European Authorities having taken the lead considering approvals on a case to case basis. Given the rising costs of healthcare and the expensive nature of these treatments enabling regulations are also expected in the US.
The generic biotechnology opportunity is estimated to be in the vicinity of $ 10 billion and several Indian companies are gearing up to capture the same. Prospects of private equity participation look bright in this context as the business of biotechnology is inherently more capital intensive than pharmaceuticals and requires strong balance sheet support. Companies which are trying to support this business with cash-flows from their generic pharmaceutical businesses will find it increasingly difficult to do so as return on these investments will not come till enabling regulation is in place which could be another 3 years away.
This sector like all sectors in early stages is characterized by lack of critical mass of senior leadership in India with the relevant skill sets in biotechnology. The government has taken several initiatives to increase the course offerings in this discipline at graduate and undergraduate levels but there is still a big gap in terms of relevant industry experience. Management teams that have therefore demonstrated technical capability in this sector are a key source of competitive advantage amongst Indian companies. Such talent is more easily available in developed economies of US / EU and may not be amenable to shifting base given the nascent stage of the industry. PE firms could play a role in designing incentive structures to overcome such limitations.
Till date there have been very few investments in the country on the lines described above but investment activity is expected to accelerate as there is greater visibility on the regulation front.
The author is Head of Investments - Pharma and Healthcare, Baring Private Equity Partners India