PE investment backed by increasing M&A activity

The PE investment trend in life sciences is backed by increasing M&A activity in the industry, especially from global players who are keen to increase their footprint in the Indian market.

Initial Public Offering
Usually an Initial Public Offering is part of a business' financing strategy. The typical pattern followed by start-up companies is to start the business with an initial investment from their own pocket, friends and family. Then, when an actual product exists, try for funding from an angel or venture capital firm, which will get the company growing at a rate that will justify an IPO. For a company to be IPO ready, it needs to be growing, have a definite need for larger funding, have a good business-plan and vision, and finally, the market should be accepting of the particular type of company and business line.

India saw a dramatic recovery in its IPO markets in 2010 following the recession. The primary driver for this has been the increasing domestic consumption and capital influx from the developed markets.

The number of IPO's in 2010 in India grew by over 200 per cent in comparison to 2009.

The number of IPOs from the life sciences industry is likely to spike up in the next few years as the industry matures. Although, a majority of the IPOs will be from the Pharmaceutical sector, as most companies in the biotech and medical Devices sectors in India are still early stage in nature. However, in 2011, the number of IPOs is likely to be fewer in number than expected at the beginning of the year, as the current weak market conditions and global economic cues have led to a huge gap between the companies' expected valuations and those arrived at by the investor community. Thus, for the near-term, PE and VC funds invested in the industry will opt for exits through sales to other PE firms or mergers and acquisitions.

According to research, there are certain factors needed, from a retail investors' point of view, to make a Life Sciences IPO successful. These are:

• Low proportion of high risk business. For example, companies investing high amounts in R&D are likely to be judged poorly by retail investors.
• Operational efficiency and financial returns (profits) accrued by the company.
• High demand for the products and services of the company and their likely outlook.
• Understanding of the industry and a set of stable rules and regulations governing it.
• Company's position in the competitive landscape and the near term outlook.

Markets reaction to I POs
By tracking the post IPO stock performance of Life Sciences companies which got listed in the last four  years, we see that all companies declined in the first 12 months and closed their first year at a price lower than that at which they  were listed.

This could be due to the challenging market conditions in the last few years or it might indicate that life science companies are setting valuations that are too high.

These prevailing trends in the life sciences industry are likely to make retail investors wary of investing in the IPOs of these companies and hence act as deterrents for life sciences companies looking to foray into the capital markets.   
Public funding
The Government has also been encouraging research and new product development in the industry through its various departments, like Department of Science and Technology, Department of Pharmaceuticals and Department of Biotechnology, under the ongoing initiatives. Several of these are aimed at encouraging the growth of new companies and entrepreneurs. Some of the most prominent ones are:

Department of Biotechnology
Small Business Innovation Research Initiative
(SBIRI): The scheme's distinctive feature is that it supports the high-risk pre-proof-of-concept research and late stage development in small and medium companies. The programme is an early stage support scheme which encourages biotech entrepreneurs to try out a wide-range of growth plans, supports their R&D efforts and stimulates technological innovation. The scheme usually provides soft loans of up to Rs 20 crore.

Biotechnology Industry Research Assistance Programme (BIRAP): To stimulate and enhance innovation capabilities of the biotech sector and to promote and sustain academia-industry interaction, the Government created BIRAP, in partnership with Association of Biotechnology Led Enterprises (ABLE) and Biotech Consortium India Limited (BCIL), to assist the industry through a range of services. These include providing testing and validation facilities, access to key resources and new technologies, timely financial assistance, technology transfer and intellectual property management, technology acquisition and technology forecasting, and addressing training needs and capacity building of SMEs.

Department of Science and Technology:

• Technology Development Board (TDB): The scheme aims at providing financial assistance to the industrial concerns for the development and commercialization of indigenous technology. The TDB invests in equity capital and gives soft loan to such entities.

Department of  Scientific and Industrial Research:

• The Technopreneur Promotion Programme (TePP): The scheme is in four phases in the form of grants for creating laboratory /model, create a working prototype, carrying out value-added work for enhancing product features and design, and for IP protection and test marketing.

Department of Pharmaceuticals: The DoP has several initiatives in the implementation and proposal stage for supporting innovator companies and start-ups. These aim at strengthening R&D capabilities by providing GLP complied chemical labs, large animal facility, incubation centers, capacity building programmes and venture finance.

Multilateral agencies
International agencies like International Finance Corp (IFC) and Asian Development Bank (ADB) also often give funds to spur entrepreneurial growth and support medical research.

The IFC, the private investment arm of the World Bank, called India the "centerpiece of IFC's global biotech strategy." The IFC is planning to invest around US$ 15 million in Vivimed Labs and has previously invested over US$ 6 million in Hyderabad-based Ocimum Biosolutions (2006) and US$ 15 million in Mumbai-based Hikal (2008). Till 2005, of the total US$ 110 million invested in 14 biotech projects globally, the IFC has invested US$ 43 million in four projects in India.