Biotech has been relatively a new ground for the Indian venture capital community. This is despite the fact that there have been a few initiatives like the APIDC fund and announcements by the Department of Biotechnology and the Technology Development Board to launch funds.

A booming capital market during 1999-2001 set a stage for biotech valuations. Companies like Shantha Biotech, Bharat Serum and Biocon could raise their first round of VC funding at fabulous valuations. But the lukewarm capital market in 2002-03 led to not so encouraging response from venture capitalists. Companies that have risen first round VC funding struggled a lot to raise their second round or follow on funding.

One exception here is Biocon due to the advantage of its large turnover base through pharma statins. Though biotech story on the part of Biocon still has to emerge clearly, but investors took it in a positive perspective mainly due to its high turnover and profitability coming from pharma product exports including statins.

The financial numbers only helped Biocon to even successfully complete their IPO. Whereas companies like Shantha Biotech, which purely depended on venture capital and debt raisings saw a different story altogether. As their single product (Hep-B) concentration and commoditization led to a price war with the increased competition from Wockhardt, Bharat Biotech and Serum Institute. Shantha Biotech could not introduce pipeline products on time due to regulatory hassles, which led to the revenue fall and delay in IPO and hampered follow on funding.

Similarly the much-talked about Bharat Biotech, which also depended on heavy debt funding, went through a dwindled scenario for some time due to its focus on single product (Hep-B) and delays in launching new products. Though Bharat Biotech could attract very good valuations similar to that of Shantha, when its product went through the price life cycle, the valuation of the company also suffered a lot.

These issues deterred the leading Indian biotech companies from holding initial public offerings so as the same deterred VCs in taking aggressive exposure in biotech. Companies with single product focus, with delayed pipeline, and firms which enter into `me-too' products which can be introduced by others in a short span of time, may generate some interest initially but in the long run the sustenance of such models will become a question mark, which is what scarring the venture capitalists.

Another major threat for the Indian product based companies is the cheap import substitutes. Since the input cost in biotech is very low, traders who import from overseas are providing a huge competition for these first generation biotech companies in India. R&D scenario on the Indian front still needs to emerge.

Even as the Indian scenario still needs to emerge fundamentally, global biotech revenues of public companies totalled $46.6 billion in 2003 ($ 39.8 bn in 2002). More than three fourths of this revenue continues to come from the US, with Europe contributing 16 per cent (21 per cent), Canada with 4 per cent (4 per cent) and Asia-Pacific 3 per cent (3 per cent). the Asia-Pacific share in global revenues is comparatively lower, yet the region outperformed Europe in revenue growth, R&D expenses and increases in the number of companies and employees. India is currently ranked 3rd in the region based on the number of biotech companies (96), trailing behind Australia (228) and China, including Hong Kong (136).

Though medicinal biotech has experienced significant progress there is still a need for improving the offerings.

Companies in the diagnosis and treatment of disease and the delivery of healthcare services can receive attention from both angel capital and venture investors by focusing on core areas such as pharmaceuticals, healthcare services and drug research.
- There are opportunities in medical devices, healthcare services, healthcare information technology and life sciences industries
- VC funding in the biotech sector is expected to grow in the coming days
- Venture capitalists are making investments in biotech ventures involving anti-infective drug research, one of the fastest growing categories of the global pharmaceutical business
- A hot biotech area benefiting the investments are biotech ventures developing path-breaking therapies for diseases such as HIV, cancer, and diabetes, where a successful therapy can rake in very high profit margins.

To gain investor confidence, entrepreneurs would need to reveal their realistic targets and their approaches to convincingly take drug discoveries and commercialization of the products through the various stages of clinical trials.

-- The author is Country Head, Firstcall India Equity Advisors Pvt. Ltd, Mumbai.