India is ranked among the top 12 biotech destinations worldwide and third largest in the Asia-Pacific region. India's sunrise biotechnology industry is expected to reach US$ 10 billion in revenue by 2015 from US$ 4 billion in 2010-2011. Though India's share in the global US$ 180 billion global biotech industry is still very small, the domestic industry grew 33 per cent in FY11 from US $ 3 billion in FY10.

At present there are more than 380 Biotechnology companies in India, providing employment for over 20,000 scientists. Most of the companies are located in the major cities of Delhi, Mumbai, Pune, Chennai, Bangalore, Hyderabad and Ahmadabad. The biotech industry in Karnataka contributed US$ 1.6 billion in FY11, accounting for 40 per cent of the country's total revenue, with almost 50 per cent of biotech companies being located in the state. To ensure that Karnataka remained a major investment destination in the biotech industry, the state government has set up a US$ 10 million Bio Venture Fund for incubating start-ups in high-technology areas.

The Government of India set up the Department of Biotechnology (DBT) under the Ministry of Science and Technology in 1986. The biotechnology industry in India is very young but still over the last decade, the country has become a hub for the global industry with almost all major MNCs setting up their manufacturing units and research laboratories here.

The Government is also emphasizing on growing the industry have given several incentives for this purpose including rebate on R&D, 100 per cent foreign direct investment, excise and customs duty waiver on certain products, promoting biotechnology SEZs and parks, establishing centres of excellence for promoting institutional research, etc.

The biotechnology industry can be classified into five different segments, bio-pharma, agri-biotech, bio-informatics, bio-industrial and bio-services with each concentrating on a particular niche area.

Bio-pharma deals with the production of vaccines, therapeutics and diagnostics, making-up three-fifth of the industry revenues in FY11, with vaccines being the major contributor.

Agri-biotech comprises hybrid seeds and transgenic crops, bio-pesticides and bio-fertilizers. This has been the fastest growing sector.

Bio-informatics create and maintain extensive electronic databases on various biological systems.

Bio-industrial industry comprises  enzyme manufacturing and marketing companies and these enzymes are used in detergent, textile, food, leather, paper and pharmaceutical industry.

Bio-services market usually deals with clinical trial, contract research and manufacturing activities and has been growing at a higher rate as global biotech majors are increasingly outsourcing their operations from India.

Investing environment for biotech Industry
The global investing environment for biotechs has been negative since 2008, as the recession severely impacted funding for the sector. Although the situation is improving now, there is still a long way to go before the industry regains its former glory. Further, in 2009, 10 US-based biotech firms had filed for bankruptcy, while another nine firms closed  shop without being officially bankrupt. These events made the investor community wary of investing in this high-risk, high-return sector.

But the conditions in India remained better and though investments slowed down in the last three years, they are once again picking up. In India, the sector has suffered due to its small size and low awareness among investors about companies and their mode of operating. Funding is primarily needed for R&D towards new products, but the outcome of R&D is highly uncertain, due to which the investors shy away from the industry. But over the last decade, investors have become more familiar with the industry’s operations and growth potential and since then funds have started flowing in.

The most commonly used methods for raising funds for biotech companies is through IPOs, private equity and venture capital financing and debt financing or loans from banks and financial institutions. The key criteria evaluated before investing in biotech companies are - strategy, market landscape, expertise and sustainability/scalability of the project. Whether the product is of domestic or of international interest, is a critical strategy determining factor. Also, the market landscape, consisting of similar products or products serving the same needs has to be studied to understand the product’s position and the competitive pressure it faces. Investors always take additional comfort from the company promoter’s background and expertise. A keen business or financial acumen coupled with relevant scientific knowledge is an added advantage. Finally, to maximize gains, the product or company needs to demonstrate it capabilities for scaling-up and eventually becoming self-sustainable, which includes a clear business growth plan with set timelines and milestones.

Yes Bank’s Life Science’s team expects the funding in the sector to increase in the coming years but that at this point in the biotech industry’s lifecycle, Venture Capital (VC) and Private Equity (PE) funding is more necessary and viable than IPOs as the Indian biotech industry is still in early stages leading to retail investors being wary of it.

Over the last five  years in India, there have only been three biotech IPO’s, Alpa Laboratories, Celestial Labs and Saamya Biotech, all of which were issued in 2007 and are currently trading below their initial issue price. Indian biotech companies should be able  to  convince the Indian public of their stability and also be successful at IPOs. For launching a successful IPO, Indian biotech companies need to have a product on the market or at least be reasonably close to achieving regulatory approval for their product, so that they can gain investor confidence.

However, institutional investors like PE and VC players are positive on this sector and are seeking out companies with a niche product/technology and scalable business operations. From 2004 to 2008, PE/VC investment in biotech formed four per cent of the total investment in healthcare and life sciences and grew at a CAGR of 12 per cent, from about US$ 10 million in 2004 to US$ 18 million in 2008. Foreign investors have started capitalizing on emerging markets opportunities. Recently, Bangalore-based Cellworks Group Inc. raised about US$ 8 million to US$ 10 million from a California-based private equity investor. Also in 2010, companies like Fermenta Biotech, Bharat Serums and Vaccines and Marck Biosciences were successful in raising funds from PE/VC players.

In India, majority of the biotech companies either have low or no revenue and are still in the red, with low credit ratings. Also, the listed biotech companies have high stock volatility in terms of value and volume. These conditions make it very difficult for regulated financial institutions to fund these companies.

For companies in research stage, which are trying to develop break-through technologies, Government grants or Angel investors remain the best method for financing their operations. The Department of Biotechnology (DBT) has launched the SBIRI (Small Business Innovative Research Initiative) to support the incubation and growth of early stage companies, and Biotech Industry Partnership Programme (BIPP) for later-stage companies. In addition, under the 11th Five-Year-Plan and the new legislation, the country's DBT has kept aside 30 per cent of its annual budget to fund public-private collaborations on new drug development.

DBT has also sponsored Biotechnology Industry Research Assistance Programme (BIRAP) in partnership with ABLE and Biotech Consortium India Limited (BCIL) with an objective to assist and promote emerging biotech entrepreneurs.

Upcoming areas and trends
There is an increasing interest in the area of biogenerics (biosimilars) as several blockbuster (annual sales of over US$ 1 billion) biologic products belonging to global biotech majors like Amgen, Biogen Idec and Schering Plough have lost or are about to lose their patent protection. The Indian biotech companies are also focusing on building their capabilities in this area. For example, Biocon plans to invest in the range of US$ 64 million to US$ 107 million over the next three years, to set up plants for supplying generic biotechnology drugs to Europe and the United States.

Several global companies are looking to form alliances with Indian companies for the development and clinical trials of biologics and biogenerics. Recently the contract research firm, GVK Biosciences partnered with US-based ResearchPoint Global, to together offer access to medical writing, clinical data management and biostatistics, as well as facilitate quicker patient recruitment. Also, Syngene International, the custom research subsidiary of Biocon Ltd, entered into a discovery and development collaboration with Endo Pharmaceuticals of the US to develop biological therapeutic molecules against cancer.

Outlook
The Indian biotechnology sector is one of the fastest growing knowledge-based sectors in India and is expected to play a key role in shaping India's rapidly developing economy. With numerous comparative advantages in terms of research and development (R&D) facilities, knowledge, skills and cost effectiveness, the biotechnology industry in India has immense potential to emerge as a global key player. The biotechnology industry in India is likely to see a significant increase in the merger and acquisition (M&A) and partnerships and joint ventures in the years to come. Indian biotech firms have started scaling up their capabilities to become global players.

Yes Bank is positive on the industry’s growth and projects it to double to achieve a market size of US$ 8 billion by 2015, doubling from the current level of US$ 4 billion.