Baring Private Equity Partners India intends to finance the inorganic growth opportunities in the small-medium enterprises (SME) of the pharma sector. SMEs are showing considerable interest in highly potential areas like clinical trials and contract research and manufacture of late. Several private equity (PE) firms are showing interest to finance these growth plans. In November 2008, Baring invested around $10 million in Sphaera Pharma, an integrated drug discovery and development company.

PE has always been an important source of funding in emerging markets. The current environment has created interesting partnership opportunities for PE to finance the inorganic growth ambitions and participate in balance sheet restructurings, Amit Chander, head of Investments - Healthcare & Education, Baring Private Equity Partners India told Pharmabiz.

But there is a clear mismatch between the deal size that would interest a PE and the funding need of an SME company. This is because, business models in the pharmaceutical value chain are not capital intensive, smaller companies do not have funding needs above $10 million which makes it unattractive from a deal size for a PE that has a large fund to manage, he added.

In India, contract research is maturing fast. Clinical trial companies are realizing the need to have a global footprint. Models in contract manufacturing are of interest because the preference is to build capacity in India as against buying manufacturing sites globally.

The need to present strong balance sheets to give confidence to customers during scale-up provides opportunity to partner with PE players. The rational choice for SME pharma companies is to look at inorganic options and PE could play a role in acquisition financing, said Chander.

There are at least 10-12 PE funds that are exploring investments in this sector. Most of the investments fall into the category of proven business models looking to scale-up. However there are a few early stage investments as well.

There are PE firms participating in follow-on funding rounds. In the past, the approach of the company and the investor was to have a PE funding round and then look at Initial Public Offer (IPO). The current volatility in the global financial system and its impact on the public equity markets as well as the increase in the number of PE funds have resulted in greater instances of companies going for more than one PE round on the path to IPO.

Companies with existing revenues in excess of Rs 150 crore, structurally high return on equity and backed by a management team with a proven track record would be highly attractive features for PE to scout.

The challenges faced by PE firms when they support pharma-biotech companies is that most of the businesses in India are family owned. During scale up, there is a need to bring in professional managers who are the best suited for the task at hand which could conflict with the existing set-up. These are tough decisions which can be painful from a short term perspective but are in the best interest of value creation in the long term, he said.