Indian biotech sector is now chalking out its next phase of growth focusing on innovation and advanced technology applications. Efforts are on to move out from contract research and translational research projects to add value, according to Dr KK Narayanan, president, Association of Biotechnology Led Entrepreneurs (ABLE) and managing director, Metahelix Life Sciences Private Limited.

Globally, large players in the pharmaceutical industry are under pressure to reduce their manufacturing costs as more blockbusters are replaced by their generic versions, and the new ones are hard to come by. As a result, we are seeing increasing interest from innovator companies to outsource their production. "We believe that Indian companies with their significant cost advantage and capabilities in manufacturing according to the highest standards will be the beneficiaries of increased outsourcing," Dr Narayanan told Pharmabiz during an interaction.

"There is a need to do a reality check on what is required to increase the quantum of funds and the viability of the new projects and which companies need to attract venture capitalists. In India, risk capital is limited and investors just do not value promising pipeline projects and Intellectual Property (IP), he said.

It is not easy for companies to get into innovation because it requires a different mindset and skill set. The biotech sector is still nascent in India compared to those in the US which began operations in 70s. Therefore, we need to start work towards IP driven innovation. In this regard, there have already been efforts by several pharma companies who have spun off their research and development wings as separate companies.

Leading Indian drug firms, Nicholas Piramal, Dr Reddy's Laboratories and Sun Pharmaceutical Industries have hived off their research units into separate entities, a step which lowers the parent's risk exposure to drug development costs and can help it realize some of the value of the unit. This helps the company to unlock value and pursue other opportunities. The trend is expected to capture value and have a market cap of $125 billion by 2015. However, its relationship with the mother company continues.

Analysts have been able to appreciate and understand the costing, and make evaluation of the companies that have hived off their research and development wings to separate units, stated Nitin Deshmukh, member executive council, ABLE and head, private equity, Kotak Investment Advisors Limited.

It is predicted that biotech market globally will touch $1.3 trillion in 2020 of which 70 per cent will form pharma and almost a quarter of the contribution will be to E7 nations comprising China, India, Brazil, Russia, Indonesia, Mexico and Turkey which are developing nations requiring tropical drugs. Therefore large volumes and high values will be growth drivers.

The keys issues in funding are the lack of understanding and confusion in the operations of a biotechnology industry. It is highly regulated and therefore uncertainties are high and difficult to encash the opportunities. All these factors make risk taking a low feature. In the US, out of 10 projects which VCs fund two may succeed and they make the best out of it. In India, this is impossible, stated Dr. Narayanan.

Industry is evolving at a faster pace and understanding the changes in technology is now a major challenge for the venture capitalists, stated Sarath Naru, managing director, APIDC-VCL (Andhra Pradesh Industrial Development Corporation Venture Capital Ltd).