The emergence of Venture Capital Companies is relatively a new phenomenon in India, largely because innovation-driven new projects are rare in the context of very low R&D investments in the country. One emerging area of increased R&D intensity, necessitated by the post-2005 patent sceanario in the Country, is the Indian Pharmaceutical sector. For Venture Capital Companies to succeed, they should have to be risk-taking and not risk-averse and be able to identify projects and products at a very early research or development phase which have high potential for commercial success. Since many of the Academic and National laboratories, where bulk of the R&D spending is deployed in India, are not capable of identifying projects with a high potential for commercial application and success, the Venture Capital Companies should take pro-active steps to track down such projects and support them to enable their development and commercialisation.
Production of Drugs & Pharmaceuticals In India
Considering the large population, the current low per capita consumption of drugs in India, the very small penetration of modern systems of medicine including drugs in rural areas and ever increasing population and diseases, Indian medical needs for drugs are bound to grow phenomenally in the coming decade. In addition, India, by virtue of its technological ability to produce cost-effectively, bulk drugs and formulations matching in quality with the very best in the World, also has the opportunity of being a major exporter of these items, particularly of generic products for the global markets.
It is therfore reasonable to assume that in volume terms, by 2010 A.D. India will produce around 15% of global requirements of bulk drugs and drug intermediates. Such a growth calls in for large investments in production capacity, of the order of perhaps, around Rs 50 Billion during this period.
The finances required for setting up World-size manufacturing capacities, have to come from large Financial Institutions (for term loans) and Banks (for Working Capital loans), apart the major chunk from equity funds.
Venture Capital Finance, on the other hand are directed largely to projects, which are in the innovation phase with substantial potential for commercial success. Identifying such projects in an early phase (in the embryonic or growth phase) in the life cycle of the project and supporting it are the critical challenges which Venture Capital Companies face. Assessing the inherent risks associated with innovation and betting on the major success of at least a small percentage of the projects supported by the Venture Capital funds calls for proper understanding of the state-of-the-art of the technology and the innovative potential for major breakthroughs in the area, in the coming years.
Sources of Projects in the Innovation Phase
India has one of the largest pool of resources to draw from while scouting for innovative projects in the Pharmaceuticals Sector. The biggest and largely untapped sources are the National Laboratories and a few independent Institutions, such as the Indian Institute of Science, Tata Institute of Fundamental research and a few Central and State universities and Indian Institutes Of Technologies. No other Country in the World has such a large net work of well-planned, well-manned and well-equipped Laboratories as India has. Of the 100 odd institutions under the aegis of CSIR, ICMR, ICAR, DBT, DST, DRDO. AEC etc, around 40 Laboratories work in areas which could be relevant to biological research with the potential to lead to health care products.
In the past, by training, mandate, interest and inclination, Scientists in these Laboratories had not applied their mind to look at application-oriented or product-oriented research. In the last three years, there has been a dramatic change in approaches, objectives and activities in these institutions.
Venture Capital companies should take a total inventory with the support of the concerned Agencies to identify activities relevant to healthcare, which in turn will lead to novel and innovative products. In the present climate, meaningful dialogue with the concerned parties can lead to a win-win situation. Venture Capitalists, in the Indian context, however, have to do more than financing, they should also assist in technology development and management support. These, naturally follow, once equity capital, apart from loans, is ploughed into Companies which are set up for exploitation through commercialisation of R&D products.
Pharmaceutical R&D
There are several phases involved in the discovery and development of New Drugs. They are: selection of a candidate preparation, by synthesis or extraction of natural material, extensive pre-clinical evaluation involving the use of multiple screening models, toxicity in animal species, drug behaviour studies in animals and humans (pharmacokinetics), and various phases of clinical evaluation. Only a successful culmination of all these activities, which would take 10 to 15 years and an investment of over U.S. $ 800 million (by western standards and costs), will result in the launch of a New Molecular Entity (NME), emphasing the very risks and high costs involved.
Indian strengths in Drug Discovery and Development are in identifying candidates for development, conventional in-vitro and in-vivo screening and clinical research, particularly from Phase 2 onwards. For all the other activities, collaboration with leading R&D based International companies would be the appropriate model for India. Establishing such synergy will lead to a win-win situation and cost- and time-effective drug discovery and development.
Even though Venture Capital companies and organisations in India have not normally involved in providing financial support for early stage R&D projects, in the Indian context, it would be worthwhile for these companies to act as a negotiator for technology and product development collaborations, between Indian R&D teams and International Companies. Some of the leading Companies in India, such as Ranbaxy (with Bayer) and Dr. Reddy's Laboratories (with Novo-Nordisk and Novartis), Torrent (with Novartis), Dabur (with Abbotts) etc have already entered into agreements following this model. This model has as an essential pre-requisite, valid patents for the invention and also the ability to convert the Patent Portfolio into tradable commodities.
Support For Patenting Activities For SMEs
One of the problems which Indian Companies face, particularly in the Small and Medium Enterprises (SMEs) Sector face, is in the area of using the Intellectual Property Protection system as a forerunner for negotiations for licensing with third party Companies. Many SMEs have the capability to create innovations which will be useful for new processes and products for both bulk drugs and formulations. Additionally, they could command R&D capabilities in discovery research by setting up laboratories for synthesising new molecules or extracting natural products with potentially useful therapeutic properties.
For screening purposes, it is possible to carry out primary screening in their own laboratories or outsource them from contract research groups. Assuming that they do come up with patentable new candidate molecules, they still lack expertise and resources for patenting them in India and abroad. Venture Capital Companies can indeed assist these SMEs by providing technical expertise for evaluating the worth of the invention and drafting, filing and prosecution of the patent application and providing the necessary fundsfor these activities. By appropriate contractual arrangements, the Venture Capital company could also assist in findng the right collaboration partner who ultimately will develop and market the product in the relevant markets, under agreed and guaranteed returns to the SME as well as to the Venture Capital partner.
R&D Areas
Indian Companies (the top 10) have the capability to engage in New Drug Research for global diseases as well as for diseases which are endemic to Developing Countries. The former comprises Coronary Heart Diseases, Diabetes, Viral and Bacterial Infections, Inflammatory Disorders, Old Age and Degenerative Diseases and Cancer, while the latter are communicable diseases of protozoal or parasitic origins. While the former require international collaboration with R&D based Multi National Corporations for total discovery and development, in view of the high costs and competitive nature of activities needed, the latter, being less attractive commercially would need support from Governments and International Organisations and funding Agencies.
Whether Venture Capital can be channelled with expected returns on their investments in the latter areas need to be studied in-depth. In terms of sheer numbers of people who require products for diseases primarily endemic to developing countries, the markets are large. The present scenario of low affordability and buying power of these people and the Healthcare systems of these countries is changing, and hence such projects may become viable for investors during the coming years.
Role of Venture Capital Support
Support from Venture Capital sources are most needed, where the innovator, whether an Organisation or an individual has not adequate finance or infrastrucural backing to take the innovation to its logical target, the market place. In order to successfully take up for support a Project of that nature,the investing Company needs to have competence to assess the innovative potential of the researchers and their approaches, the current and the future markets, the quantum of investments required and most importantly the inherent financial risks that the Company needs to take.
In India, the concept of supporting entrepreuners and innovators with Venture Capital funds has developed rather recently. Even though development funds have been available from various Government sources and Development Banks, they are largely to support proven technologies whether indigenously developed or imported. Support by funding "Home grown technologies" are available though Government and other sources they still follow the pre-condition of having validated the technology bat least at the laboratory scale, if not in the Pilot Plant. Even today most of the Venture Capital Companies whether attached to large financial institutions such as IDBI or ICICI or to State and Central Governments are vary of supporting very early stage projects which are at an R&D stage, primarily due to the fear of failure.
Sources of Projects in the Innovation Phase.
National Laboratories
CSIR, ICMR, DBT, ICAR, DBT, DST, DRDO, AEC etc, are all Agencies which not only run R&D Institutes, but also fund research projects in outside research Centres. While all of them have screening bodies for evaluating R&D applications, they are largely ill-equipped to assess the commercial worth of most of their projects. Among the 100 laboratories, around 40 have research projects which have a bearing on health care related projects and products. They carry out excellent basic research in biological and chemical sciences, which if properly directed and developed could lead to application and product- oriented research.
Venture Capital Companies should work in close collaboration with these laboratories, so that innovations of great potential commercial interest can be identified and supported through negotiating with potential licensees and collaborators. For proper development, the Iicensees may require not only financial inputs, but also technological, management and marketing support.
Similar approach should be adopted for collaborations with University Research Groups. For individual inventors and entrepreuners in the Small and Medium sector, since their work is poorly documented and less known, Venture Capital Companies should take a more pro-active role by working with these groups from an early stage, guiding them in their product development-oriented approach and once the product is protected by patents, promote it for licensing or commercialisation.
Areas for Support
Health care products fall under four major categories. They are :
- Prophylactics (Vaccines)
- Diagnostics (Laboratory)
- Therapeutics
- Medical Devices.
All the four categories are potentially very rewarding areas for Venture Capital support and projects under each of these should be individually and independently evaluated for their commercial potential. The nature and modalities of support will vary depending on the innovator, nature of the project, estimated gestation period for completion, potential markets, competition from marketed and pipe-line products etc.
Within the above areas,the state-of-the-art disciplines which would warrant support would be:
- Biotechnology based products (r- DNA proteins for any of the above categories).
- New molecules or natural products extracts.
- Chiral Molecules from established or new racemates.
- Novel and innovative Drug Delivery Systems and
- Traditional Systems of Medicine-based products.
Possible Approaches
A national scouting of the various R&D projects being undertaken by the various groups in India could be a starting point followed by critical appraisals of their potential, prioritisation for support and a detailed analysis of investments requirements, timeframes for various milestones of progress, continuous evaluation of competitive activity in the area, expected returns etc are some of the sequential approaches to be adopted by Venture Capital Companies. Such a pro-active step alone will ensure that the results of indigenous R&D are gainfully converted into commercially viable projects and products.
At the present time and in the prevailing environment, most of the Academic Research groups are ill-informed and ill-equipped to identify areas of commercial interests from existing projects or for designing new projects. So too, the Venture Capital Companes also lack expertise to evaluate grass root R&D during the early phases of innovation, which have the potential of being converted to technically and commercial viable projects. The ability to weigh the balance between risks and returns inherent in any Venture funding is an important component of the investment decision by the investor. So too, the assessment of the odds of major success in at least some of the many projects that a Venture capital Company supports. After all, the successful ones have to cover the costs involved in promoting the large proportion of failures which are inevitable in this business.
-- The author is a leading scientist and industry observer