The Department of Pharmaceuticals (DoP) has released the Detailed Project Report (DPR) for setting up Venture Capital Fund for R&D in pharmaceuticals that proposes to provide a government 'push' for the development of a focussed VC industry which would promote entrepreneurship in the pharma R&D sector and support the development of a self-sustaining environment for pharma R&D in the country.

The terms of each Pharma Fund would be largely market-driven. The government would, in the first instance, allocate a total amount of Rs.500 crore to be invested between all the Pharma Funds set up in pursuance of this Project.

Government criteria for investment would require that each Pharma Fund commit to investing at least such amount in Indian companies for their Pharma R&D activities (Innovative Pharma Companies) as is, the higher of Rs.150 crore; and 4 times the amount sought as investment from the government. Beyond the amount required to be invested in Innovative Pharma Companies, the government would not seek to pre-determine the nature of the investments that may be made by the Pharma Fund, in order to permit the fund managers to formulate and implement a business model and investment strategy that is elective and marketable.

This DPR sets out in detail the design for the project and the manner in which each Pharma Fund will be established and managed, the identities and roles of key stake-holders, and estimated event schedules and time-lines.

In terms of the proposed project design, the government would be an investor whose contribution to the Trust would be managed by the fund manager in terms of the contribution agreement entered into between the government, trustee and fund manager. In order to be eligible for investment by the government, the terms of each fund would need to be subject to certain specifications of the government and, in return, be entitled to certain financial incentives.

The Venture capital (VC) funds make equity or equity-linked investments in young growth-oriented firms. The VC industry developed as a financing solution for high-risk, potentially high-reward projects that, due to the lack of substantial tangible assets, expected years of negative earnings, and uncertain prospects, are unable to raise funding from more traditional sources like banks or capital markets.

Pharma R&D projects are a typical example of such 'high-risk, potentially high-reward' projects that struggle to raise funding in the absence of a well-developed local VC industry.   The Feasibility Report argued that providing a government 'push' for the development of a focused VC industry would promote entrepreneurship in the pharma R&D sector and support the development of a self-sustaining environment for pharma R&D in India. It also discussed several 'public venture capital' models that have been adopted both in India and abroad to achieve this objective.

The proposed implementation model for the project draws on the positive features of these experiences to construct a blueprint for one or more 'Pharma Funds' that are professionally managed, mobilise investments from both the Government and private investors, and focus on investing in pharma R&D projects.

The DoP has invited comments from the stake-holders on the DPR.