Nature Biotechnology | Trade Secrets

Financing Know-Hows for Biotech Start-ups in India

The early stage life science companies are an important engine for medical innovation and economic growth across the country. The Indian biotech industry is mainly dependent on private equity (PE) and venture capital (VC) funds. While Indian biotech has shown astounding growth, funding for the high-risk models have continued to be a challenge. In recent years, Indian start-up biotech companies have been threatened by the decline in early stage funding, as private investors move to later-stage investment strategies, due to the closed exit market and a lack of money to invest in new and risky projects. Irrespective of the business model, biotech startups require infrastructure, such as laboratories and manufacturing facilities, as well as skilled people  power, and legal and regulatory knowledge. They also will face serious challenges in finding early stage investment capital. To obtain financing, startups raise venture capital, partner with big pharma or rely on initial capital from angel investors or government grants.

In India, small and medium-size enterprises (SMEs) make up the bulk of the biotech industry that is either involved in basic R&D or is coupled to contract services. But there are a few important ways to close this critical funding gap and offer attractive investment opportunity for investors, given the business models of Indian biotech firms.

Early stage investing is a resource-intensive business, where every entrepreneur needs to build partnerships with local and global investors, and with corporations and government entities, hoping to gain enough runway to validate their business model, create value and become cash flow positive, before they look for additional funding.

Typically, the entrepreneurs leaving academia and wanting to start a company would have to:

Select a low-risk, high potential sector

With almost no angels, and just a handful of VC/PE firms proactive in Indian biotech, choosing an appealing area (drug discovery, vaccines, medical devices and diagnostics) becomes a priority for early stability. In the present market conditions, the funds are mostly focused on low-risk growth capital opportunities. In the post-genomic era, rational drug discovery is a major approach for discovering and designing new drugs. Academic institutes are invaluable sources of new therapeutic targets for diseases and biological assay techniques. For the early stage biotech to effectively move into the global biosimilars/ follow-on-biologics business, will have to collaborate with public institutions to leverage strengths in targeting a key therapeutic area or sub-segments.

This would attract the necessary early stage recognition for investment capital. Companies such as NovaLead, Indus Biotech, Sphaera and Incozen are involved in innovative medical research, and private investors such as Reliance, MPM Bioventures, ICICI Venture and Citigroup Venture Capital International are interested in innovative startups. The VCs in India lack the confidence to fund a startup to take its product to a next stage, and/or later license it to a big pharma company.

Become an attractive incubation target

Many pharma companies have acquired biotech companies, in the process solving the funding challenges of the early stage biotech. Similarly, in recent times, large Indian pharma companies have been taking interest incubating 4-5 years old, early stage biotech ventures. Generally, the biotech start-ups have a better track record in early stage scientific research and product development; but limited expertise in funding clinical trials, managing regulatory bodies and taking drugs to the market. Therefore, the symbiotic co-existence of Indian pharmaceutical and biotech companies would help both in attracting funds and necessary expertise from a common investor. Incubating a biotech company implies that the pharma company can add new products, product platforms and technologies, which would be more economical than to start from scratch.

Network with investors

The Association of Biotechnology Led Enterprises’ (ABLE) recent flagship networking conference, BioInvest’2010, was held in Ahmedabad, Gujrat, and mainly focused on life science companies, institutional investors and investment bankers on a common platform. Investment and partnership opportunities were explored for collaboration and growth by leaders from industry verticals (agbiotech, vaccines, and platform technologies). For example, Nadathur Holdings and Investments Pvt. Ltd. are promoters of Lifespring Ventures, which recently funded five drug discovery and development start-ups in India. SMEs that attended Bio-Asia’2011 in Hyderabad likely benefited from interactions with foreign investors. Networking during BIO International Partnering Conference in India will allow biotech companies to connect with big pharma companies, venture capitalists and bankers, and service providers from around the globe. India Innovation Fund (IIF) led by IT industry body Nasscom and ICICI Knowledge Park Trust is looking to invest in innovation-driven, early stage Indian companies focused on healthcare and IT sectors. Recently, it has invested about $0.75 million in Bangalore-based Mitra Biotech, a spin-off from MIT focused on personalized treatment of cancer, where Accel Partners and Kitven (Karnataka government-backed fund) are co-investors. Kitven has raised funding from a host of investors, including Karnataka State Industrial Investment & Development Corporation Ltd. (KSIIDC), Karnataka State Financial Corporation (KSFC), Small Industries Development Bank of India (SIDBI) and Karnataka Bio-technology & Information Technology Services (KBITS). It targets investments in IT, biotechnology, nanotechnology and other knowledge-based industries in Karnataka.

In my next post, I’ll discuss government funding and collaborating with global companies.

Viren Konde

Comments

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    Andrew Marshall said:

    Its very interesting to learn that venture groups appear to be more and more active in providing early funding to Indian companies. I am wondering the extent to which biotech startups in India are able to obtain VC funding; is angel funding and investment from private individuals the more common route, particularly in seed funding? The suggestion from your post is that VC backing is becoming more prominent. Do you think this is the case? Also are Western investors taking positions in these Indian VC funds…I ask because MPM at least is an active fund in the US and Europe.

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    Viren Konde, PhD said:

    Thanks for your interest.

    I think the seed funding that has been raised in India is mainly through public and private investors. Moreover, it feels like the public-private partnership (PPP) investment funds as a part of co-investment strategy are becoming more prevalent.  For example, a PPP investment fund, APIDC Venture Capital Ltd (APIDC VCL), a joint venture between Andhra Pradesh Industrial Development Corporation (APIDC) and Venture Capital Limited (Ventureast Pvt Ltd) has been operative in early stage venture capital in India. The Funds have been established to invest primarily in opportunities that have emerged as a result of the significant biotechnology and life sciences related developments. The Fund operates primarily as a start up and early stage investor in businesses focusing on life sciences related areas, health care, drug discovery, agriculture, dairy, environmental and industrial applications. Similarly, Mitra Biotech Pvt Ltd, a Bangalore-based biology research firm in anther PPP based model raised venture funding from global venture capital fund Accel Partners and Karnataka Information Technology Venture Capital Fund (Kitven). Sometimes back in 2007-2008, Reliance Life Sciences (RLS) in partnership with MPM Capital (MPM BioVentures IV) alloted a portion of the funds to invest selectively in emerging life science companies in India.

    During about the same time, MPM Capital has made a $20 million initial investment in Sai Advantium Pharma, a leading chemistry-driven drug discovery and development service company headquartered in Hyderabad, India.

    Now about the proportion of biotech startups in India and their sources of national and international private investments becomes a larger but very interesting part of the study and further discussion.