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Facing Private-Equity Drought, Indian Biotech Hunkers Down

NEW YORK, Aug. 19 - Indian biotechnology companies, including those in the nation's burgeoning bioinformatics sector, have enjoyed broad government support in recent years, and the country's media have followed the industry with glowing headlines.

 

Additionally, India's modest venture-capital community has doubled its investment in the nation's biotech startups over the past couple of years, and a growing number of US and European companies have forged lucrative research collaborations with the sector.


Yet young biotech companies in India are finding it exceedingly difficult to secure enough venture capital from risk-averse local investors, according to interviews with industry players, and tumbling stock markets in the US and Europe are hurting their chances of closing foreign private-equity deals.

 

A promising industry ...

 

Though India's biotech sector today is split into two major disciplines, agricultural and drug discovery, the nation is angling to build a strong biotech presence. The fate of this sector rests in the hands of young start ups that either focus on contract research for large international corporations, or those that parlay India's IT strength in bioinformatics.

 

One would think the space has it made. Despite its reputation of being 25 years behind the United States and the fact that the sector represents just two percent of the world's biotech muscle, India is widely known to have the raw materials and educated workforce needed for biotech to thrive.

 

Headlines in local newspapers feed the image: "India--An Emerging Biotech Giant," and "India Ready for Biotech Take-Off" are examples of the kinds of headlines that have appeared over the past two years in major Indian newspapers like the Times of India or the Economic Times.

The Indian government, for its part, has given the country's biotech sector a growing pile of cash. Since its inception in 1986, for example, India's Central Department for Biotechnologies has invested $500 million toward R&D projects in national labs, according to the Confederation of Indian Industry, a national trade group.

The CDB's focus now is on genomics, proteomics, transgenomics, and even stem-cell research, and the agency's budget has skyrocketed over the years: In just the last two years, the Indian government has more than doubled the agency's budget, which this year grew to $2.4 million, according to CII.

 

Big pharma and IT companies also appear to have shown an interest in the industry. Recently, AstraZeneca, which has a foothold in India through its subsidiary, AstraZeneca India, said it intends to invest 1 billion rupees, or about $20.6 million, in India's biotech field, according to Kiran Mazumdar-Shaw, chairwoman of Biocon India, considered the biggest biotech company in India. A spokeswoman for AstraZeneca could not immediately confirm that number.

 

India's draw, according to outside biopharma, is multifold: IT expertise, a growing pharmaceutical industry, low-cost infrastructure, and a robust stock of highly skilled labor.

 

... stalled by a cash crunch

 

However, despite CII's finding that "big opportunities exist" for Indian biotech "both in terms of growth in the domestic market [and as] ... export potential," local venture-capital companies still seem skeptical about investing in the field. 

The current total sum invested by local VC firms last year, around $30 million, represents less than one-fifth the total dollar amount funneled to biotech companies in India, according to a survey released this summer by the CII. US venture capitalists, by comparison, pumped $2.9 billion into US-based biotech companies in 2001, according to VentureWire, an industry tracking service. (To be sure, the lack of a tracking infrastructure in India makes it extremely difficult to obtain a detailed picture of venture-capital activity in the country, and figures for the first two quarters of 2002 are particularly difficult to find.)

 

In addition, many local VC firms, finding it tough to stomach the inherent risk of investing in biotech startups, are instead unloading their cash on local IT ventures.

Over the past two years, India's biotech industry has won just $50 million of the estimated $1.8 billion in total VC spending in that country, according to Vijay Angadi, managing director of ICF, an Indian VC firm. The vast majority of those funds head for low-risk software-service startups and telecommunication firms, he said.

 

"Venture capitalists are pretty cautious this time," added Vijay Shukla, an administrator with the 4,000-student Bioinformatics Institute of India, founded last year. "Unlike with the Internet boom that happened earlier where VCs were more liberal, this time they are not investing from the start. They are waiting [instead to invest in the] second or third round. ..."

 

For instance, the bioinformatics company Avesthagen, whose Bangalore facility grew from a six-person space in 1998 to nearly 70 employees today, has been searching for its second financing round since January. "Believe me," said an Avesthagen executive, "it is nearly impossible to get the funds. The fear of investing in India is there, definitely there."

 

Experts point to three reasons why venture capitalists are reluctant. Some say private-equity investors have become more cautious since the dot-com mirage. "They have burnt their fingers once during the dot-com era," says Sumeet Singh, executive director of the Indian Venture Capital Association.

 

Another reason is that VCs, accustomed to early exits and fast rewards, lack the patience needed to wait out the long gestation periods common among most biotech startups. "VCs are looking for short-term wins," says Rama Subramaniam, managing director of ThinkGen, a biopharma company based in India. "For companies that are still in their initial stages, VCs usually don't have the patience to wait for the eggs to hatch."

 

Finally, many posit that Indian VCs have been taking their time because they are still new to the biotech cosmos. "VCs don't fully understand the field yet," offered Vivek Kulkarni, secretary for IT and biotechnology for the state of Karnataka, whose capital is biotech-rich Bangalore. "In IT they understood what the technology was. It's not the case here [with biotechnology]. That's why they are not clearing the projects easily."

Western blot

 

Some Indian biotechs, Avesthagen among them, have turned their fund-raising efforts to the deeper pockets of US and European private-equity firms. They have been taking these steps for good reason: US VC companies have thrown record amounts of cash at biotech startups in recent years. In 2002, for example, private-equity financings by US VCs increased to $2.9 billion from $2.1 billion in 2001, according to Ken Anderson, an editor with VentureWire.

 

However, few Indian companies have succeeded in hitting up for cash US VCs. It turns out that most of the US private-equity companies that have shown an interest in biotech startups are not interested in India's biotech startups.

 

"There is a global turndown in the amount of money being invested in the biotech sector," explained Vishal Gulati, an analyst with Atlas Ventures, a VC firm based in London. "People are going for proven locations and clearly India is not one of them."

 

The Avesthagen executive, who spoke on the condition that her name not be used, was more blunt: "The VCs said [to us]: 'We would have put in our money if you were located in the US," said the exec, whose request for American private-equity cash was ultimately turned down. "So no matter what the advantages are, they are not looking into India."

 

Experts agree that one point on which Indian companies can work is their image. "India needs to improve its PR and its image," said Mazumdar-Shaw, chairperson of the CII's national committee on biotechnology. International perception is "bad," she said.

 

"The lack of IP protection is often the excuse given by VCs for not investing in Indian biotech," Mazumdar-Shawadded. "But by the same token China should also be a bad haven for investment, but this is not so. I put it down to an image problem."

 

Atlas' Gulati agrees. "It's a question of having the visibility globally. The Indian biotech industry does not have global visibility at this point," he said. "If you ask some of the big pharmaceuticals in the world they probably don't know that a biotech industry in India exists. So that is a problem.

 

"There is no sort of concerted effort by the biotech industry to present itself to the buyers in the West like many software companies have done," Gulati added. "They have all opened offices globally to get into business, so that is necessarily something that needs to improve if the industry has to go anywhere."

 

Venture-capital investments are slow to come but many biotech executives in India are remain hopeful. "I think it's a good space," said Sumir Chadha, senior managing director of WestBridge Capital Partners, a VC group based in California that focuses on India. "It's taking time to develop. It'll be something [in the next] five years, not in the next year or two."

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