Bangalore: Early next year, Villoo Morawala-Patell, fou-nder and chairman of Avestha Gengraine Technologies Pvt. Ltd (Avesthagen), will embark on a roadshow that will cover 100 cities and towns, even small ones, across India in an attempt to sell the company’s initial public offering (IPO) to investors. By doing this, she will be bucking two trends: one, of Indian biotech companies shunning the equity market; and two, of trying to get investors who understand only such things as revenues and cash flows buy into the economic benefits of research and development (R&D).
“We will make Indian investors understand what IP (intellectual property) is all about. I believe the Indian market is ready for it,” says Morawala-Patell. Avesthagen, a biotech company based in Bangalore that focuses on both agriculture and pharmaceutical products, plans to float an IPO in mid-2008.
Five years since the Indian biotech industry officially came of age, with the government approving the genetically modified Bt cotton, the fledgling business is still to sort out its capital woes.
Small Share (Graphic)
Life Sciences Lagging (Graphic)
Local venture capital is hard to come by as Indian investors are averse to risks associated with typically long-gestation biotech products; foreign venture capitalists (VCs) are just beginning to revisit their India plans after a late 1990s boom (in Internet companies) went bust; and the capital market is shy of putting a number to IP as there’s no precedent on how this is to be valued.
Avesthagen’s IPO will be the first. It will be followed by a wave of IPOs by biotech companies, all scheduled to hit the market in the next 12-18 months. The IPOs, and their success, could make or break the industry.
Kiran Mazumdar-Shaw, the chairperson of Biocon Ltd, is concerned that the sector doesn’t have enough IPOs, essential to make more people (read: investors) buy into the business of biotech. “We need at least 10-15 IPOs in the next five-seven years,” says Mazumdar-Shaw.
She adds that she can’t really fathom the reasons for “this aversion to listing” among Indian firms, but thinks “either the companies are advised not to list or they are shying away from post-listing pressure (in delivering quarter-on-quarter results)”.
For various reasons, even established biotech firms such as Bharat Biotech International Ltd or Serum Institute of India Ltd have not made IPOs.
And the response of Vijay Chandru, co-founder and CEO of Strand Life Sciences in Bangalore, may indicate why. “The Indian stock market is not in a position to value potential based on intellectual property or a novel algorithm or a new technique,” he says. The market starting to do this, he adds, is “a long way” off.
Still, Strand is looking to make an IPO in 2009-10.
A strategic choice
Some experts say it is too early to expect IPOs from Indian biotech firms. Others say it is a strategic choice and that some companies may want to make an IPO while others raise money in other ways.
“A clear demarcation (from pharma) came in Indian biotech only around 2003, after Bt cotton was approved. We are just coming out from the first phase of translational research,” says K.K. Narayanan, president of ABLE (Association of Biotech Led Enterprises), an industry body, and founder and managing director of agri-biotech company MetaHelix Life Sciences Pvt. Ltd.
Bharat Biotech, a nine-year-old company, has made that strategic choice already. It plans to build a strong pipeline of products, and research capabilities through soft loans and grants before reaching out to the public. “Getting money is not enough, I should be able to use that money effectively. For that, you need good scientific foundation,” says Krishna M. Ella, chairman and managing director of the Hyderabad-based firm. Ella adds that he won’t think of an IPO for Bharat Biotech until he has three molecules in phase I and II of development. Incidentally, he has three molecules, albeit in early stages of development.
Ella’s model is a popular one with foreign biotech firms, which look to tap the equity markets only when they have a product that is in clinical trials, even if they have no revenues to speak of. “A pipeline of only discovery or preclinical (drug) candidates will result in massive stock volatility,” says Rajiv Shukla, executive director of investment bank Avendus Advisors in Mumbai.
The IPO climate is tough even for companies that operate in the biopharma space; biopharma refers to the use of biotech in the pharmaceuticals industry.
“It appears the Indian public market is not discerning enough when it comes to valuing biopharma innovation. Suven Life Sciences Ltd (a Hyderabad company that specializes in drug development for central nervous system disorders) is delivering concrete results, but is not fully valued by public investors,” says Shukla. Compared with this, New York-based Acorda Therapeutics, a company that operates in the same area, made a 2006 IPO that valued it at $500 million (Rs2,214 crore in February last year) despite a loss of $30 million, he adds. On Thursday, Suven’s shares ended trading on the Bombay Stock Exchange at Rs36.40 each, giving the company a market capitalization of Rs420.9 crore.
Overseas listing is a way out, but for this, the companies need to make an IPO in India first, according to Mazumdar-Shaw. That is one reason why many Indian firms register in the US, even if most of their work is done in India. “Even VCs are willing to back companies registered in the US; the exit strategy is better understood there,” says Chandru.
Still, overseas listing could be a double-edged sword. Companies need to not only reach a certain scale, but also be prepared to be measured against international benchmarks and shell out more money on showcasing themselves.
“It would be difficult for Indian biotech companies to access US capital markets without IP,” says Mazumdar-Shaw, but adds that with the “emerging interest in biosimilars (generics or off-patent versions of biotech drugs)..., they may be in a position to offset the IP needs”.
Shukla says that the ideal strategy may involve tapping local capital markets on the strength of biogenerics, while listing overseas on the strength of IP.
Elusive venture capital
Indian biotech firms have to figure out a way to crack the IPO market because it isn’t easy for them to attract venture money either.
“There’s truly no venture money; investors are extremely risk averse,” says Anuradha Acharya, an engineer-turned entrepreneur and promoter of Ocimum Biosolutions Ltd in Hyderabad. Ocimum, a bio-services company, intends to tap the public market by 2010. Speaking from experience, Acharya suggests that biotech companies should look for government money or even debt, instead of wasting time running after VCs. “They can use that time and energy to build the company,” she adds.
Government money is available and agencies such as the department of biotechnology (DBT), department of science and technology (DST), Technology Development Board, and the New Millennium Indian Technology Leadership Initiative (NMITLI), have become the early stage saviours of the industry. Bharat Biotech’s three new molecules are funded by NMITLI, DST and DBT.
“The Small Business Innovation Research Initiative of DBT is a good beginning, but it lends only tiny amounts— Rs20-30 crore for the entire country is not enough,” says Narayanan, who is considering an IPO for MetaHelix in 2009-10.
However, Narayanan worries that his company’s valuation will be hurt by the Indian investor’s penchant for looking at “profit and loss statement” and discounting intellectual capital. “Because of our accounting system, we can’t even capitalize on our R&D investment,” he says.
With revenues in excess of $2 billion in 2006-07, India’s biotech industry is growing at more than 30%, according to the yearly BioSpectrum (a trade journal) and ABLE survey of the industry. But even this growth doesn’t seem to impress the investors. Going by the investments in the first nine months this year, everyone’s preference would appear to be generic pharma, healthcare and medical devices.
“It’s all about understanding the sector. Unless we have sophisticated analysts who understand biotechnology, we won’t see true valuation,” says Chandru.