Private Equity in Indian Pharma/Biotech

- An Overview
- Six Mantras
Sanjiv Kaul
ChrysCapital
BioInvest 2006

Capital Raise by Asset Classes

Figures in $ mn

6000

5500
5400
4760

5000
4000

4800

3960

3000

Dom Pub Issue

FCCB
GDR
Private Equity
Year

Total
Capital
Raised

2003

4865

2004

6680

2005

17800

2100

2000
1000
0

800
60
45

2003
Source: ChrysCapital

1100
680
140

2004

2005

PE Investments In India
Figures in $ mn

2500
2100
2000
1500
1100
1000
500

All Sectors
Pharma/Biotech

800
360
210

110

0
2003
Source: ChrysCapital

2004

2005
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Capital Raise by Indian Pharma

Figures in $ mn

2000
1800
1600
1400
1200
1000
800
600
400
200
0

1870

565

540
360

310

210
10
0 0

2003

110 90
0

2004

55 110

170

Private Equity
Dom Pub Issues
FCCB
GDR
Year

Total
Capital
Raised

2003

220

2004

765

2005

1065

2006/09

2365

35

2005 2006/09
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Source: ChrysCapital

PE story thus far..

PE/PIPE investments worth USD 2.1 bn in India in 2005 with Pharma/Biotech

Pharma/Biotech
share at 18%

Could cross USD 6 bn in 2006 with pharma/biotech

pharma/biotech at USD 450 mn

PE investments in pharma reflect a growing trend over the last 3 years

Healthcare topped FDI chart in 2005 with a USD 368 mn inflow as compared to
USD 340 mn in 2004*

45 PE deals valued at more than USD 970 mn done by pharma companies in

last 4 years

Investments primarily for expansion funding

Other assets class also becoming extremely competitive

Source: Industry reports
* Avendus report

Some of the recent deals..

Invested Company

Investor

Est. amount (USD mn)

Jubilant Organosys

General Atlantic

25.00

Claris Lifesciences

Carlyle

20.00

Perlecan Pharma

ICICI Venture, CVC, DRL

45.00

Malladi

ICICI Venture, IL&FS and others

23.00

Intas Pharma

ChrysCapital

12.00

Jubilant Organosys

CVC and Henderson

50.00

DRL

CVC and ICICI

56.00

Unichem

New Vernon

12.60

Matrix Labs

Temasek and Newbridge

Emcure

Blackstone

50.00

Aurobindo Pharma

Merlion India Fund

20.00

130.00

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Source: Industry reports

Deal characteristics..

A large portion of money from PE funds went to late stage or publicly

publicly listed companies
as growth capital
Jubilant General Atlantic
Unichem New Vernon
Compared to global standards, typical ticket sizes are small
valuation expectations of the promoters are high
minority stake investments primarily by PE
Funds are recently showing higher risk appetite
Dr. Reddys Labs (Perlecan Pharma) Research funding
Emcure/Blackstone Expansion funding
PE funds encashing on the momentum play
DRL/3i betapharm
ChrysCapital/ICICI - Intas
Indian funds are investing overseas
ICICI Venture Fund Onconova (A company specializes in research in oncology)

Trend forecast

Big ticket deals are expected

Pharma stock valuations expected to be in alignment with the overall Sensex
Indian pharma/biotech players are becoming aggressive on the global front

Innovative deal structures to unlock value further

PE Funds are structuring innovative deals, DRL(Perlecan Pharma)
Demand for acquisition funding,e.g. Zydus, Wockhardt
R&D spin-offs as a separate entity,e.g. Sun Pharma
MBOs are expected in case of good assets with capable management team

PE funds are expected to be more choosy and will focus on specific

specific segments within the
pharma space
Will bring more strategic value on table
Can lead to internal consolidation amongst Indian players

Collaboration between Indian funds and overseas funds expected

US and Europe based pharma focused funds, without a presence in India may co-invest
with Indian funds who understand the local market dynamics

PE funds have largely ignored biotech: VCs may focus on biotech more aggressively
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Management Viewpoints from a PE Funding perspective

What is the Vision for the next five years The Road Map ?
What is the technical competence of the promoters who is going to drive the
business in the next 5-7 years Have they done it before?
What does the Management think is its key strength Manufacturing or Marketing
How has the organization benchmarked itself vis a vis other peers (best-in-class
practices)
What has been the main critical success factor till date ?
What are the Managements plans for exports / overseas markets? With Indian market
growing at 9-10%, no companys Business plan could be complete without a full
fledged overseas expansion plans
What would be the Managements strategy for inorganic growth plans?
Is the Management prepared for future rounds of dilutions if required?
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Management Viewpoints from a PE Funding perspective

(contd.)
What track record has the Management shown in creating new brands/new markets ?
Organization hierarchy structure
Professionals in the company
Plans for future recruitment
Management role of each family member
Is the Organization / Management prepared for more accountability, greater
transparency, mindset change? Who in the organization would drive the change?
What is the Management seeking from us?
Money
Credibility
Strategic value addition
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The Six Mantras for PE investments

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No.1 : Real revenue based business model

Robust due diligence People/Systems/Accounting/Legal/MIS

And not of Hypes and Hopes. Market favors companies with revenue,or at least
the glimmer of a robust revenue model.

Not only should you know who is going to pay for the product development and who
will buy the products, but also how much your products will cost and how much the
markets will be willing to pay for them.

Entrepreneurs need to build businesses that can produce predictable and sustainable
Margins and Earning Growths.

Current valuations in Pharma fully valued and present expectations of Biotech on
similar lines. Current perception of Biotech is that of long gestation and high risks.

Prevailing financial mantra in the PE world for biotech investments is Why take the
risk. Biotechnology can no longer use its youth, or the hype of its future potential, as
an excuse.
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No.2 : PE invests in Passionate and Quality Leadership

Top Management team is one of the scarcest resources in Biotech as compared to
Pharma. Consequently, remains the weakest pillar in most biotech ventures.

One of the first questions that a PE firm tries to answer is Are these people whom we
can work with for the next five years ?

Companies are judged by the company they keep. Great LEADERS make great
companies. Identify the Face of the company from a financial investor perspective.

Within the family, are all members roles clearly defined ?

Repertoire of managerial skills required to navigate the company successfully from
start-up through full integration is wide ranging and different.

Ramp-up ability of the organisation for future aggressive growth is a critical attribute
that PEs lookout for .
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No.3 : New Technology, New Products

Investors favor platforms of technology that have the potential to generate multiple
product lines. One product wonders are no longer in vogue.

Determining that the technology is patentable is no longer enough. You should be free
to operate in the market place without any need for a license from some other patent
holder. Premium on Intellectual Property residing in the company.

Maintain a rigorous focus on the chosen product and its underlying technology.

Make sure that the products that will come from your technology address a real
unmet need of economic significance for investors to view the opportunity favorably.

Do not abandon or relinquish otherwise viable products in favor of those based on
nascent discoveries.
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No.4 :Ensure Adequate Cash Flow

Under capitalization and a weak CEO are the two root causes of most biotech
company failures.

Many biotech companies are founded on Day One, only to realize that they are
undercapitalized on Day Two. Such entities are then forced into accepting less than
desirable terms to keep going.

We all know start-ups can never have too much of Capital. Do yourself a big favor
and sell more of the company at a lower price.

Its like buffet dining at an Indian wedding Grab as much as you can you dont
know whether there will be a second helping !

PEs prefer high asset turns coupled with moderate WC intensity leading to healthy
ROCE(25%)
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No.5 : In the Companys success is your own success

PE prefers primary investments compared to secondary.

PE focused on growth capital users. Hence Pharma will continue to attract
investments for expansion funding and acquisition financing.

In raising money for your company, worry far less about how much promoters
shareholding will be diluted as a result of the financing.

Bioentrepreneurs have a gnawing fear of losing control of their companies !

Most managers turned entrepreneurs want to have their cake and eat it too. They
want to have both, the best in class salaries as well as equity for wealth creation. It
is Alice in Wonderland

Corporate Governance applies to you too !

PEs prefer investments with long term value creation rather than a quick pop
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No.6 : Making a successful exit

Most PE firms work on the investment timeframe of five years.

They generally look forward to ROI of 3X and IRR of 25%.

Deal-making skills is an essential element of collaboration. PE firms have great
competencies because of the number of pharma/biotech companies they finance.

They can leverage their network for establishing contacts and collaborations.

PE firms will most likely use the IPO route to recoup their initial investments in your
company.

They can also influence market capitalization and add great value in sale to a strategic
investor.
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THE MARKET, LIKE THE LORD, HELPS THOSE WHO HELP

THEMSELVES
BUT UNLIKE THE LORD, THE MARKET DOES NOT
FORGIVE THOSE WHO KNOW NOT WHAT THEY DO

WARREN BUFFETT
Known as the The Oracle of Omaha, Buffett is Chairman of
Berkshire Hathaway and arguably the greatest investor of all time.
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