Investment Opportunity Contract

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					The Biotech Investment opportunity in
India


Presentation by


Sarath Naru
APIDC Venture Capital Limited
    Quote: Nature Biotechnology…


Fools who persist in folly can
sometimes become wise.
       Mandate from the Organisers….

“So why are investors in the emerging
  markets so excited about opportunities in
  biotechnology?”

                           Are they ?………
       Quote: „Nature Biotechnology‟ journal

  One of the most important lessons to emerge is that biotechnology is a hard
  slog. It takes time to build all the elements-
      An advanced education system
      A requisite level of scientific excellence.
      A business friendly set of intellectual property laws,
      And an adequate regulatory infrastructure and healthcare system.
  Even when all this is in place, it will be much harder for lesser industrialised
  nations where……
      R&D expenditure is less than a quarter of industrialised nations
      Skilled and educated labour is at a premium
      Intellectual turf wars stifle collaboration
      Political turmoil is a frequent backdrop
      Intellectual property protection is murky
So why would anyone invest in biotechnology in developing nations ???
                     Sure enough Indian VC’s are
                     not exactly rushing into this
                     space…

                     Early stage Pharma / life sciences
                     investment is low
              Early Vs. Late stage investments in India in the last 24 months:
             # of deals   % by # of deals     Amt – USD mn       % by amt
 Early       4            19                  4.11               1%
 Late        17           81                  430.25             99%

              Size of deals in the last 24 months:
             # of deals    % by # of deals    Amt – USD mn        % by amt

<$1 mil      3             14%                1.61                0.40%
$1- $3 mil   1             5%                 2.5                 0.60%
$3-$10 mil   8             38%                54.85               13%
>$10 mil     9             43%                375.4               86%
                     Of course, this is a common
                     theme with early stage VC
                     investment as well:


              Early Vs. Late stage investments in India in the last 24 months:
             # of deals   % by # of deals     Amt – USD mn       % by amt
 Early       19           16%                 23.14              1%
 Late        100          84%                 2367.48            99%

              Size of deals in the last 24 months:
             # of deals    % by # of deals    Amt – USD mn        % by amt

<$1 mil      11            9%                 3.94                0.20%

$1- $3 mil   8             7%                 19.2                0.80%

$3-$10 mil   48            40%                315.28              13%
>$10 mil     52            44%                2052.2              86%
       Against this backdrop … APIDC
       Venture Capital launched Indias first
       biotechnology focused VC fund
Final closing April 2005
Fund size: = $37 million
Important investors:
   IFC, Washington;
   APIDC – State govt. institution.
   Life Insurance Corporation- Largest insurance
   Corp
   Andhra Bank – leading bank
   Technology development Board- Govt. tech
   funding institution.
               Having already confessed to being a
               fool…a more preposterous thought:

To build real market leaders in a 5 to 10 year time frame.

Our Overall Strategy: To launch early stage companies addressing
  „potentially large markets‟ on a “market leadership track” over a “5 to
  10 year time” frame.



                                           Clearly further foolishness….
                 Our (naïve) strategy to achieve
                              this…
  Stage of Investment: Invest “primarily in early stage companies”,
  and in larger companies that are attempting a paradigm shift in
  business.
  Geographic focus: Invest in India related businesses anywhere that
  “leverage India advantages” to gain market leadership.
  Sectoral Focus:
      “Core areas” of biotechnology in:
       (a) health care & drug discovery,
       (b) food & agro processing, agriculture & dairy, and
       (c) environment & industrial.
-    “Peripheral areas”
       That are being spurred due to the impact of biotech (such as
          healthcare services, seeds distribution, food processing,
          waste management, etc.)
               Our (naïve) strategy to achieve
                         this……..
Financial risk diversification strategy:
   Invest $500k to $2 million in the first round of investment of a
   company.
       This is appropriate based upon deal sizes in India.
       This is appropriate based upon empirical data of individual
       investment size relationship to Fund size.
   Invest in later rounds up to $5 million based on milestones.
       In line to provide sufficient diversification to fund in terms number of
       deals.
       This is appropriate based upon empirical data of individual
       investment size relationship to Fund size.

   Invest in 15 to 20 Companies over a 2 to 3 year time frame.
       Empirical data shows that about 15 to 20 companies / fund is
       sufficient to diversify risk.
Lets take a look at how we expect to take a
               shot at this…
Factors and lessons we considered as we
         build the Fund portfolio.

        1. Global biotechnology VC investment trends.
        2. What will be India’s biotech VC investment
           opportunities ?
        3. India VC investment parameters versus US/Europe:
        4. How are market leaders built in USA/Israel/India ? Lessons
           for us in India.
3. Factors and lessons to be considered as we build the Fund portfolio.

Global biotechnology VC investment trends.
                      Global 10 Year Biotech VC-Investment Trends*:
                      Small Molecules and Medical Technologies
                      are Hot!


        Small molecules drug discovery - High Interest
        levels remain over the decade !
        Medical technologies including devices, reagents
        and research equipment - Increased focus.
        Platform technologies, particularly bio-informatics
        based ones - Decreased interest.




*Source: 7 VC websites and www.vcdeals.com
                                  Global 10 Year Biotech VC-Investment Trends*:
                                  Small Molecules and Medical Technologies
                                  are Hot!
                50%                                                                                                        Rapid
                                                                                                                          decline!
                45%
                                      Continue
                40%                   d interest
                                                                                                                                 Big
                35%
                                                                                                                               decline
                30%
                                                                         Huge
 (% of total)




                25%                                                     growth !

                20%


                15%


                10%


                5%


                0%
                       Small       Proteins /   RNAi / Stem    Diagnostics   Drug Delivery     Medical      Platforms          Services
                      Molecules    Peptides     Cells / Gene                                 Technologies
                                                 Therapy
                                                                                                  1993      1996        1999      2002
                                                                 Healthcare Segments




*Source: 7 VC websites and www.vcdeals.com
                                     Global 10 Year Biotech VC-Investment Trends*:
                                     Small Molecules and Medical Technologies
                                     are Hot!
                                                                                                                                    Initial euphoria
                                                                                                                                    associated with
                                                                                                                                          HGP,
                                                                                                                                   opportunities still
                                                                                                                                     exist in wetlab
                  50%                                                                                                               and inf ormatics
                                                                                                                Huge interest due combinations
                                                                                                               to advancement in
                  45%                                                                                              nanotech,
                        Interest in small                                                                       semiconductors
                           molecules                                                                                                                 Shif t away f rom
                  40%                                                                                            and bio-f riendly
                             remains                                                                                                                   internet and
                                                                                                                    materials
                                                                                                                                                         sof tware
                  35%                                                                                                                                applications to
                                                                                                                                                       customized
                                                                                                                                                         reagents,
                  30%
                                                                                                                                                   research, retailing
   (% of total)




                                                                                                                                                             etc
                  25%


                  20%                      Interest in  Marginally down Remains low due
                                        biotherapies up    due to a f ew  to small market
                                          due to more   f ailures with GT size, but shif t    Shif t towards
                  15%
                                            products    but RNAi is hot    towards PGx         converting
                                                                             products      injectables to oral
                  10%
                                                                                              and inhalation

                  5%


                  0%
                         Small              Proteins /    RNAi / Stem       Diagnostics      Drug Delivery         Medical            Platforms          Services
                        Molecules           Peptides      Cells / Gene                                           Technologies
                                                           Therapy
                                                                                                                        1993         1996         1999        2002
*Source: 7 VC websites and www.vcdeals.com                                     Healthcare Segments
3. Factors and lessons to be considered as we build the Fund portfolio.

What will be India‟s biotech VC investment
opportunities ?
                   3. What will be India‟s biotech VC investment opportunities ?

                   India biotech investment opportunities
                   driven by its competitive advantages
1.   Drug Discovery:
          Deep knowledge base of traditional medicine to aid in drug discovery.
          Large Bio diversity of plant / marine / animal to aid in drug discovery / production &
          nutraceuticals.
2.   Clinical trials:
          Large drug naïve populations for rapid and low cost clinical trials.
3.   Services focusing on the huge domestic market:
          Huge domestic markets with specific needs that can provide scale advantages to
          companies addressing these needs: availability of drugs, diagnostic services,
          healthcare delivery, health insurance, etc.
4.   Contract research/ manufacture:
          chemistry skills, that can lead to strength in process design, contract manufacturing,
          laboratory drug discovery related services.
5.   Orphan drug discovery & development: Low cost skilled labor with easy availability
     provides the ability to build contract manufacturing and services businesses; build drug
     discovery businesses focused on orphan drugs, etc.
6.   Bioinfomatics services: strong IT skills to aid in developing IP in a number of the
     services areas that Indian companies are involved in.
7.   Stem cell / GM crops: Enabling policies that help development in Stem cell/ banking
     research, GM crops, etc.
                                  India Biotech VC investment Opportunities
                                  India investment opportunities include a
                                  higher proportion of Agricultural and
                                  Industrial Biotech than US biotech.
                   120%
                                                                                         APIDC-VCL        Global VC




                   100%            97%




                   80%

                          69%
Investment Focus




                   60%                   India advantages include (i) India
                                              specific traits (ii) unique
                                         microorganisms animal health (iii)
                   40%
                                           enabling regulatory processes
                                                                        India advantages include (i) tropical
                                                                         biological material plentiful (ii) low
                   20%
                                                   19%                          cost manufacturing
                                                                                      12%

                                                                   3%
                                                                                                   0%
                    0%
                           Healthcare                    Agribio                       Industrial / Env
           India Biotech VC investment Opportunities
           Key areas driven by Huge local markets,
           bio-diversity (plant, marine); traditional data
           base of proven medicine, unique tissue,
           enabling policies, low cost
Small molecules: Driven by Ayurveda / biodiversity

Diagnostics: infectious disease (India-specific strains) and PGx (drug
naïve / inbred tissue)

Services: enabling environment for clinical trials, health insurance,
retailing

Other segments enjoy faster R&D and low cost
                                            India Biotech VC investment Opportunities
                                            In comparision to the US:
                                            1.Similar scope in small molecules;
                                            2. Significantly higher potential in diagnostics, services;
                                            3. Significantly lower potential in medical technologies.

                   35%
                                  32%


                   30%                                                                                      29%
                            28%


                   25%
                                                                        22%                                                            22%
Investment Focus




                   20%




                   15%
                                                                                                                          13%

                                                11%                                                                 11%

                   10%

                                                                                                                                             7%
                                           6%             6%                                           6%
                   5%                                                         4%
                                                                                            3%
                                                               2%
                                                                                       0%
                   0%
                         Small Molecules   Proteins /   RNAi / Stem    Diagnostics   Drug Delivery     Medical      Platforms          Services
                                           Peptides     Cells / Gene                                 Technologies
                                                         Therapy                                             APIDC-VCL    VC-Average
                                           India Biotech VC investment Opportunities
                                           In comparision to the US:
                                           Reasons



                         Ayurveda and
                                                                                                                   Few opportunities due to
                   35%    biodiversity
                                                                                                                      lack of synergies
                                  32%                                                                                between disciplines
                                                                                                                   (doctors and engineers)
                                                                      High interest levels f or                                               Enabling environment
                   30%                                                                                                   29%
                            28%
                                                                        inf ectious diseases                                                  f or insurance, retailing
                                                                      (India specif ic strains)                                                and low cost ops f or
                                                                       and PGx (drug naïve                                                        custom research
                   25%                                                   and inbred tissue)                                                           services
                                                                               22%                                                                     22%
                                                                                                                                  Biodiversity f or
Investment Focus




                   20%                                                                                                             small molecule
                                                 Faster
                                                                                                                                 related genes and
                                           development at
                                                                                                                                 unique phages f or
                                           lower cost, but
                                                                                                                                     antibiotics
                   15%                       f ew projects      Faster
                                                           development at                                                                 13%
                                                           lower cost, but
                                                   11%                                                                              11%
                                                            f ew projects,
                   10%                                      crowded IPR
                                                                space
                                                                                                  Few paradigm                                               7%
                                             6%               6%                                     shif ting      6%
                   5%                                                                             opportunities
                                                                                     4%
                                                                                                         3%
                                                                   2%
                                                                                                    0%
                   0%
                         Small Molecules    Proteins /      RNAi / Stem       Diagnostics         Drug Delivery     Medical         Platforms           Services
                                            Peptides        Cells / Gene                                          Technologies
                                                             Therapy                                                      APIDC-VCL       VC-Average
3. Factors and lessons to be considered as we build the Fund portfolio.

India VC investment parameters versus
US/Europe:
      US/Europe VC investment parameters :

Leading overseas Early stage Biotech VC data:
• Early stage investment size - $2 mil
• Follow on Investments up to - $ 7 mil
• % of deals receiving 1 round of Funding = 50%
• Syndication of the deal more the norm.
• Invest in multiple rounds over the life of the deal
                             $1- 3 M $3.1- 5 M   $5.1M+   Total

        No of Inv in Range     9         4         5       18

          $ Inv in Range     19.52     15.83     32.57    67.92

           Av Inv Size        2.17     3.96       6.51    3.77

           % by $ Amt         29%      23%        48%     100%

        % by no of Deals      50%      22%        28%     100%
                         India Vs. US/Europe:
    US/Europe VC fund Parameters                India VC fund Parameters
• First Round Inv. size - $2 mil          • First Round Inv. size - $500k to $2 mil
• Follow on Investments up to - $ 7 mil • Later rounds up to $4 mil
• About 50% receive follow on           • About 50% receive follow on.
• Syndication of the deal more the norm.• Very little SYNDICATION
• Multiple rounds in a single comp.       •Total number of deals 15 to 20 deals.



                               $.5- 2 M      $2. 5 M       $4+          Total


        No of deals                10          5            5            20

      $ - Inv in Range             10       12.5           20          42.5
3. Factors and lessons to be considered as we build the Fund portfolio.

How are market leaders built in
USA/Israel/India ? Lessons for us in India.
                 Some Case studies

Dr. Reddy‟s - India
Biocon      - India
Various Companies – Israel
Martek      - USA
Invitrogen - USA
Martek current market Cap: $1.33 billion
Sales:$5 mil to $10 mil in 1st in 8 yrs
      $10 mil to $185 mil in next 4 yrs.
              Martek: Success Factors -
              Lessons

Identified a product (DHA) which appeared to have a huge potential
market, but small current need.
POSSIBLE TO EMULATE.

Invested heavily and built patented processes to produce a
significantly superior product.
POSSIBLE TO EMULATE, BUT NEEDS LOTS OF EARLY STAGE
FUNDING.

Invest in market development and collaborate with biggies (likes of
GSK, nestle)
   Access of distribution network
   Sharing product development cost
WILL NEED OVERSEAS COLLABORATIONS
                                       Invitrogen: Inorganic Growth
                                       Current Market Cap: $3.87 billion
                                       Sales: $ 0 mil to $9.3 mil in 1st 10 yrs.
                                                       $ 9.3 mil to $1023 mil in next 5 yrs.
                                                       Invitrogen Revenues

     1200


                                                                                                                                          1023
     1000




      800
                                                                                                                                   778


                                                                                                                     629    649
$M




      600




      400

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      200
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                                   8      11      14      16      19      22      25      27      30
              0      3      5
        0
         87

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       19

              19

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              Invitrogen: Path to Success -
              Lessons

Got into the reagents/kits space, addressing the needs of bio-discovery labs
early on, and built a large network of customers. –
EARLY ENTRY DIFFICULT BUT POSSIBLE IN NICHE AREAS.

Used VC funding to reach up to IPO.

Consolidated multiple niche products for the same space through
acquisition (by using IPO funds).-
NOT POSSIBLE TO ACQUIRE IN INDIA

Added to their market network by acquiring a complementary company.
NOT POSSIBLE TO ACQUIRE IN INDIA
           Some lessons from India…..

Dr. Reddy‟s- A doable model
    Experienced founder
    Took advantage of large domestic markets to build
    competitive advantages
    Used regulations cleverly but not lulled by this „false sense of
    calm‟ invest largely into R&D
    Raise capital aggressively to invest in the Company‟s future
Biocon – A doable model
    Entreprenurial and gritty founder
    Follows Sam Colella‟s maxim, the business focus of early stage
    companies can never be predicted
    Use services income to build IP in products/process.
                   Some lessons…..


Israeli Companies – An IT model But India has the pre-
conditions
    Move to USA in about 18 months
    Leave R&D, operations in Israel, but the marketing and even
    corporate offices in USA,
    Founder makes room for well scarred CEO from the USA,
    Transition timing is important… before the previous mgmt
    gets too settled, and after sufficient capital is raised from
    VC’s both in Israel & USA
              Should you jump into it ?
               Can we pull this off….


You must….! Co-investment is an important aspect. More hands to
build leadership , the better it is !
Meet us here in five years to see if the fools persistence paid off.




                                                     Thank You!

				
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