Baring India sees funding gap of $1 bn in life sciences sector, needs fresh equity infusion

Private Equity major Baring India estimates a 20 per cent growth outlook for the Indian life sciences sector and a funding gap of $1 billion over the next year which will have to be met through fresh equity infusion. Over the last five years, the life sciences industry in India has attracted $1 billion in investments from global PE funds. The absolute number by itself is not small, yet this represents only 2.6 per cent of overall investments made by PE funds in the country over the same time period, Amit Chander, Head of Investments - Healthcare & Education, Baring Private Equity Partners India told Pharmabiz in an email interaction on the current and future prospects of the funding for life sciences. Each segment of the life sciences industry has several different business models which have a distinctive return on capital profile. Factors that determine the funding needs are growth outlook and average return on capital. “In the life sciences industry it is easy to evaluate from a growth perspective which is far more complicated when it comes to determining a sustainable return on capital for the industry,” he added. According to Chander, the domestic demand for the life sciences is expected to grow at 15 per cent over the next 20 years. This is driven by increasing incomes in urban and rural areas, improving access to healthcare and a demographic profile where for the next 30 years at least 500 million people will be either in the age group of less than 15 years or more than 55 years where both age groups have higher need for healthcare. Growth outlook is further enhanced to a 20 per cent level based on a vibrant export demand for generic pharmaceuticals from India given the low cost advantage, he said. Specific to the pharmaceutical segment are multiple business models that range from pure research to manufacturing companies, those with own sales and distribution or a combination of the two. “The aggregate return on capital across all these models is estimated to be 16 – 18 per cent on an average. Every Rs.100 invested in the business generates sales of Rs.125, if not more and an operating profit of 13-14 per cent on the total sales up to a return of 17 per cent on the investment,” he said. “With a 20 per cent growth outlook there is clearly a need for funding in this segment. Rough estimations indicate a funding gap of $1 billion over 12 months which will have to be met through fresh equity infusion. However the key challenge is the interest of global pharma in acquiring Indian firms which has stretched valuation expectations keeping many financial investors at bay and the situation appears unlikely to change in the near future. There is need for a right alignment of interest between entrepreneurs and investors. The focus must be less on entry valuations and more on future value creation and sharing of upside therein, pointed out Chander. Big pharma with a strong balance sheet can grow without external funding but small companies might just miss the bus. In the diagnostics and medical devices segment, India is dominated by global majors and domestic companies are operating as distribution platforms for them. Funding interest of technology led investors in this segment is more on smaller innovative start –ups. But with multi-disciplinary skill sets still nascent in areas of electronics/mechanical/material science/biology it will take a while to attract financial capital, stated Chander. Source:Pharmabiz