Biotechnology: Emerging Funding Models

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• Biotechnology Emerging Funding Models

• - Infusing a booster dose

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Global Overview
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Financing Trends
GLOBAL OVERVIEW
Global financing (USb)
Source Ernst Young, BioCentury, and BioWorld
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Emerging Markets East is East West is
West.. will the twain never meet??
Companies in the West have followed a familiar
path to maturity
University Research
Startup
Public Company
Tech Transfer
RD



VCs Deal Partners
Pub. Equity Investors
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Emerging Markets East is East West is
West.. will the twain never meet??
but Asia-Pacific companies have often faced
obstacles along the way
University Research
Startup
Public Company
Tech Transfer
RD



VCs Deal Partners
Pub. Equity Investors
Focus often on teaching rather than research
Poor incentives for tech transfer
Shortage of experienced VC
IP laws discouraged RD
Immature companies, lukewarm investors
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Funding Challenges A VC perspectiveDoes the
seeker seek the sought?
INDIAN SCENARIO

• Technology not understood
• Too small funding requirement
• Promoter profile Not Acceptable
• Uncertain Exit Options
• Single Product / Technology based No alternate
  game plan
• Negligible / Too small Market
• Commoditized Space / Too many existing players

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Funding Challenges An entrepreneurial
view-.or does the sought the seeker?
INDIAN SCENARIO

• Short term view
• Technology not understood
• Overseeing vs. Oversight
• Unmatched valuation expectations
• Limited attention span
• Funding assistance only

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Before we move to Phase II
The answer, as always, lies somewhere in between
SourceThe Dilbert Principe - by Scott Adams,
Harper Business, 1996
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• Phase II
• Funding Models
• Beyond Borders
• Truly Indi(genius)??

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Off-PL Financing Vehicles(Symphony Capital)
EXAMPLES ACROSS BORDERS
RRD International
Clinical dev assistance (optional)
Shares / warrants

• NewCo
• In-licenses IP
• Funds clinical development

Symphony Capital

• Portfolio Company
• Retains right to acquire IP
• Conducts clinical development

Funding clinical dev


IP
License to IP
IP

Future option to re-acquire IP at pre-negotiated
premium (3-4X in 4-5 years)
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PE / Virtual Pharma(Celtic Pharma and Others)
EXAMPLES ACROSS BORDERS
Biotech company
IP acquisition

• Equity stakes, board seats
• In-licensing

IP

• Fulcrum Pharma PLC
• Operational project mgmt

• Celtic Pharmaceutical Holdings LP
• and
• Celtic Pharmaceutical Development Services Ltd.
• (clinical development sub)
• Strategic decision making
• Regulatory interaction
• Contract negotiations
• Project supervision

Investors
Outsourcing
Raising capital

• CROs
• Clinical trial operations

Services

• Fund equity
• Mezzanine financing
• Securitizing licensed prods

• CMOs
• Manufacturing

Auctioning approved products
Prods

Pharma company
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Royalty / Revenue Interest Financing(Paul
Capital, Drug Royalty, Royalty Pharma)
EXAMPLES ACROSS BORDERS
Future royalties or product revenues

• Investor
• Paul Capital
• Drug Royalty
• Royalty Pharma

Portfolio Company or Academic Institution
Up-front payment

Optional equity and/or debt investment

Future milestones

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Creative Deal StructuresKey Features
EXAMPLES ACROSS BORDERS
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The Biotech Sector
INDIAN SCENARIO

• As per 5th ABLE BioSpectrum Survey, the number of
  Biotech companies have increased from 160 in
  2002-03 to 325 in 2006-07.
• The revenues have zoomed from USD 572 mn in
  2002-03 to USD 2.08 bn in 2006-07.
• There are close to 17 recombinant products
  approved for marketing in India, according to
  Indian GMO Research Information System (IGMORIS),
  compared to 12 in 2005-06.

Source ABLE BioSpectrum Survey
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Funding An Analysis
INDIAN SCENARIO

• Early stage funding in biotechnology in India is
  at best in the emerging stage.
• The last three years witnessed just a handful of
  medium-sized deals going through in the biotech
  sector.
• Sterling Biotech received 9 million from
  CitiGroup
• Bharat Biotech was injected with 6 million by
  IFC
• Celestial Biologics was boosted by a 0.5 million
  fund from Gujarat Venture Fund (GVFL).
• Biotech firm Avestha Gengraine raised Euro 20
  million from European banks

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Government Funding in Biotech
INDIAN SCENARIO

• Department of Science Technology (DST)
• Department of Biotechnology (DBT)
• Department of Scientific Industrial Research
  (DSIR)

Funding Agencies
Funding Schemes

• Technology Development Board (TDB)
• Technology Information Forecasting Assessment
  Council (TIFAC)
• Home Grown Technologies (HGT)
• Program aimed at Technological Self Reliance
  (PATSER)
• Technopreneur Promotion Program (TePP)
• Research Development by Industry (RDI)
• Scheme to Enhance the Efficacy of Transfer of
  Technology (SEETOT)

In addition, DBT has launched Small Business
Innovation Research Initiative (SBIRI) to boost
public-private-partnership effort in the country
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Lifecycle Analysis Funding Perspective
INDIAN SCENARIO
Growth
Maturity
Inception
Funding Pattern

• IPO / AIM
• PIPE
• Follow-on Public Offer
• SPACs

• Debt on companys leverage
• Growth Capital from VCs PEs
• Strategic interests from large corporates

• Funds from family friends
• Debt on personal leverage / capabilities
• Government Grants
• Seed Capital from VCs

Constraints

• Availability of various funding options, subject
  to, attainment of critical mass by the company

• Funding options available based on promoters
  profile, companys performance attractiveness/
  novelty of technology

• Bandwidth to evaluate technologies market
  opportunities
• Promoters ability to raise finance through
  personal leverage
• Limited availability of Government grants
• Limited VC interest in Seed Capital funding

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Lifecycle Analysis Funding Perspective
INDIAN SCENARIO
Growth
Maturity
Inception
Current Scenario
Access to National International markets
Gap to be bridged
Significant Interest from VC PE community
Adequate Traction Available for Good Business
Models
Increased Risk Appetite in Primary Markets Though
Indian Biotech Market yet to see significant
traction
Potential Solutions
Association or Technology Board to address
Technology Bandwidth
Incubation Corporations???
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RD Funding Recent Developments
INDIAN SCENARIO
Nature Of Transaction
Investors
Company
Funding of NCE Research via separate subsidiary
Dr Reddys Laboratories
DRL ICICI Ventures Citigroup
Demerger and listing of NCE Research division
Sun Pharmaceuticals
Shareholders of Sun Pharma
Demerger of NCE Research division
Nicholas Piramal India (NPIL)
NPIL Shareholders of NPIL

• Increasing trend among Indian pharmaceutical
  companies towards separating main-stay
  pharmaceutical business from research
  development efforts
• Recent transactions driven pressure on market
  valuations due to negative effect of RD
  expenditure on net profits and separate risk
  profile and investor expectations for generics
  business RD businesses

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RD Funding Dr Reddys Perlecan Pharma (PPPL)
Funding
INDIAN SCENARIO

• Deal motivators
• Reduction of RD expenditure at DRL parent level
  and resultant savings PAT
• Mitigation of valuation pressures as a result of
  risks in RD
• Funding through incorporation of new entity
  PPPL which PPPL is engaged in clinical
  development and out licensing of new chemical
  entity (NCE) assets of DRL
• DRL to continue RD efforts but on behalf of
  PPPL RD expenses incurred by DRL reimbursed by
  PPPL
• Success of commercialization milestones leads DRL
  to get majority stake through exercise of
  warrants this captures upside in case of RD
  success while limiting the down sides for DRL

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RD Funding Sun Pharma (SPIL) SPARC RD
Demerger
INDIAN SCENARIO

• Deal motivator
• To separate RD business from main stay business
  in order to unlock value in secondary market for
  existing shareholders with different risk
  appetites
• Deal involved creation of a wholly owned
  subsidiary (SPARC) of Sun Pharma transfer of NCE
  research assets into SPARC and subsequent
  demerger
• Shareholders of Sun Pharma get direct
  shareholding in SPARC resulting in immediate
  liquidity to investors with different risk
  appetites
• Possibility of creating a pure play RD company
  and future fund raising from public based on
  valuation metrics commensurate to RD business
• SPILs direct exposure to RD and financial and
  resultant valuation risks completely mitigated
• SPIL to have low / no control on business of SPARC

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New Trend In Funding SPACs
INDIAN SCENARIO

• Latest trend of Special Purpose Acquisition
  Companies (SPACs) to fund high growth potential
  companies
• Main objective of SPACs Valuation arbitrage
  between Indian companies and US capital markets
• US capital markets willing to pay a premium for
  capturing arbitrage in cost of doing business in
  India vs., US or Europe
• Over 10 India dedicated SPACs one
  health-sciences focused SPAC in India
• Possibility of accessing international capital
  markets Added advantage to Biotech

Biotech focused SPACs Need for Biotech ventures
with critical size and a good story to sell to US
investors
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Incubating a successful Incubator?
INDIAN SCENARIO
Shares risks with start-ups and offers essential
value added services Sustainable business
model -helps companies fail early fail
cheap Helps entrepreneurs grow strong
businesses that can sustain and succeed on their
own
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Incubation Models
EXAMPLES ACROSS BRODERS
U.S Model
European Model
Israeli Model

• Target US market
• Benefit from army sponsored RD
• Local engineering talent
• Exit at NASDAQ or MA to US companies
• Substantial corporate VC sector

• Technology driven innovation
• Benefit from global players such as GSK,
  Sanofi-Aventis, Novartis and Roche
• Issue that there is no leading exit market for VC
  backed companies in Europe
• Strong Regulatory framework

• Concentrated in clusters like Bay area and
  Boston.
• Top Universities such as Stanford, Harvard, MIT.
• Entrepreneurial talent culture.
• Serial entrepreneurs.
• Angel money available.
• Exit at NASDAQ
• Institutional support.
• Regulatory framework in place

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University Incubators The Maryland Model
EXAMPLES ACROSS BORDERS

• Universitys Technical Advancement Program (TAP),
  serves as an on-campus incubator that provides
  business and technical support to start-up
  companies
• Rigorously assesses the potential of each
  candidate company through an initial informal
  screening and two formal reviews ( technical
  business)
• The start-up signs a contract with the University
  that lays out the costs to the company nature of
  University support, its right to review company
  progress companys length of stay in the
  incubator and other legal issues.
• The company pays a monthly fee that depends on
  the amount and type of space it occupies (i.e.,
  office, wet laboratory), and the University has
  the right to acquire 1 ownership of the company
  for each year it remains in TAP
• The TAP director and others in the management
  serve as matchmakers for incubator companies
  seeking connections to campus researchers,
  students, laboratories, and other facilities

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Entrepreneurial Ecosystem
INDIAN SCENARIO
Entrepreneurial Talent
Leading Universities

• Indian Institutes of Technology / Indian
  Institute of Management are world class
• Technology transfer to start-ups limited
• Limited examples of success

• (Serial) entrepreneurs comings back to India
• Role Models are emerging
• Angel investing is picking up

Eco-system
Exit markets
Legal framework

• No specific exit markets for VC backed companies
  / early stage companies with risky business models

• Strengthening of IP laws and their enforcement
• Limited flexibility on structures

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Incubation Corporation of India
An idea whose time has come.

• Holistic solution instead of
• Concessional land
• Funds
• Equipment
• Hand holding through seed to breakeven
• Technology validation
• Business plan validation
• Provision of Managerial bandwidth
• Defined Exit route

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Making Ideas meet Opportunity
Corporate/ Business House
Biotechnology
Nodal Agencies (Incubators)
Making Ideas meet Opportunity
Has a new Idea/ Lacks the Money
Life Science Researcher/ Scientist
Sponsor/ Venture Capital
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Implementing the Strategy
Industry Body /Association
screen ideas based on feasibility Provide
assistance with team building prepn of
business plan
Make presentation with team to get funding for
idea
Financial Screening
Corporate/ Business House
Scientist/ Researcher
Approach consultants for foraying into Biotech
sector
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Stigma associated with Failure !!!

• Chinese extended family, mutual obligations,
  referent group loyalty, succeed to improve family
  welfare, education, results, Confucian work
  dynamism, compassion, tolerance, prudence,
  achievement, conformity, moral discipline
• Japanese avoid shame/failure, achievement but
  team achievement over individual, mutual
  obligation, education, fulfill obligations,
  consensus, risk aversity, hard work/diligence,
  self-sacrifice, harmony for the common good,
  indecisiveness, obedience to parents
• Filipino extended family, personal
  relationships, avoid shame/failure, machismo,
  community expectations, fulfill obligations, live
  within means, humility
• Vietnamese respect for elders, education,
  achieving parity, calculated risk-taking,
  hierarchy/paternalism, protect independence
• Korean hard work, frugality, future orientation,
  respect for elders, education, team over
  individual, risk averse, public harmony, older
  children responsibilities, public responsibility
  for mistakes
• India??

Social stigma attached to failure
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"I've missed more than 9000 shots in my career.
I've lost almost 300 games. Twenty-six times I've
been trusted to take the game winning shot and
missed. I've failed over and over and over again
in my life. And that is why I
succeed." Michael Jordan
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EY Health Sciences.. - Global
Reach...Local Impact
Utkarsh.Palnitkar_at_in.ey.com Partner, Transaction
Advisory Servics Industry Leader Health Sciences
Ernst Young Pvt. Ltd. Transaction Advisory
Services 205, Ashoka Bhoopal Chambers S.P.
Road Secunderabad 500 003 Phone (91) (40)
27898850 Fax (91) (40) 27898851 www.eyindia.com
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Investment Opportunities
INDIAN SCENARIO
RD / Manufacturing
Contract Research
Infrastructure

• Intermediates, APIs, Dosages, Cytotoxics, HPAI
• Bio-pesticides Bio-fertilizers
• Industrial Enzymes
• Bio-polymers
• Human Biotech Kits
• Plant Diagnostic Kits
• Stem Cell / GM Crops
• Diagnostics Infectious disease (India-specific
  strains) and PGx (drug naïve / inbred tissue)

• Contract Research
• Clinical Research
• Tissue Culture Technologies

• Integrated Biotech Park
• Marine Biotech Park
• Bio-remediation of heavy metals from aqueous
  solutions and industrial waste water treatment
• Dedicated testing facilities

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RD Funding Learning For The Biotech Industry
INDIAN SCENARIO

• Deals in pharma space provide good examples for
  possibility of separating biotechnology projects
  with varied risk and return profiles

• Biotech can take advantage of todays market
  depth in the pharma space to identify investors
  in the private (PE investors) and public capital
  markets to fund projects or to de-risk existing
  businesses

• All thats needed is one benchmark deal to
  replicate innovative funding / de-risking
  strategies to the Biotech sector

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The Dilbert Principe A Cubicles Eye View of
Bosses, Meetings, Managemend Fads Other
Workplace Afflictions - by Scott Adams, Harper
Business, 1996