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Private funds keep off biotech firms

Baburajan K in Mumbai

Private equity funds are shying away from biotechnology firms as promoters are seeking unrealistic valuations.

At the same time, the availability of cheap debt from institutions has become the preferred route for these firms to fund their expansion.

Over the past 8-12 months, no top biotech firm has received funds via private placement of equity.

Companies such as Bharat Biotech, Biological E, Shanta Biotech are still waiting to conclude their proposed deals.

"Funds are cagey of investing in biotech firms as Indian promoters still want very high valuations. They are even looking at Nasdaq valuations in their peak time of early last year," Dhanpal Jhaveri, head of corporate finance, ICICI Securities, said.

"In line with the international market trend, no biotech firm is getting good valuation," Ajay Piramal, chairman, Nicholas Piramal India, said last week.

Certain funds are looking for biotech firms with aggressive growth plans and strong research and development base.

Private equity funds which are keen to offer funds include Warburg Pincus, Schroders, Walden International, among others.

Almost 18 months ago, a leading merchant banker valued Bharat Biotech at around Rs 1,000 crore (Rs 10 billion), but could not find a strategic investor as no potential investor was willing to accept that price.

"Things could change as the stock market is bound to take a reverse turn shortly as is the indication of the last few days," an analyst with a foreign brokerage said.

Though the Hyderabad-based Shanta Biotech is said to be in the final stage of talks to bring in a strategic investor by offering around 26 per cent stake, a number of biotech firms are either putting on hold their private placement plans or reviewing strategies.

Pharma companies such as Wockhardt, which is investing Rs 150 crore (Rs 1.5 billion) in its biotech park at Aurangabad, is not keen on raising funds from private equity funds. The case with Nicholas Piramal India is also the same.

VVLN Shastry, country head of First Call India Equity Fund, said companies were now opting for debt route as well as the valuation has already taken a beating.

"Getting funds at cheaper rates is easy as banks have slashed their prime lending rates. Comparing the dividends being offered to equity funds, bank funds could be a better option to reduce the cost of capital," he added.

According to an investment banker, several funds do not have enough funds and are not willing to fund biotech companies as an exit option through initial public float is still bleak due to market conditions.

"In addition, some funds have lost money due to their investment in infotech firms and are reluctant to enhance their exposure," he added.

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