Biotech to have more M&A activity due to fund crunch: Report

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Paucity of funding for the Indian biotechnology sector for expanding its operations forces it to look towards mergers and acquisitions, according to Yes Bank.

The Indian biotechnology sector is not just finding it difficult to raise funds from the public, but also from the private equity sector as well, Yes Bank said in its report on biotech industry, titled 'Indian Biotechnology Ecosystem- an Investment Perspective'.

"Further, the investments, which are made, will be in several tranches tied to milestone payments and not in lump-sum, as was wont to be the case earlier."

However, Yes Bank expects the M & A activity in the sector to see a significant rise, as small niche companies exhaust their cash surpluses and start exploring new models for restructuring their business, the report said.

Most investors are unwilling to invest in life science companies' R & D activities, as they prefer funding companies, whose product and market are clearly identified, forcing life science entrepreneurs to be unable to raise sufficient funds for basic R & D through equity investments, it says.

"The current conservative investor mindset is resulting in Indian investors looking to fund matured companies. Most of the deals done over the last few years have been for manufacturers of generic drugs or contract manufacturers, as these are perceived as fairly low-risk businesses," it further said.

The bank opined that a majority of the IPOs will be from the pharmaceutical sector, as most companies in the biotech and medical devices sectors in India are still at a nascent stage as the recent years have not been successful for Life sciences IPOs owing to the current weak market conditions and global economic cues.

The situation has led to a huge gap between the companies' expected valuations and those arrived at by the investor community.

Within the life sciences Industry, Biotechnology has been identified as a key area of growth with the Global biotechnology market predicted to surpass USD 320 billion by 2015.

The global Biotech industry is lead by US, followed by advanced European countries. Developing countries such as India and China are soon emerging as major Biotechnology markets, according to the report.

Indian Biotech market has tripled over the last five years, and is projected to grow at a CAGR of over 20 per cent to achieve a market size of USD 8 billion by 2015.

The global biotech market for 2010 is around USD 85 billion and is expected to reach USD 320 billion by 2015.

There has been a large gap between the funding available for this sector and the funding required by the players to achieve their full potential, it said.