The two venture capital firms had invested around $ 22.5 million (Rs 95 crore) in the drug discovery outfit Perlecan Pharma. They exited it for $18 million (Rs 74 crore) late last month. Though both the companies have refused to comment on the reason behind their exit, industry sources said the failure of two products under development was the main reason for the pullout.
On its part, Dr Reddy's, which will buy out the stakes of Citigroup and ICICI Venture in Perlecan, says the pullout adds strength to the drug discovery research programme. "We will take forward the targets under development," said G V Prasad, vice- chairman and chief executive.
The huge risks involved in investing in a business which may give returns after a minimum 8-10 years is a major concern for such investors, say industry experts and fund managers. Other risk factors include the nascent nature of India's new drug discovery efforts, lack of sophisticated infrastructure, lack of adequate scientists with requisite synthetic chemistry skillsets and exposure to new drug development efforts.
The lack of interest shown by private equity investors in the efforts by India's leading drug companies such as Piramal Life Sciences, Wockhardt and Sun Pharma to hive off their research and development assets to separate entities, is also seen as growing evidence to their risk averse nature.
"The high risk, long term reward ratio of drug discovery process is an unattractive proposition for investors like us. The success rate is very low in pure drug discovery process, which involves screening of thousands of potential targets and zeroing in on only one or two targets that reach the trial stage," said Mahesh Chhabria, partner, 3i Growth Capital, a leading global growth capital fund. "Investment is dependent on the firm's strategy and fund availability," he adds.
Steve Arlington of PricewaterhouseCoopers (PWC) points out that global private equity companies are no longer interested in investing in pure pharmaceutical R&D companies with less attractive pipelines and in early stage drug development.
"India is yet to prove its skills in developing and commercialising an own molecule. It is a high risk game and so far none of our compounds have reached the last lap of Phase III clinical stage, in accordance to global clinical trial norms. This may be the reason for lack of equity investments in our drug discovery programmes," said Ranjit Kapadia, head, pharma research, Prabhudas Liladhar.
Not everyone agrees with this view. Ashok Chaudhary, managing director, IFCI Venture Capital Funds says pharma and biotech sectors continue to offer good investment opportunities. "One should be careful about the valuation. Even in our case, success rate was not very high in greenfield projects promoted by first generation entrepreneurs. However, we continue to show interest in this sector," he said.
CHILL PILL
ICICI Venture and Citigroup Venture had exited from a three-year-old drug discovery partnership with Dr Reddy's Laboratories last month
They exited it for Rs 74 crore
The huge risks involved in the business and delay in returns are turning VC funds away from pharma firms