09CHAPTER - 4shodhganga.inflibnet.ac.in/bitstream/10603/112709/10/10_chapter4.pdf · Melrose,...

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4.0 Introduction

In the preceding chapter a profile of APIDCVCL is presented along with the

strength of the team of Investment Manager (IM). Further, the growth and pattern of

VC/PE investment have been analyzed and the background in which the

Biotechnology Venture Fund (BVF) has also been presented. This chapter is divided

into five sections. In section-I and II investment pattern of BVF and profile of the

portfolio companies are presented respectively. The performance of the BVF is

evaluated along with factors contributed thereof in section-III. In section-IV the

impact of performance on the capital of the fund and employment generation in

investee companies is analyzed and finally in section-V the value added services

provided to the investee companies is presented.

SECTION - I

4.1 Bio-technology Venture Fund

4.1.1. Investment Pattern

Biotechnology Venture Fund (BVF) is an early stage investment fund and

established during May 2003 with a corpus of INR 1554 millions as a close ended

fund. The fund has been structured as a Unit Scheme and it has Resident Indian

Institutional Investors and overseas investors. The fund manager is APIDC VCL

which is appointed by Ventureast Company Pvt. Ltd., the trustee to the fund. The

investment objective of the Bio-technology Venture Fund is to achieve attractive

returns primarily through the generation of capital appreciation by investing in equity,

equity related and Mezzanine Capital Instruments of unlisted companies as per SEBI

guidelines for Venture Capital Investments in India. The Investment Manager raised a

total corpus of INR 1554 millions from the investors against the target of INR 1500

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millions. Thus, the IM is successful in raising funds by exceeding its target of fund

raising. (Table 4.1)

4.1.2 Sources of the funds

Both domestic and overseas investors together contributed an amount of INR

1554.01 millions to the fund as investors. In terms of percentage, the domestic

investors contributed 69%, whereas the remaining 31 percent was contributed by

overseas investors. Among domestic investors, the APIDC, and Andhra Bank

contributed 11 percent each, LIC and Bank of Baroda contributed 7 percent each and

TDC co-investment shared 19 percent Thus APIDC, Andhra Bank, Bank of Baroda,

LIC and TDB together contributed nearly 60 percent total fund. Whereas the overseas

investors such as IFC and SEDO contributed 14 percent each and Nor Fund

contributed 10 percent of the total fund. Thus, nearly eight investors (both domestic

and overseas) contributed 90 percent of the total fund. (Table-4.2).

However, only three institutional investors particularly World Bank (55%)

contributed more than 80% of the total corpus (INR 22 crore) of the first fund when it

was established in 1995 as mentioned in the preceding pages. Thus, the structure of

investors is concentrated in the first fund, whereas the structure of investors is

diversified in the bio-technology fund. The main reason is that during early 1990’s,

the Venture Capital Industry in India was at infant stage but during early 2000’s it

took roots and reached developed stage – i.e. three decades old industry in India.

4.1.3 Funds - Draw down

The IM drew 100% of total corpus (INR 1554.01 millions) committed by 31st

March 2009. Thus, the fund has drawn the entire amount committed by the investors

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within the stipulated period i.e. within three years and 10 and ½ months of final

closing of the fund (Table-4.3).

4.1.4 Flow of business deals - Selection of Investee Companies

Since first closing date (8th

May 2003) of the fund, the IM received

cumulatively (both from India and abroad) 378 project proposals for venture

assistance as on 31st March 2008; of which 55%, 24%, 15% and 11% received during

2003-05, 2005-06, 2006-07, 2007-08 respectively. Thus, IM is successful in receiving

with its approach a good deal of flow of proposals by about 378 cumulatively. Further

80 percent of deals are received within the 3 years of the first closing date of the fund

(table-4.4).

Out of 378 deals, the Investment Committee cumulatively approved

investments in 27 deals (7 percent of total deals), but 12 approvals sanctioned out of

27 have been withdrawn as the IM could not reach agreement with their founders and

the terms of investment. Hence, net investment commitments are only in 15

companies with an amount of INR 1344 millions. Thus, IM has been very selective in

making investments investing only in 4 percent of deals received. Further, the

investment committee actively engaged 18 deals but did not consider any new deal for

investment because 86 percent of corpus fund is already committed including follow-

up funding and it would like to keep the balance in reserves because of the strategies

of the fund and prudent investment practice. The IM however, decided to use these 18

actively engaged deals for, ‘warehousing’ purpose so that they become available for

investment consideration from successor Ventureast Life Fund.

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Though the deals are mainly (two-thirds), generated in India but significant

(1/3rd

) deals are also generated from abroad. However, investment approvals more or

less are in the same proportion both in India and abroad deals.

As expected, nearly 50 percent (184) of deals generated are received from the

health sector. Further, this sector accounted for nearly 90 percent of total deals

approved. This signifies the focus in the Health Care Sector /Biotechnology by the

fund.

4.1.5 Investment Commitments – Sanctions

The Investment Management of fund invested an amount of INR 1341

millions in 15 companies which constitute 86.29 percent of total Corpus of INR 1554

millions by March 31st 2010. The agreement (between investors and IM) permits IM

to invest only 86 percent of the total corpus. Thus the investment commitment by the

fund is as per the agreement (Table-4.5).

The year wise data reveals that the Investment Management fund completed

its 50 percent of total investment commitments to the investee companies by 31st

March 2006 (including those with documentation underway) in just one year after

final closing of the fund (April 2005) against a 4 year period available (March 2009),

this also compares favorably against 42.47 percent of the corpus drawn down from the

investors. It reflects increased investment activity and investment commitment

exceeded the funds drawn down from the investors by 31st March 2006. Further, the

percentage of investment commitment increased to 68 percent of the total corpus fund

by March 2007 and further increased to 80% by March 2008 and reached to 86% by

March 2009. Thus the IM completed investment commitments to investee companies

within the stipulated period.

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4.1.6 Disbursements to Investee Companies:

The IM disbursed INR 1341 millions i.e. 100 percent of its investment

commitment by 31st March 2011 to 15 investee companies. The year wise data reveals

that the IM disbursed only 23.5 percent of its investment commitment (INR 1395.00

millions) during 1st year i.e. 2004-05 and increased to only 50 percent of its total

investment even in 2005-06. This implies that the gap between commitments and

disbursements is 50 percent it means gap is high even in the second year thereby

indicates the inability of the IM to rapidly close the documentation post approval by

the Investment Committee. A number of unanticipated reasons, including investment

approvals contributed for this inability. However the disbursement activity picked up

during the following years – 72 percent in 2006-07, 77 percent in 2007-08 and 94

percent by March 2009, it reached to 99 percent of its total investment commitment

by March 2010. On the whole, it can be concluded that in the initial 2 years, the

disbursement activity did not pick up, but by March 2009 it disbursed almost the

entire investment commitment to the investee companies (Table-4.6, 4.6a)

Out of 15 investee companies, six, eight and one investee companies received

disbursements during 2005-06, 2006-07 and 2007-08 respectively. 5 companies

received disbursements in one round and 10 companies received disbursements in 2 to

4 rounds because of follow-up funding. Thus 10 out of 15 investee companies

received funding in two to four rounds. The investee company wise details reveal that

companies such as Trans India acquisition, Elbit, Medical Diagnostics,

Neurosynaptics, Sapala Organics and Itero Pharma received disbursements in one

round that is in the investment commitment year itself. Four in 2006-07 and one in

2007-08 because of relatively small size of investment. Except Elbit Diagnostics, the

size of amount ranges from INR 10 millions to INR 30 millions, whereas Elbit size of

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amount is INR 100 millions of investment. Among the follow up funding investee

companies, the Bioserve, Mardil and Imedx received funding in 4 rounds because of

relatively big size of investment amount ranging from INR 120 to 186 millions,

Melrose, Evolva, Cecilia and Marillion received funding in three rounds with a

medium sized range from INR 73 to 121 millions and Natural Bio-Energy, Sreshta

and Milior received funding in two rounds ranging from INR 74 to 143 millions.

Thus, the number of rounds depended on the size of investment with the practice of

follow on funding.

4.1.7 Investment Instruments

While investing, the IM used financial instruments such as equity and quasi

equity instruments. The IM selected only equity shares in three companies only

preferential shares in five; convertible preferential shares equity in five and

convertible debentures in two investee companies. Thus equity and convertible

preferential shares are the major instruments chosen by the IM while investing in

investee companies.

Fund’s percentage of ownership holding in total investment of investee companies is

up to 15 percent in three companies, up to 30 percent in four companies, up to 40

percent in two companies and up to 50 percent in five companies’ ownership. Thus,

IM’s holding is nearly one-third to 50 percent in 80 percent of investee companies.

4.1.8 Role of Fund

Fund’s role is lead role in eight of 15 investee companies and co-lead in the

remaining seven investee companies. Thus, fund’s role is lead role in majority

investee companies. Further, the fund has its own nominee in the board in all 15

Investee Companies.

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SECTION – II

4.2 Nature of Business of Investee/Portfolio Companies

The Fund’s 15 portfolio/investee companies broadly come under health care /

Biotechnology Sector. Within the Health Care sector again, the investee companies

are specifically divided into three sub-sectors viz. Pharmaceuticals / Drugs; Health

Care Infrastructure and Services and Clean Technologies. The number of investee

companies and the amount of investment under these three subsectors are presented in

Table 4.7

The pharmaceuticals (7) units accounted for 50 percent (INR 676.00); the

Health Care Infrastructure and Services (6) units accounted for 32 percent and the

Clean Technologies (2) units accounted for 17 percent of total investments made.

Thus the fund gave first priority to Pharmaceuticals followed by Health Infrastructure

and Services and Clean Technologies.

A profile of Investee companies’ viz. Date of establishment, amount invested

location of offices; nature of business and management team and funds share of

ownership holding, and role; other key venture investors/funds is presented below.

Nature of Business/Product and Services

1. Bioserve Biotechnologies India Pvt. Ltd

1. Name of the company : Bioserve Biotechnologies India Pvt.Ltd

2. Date of Investment : 2005-06

3. Amount of Investment : INR 126 millions

4. Percentage of ownership by fund : 43%

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5. Funds Role : Lead

6. Other key Investors : None

7. Location of Head-Office or Management : Hyderabad, India and Maryland,

USA – Indo – US based company

8. Nature of Business/Products and Services: To provide genomic services – Pre-

clinical Drug Discovery Services through proprietary protocols Technology for Zene-

extraction and Analysis using human deceased tissue. The company integrated to

produce new drugs with one of the largest human biomaterial repositories with the

largest collection of annotated disease tissues in the world and Bioserve is the

pioneering a new way in drug discovery to reduce cost and increase reliability through

proprietary technology-(platform)-Drug Discovery and Drug Discovery Services –

new products and services.

9. Team: Bio-serve has teams based in Hyderabad, India and Maryland, USA. The

India team is led by Joe Thomas, who has extensive CXO-level experience in rapidly

growing pharma business. The US team is led by Dr. Rama Modali, a scientist with

over two decades of experience at the National Institute of Health (NIH).

2.Evolva Biotech Private Limited

1. Nature of the company : Evolva Biotech Pvt. Ltd


3. Amount of Investment : INR 106 millions

4. Percentage of ownership by fund : 7.3 % (5.3% in Indian subsidiary and

2% in US Holding Company)

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5. Funds Role : - Co-lead in US company

- Lead in Indian Company

6. Other key Investors : Backed by world - Investors (Aravis

and Sunstone Capital) and venture

arms of global pharma companies

Novartis Ventures and Astellas

Ventures)

7. Location of Head-Office or Management : – Hyderabad, India, Switzerland and

Europe Management

– Indo-US and European based

company

8. Nature of Business/Product and Services: To create and produce safer versions of

the drugs – (New drugs) currently in the market through the use of proprietary

technology platform for small molecules, services and proprietary drug candidates

thereby to extend the patent life of the MNC’s products – use of proprietary

technology to produce new drugs and research and development services to produce

new drugs. The companies model is a combination of services and IP-led product

development reducing risk profile drug discovery proprietary platform and to provide

research and development service for MNC’s to produce new drugs.

9. Team: Evolva’s team comprises leaders in technology and drug development, with

several decades of relevant experience. Importantly, it has been backed by world-class

VC investors (Aravis and Sunstone Capital) and venture arms of global pharma

companies (Novartis Ventures and Astellas Ventures).

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3.Mardil Medical Devices Pvt. Ltd.

1. Name of the company : Mardil Medical Devices

Pvt. Ltd.


3. Amount of Investment : INR 186.25 millions

4. Percentage of ownership by fund : 45.7 %


6. Other key investors : None

7. Location of Head-Office or Management : Hyderabad, India and

Morrisville-North

Carolina – US (Indo-US

based company)

8. Nature of Business/Product and Services: To develop a cardiac device – Mitral

valve to solve the functional Mitral valve – Regurgitation (FMR) - Cardiac Repair

Devices.

9. Team: Mardil is led by Jim Buck, a medical device industry expert with experience

in early-stage development companies as well as large corporations, such as St. Judge,

at senior positions. Dr. Jai Raman, the inventor of the device, is a practicing surgeon

from the University of Chicago. Dan Pelak, a reputed medical devices expert and ex-

Medtronic, is on the board of the company.

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4. Itero Biopharmaceuticals

1. Name of the company : Itero Biopharmaceuticals

2. Date of investment : 2007-08

3. Amount of investment : INR 9.47 millions

4. Percentage of ownership by fund : 12.5%

5. Funds Role : Co-Lead

6. Other key investors : VC’s namely Schroeder ventures

and Panorama Capital.

7. Location of Head-Office or Management : San Francisco, US - Purely US

based company

8. Nature of Business/Product and Services: To make safer versions of

pharmaceuticals currently in the market to reduce side effects – Bio-similar

development and marketing the products and are patentable.

9. Team: Itero is led by a team of biopharmaceutical professionals with a proven track

record, having developed 25% of the biopharmaceuticals in the market. They are

backed by leading US life sciences VCs, namely, Schroeder ventures and Panorama

Capital.

5.Marillion Pharmeceuticals India private limited

1. Name of the company : Marillion Pharmeceuticals India

private limited


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6. Other key investors : Bio-advance Upenn

7. Location of Head-Office or Management : Hyderabad, India and

Philadelphia, US

8. Nature of Business/Product and Services: To provide a combination of integrated

drug discovery services (for both biology and chemistry services) as well as product

development capabilities to produce pre-clinical and clinical products for prostate and

breast cancers - de-risking model BOF the over 100 custom research organisations

operating in India, only a handful (e.g. Advimus and Chembistek) provide product

development capabilities and integrated drug discovery services.

9. Team: The Company is led by Zahed Subhan, a leader in drug development and

licensing strategies (experience gained at both large MNCs and early- stage

companies). The current CEO of the Indian – listed entity has developed and sold

technologies and drugs to both DRL and Serum Institute.

6. Melior Drug Discovery

1. Name of the company : Melior Drug Discovery




5. Funds role : Co-lead

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6. Other key investors : Osoge,(lead) Commebys,bio-advance

7. Location of Head-Office or Management : Hyderabad, India, Philadelphia-(US)

8. Nature of Business/Product and Services: To find new uses for known drugs

through the proprietary animal platform to reduce the risk typically associated with

drug discovery – (reposition existing drugs for new indications) Melior’s Technology

combines a several disease models in animals to create platform.

9. Team: Melior boasts of an industry – leading mix of skills for generating safe

drugs. The team consists of ex-Pfizer experts with 30+ years of experience in

chemistry and animal research. The company is backed by US VCs: Osage parters,

BioAdvance and Cammey’s Capital.

7. Sapala Organics Pvt. Ltd.

1. Name of the company : Sapala Organics Pvt. Limited


3. Amount of Investment : INR 32.50 millions


5. Funds Role : lead

6. Other key Investors : None

7. Location of Head-Office or Management : Hyderabad India.

8. Nature of Business/Product and Services: The first Indian chemistry custom

research organization (CRO) to provide complex, high end contract chemistry

services - probably for the first time doors opened for Japanese custom service

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industry to meet Japanese customers needs – synthetic chemistry drug discovery

services.

9. Team: Sapala’s founding team comprises two scientists, namely, Prof.Takeshi Toru

and Dr. Masami Nakane who have opened doors probably for the first time into the

Japanese custom service industry. Founders collectively have 50+ years of

experience in synthetic and organic chemistry at large pharma companies, such as

Pfizer.

8. Neurosynaptic Communications Pvt Ltd.

1. Name of the company : Neurosynaptic Communications

Pvt Ltd


3. Amount of investment : INR 12 millions



6. Other key investors : Venture east – tenet fund and

Vishal Bharat comnet

7. Location of Head-Office or Management : Bangalore, India.

8. Nature of Business/Product and Services: To provide primary health care in rural

areas using a proprietary device and technology, that allow recording and

transmission of diagnostic data while permitting video – and – audio conferencing at

low band width with less costs – primary health care – rural areas .

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9. Team: The Company is led by experts in telecommunications. The team was

formerly at Motorola (India), where it played a seminal role in the early development

of communication devices.

9. Cecilia Health Services Pvt. Ltd.

1. Name of the company : Cecilia Health Care Services Pvt. Ltd.



4. Percentage of ownership by fund : 39% in CDH and Wellnest

Investment in main company 9.6% in

MZI Health Care

5. Fund’s role : Co-lead in MZI and lead in

Holding company

6. Other key investors : ACM Business Solutions, LLC and

N.C. Murthy

7. Location of Head-Office or Management : Hyderabad, India

8. Nature of business/product and services : Build and develop online healthcare,

risk assessment (HRA) Tool and Disease Management Programme (software) for six

diseases to provide online HRA and Disease Management and Wellness Services

relating to Indian population to corporate customers in India and abroad proprietary. It

also includes development of TPA software from MZI-Health Insurance related

services with the development of software program and software TPI and HRA Tool.

9. Team: Cecilia has an experienced team that is headed by the Ex-CEO of Indian

Operations of United Health care. Importantly the Board of Directors of the company

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is headed by the Ex-Chairman of Insurance Regulatory Development Authority

(IRDA), who presided over the privatization of the Insurance Sector in India. MZI is

run by a serial entrepreneur.

10. Elbit Medical Diagnostics Limited

1. Name of the company : Elbit Medical Diagnostics Ltd.




5. Fund’s role : Lead

6. Other key investors : None

7. Location of Head-Office or Management : Hyderabad, India

8. Nature of Business/Product and services : To provide world class comprehensive

Diagnostic Services by using advanced technology of imaging equipments and

cutting-edge pathology technologies (Molecular Diagnostics and Tele-Radiology)

including MRI scanning to cities, urban and semi-urban areas targeting to middle and

lower-middle income groups at affordable costs.

9. Team: Elbit was founded by Ex-Managing Director of Dr. Reddy’s Laboratories

(DRL). The strong team of 250 plus presently headed by Anantha Chari. The team is

highly experienced with background from top diagnostic industry, pharmaceutical,

medical equipment and hospitals.

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11. iMedex Information Services Pvt Ltd.

1. Name of the company : iMedex Information

Services Pvt Ltd.

2. Date of investment : 2006 – 2007

3. Amount of investment : INR. 120.34 Milons


5. Funds role : Lead Role

6. Other key investors : David Kohen (Angel

Investors & USPE Fund)

7. Location of Head Office or Management : Hyderabad, India,

Philadelfia (US)

8. Nature of business: It is a US-indo based venture and intends to provide web-

enabled – online health outsourcing services – Online such as Medical

Transcription, Electronic medical records and electronic prescription with

minimal up-front cost through proprietary platform .

9. Team: Venkat Sarma, the founder has 25 years of experience in the U.S.health

care industry and is a serial entrepreneur. The company is backed by an

experienced senior management team

12. Melrose Trading Company Pvt Ltd. (Medicine Shoppe)

1. Name of the company : Melrose Trading

Company Pvt. Ltd.

2. Date of investment : 2005–06

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3. Amount of investment : INR. 60.00 millions



6. Other key investors : Actis, Acumen

7. Location of Head Office or Management : Mumbai, India.

8. Nature of business: Retail Pharmacy chain through vision stores and special

pharmacy divisions-different business model.

13. Trans India-Acquisition Corporation.

1. Name of the company : Trans India-Acquisition

Corporation


3. Amount of investment : INR. 24.30 millions



6. Other key investors : Business Ventures Corporator

Venkatadri Bobba, N.C.Murthy,

Crig, Colmar

7. Location of Head Office or Management : Hyderabad, India,

Chicago (US)

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8. Nature of business: A special purpose vehicle created by the Investment

Manager to raise funds in the US Stock Exchange by a leveraging small equity

investment to identify the acquisition opportunities in life sciences business in

India.

14. Naturol Bioenergy Limited.

1. Name of the company : Naturol Bio-energy Limited


3. Amount of investment : INR. 143.00 Millions


5. Funds role : Lead

6. Other key investors : Desmet Ballestra (

Technology Provider)

UTI Venture Capital and

SIDBI Venture

7. Location of Head Office or Management : Kakinada Port, Hyderabad,

Andhra Pradesh.

8. Nature of business: Natural is the first fully integrated bio-diesel company

with a state of the art – Bio-diesel plant in India with an ability to use multiple

feed stocks and produce value added by-products, further the company’s

unique technology enables a significant cost advantage.

9. Team: Bhaskar Chalasani, the founder of Naturol, is a second-generation

entrepreneur who established and ran a paper mill for over a decade

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before selling it profitably prior to Naturol, Mr.Chalasani was incharge of

supply chain management with an automobile major in the US.

15. Sresta Natural Bio Products Pvt Ltd.

1. Name of the company : Sresta Natural Bio

Products Pvt Ltd


3. Amount of investment : INR. 94.02 Millions


5. Funds role : Lead

6. Other key investors : Ventureast life fund and

Peepul-capital

7. Location of Head Office or Management : Hyderabad,

Andhra Pradesh.

8. Nature of Business: Produce and supply reliable certified organic food-

products worldwide exports - meeting the needy for healthy through reputed

retail chains-capital efficient-store-in-store model.

9. Team: Raj Seelam, the founder and Managing Director of Sresta, is a serial

entrepreneur. He built two companies previously and sold them profitably

before starting Sresta. The company’s CEO for its India Business, S.

Balasubramanian, had launched “Pedigree” in India and built it to a INRL

billion brand in 5 years.

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On the whole, from perusal of brief profile of the 15 investee companies, it

can be concluded that the nature of business of 15 investee companies are in the early

stage business and in the areas of drug discovery, drug discovery services and

production of pharmaceuticals, health care services and clean energy products. For

these activities they intend to build, develop and less proprietary - new innovative and

high technology. Some of these companies also planned to adopt new business model.

The founders and management team of these companies comprise leaders and experts

in technology; and pharmaceuticals and health care services organizations with

several decades of relevant experience in early stage development companies as well

as large corporations and proven track record. 10 of 15 companies are also backed by

popular venture capitalists particularly from the US and 10 of 15 companies also

directly integrated with (demand and supply backward and forward linkages), global

economy particularly US (8 or Indo-US companies and 2 companies export oriented

companies). Fund role is lead role in majority of the companies and shared 25% to

45% in ownership holding of the Investee Companies.

SECTION-III

4.3 Evaluation of Fund’s Performance

The performance of the BVF fund has been assessed and analyzed with the

help of the following indicators,

1) Fair value appreciation / depreciation rate

2) Annualized appreciation rate - Gross IRR

3) Health code ratings / Categories

4) Appreciation or depreciation in Net Asset Value - Net IRR

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1) Fair value appreciation / Depreciation rate over cost of investment – The PWC

provides valuation in terms of fair values over the cost of investment of fund in

investee companies every year based on the performance of the investee companies –

Quantitative and Qualitative – and exchange rates by following worldwide accepted

valuation guidelines.

2) Annualized Appreciation or Depreciation rate / Gross Internal Rate of

Return (Gross IRR):- The PWC provides Annualized Appreciation / Depreciation

rates over the cost of investment based on the worldwide accepted International

Private Equity and Venture Capital Valuation guidelines. This guidelines will take

into account the time where venture investments have been made, when partial or full

disinvestment are achieved, when dividends or interest are received and how the

venture investments valuation has appreciated or depreciated.

3) Health Code Ratings / Categories: The Investment Manager (IM) introduced

four health ratings a system of health ratings – to the investee companies to reflect the

health of the investee company against the projections of the IM at the time of

investment commitment. The IM also used the system of health ratings to monitor the

performance of the investee companies.

4) Net Internal Rate of Return (Net): Appreciation / Depreciation rate in Net

Asset Value (NAV) – Net internal rate of return (Net IRR)

Net IRR is another measure of the fund manager. This captures the returns to

investors including management fees, other expenses and carried interest. This also

takes into account the funds drawn from investors and net returns to investors based

on investment from portfolio companies after expenses.

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4.3.1 Fair Value Appreciation of the Fund

The Bio-Technology Venture Funds investment portfolio showed that fair

value appreciation rate is by 27% over the cost of investment during 2005 – 2006 and

2006 – 2007 as per valuation of price water-house (Table-4.8,4.8a,4.8b,). This is

because these years are initial years for investment and disbursement of investments

started to 14 out of 15 investee companies during these years. Most of the investments

made are relatively young, two investee companies had two and more years of

operations, another two had one full year of operations and other 10 have less than

half year operations. Since investments are young and units are yet to become

functional most of the investments are valued at more or less at cost value. Even this

growth (27.1%) during these years is because of very high growth in value of three

investee companies (50 to 100 growth in case of Bio-serve, Melrose Trading and Elbit

Medicals).

The fair value appreciation rate increased to 42 percent in 2007 – 2008 and

further slightly increased to 44 percent in 2008 – 2009. This is because 95 percent of

(INR 134) total investments are disbursed to investee companies by March 2009 and

10 out of 15 investee companies have 2 to 3 years of full business operations.

Nine companies have increased in fair value; specially three companies have

showed very high growth rates ranges from 104 percent to 226 percent Bio-Serve

(226%), Imedix (163%), Mardil (104%) registered very high growth rates. Another

three companies showed high rates ranging from 70 percent to 83 percent and another

three company’s registered significant growth rates of between 10 percent to 28

percent. However, investments in Melrose Trading and Trans India are written off

worth INR 123 millions. Further Bio-Energy showed more than 80% erosion in value

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and Neurosynaptic remained at cost. Fair value appreciation rate was robust and

increased to 56 percent in 2009–10 and further increased to 73% to 2010 – 2011. This

is because 11 companies have appreciation in value ranges from 10% to 227%, five

companies such as Imdex, Elbit, Melrose, Mardil and Evolva have registered very

very high growth rates ranges from 135 percent to 227 percent. Another five

companies such as Marillion, Sresta, Sapala, Bioserve and Cecilia have registered

very high growth rates between 50 percent to 100 percent and the other Itero

registered 11 percent growth rate. At the same time, the number of written off

companies increased to three because the Bio-energy also showed 100 percent erosion

in value and the Neurosynaptic remained same at cost value.

Surprisingly, the value in appreciation steeply fell to 34% in 2011 – 2012 and

further to 33% in 2012 – 2013. This is because, the number of written off companies

increased to six which includes Marllion, Melior and Neurosynaptic, hence resulted in

loss of cost of investment worth INR 490 crore. Further, two companies, Evolva and

Imedx lost heavily in their value by 103 – 143 percentages compared to the values of

2010 – 2011. Cecilia, Sapala and Bio-Serve also significantly lost in their values

ranges from 5 percent to 25 percent. As a result, the fair value of investment worth

INR 2324 at 70 percent appreciation rate in 2010 – 2011, sharply fell to INR 1778

millions in 2012 – 2013, a loss of INR 546 millions. Finally, the fair value of

appreciation over cost of investment (INR 1341.00) is just only 33 percent and (INR

1788.00) or 1.33 multiples only.

However Sresta, Mardil registered higher growth rate in value appreciation in

2012 – 2013 ranges from 75 percent to 120 percent compared to 2010 – 2011. Itero

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improved its growth significantly (22%) and Elbit maintained the same high growth

rate of 2010 – 2011 (135%).

On the whole, from the above analysis it can be concluded that the fund’s

investment fair value appreciation rate is just 33 percent (INR 1791.51 millions) over

the cost of investment worth INR 1336.53 millions by 2012-13. This indicates that it

provides only 1.33 multiple of funds investment, which is much below the projections

at the time of investment made even at almost 6 years the weighted average period.

Six companies such as Melrose Trading, Trans India, Natural Bio-Energy,

Neurosynoptics, Melior and Marrillion have performed very badly, further Cecilia

also performed poorly and lost significant value compared to last year and fair value

dipped from INR 2320 millions in 2010 – 2011 to INR 1777.84 in 2012 – 2013. As a

result, the investment made is very poor. Performance companies worth INR 490

millions are written off as there is no scope of recovery of money. The IM can recover

the principal amount at best from Cecilia.

4.3.2 Gross IRR

The data reveals that Gross IRR is 26 percent in 2006–2007 and 25 percent in

2007–2008 (Table-4.9). One can consider this rate of growth as satisfactory and

good on Fund’s Cost of Investment because of the initial year of investment and

around only two years. However the rate of appreciation in value sharply declined to

18 percent in 2008 – 2009 and further declined to around 14 percent during 2009 –

2010 and 2010 – 2011. Again, the Gross IRR sharply fell to 5 percent by 2012 – 13,

thus the annualized appreciation rates or Gross IRR in value over cost of investment

sharply declined from 26 percent to very low rate of 5 percent that too over at almost

6 years (2005-06 to 2012-13) of weightage average investment period; the reasons of

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this phenomenon are six investee companies such as Melrose Trading; Trans India;

Naturol Bioengergy; Neurosynaptic; Melior and Marillion have zero gross IRR;

another five companies such as Cecilia, Evolva, Bio Serve, Sapala, Itereo have low

rates (4% to 5%) gross IRR by 2012-13. The zero gross IRR companies have closed

their business operations and shutdown their plant and machinery i.e. dead unit. As a

result, the investment made is written-off from these companies, further the

performance of Evolva, Ceceilia is showing a much below projection and investment

can return principal amount at best.

4.3.3 Assessment under Health code Ratings/Categories

During 2005–07, the fund’s investments are made in early stage companies

and investee companies are also in early stage of their business cycle with the

weighted average investment period being only one year and seven months, the units

are yet to become fully functional to generate a positive cash flow, and in the absence

of warnings from companies hence most of the companies have been classified as

health code I and II. However, during 2008 – 2009, two and one company is classified

as category IV and III respectively because their performance is well below

projections. As a result, investments in two companies have been written-off and the

other one last significant erosion in its value. More or less the same trend is continued

during 2010 – 2011(Table-4.10).

However during 2012 – 2013, six companies such as Melrose Trading, Trans

India, Natural BioEnergy, Neurosynaptics, Melior and Marillion have been classified

as Category 4 and cost of investments worth total INR 490 millions have written off

because the performance is well below projections, Cecilia which is also categorized

3 due to below projections performance also lost significantly in its value compared to

the value of previous year of 2011–12. Finally, only three companies such as Mardil,

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Sresta and Sapala are allotted as Category 1 and the other five companies Elbit,

Imedix, BioServe, Itero and Evolva has been categorized as 2.

4.3.4 Net Asset Value (NAV) – Net IRR

Growth in Net Asset Values

The Net Asset Value (NAV) of the fund is another important measure to

evaluate the performance of the fund; because it takes into account the Net Returns to

investors including Management Fees, other expenses and carried interest and net

returns from disinvestment from portfolio companies after expenses (4.11).

Data reveals that during 2008-09, the growth rate in NAV is 27 percent, which

is considered as good and satisfactory, because the investment phase of the fund is

completed by 2008-09 and 95 percent of investment is disbursed to investee

companies and weighted average investment period is also more than 2 years.

However, the growth rate came down to 10 percent in 2010-11 and surprisingly

negative growth rates were registered in 2011-12 and 2012-13 -25% and -8 percent

respectively. The negative growth rates indicate that there is significant erosion in

NAV by 2012-13. Thus, the growth in NAV steeply fell and registered negative

growth rates during 2011-12 and 2012-13, resulting significant erosion in its value.

This may be because of very poor (from INR 1460 millions in 2010-11 to INR 1091

millions in 2012-13) performance of six Investee Companies which are mentioned

above.

4.4 Performance of the Fund on exits: Disinvestment either on partial/full is not

made in 13 companies and only partially in Evolva and full in Biotech Company. In

Evolva, partial disinvestment of INR 4.40 millions made at INR 27.8 millions during

2011-12, and INR 26 millions was distributed to the investors in the same year. This

129

is the first distribution to the investors from the fund. Full disinvestment was made

worth INR 50 millions from Sapala during 2012–13 and the amount would be

received in June 2013. Moreover, the dividends and interests from investments made

have not received from all the companies. Thus, the performance of the fund on exits

from portfolio companies is also low and not successful and maturity is longer than

expected.

Factors contributed for low performance of the Fund

Based on the analysis of assessment indicators of the performance of the BVF,

it can be concluded that performance of BVF is low and not satisfactory. Fair Value

Appreciation is just 33 percent and provides only 1.33 multiple for the cost

investment; Gross IRR is only 5 percent and 7 companies have been allotted health

category under IV and III. Net IRR registered negative growth rates by 2012. Further,

the performance on the exits from portfolio companies is low and not satisfactory and

maturity is longer than expected. Moreover, the dividends and interests are not

received from the portfolio company.

If we look at the performance of other venture funds in health care sector

globally, the data reveals that for the 2005 year, the Venture Fund’s performance in

health care sector has also been poor globally (Table 4.12). The main factor may be

contributed for the poor performance of BVF is the failure of the seven investee

companies. Because the performance is very poor and much below projections and

ultimately they have closed their business operations and dead. The global economic

meltdown seriously had an impact on the performance of the fund’s Investee

Companies particularly the said six or seven companies 10 of 15 Investee Companies

130

have closely integrated to US and Europe economy (Eight companies Indo-US

companies and two companies are mainly export based) (Table 4.13).

1. The 4 out of 6 poor performance companies such as Marillion, Melior,

Trans India and Naturol Bioenergy are directly affected by global

economic meltdown.

2. Marillion is basically an Indo-US based company and could not raise

funds from venture funds, either from US and European countries for

clinical stage development of two oncology products. The Melior drug

discovery is seriously affected by continued lower demand from big

pharma clients/traders including Pfizer of US. This is because of the big

clients reduced their expenditure due to economic meltdown. Significant

erosion in values of solar stocks of TransIndia in US stock exchange due

to meltdown of global markets during 2008-09. Natural Bioenergy

incurred a loss of INR 560 millions for financial year 2008-09 due to

falling commodity prices internationally (dropped by over 50 percent in

palm oil price) and Forex value fluctuations (over 25 percent in rupee

value against US dollars) which constricted working capital and led to

closure of production.

3. The Cecilia Health Care Services which is classified as health code

category III because the performance is much below expectations. The

main reason is due to lack of demand because big corporate clients in US

terminated their contracts for services in the context of global economic

meltdown. The other moderately performed companies such as Bioserve,

Evolva are also affected by global economic meltdown. The moderate

performance of Bioserve is due to budgetary cuts by US government on

131

health; the Evolva suffered seriously from reductions in its market caps (in

value of market prices) in Swiss Stock Exchange (it is a listed entity in

Swiss Stock Exchange) due to economic uncertainty that prevails the

European market. Imedx is also affected by comparable companies’

dropped multiples due to current depressed markets.

On the whole, the supply side factories such as funding institutions have not

come forward to fund in portfolio companies and many corporate pharmas and other

institutions of US and European have cut down their budgeted health expenditure.

Thus, supply and demand factors of world economy seriously impacted the

performance of the said companies. The reasons for the poor performance of 7

companies are presented in detail in the following pages.

The empirical evidence also reveals that the success rate in terms of returns is

lower in early stage business or business adopting new business models. At the same

time, risk is very high. Further, there is a view that new venture funds in

biotechnology lack adequate operational experience in India. The data on VC / PE

investments reveals that 77.5 percent of investments deals are in growth, later stage

companies in health sector during 2006-07. Even during 2007-08, investments in

early stage startup companies accounted for only USD 120 millions, which was less

than 25 percent of health sector investments or 1 percent of all VC / PE investments.

Moreover, investment deals reflect a preference towards manufacturing and services

in health care sector rather than the early stage discovery sector. The reasons for low

investment in early stage business are high risk and late returns. They prefer safer late

stage deals, which also gives quick returns compared to early stage investments. The

132

BVF’s all investee companies are early stage startup companies in the areas of drug

discovery and drug discovery services with proprietary technology.

The reasons for low exits and longer maturity period for exits from portfolio

companies are as follows:

Being early stage fund with focus on innovative companies, generally maturity

of the portfolio is longer than PE funds. All the investee companies are early stage

startup companies with proprietary technology, hence low exits and maturity is longer

than expected. The empirical evidence also reveals that there are low exits globally in

the health care sector. The data reveals that percentage of global exits over total

number of PE / VC investments in health care sector was only 22 percent during 8

years period of 2005-2012. Further, the percentage of exits sharply came down from

50 percent in 2010-11 to 23 percent 2011-12 and further came down to 14 percent in

2012-13. The reasons for this phenomenon are:

The slump in the health care sector has made potential acquirers conservative.

The stage for acquisitions globally was also moved from Phase-I and II to Phase-III.

With most of BVF’s investments are in phase I and II, this conservative nature of

potential acquirers has impacted the whole industry globally and BVF is no exception

to this and also, global Macro Economic Environment during late 2000’s and early

2010 has not helped the process either. Thus, the stage of investments, nature of

business and global economic meltdown contributed for the low exits and longer

maturity from portfolio companies.

On the whole, the global economic meltdown of the 2008-09, the stage of

investment, early stage startup companies and nature of business are mainly

contributed for the poor performance of the fund.

133

SECTION-IV

4.5 Impact of performance of Fund on Capital and Employment

a) Impact on Capital as per books of Accounts

Data reveals that the capital value of the fund is increased from INR 470.03

millions in 2006-07 to INR 1859.43 millions in 2008-09 and further increased to INR

2261.64 millions in 2010-11. Thus, growth in capital was around 52 percent during

2007-08 and 2008-09 and declined to 22 percent in 2010-11(4.14).

However the capital declined from INR 2261.64 millions in 2010-11 to INR

1690.89 millions in 2012-13 resulting a negative growth of -25 percent. Thus, capital

increased up to 2010-11 and declined by 2012-13, a loss of worth of INR 571 millions

in capital value (unrealized gains). This is because the fair value appreciation rate

over cost of the investment of the fund declined from 73 percent in 2010-11 to 33

percent in 2012-13 due to very poor performance of six companies. Further, net losses

of the fund increased from INR 85.11 millions in 2006-07 to INR 682.89 millions in

2012-13 which is deducted from capital of the fund. Thus, low appreciation rate and

large accumulated net losses contributed for the decline in the assets of the fund.

b) Employment in Portfolio Companies

The fund’s portfolio companies generated employment to 788 persons in

2006-07 during the year only little more than 50 percent of total investments are

disbursed to 14 out of 15 investors. The employment increased to 1477 persons in

2008-09 the year in which 95 percent of total investments were disbursed and

weighted average period of investment was also more than 2 years (Table-4.13,4.14).

Thus, there is a two fold increase in employment generation from 2006-07 to 2008-

09. The employment generation further increased to 1958 persons in 2010-11, a

134

threefold increase from 2006-07 to 2010-11. During this year, the rate of appreciation

in fair value is also very high - (70%) and weighted average investment period is

more than 4 years (Table 4.15).

However, the employment generation declined to 1496 persons in 2012-13 the

year in which rate of appreciation in fair value is low (33%) and weighted average

investment period is almost 6 years. On the whole, generation of employment

increased up to 2010-11 and declined afterwards. This is because of closure of

business operations of above mentioned very poorly performed 6 companies. Further,

the Imedx, a successful company also reduced its employment from 1146 in 2011-12

to 850 in 2012-13. On the whole, the very poor performance of 6 companies and

Imedx contributed for the reduction in employment generation of the investee

companies.

SECTION-V

4.6 Value Added Services

The IM helped and provided services to the Investee Companies such as:

1. Business Plans:

These plans helped in shopping, developing, strengthening, focusing and re-

focusing business plans of investee enterprises (High value services – Sapala;

services in less developed areas – and starting new business verticals – Elbit

Medical Diagnostics; on organic foods retail chains – Sresta Naturol Bio

Products

135

2. Senior Management Teams:

These teams have assisted in identifying an experienced management team;

recruitment and hiring of key personnel and senior management (Ex-Chairman

of IRDA (Insurance Regulatory Development Authority) to head the Board of

Directors of Cecilia Health Care Services; CEO of Indian Operations of

Evolva).

3. Indian Operations:

Helped in establishing and setting up of Indian Operations from startup;

expanding backend facilities; conducting clinical trials; to scale up

infrastructure facilities as well as work force and collaborations with reputed

Indian institutions for Research and Development; in setting up important

contracts (collaboration with the reputed Indian Institute of Clinical

Technology (IICT). Backend facilities; and work force Imedix; clinical trails –

Mardil Medical Devices; Sai Life Sciences (SLS), a leading Indian CRO for

Marlion Drugs; contracts for the company with leading Indian pharmacy –

Melior Drug Discovery and Mardil Medicals).

4. Raising Funds:

These funds helped to buy the business concept, plan and attract the investors

into the investee companies; identifying and getting equity investors; raising

funds from other venture funds and also helped in sourcing low interest loans

from government financial institutions. (Cecilia Health Care Services;

Neurosynaptic Communications; Sresta Naturol Bioproducts; Mardil Medical

Devices; etc.)

136

5. Acquisitions/Mergers

Helped in acquisitions, identifying potential acquirers; drive mergers; role-up

plan to acquire, merge with complementary entities and forging new

partnerships (acquisition of GCP Tissue Respiratory – Bioserve

Biotechnology; Neurosynaptic; Sapala Organics; Imedx Information

Services).

6. Technology:

IM also helped investee companies access the technology to make first

products (Itereo Biopharma Clinicals).

Thus on the whole the IM helped and provided value added services to the

investee companies in the areas of business plans, identifying experienced

management teams; attracting other investors and raising funds, collaboration with

reputed research institutions; setup Indian operations from startup; acquisitions and

mergers; access technology etc.

The investment manager is successful in raising a total corpus of INR 1554 millions

from investees by exceeding its target and mainly 8 investees contributed 90 percent

of total corpus. The IM is successful in receiving a good number of business

proposals i.e 3789 by 31st March 2008 50 percent of deals generated are received

from health sector but health sector accounted for nearly 90 percent of total deals

approved. The IM fund has drawn 100 percent of the total corpus from the investors

committed with in stipulated period.

The IM fund invested an amount of INA 1341 millions in 15 investee

companies by 31st march, 2009 and it is within the agreement between investors and

137

IM of the fund. The IM disbursed the entire investment commitment of INR 1341

millions to 15 investee companies by 31st March, 2009. 10 out of 15 companies

received funding in 2 to 4 rounds because of follow-up funding and the remaining five

companies received funding in one round during the investment commitment year

itself. The instruments such as equity and convertible preferential shares are the

major instruments chosen by IM while investing. Fund’s percentage of ownership is

in between 33 percent to 9 percent in 10 out of 15 companies and fund’s play a lead

role in majority investee companies.

Based on the analysis of assessment indicators of the performance it can be

concluded that the performance of BVF is low and not satisfactory. The main factor

contributed for the poor performance of the fund is the failure of the some investee

companies. The Global economic meltdown of 2008-09 mainly affected the

performance of the seven companies. Apart from global economic meltdown, the

nature of business and stage of investment also contributed further poor performance

of the fund. The poor performance resulted in decline of capital of the fund because

of loss of annualized value gain worth INR 571 millions. The poor performance of

seven companies also reduced the employment generation in Investee Companies.

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