Challenges in exiting biotech portfolio investments

The journey of a large number of bio technology or life science entrepreneurs is initially fuelled by private and public grants as well as collaborations with educational institutions. However, these grants and collaborations come with their set of challenges and restrictions, especially concerning the underlying intellectual property rights.

A private equity or venture capital exit from a portfolio company is typically achieved either through (i) a listing of the company’s shares on a stock exchange; (ii) a strategic sale of either the portfolio company or its assets; (iii) a sale to an institutional investor or other private equity or venture capital funds; or (iv) a promoter buyout or a company buyback.

In some instances, the investor also has the right to “drag along” the other shareholders of the portfolio company such that the acquirer gets control of the company. While these exit rights may be contractually available to an investor, in practice, their implementation would depend on the restrictions and conditions that are imposed on the portfolio company under law or under contract.

These restrictions and conditions could have an impact not only on the exit mechanism but also on the timeline of a deal and the valuation of the portfolio company at the time of the exit.

The biotechnology sector is heavily regulated, not just under law but also by contract. Therefore, the transaction structures should also factor in the consent requirements needed for the deal to be concluded and the certainty and timeline required for obtaining such consents.

In our experience, investments in the biotechnology and life sciences sectors are usually structured keeping in mind the entry barriers for the investment and not necessarily factoring in the exit challenges.

While the limitations and restrictions under the Companies Act, 2013, the Foreign Exchange Management Act, 1999, and the Competition Act, 2002, need no discussion, there are several other limitations and restrictions that could impact an exit.

1. If land has been sourced for the portfolio company’s operations from the government under any concessional or beneficial scheme, it is not uncommon for the government to require consent not only for the transfer of the land but also for any change in shareholding (whether or not it constitutes change in control) or any change in management.
2. If the portfolio company has an in-house research and development centre (R&D lab) that is recognized by and has received a grant from the Department of Scientific and Industrial Research (DSIR), the underlying assets (including the intellectual property) of the R&D lab would be subject to the terms of the grant and, in some instances, any transaction involving the intellectual property may require the prior consent of the DSIR.
3. If any intellectual property is obtained from or developed in collaboration with any educational institution (including the faculty or research scholars), the use of such intellectual property would be subject to the terms and conditions imposed by the educational institution, which could be a revenue-share mechanism, or giving an equity stake, or a mandatory consent for use or transfer of the intellectual property.
4. Section 4 of the Biological Diversity Act, 2002, requires obtaining the permission of the National Biodiversity Authority before transferring the results of research relating to Indian biological resources to any person who is not a citizen of India or to an Indian company or organization that has non-Indian participation in its share capital or management.
5. The Biotechnology Industry Research Assistance Council (BIRAC) provides several forms of financial assistance through various programmes to entrepreneurs, including the Biotechnology Ignition Grant for early-stage startups. These funding initiatives are available only to Indian companies (where 51% or more of the capital in the company is beneficially owned by resident Indian citizens or Indian companies) and Indian citizens. In the event of a change in control, BIRAC will have the right to reconsider further funding, governance of the underlying intellectual property and also seek a refund of the amount of grant-in-aid.

It is therefore vital that emphasis is given to issues that could impact the exit from a biotech or life sciences company even at the time of the investment in order to avoid or mitigate the risks associated with the typical hurdles in transactions involving such companies.

Ekta Bahl is a partner and Sandeep Pareekshit is a senior associate at the Hyderabad office of Samvad Partners.