The Indian government is in the process of starting a venture capital(VC) fund to support new drug research initiatives in the country. It will put in sponsorship seed capital of Rs 200 crore and expects to raise another Rs 300 crore as part of the first tranche of the pharma fund that is expected to have a corpus of Rs 2,000 crore.

It will fund entities engaged in early stage of drug discovery and backed by Indian researchers.

Department of pharmaceuticals secretary Mukul Joshi speaking at the sidelines of a pharma industry event in Delhi said the proposed fund will be managed by professionals through an asset management company and could be operational by end of 2011.

It is not clear but apparently this VC fund is a truncated version of another proposed pharma fund that was announced early this year. Another top bureaucrat had earlier said the government is looking to set up a Rs 10,000 crore VC fund for financing research in the pharmaceutical sector.

It was announced that the government will contribute a sixth of the corpus with the rest being scooped up from other investors. This mega $2.2 billion fund was to raised in multiple rounds with Rs 3,000 crore to be raised by March’12, Rs 5,000 crore in the following year and the balance thereafter.

These moves comes even as Indian pharma sector that largely banks on supply of generic or low cost copies of drugs developed by foreign drugmakers has been seeing sellout by promoters of Indian companies to overseas firms. While Ranbaxy was acquired by Japan’s Daiichi Sankyo, Sanofi Aventis snapped Shantha Biotech, Fresenius Kabi buying Dabur Pharma and most recently Piramals selling domestic formulations business to Abbott that made the US-based drugmaker the largest domestic player in retail sales.

While the success of the proposed pharma fund when it is formed will be judged in the future, it would not be easy to generate a big winner anytime soon. The chances of failure in new drug discovery research is high and there is a long gestation period in bringing returns. This has been one of the reasons why many large local drugmakers have hived off their research arms into separate entities (with some even being listed companies).

Government (or government backed organisations) sponsored VC funds have been few in the country but they have been fairly successful. Among the prominent ones SIDBI Venture Capital has apparently raised Rs 1,000 crore ($214 million) for its third VC fund. Double the size of its last fund, SIDBI brought in Rs 250-300 crore as its contribution in the new fund.

SIDBI VC's first fund had a corpus of a modest Rs 100 crore targeting IT sector deals and was followed up with SME growth fund. Its parent SIDBI is also one of the anchor investor along with Rajasthan State Industrial Development and Investment Corporation (RIICO) for Rajasthan Venture Capital Fund (RVCF) new fund. The state run VC fund that invests in firms located in Rajasthan and NCR (National Capital Region) is raising its second fund with a target corpus of Rs 500 crore.

There are also other regional VC funds backed by the respective state government. Early this year the Gujarat government was said to be planning a Rs 500-crore VC fund in partnership with the private sector to invest in tourism-related infrastructure in the western state.

In another move, Gujarat Venture Finance Ltd (GVFL) said early this month a plan to set up an infrastructure development fund of Rs 1,000 crore. The launch of the new fund is slated for January. The state government will bring in half of the corpus with 10% each coming from two co-anchors that would include a bank with the balance coming from other domestic and foreign financial institutions.

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