AusBiotech 2006: the business of biotech

It hasn't been the best year on record for the Australian biotechnology industry but things should improve somewhat next year. Kate McDonald reports that the fragility of the sector is sure to be a topic of discussion at this year's AusBiotech conference.

A 14 per cent plunge in the share price of a particular industry sector would normally spook the most hardened analyst, but when that sector is called biotechnology and consideration is given to its relative youth, excuses can generally be made.

One big excuse for the fall in the share price of publicly listed biotech stocks in the final quarter of 2006 is this country's - and others too obvious to mention - appetite for cheap and plentiful resources. The consensus of opinion seems to be that the booming resources sector is taking the ready cash away from most of the others, not the least biotech.

While the resources boom is part of the problem, the current trend towards risk-aversion is not helping matters, says Andrew Sneddon, life sciences partner with PricewaterhouseCoopers (PwC).

His report on the last quarter of 2006 showed a decline in the value of the listed life sciences sector of 3.5 per cent, in line with the All Ordinaries, which declined 3.2 per cent.

Take out the Big Three of the Australian life sciences sector - CSL, Cochlear and ResMed - however, and you find a fall of 14.6 per cent. This almost mirrors the decline in the NASDAQ Biotech Index, which fell 14.3 per cent over the same period.

"When you take the big three out - and this is such a large part of the market here - it was a substantial decline," Sneddon says. "In many ways it was because during recent times a lot of speculative money has gone into the resources sector where there have been significant returns.

"The resources boom is part of it, but markets are very fickle and at the moment the market is risk-averse, and except for the majors, which have done pretty well, the life sciences sector is still highly speculative.

"When a market shifts - if you can make 20 or 30 per cent return on resource stock - why would you invest it in a life science stock that maybe takes on average eight years to get to market?"

Sneddon, who will speak at AusBiotech 2006 on single product companies and diversification, forecasts that things should improve in the next 12 months, although not as fast as some would hope.

"At the moment ... it looks relatively stable," he says. "I do hope and expect that there will be some really good deals and success stories. Money goes around in circles and like anything you just need a bit of impetus in the market and a couple of people pocketing a lot of money to drive a re-focus on the market. I think it will come back in the next 12 months."

Professor Michael Vitale of the Melbourne Business School agrees that the resources boom is partly to blame for the recent poor performance.

"I think there are a couple of things [to blame]," Vitale says. "There have been very good returns available in the resource sector, which seems to investors much lower risk. The ASX 200 is rising at 20 per cent or whatever but the risk of biotech makes it look like it just doesn't seem worth it.

"That's one thing - people taking money out of biotech and putting it into resources. Secondly, there's been a series of disappointments with a few companies - we've had a few successes but nothing of the home-run variety."

Youth on our side

In March this year PwC released a BioForum report covering the last five years of the sector. It showed that the market went up substantially, almost doubling from a value of $11 billion in 2000 to $20 billion last year. Sneddon expects the next five years to show similar returns.

"As an industry it is very much in its infancy, it's still a very young industry," Sneddon says. "In Australia when you look at science, in many areas we do lead the world in some of things we are doing: the bionic ear and Cochlear, in respiratory medicine, asthma, in monoclonal antibodies.

"We have such a strong science base but we have a poor commercial base to capitalise on the opportunity, so unfortunately there's not enough money to fund a lot of these [developments] and that's why when it is so early-stage there will be a fair bit of fluctuation.

"But I would expect in the next five years it could very likely double again. There's no reason why, if you look at the opportunities here, the market can't grow substantially.

"If you look at the clinical trial results they're very positive, so more and more things are getting through to stage II and stage III. That will lead to more and more large commercial deals."

Sneddon points to a number of biotechs that are extremely promising, not only due to their movement through the clinical trials process but in part because of the good people they have on board.

While he has to be careful of who he singles out as he and PwC act as advisors and auditors to many Australian companies, there are a couple he has his eye on.

One is Mesoblast, the mesenchymal stem cells company that is moving into phase II trials in the US for its orthopaedic therapy.

"Mesoblast is doing extremely well - it's getting to late trials and the main product they have at the moment is a stem cell that gets added to a paste for bone regrowth," Sneddon says.

"There are so many other applications that they haven't even started on yet so there is a lot of opportunity there. [Scientific director] Silviu Itescu [also speaking at AusBiotech] is a very clever man, and if you look at [chairman] Michael Spooner, he shows that the right sort of people can be very successful in raising capital and driving a company.

"When he was at Ventracor he did a wonderful job and since he's been a Mesoblast the share price has only gone one way and they've raised a lot of money in that time."

Another company he likes the look of is Fermiscan, which is launching a test for breast cancer using synchrotron X-ray diffraction of human hair.

"Fermiscan did a reverse listing through Olympus Resources, a mining company that was listed on the ASX. Sometimes with those sorts of stocks that's the only way they can get to market, but when they do get to market they can at least raise a bit of capital to support their development."

He describes Prana Biotech, which is achieving interesting results with a potential therapy for Alzheimer's disease, as "one of those really impressive companies that are going to come through".

He also mentions Phosphagenix, Peplin and GroPep, which have all done well recently. "There are a number of them doing some really good work - and a heap of my clients too."

The management

One thing most commentators on the sector agree on is the dearth of good management candidates who can also understand the intricacies of life science.

"Everyone agrees that there is a lack of good people," Michael Vitale says. "You see it in the kinds of mistakes that some people make. That's not to say that if I were there I wouldn't make the same mistakes, but I'm not there."

Sneddon agrees that one of the issues the sector has to face up to is that scientists don't always make good businesspeople.

"It's a big issue and that's why you look at the 110 listed public companies ... many of those are being controlled by people who don't have strong commercial skills. And why do they flounder for so long? That's the other big characteristic - a lot of this is getting the right people in place."

Vitale has recently taken on a role at the Melbourne Business School, which has launched a new master's degree in management (innovation). He says the new course is not a direct response to the lack of management expertise in biotech in particular but is targeting people who need to know more about how to manage innovation.

Vitale, who will also speak at AusBiotech on the communication challenges facing the industry, says the course was set up for two reasons.

"One is the belief that innovation is a learnable thing - you can learn to do it better. The second is that in order to increase the rate of innovation we need to reduce the risk, and by having people who are skillful at [innovation] will reduce the risk."

Monash University has also launched a master's of business (commercialising science and technology), taught jointly by the faculties of medicine and business, that is directly aimed at students with a science base who want to move into commercialisation.