AusBiotech special: Australia's place in the global gravity shift

The Australian biotechnology industry may have reached a milestone this year with market capitalisation passing $30 billion, but we are just a drop in the ocean compared with the frightening potential of Asia.

Those in the know are predicting an equatorial gravity shift in the global biotech and pharma industries to occur sooner rather than later.

The milestone of $30 billion in market capitalisation passed in the third quarter of 2007 (ended 31 March) is certainly something to be proud of for a relatively small country like Australia, but it is of course tempered by the fact that our big three - CSL, Cochlear and Resmed - make up the vast bulk of that market.

In fact, excluding the well-known trio, Australian biotech comes in at a much more realistic $7.5 billion market cap, according to PricewaterhouseCoopers' (PwC) latest BioForum report.

And despite extreme volatility in the market recently due to the overwrought drama that was the American subprime lending fiasco, PwC gives a restrained thumbs-up to the overall situation in the life sciences sector as a whole.

Activity in the whole sector was "promising" based on initial public offerings and secondary capital raisings activity, the report states. For the quarter ended 30 June 2007, there were five listings with a value of $216 million and 64 secondary capital raisings valued at $282 million, up 50 per cent on last year.

"There was an upswing in the market in the past 12 months and activity has remained consistent in the quarter ended 30 June 2007," PwC life sciences partner Tony Stephen says. While the sector was hit hard as a result of those volatile global markets, recent movement has seen strong support for quality stocks, he says.

"This is a positive sign reflecting the recovery of the NASDAQ life science market and strong underlying fundamentals."

Rhenu Bhuller, the Singapore-based global vice president for pharma and biotech at Frost & Sullivan, also values the industry at around $30 billion, and expects growth to come in at around 10 per cent per annum for the next three years.

We do well for a small sized country, she says, and have clear advantages for international investors in terms of costs and skilled labour compared to other OECD member countries like the US, the UK, Germany and Japan.

However, that $30 billion pales in comparison to the staggering achievement of India, for example, which has a total market cap estimated at 10 times that amount. According to Bhuller, India is a far more mature market than ours with strong capabilities from pre-clinical up to manufacturing.

Bhuller, like PwC, is urging the local industry to look much more closely at Asia for alliances and deals rather than setting its sights on the US and Europe.

"The US is still the focus of many Australian biotech companies in terms of alliances, and this is clearly due to the population that they hope to reach by commercialisation in the world's largest market," she says.

"One of the disadvantages of this is that it is highly competitive, as every biotech company globally hopes to strike an alliance in the US and often it is a long road to get noticed and have a successful deal.

"Japan and China should have a stronger focus than it currently has. Some larger Australian companies see its potential and have specific positions looking at collaborations with Japan and China - however, most still focus on the US and Europe.

"Singapore is an upcoming area in terms of collaborations. It has similar strong government backing, and good ties with Australia, so Frost & Sullivan sees that as one of the potential countries for research collaboration."

Global gravity shift

PwC recently released a survey of 185 global pharmaceutical companies that it says points to an industry "gearing up for a global gravity shift". While activity in the North American markets will continue to have a strong influence on Australia, it says, there will soon be felt an increasing effect from the pharmaceutical industry in Asia.

"The centre of gravity of the global pharmaceutical industry is shifting," the survey found. "Not only is Asia set to be the largest pharmaceutical market in the world but many Asian territories will be powerhouses of the industry.

"The shift started as economies grew and low cost manufacturing in the region expanded. Now, companies are, increasingly, also seeking to site research, development and clinical trial activity in Asian territories."

The survey found that multinational pharmaceutical companies are building up their presence in the region and, in parallel, many Asian pharmaceutical companies are looking outward and extending their own international reach.

It found that 55 per cent of multinational companies and 62 per cent of domestic companies in the survey believe the centre of gravity of the global pharmaceutical market will be in Asia rather than North America and Europe in the near future. "China, India and Singapore will be key countries."

PwC's Tony Stephen says India and China are emerging as major suppliers of several bulk drugs at lower prices than other producers, and that Malaysia, Thailand, Taiwan and Hong Kong are also building a strong domestic pharmaceutical market.

The survey found some interesting contrasts between domestic companies in India, China and Singapore. "Indian companies had the strongest appetite for acquisitions and the least appetite for divestments," it says. "Forty eight per cent of Indian pharmaceutical companies were considering acquisitions compared to 31 per cent in Singapore and just 17 per cent of Chinese companies.

"In turn, 46 per cent of Chinese companies and 44 per cent of Singaporean companies were open to foreign investment in their companies compared to just 20 per cent of the Indian companies surveyed."

Australia, Stephens says, is well positioned to benefit from this growth. "All this regional activity and the prediction that the shift will happen sooner rather than later is good long term news for the Australian life science sector," he says.

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How to compete

This global gravity shift may turn out to be perfect timing for someone like Dr Rob Daniels, who has recently returned to Australia to set up Asia-Pacific office for PharmaVentures, the UK-based pharma and biotech consultancy service (see below).

Daniels, who spent five years in Melbourne working in biotech, will mainly be focused on Australia and New Zealand for the short term but China definitely beckons.

"China is pretty exciting and a bit jaw-dropping," Daniels says. "To see what's happened over there, it is substantial to say the least.

"For the rest of the region, Australia and New Zealand are obviously very strong in science and invention, although not necessarily in innovation. Singapore has a lot of money in terms of infrastructure to try to attract people there, but out of the whole region the biggest market is obviously China. There is a lot of money washing around there."

Both Daniels and Rhenu Bhuller, who was previously based here as managing director of the Frost & Sullivan Australia, believe that while there are many interesting things going on down here, we still have to pull up our socks when it comes to positioning ourselves in this new world order.

"There are quite a few interesting companies in Australia and one of the things that the country and the industry as a whole can improve upon is not necessarily the number but the quality of deals that are done and the positioning of the industry in terms of the rest of the world," Daniels says.

"There's lots of great IP that appears to be locked up either in very small companies or tech transfer offices, and overcomplicated corporate structures that makes it almost impossible to get your hands on. There are also situations where there is potentially too much noise in the industry in the form of smaller companies that maybe shouldn't be companies that detract from the key opportunities."

Bhuller agrees. "While some Australian companies have had success it is often the same names that are heard like Relenza and Gardasil that overshadow the many that get lost by the wayside," she says. "A Frost & Sullivan study showed that in practice, more than half the biotech companies in Australia do not have a sound R&D and commercialisation strategy.

"The larger companies seem to be the ones who have some sort of activity on this front. For the smaller companies, it is virtually absent in reality.

"One of the reasons why the R&D strategies are not followed in reality is because of the short-term views of people. Managers get so tied up in daily activities, that strategising and reviewing policies is the last item on their priority list.

"Hence, R&D management is often based on short-term objectives or is formulated in response to competition."

Bhuller believes that biotech companies need a more rigorous approach to commercialisation and need to treat marketing not as a 'spend' but as the investment it really is.

"Biotech companies face competition for their researched molecules from both the big pharmaceutical companies as well as other biotech companies. It can be quite often that there is no significant difference between two drugs (in terms of efficacy or safety or compliance) used for the same disease.

"Hence, it is important to do both a market scanning exercise as well as understand patient outcomes well in advance of launching the drug in the market.

"Information like burden of disease and treatment satisfaction surveys are very helpful in deciding where a drug can be positioned, what its communication should address and what the pricing should be. This needs to be done in parallel with clinical research.

"However, most biotech companies in Australia and New Zealand do not seem to give much importance to this area."

Begone the blockbuster

While many a lone scientist beavering away in a lab may have fantasised about developing the great blockbuster, there is only ever a minute chance of it happening and everyone knows it. Is there still, however, a vestige of belief in the Australian sector that world domination is at hand?

"I don't know if companies really believe they are going to do it all on their own," Rob Daniels says. "There are only three or four that are going into phase III trials and are showing the capability to raise the money to support it.

"As an industry as a whole, Australia and companies in Australia really need to understand where their competitive advantages are, where they should be picking up products, how far they should develop them and where they should be exiting.

"I don't think there's anything wrong with an industry model that says that at the end of phase II or phase III we are going to sell off either the company or the product and we are going to go back and doing it again."

"(Pharma) is going through a consolidation phase," Bhuller says. "The past five years have not been the best in terms of producing blockbusters, and have seen several pipeline failures and recalls, as well as a slew of patent expiry.

"The traditional model of blockbusters producing strong company growth and profits is not going to be the face of pharma in the coming years, and companies realise that the blockbuster approach is no longer going to drive profits.

"Investors have been used to double digit performances, and it is also these high expectations that have put a lot of pressure on the industry to deliver results that investors have been used to seeing over the years."

The strategy of big pharma now seems to be more focused on chosen areas of specialisation, "more of a specialty pharmaceuticals and biotech focus", rather than the traditional big pharma blockbuster approach, she says. "The loss of patents and weak pipelines has led to cuts in sales and marketing to allow for investment in R&D and specialty growth areas."

Daniels believes there are plenty of opportunities for more innovative approaches from Australian biotech, rather than the traditional route of looking at a university's very early stage product, particularly in the area of in-licensing.

"And I think Australia does have access to capital, much as people like to say it doesn't. There is money around if you have the right story. Australia has a lot of advantages in terms of cost base, the strength of IP and early development and a very strong clinical and regulatory infrastructure that can support clinical trials and has been doing so for a long time.

"So there's a lot of value add to be done in the development process, it's just a matter of recognising that and taking advantage of that and exploiting it. The crux of doing that successfully is paying the right amount in the first place and selling it for the right amount at the end."

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SIDEBAR: PharmaVentures into Oz

Dr Rob Daniels admits he has a soft spot for Australia, having spent close to six years in Melbourne doing post-doctoral studies and working in business development for the biotech industry. So it wasn't that difficult a decision to make when he was asked by PharmaVentures's CEO, Dr Fintan Walton, to consider returning to set up an Asia-Pacific office of the UK consultancy service.

"I began talking to Fintan well over a year ago and I knew he'd been active over here and was aware that he wanted to do something a bit more substantial in this region," Daniels says. "I still have a soft spot for this region so I joined (PharmaVentures) in February with a view to setting something up covering the Asia-Pacific."

Daniels arrived in May and is based in Sydney. Initially, he will be mainly focusing on Australia and New Zealand but his eye is on China and Singapore, and perhaps even Japan and South Korea. "If you look at the region as a whole, Japan is fairly separate because it's a rich country with a fairly long history of R&D and is a substantial market," he says. "It almost has to be approached independently.

"I have a partnership with a Chinese company based out of Hong Kong who I worked with before. I'm really in an evaluating phase at the moment to see what the opportunities are over here and how PharmaVentures needs to be positioned in this region."

Daniels first ventured into Australia in 1997, when he took up a postdoctoral position at Monash University following a PhD in developmental genetics from University College London. He joined Alan Trounson's group studying stem cells and cloning and then moved into business development at the Monash Institute of Reproduction and Development under then-CEO Robert Klupacs, now managing director of Vegenics, part of Circadian Technologies.

"It was Robert Klupacs who essentially lit the fire of me getting into the commercial side," Daniels says. "Robert put me through the masters of entrepreneurship program at Swinburne University's Graduate School of Entrepreneurship. What was originally going to be six to 12 months turned in to four to five years in Melbourne and during that time I was involved in a number of the spin-outs that came out of Monash University."

He returned to the UK in 2003 and consulted to a number of university transfer offices and spin-outs and then joined PharmaVentures UK this year.

"PharmaVentures appears to be involved in a lot of things and gets involved in a lot of ventures," he says. "It's easier to look at it from a historical perspective. The first thing [Walton] did was to employ a couple of analysts to sit in front of a computer and input every life science deal that was ever done around the world into a database.

"So we now have 12 to 13 years of every deal done, and a large proportion of that will have financial information, so if a company wants to understand where its product is positioned and deal valuation, you can do a search - for example on a product coming to the end of phase II for type 2 diabetes - and understand what sort of terms have been paid and how they've been structured over the past five or ten years.

"That is a fundamental asset of the company. On top of that, over the past 10 years the company has become more involved in ... evaluating technologies ... to negotiating terms on behalf of others and sitting next to partners in negotiations. Building on that, [the company was] becoming more involved in business development in terms of looking for licensing partners, whether it's in or out or more commercial partnerships like mergers and acquisitions.

"Now, essentially 80 to 85 per cent of the business is really focused on consulting and transactions in the life sciences. It's really helping companies sell or buy products or themselves.

"We have a number of industry reports and the database descriptions; they are all elements that basically support the core of the business, which is to assist people to do deals."

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SIDEBAR: What Australia does well (and not so well)

A 2006 Frost & Sullivan study showed that Australia is competitive when compared to other developing countries in the Asia Pacific region.

"It has a very strong R&D base and strict regulations - it received the highest ranking for these parameters," Frost & Sullivan's Rhenu Bhuller says.

"With respect to other capabilities like manufacturing, infrastructure, government support, manpower, ease of market entry, industry-academic collaboration and role of private sector, China, Taiwan and India have been ranked at par."

However, very few companies in Australia and New Zealand have products in the later clinical phases of their research, she says.

"Around 30 per cent of the companies who were interviewed have their products in Phase II. A few of these companies undertake market research to assess demand for their products when the product is in Phase III. However, most of the companies are start-ups, who do not have enough financial muscle to undertake market demand estimation studies."

Top performers CSL $15bn Resmed $4.7bn Cochlear $3.5bn Pharmaxis $571m Cellestis $354m Clinuvel $338m Progen $336m Peptech $307m Avexa $290m Biota $281m Ventracor $244m Novogen $239m Mesoblast $230m Source: PwC BioForum - April-June 2007

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SIDEBAR: Eye on biotech and pharma

Rhenu Bhuller points to devices and clinical diagnostics as a hot development area, so she likes the looks of Ventracor with its artificial heart devices, as well as Peptech in biologic therapeutics, Pharmaxis in bronchiectasis, Avexa in HIV and ChemGenex in chronic myeloid leukaemia.

Bhuller particularly likes the look of Avexa, which has recently signed a deal with Shire for the global development of apricitabine in HIV, with an anticipated launch of 2009. Following a fundraising drive in 2005, Avexa raised a further $9.75 million from an extended share purchase plan, which concluded in December 2006.

In February this year, it announced the signing of a manufacturing agreement with the French company Novasep in preparation for Phase III clinical trials with apricitabine and subsequent market launch. Avexa has also recently entered into a licensing agreement with TargetDrug of Shanghai to expand its portfolio of HIV programs.

The past two years have seen a significant increase in the number of companies that have products that have progressed to Phase II and III, as well as signed licensing and collaboration deals, she says. Examples include Biota with Boehringer Ingelheim and Med Immune, Polynovo Biomaterials and Medtronic, and Evogenix and the US National Institutes of Health (US) for anti-cancer antibody therapeutics. "BioDiem and Pharmaxis have also had products that have progressed in their road to market."

Big Pharma sees Australia as a significant research base, she says. "It is one of the world's preferred locations to conduct global clinical trials, and there are currently 50 Phase 1 trials, 153 Phase 2, 262 Phase 3 and 65 Phase 4 trials."

Activity includes Eli Lilly Australia, which is increasing its investment in drug discovery and pharmaceutical development; J&J's research centre in Sydney, which is involved in clinical trials of DNA and RNA-based therapeutic molecules for diseases such as HIV-AIDS and is developing new drugs from plant alkaloids; and Merck Sharp & Dohme, which is investing in a range of R&D projects, spanning basic research to pre-clinical research, in collaboration with CSL.

"Servier Laboratories Australia has a portfolio of drug-discovery pharmacology projects and Phase I and II clinical trials in cardiovascular disease, diabetes, osteoporosis, mild cognitive impairment and schizophrenia," she says. "Its P3 program will evaluate six drug-led molecules and is collaborating with leading Australian researchers to identify new drug candidates."