Delayed reaction

2012 wasn’t the breakthrough year many were expecting for Australian biotechs, but 2013 could be.

It was a year of great expectations. 2012 saw a second wave of Australian biotechnology companies about to break, with a new generation of ‘major minors’ close to turning the corner and turning a profit. Instead, where the start of the year enticed, the second half disappointed. A number of high-visibility setbacks and a flagging stock market midyear took the edge off the sector’s eager anticipation of a watershed year.

However, a disappointing 2012 is not necessarily a sign of weakness in the life sciences sector, but rather a reminder of the volatility that is intrinsic to it. The setbacks through the year and into early 2013 have also not necessarily stalled progress, only delayed it. As such, 2013 could be the year that the sector has been waiting for since the arrival, and lingering, of the global financial crisis in 2008.

This is not to suggest that 2013 is expected to be smooth sailing. There are a number of entrenched factors that threaten to keep the industry on its toes, not least of which is the unpredictability inherent in dealing with regulators, along with an unprecedented political climate in Australia culminating in an election, the outcome and implications of which is anyone’s guess.

2013 looks to be yet another turbulent year, and another where life science companies will have to battle a headwind in order to make significant progress. Yet, should they prevail, 2013 could be the breakthrough year the sector has been waiting for.

Speed bumps

Many of the expected star performers in early 2012 were struck by a stark reality check in the back end of the year. One such was Starpharma, which is developing its dendrimer nanotechnology platform to enhance the effectiveness of a wide range of compounds.

Starpharma’s strength is that it is not bundling all its eggs into only a handful of drug candidates but developing a platform with a broad range of applications, from treating infections to enhancing anticancer drugs, to boosting the effectiveness of agrichemicals. However, it still needs to visibly demonstrate to the market its platform’s effectiveness through a flagship product, which in this case is VivaGel, a treatment for bacterial vaginosis.

After a string of positive news in the second half of 2012, Starpharma received a blow when the results of the largest yet phase III trial of VivaGel failed to reach its primary end point in late November last year. While there was mention of possible irregularities in the trial, the fact remains that the Food and Drug Administration (FDA) is unlikely to be persuaded to give the go-ahead for VivaGel without additional data, or a shift in indication, which is being explored. While VivaGel remains in limbo for the time being, the company does have its wider portfolio, which is progressing thanks to partnering arrangements signed last year.

Another star performer in recent years in Pharmaxis, which has taken its treatment for cystic fibrosis, Bronchitol, from spark of an idea right the way through to manufacturing and marketing approval here in Australia and in Europe. 2012 was an auspicious year for the company, with it seeing Bronchitol launched in Europe, the National Institute for Health and Clinical Excellence in the UK recommending it for reimbursement under the National Health Service, and a listing on the Pharmaceutical Benefits Scheme back home.

Pharmaxis is a great Australian biotechnology success story, although that image was tarnished somewhat in January this year by a negative recommendation from the committee advising the FDA on its approval in the US. Pharmaxis’s stock went from $1.25 to 64c overnight following the news.

The recommendation brought with it the prospect of running new trials to hone in on the dosage and details of treatment, which could be a costly exercise. That said, Pharmaxis remains in a strong cash position - as it has done throughout the GFC - and is still working aggressively to achieve marketing approval in the US.

One company that appeared to be a relatively safe bet (if there exists such a thing in this industry) was QRxPharma. Instead of dragging an entirely novel compound through the regulatory process, QRxPharma is taking two already approved drugs - the opiates morphine and oxycodone - and combining them at a 3:2 ratio, with trials showing good efficacy with lower side effects than conventional opiates.

Its first formulation, MoxDuo IR (immediate release), hit a roadblock in June last year when it received a Complete Response Letter from the FDA, which was unsatisfied with the data provided showing MoxDuo is safer or more effective than its two component opioids used in combination. QRxPharma is in the process of refiling its New Drug Application and expects a decision from the FDA in Q3 of this year.

Another blow to the sector came as Alchemia failed to excite investors in its cancer arm, which it was seeking to skive off into a new company, Audeo Oncology. Alchemia is also behind fondaparinux, which is a generic version of GlaxoSmithKlein’s injectable anticoagulant, Arixtra, which is being marketed in the US by Dr Reddy’s. With fondaparinux bringing in greater revenues, and the oncology arm consuming greater resources, management was partial to the idea of keeping the two at arm’s length.

However, in December last year, Alchemia pulled the plug on the demerger - or “deferred” it, as it has stated since - citing insufficient interest and concerns from investors over the timing and market conditions. The company continues trials of HA-Irinotecan to treat metastatic colorectal cancer, with results expected in 2014.

Other biotechs also experienced setbacks, including the otherwise impressive ImpediMed, which posted a $12.3 million loss in the first half of FY2013 and shed 85% of its share price over that period. Immuron also lost 80% of its share price, posting a $2.3 million loss in 1H of FY13 and predicted a negative cash flow for the year.

Hurdles

That’s quite a list of sour news, although as Manoj Santiago from PricewaterhouseCoopers points out, it’s not all unexpected. “From another angle, it is a reaffirmation of what companies in this sector face and the challenges they have to go through,” he says.

“In the past, such challenges have proven to be a great way for companies to go on to bigger and better things. So it can be seen as a setback or as a stepping stone where they can end up with a better offering in the long run. It is also a wakeup call for anyone who thought these companies were going to be overnight sensations.”

The year was also not without its environmental hazards. Besides the ongoing debt crisis in Europe and the self-inflicted budget crisis in the United States, the Australian economy also flagged midyear. The All Ordinaries showed promising signs early in 2012 but fell backwards around May, finally recovering and ending the year around 500 points up on its start.

The life science index, as it has been in the past, was a two-horse race, with the ‘majors’ (CSL, ResMed and Cochlear) performing strongly, particularly towards the back end of the year, while the ‘ex-majors’ (ie, everybody else) underperformed the broader All Ordinaries.

According to AusBiotech CEO Dr Anna Lavelle, biotechs also had to face uncertainty in the policy sphere as well. While the introduction of the R&D Tax Incentive was seen as a great boon to the sector, with it returning at least $28 million particularly to cash-hungry, early-stage companies, the rest of the policy story is less positive. Much of this appears to be driven by federal Labor’s penchant for reviews.

“In the last three to four years we have had a huge number of reforms and reviews,” says Lavelle. “The volume of reforms and reviews is such that even the larger companies can’t keep track of it all.”

She cites the Therapeutic Good Administration (TGA) blueprint reforms and the Australia New Zealand Therapeutic Products Agency (ANZTPA) harmonisation and the ongoing reviews into gene and biological patents. All these are contributing to the bureaucratic overhead that biotechs face and increase uncertainty over what the policy landscape might look like in years to come. Add to that a looming election in September of this year which only elevates the unpredictability of policy.

Looking up

That’s not to say it is all bad news. In fact, Labor has enacted some reforms that have been welcomed by the sector, such as the R&D Tax Incentive - although the occasional murmurs that the scheme might be altered or scrapped have left a few CEOs and CFOs on edge.

Labor’s jobs plan, announced in February, also made a $9.9 million commitment to “fast track” the recommendations of the Clinical Trial Action Group Report from 2011, which should streamline trial approval and recruiting processes. It also promised more cash for the Innovation Investment Fund and a vision to establish up to 10 Industry Innovation Precincts.

Several life science companies also managed to beat the odds and had stellar years in 2012. CSL underwent a company restructure of its local operations, lumping its plasma operations under the banner of CSL Behring and placing the vaccines, pharmaceuticals and in vitro diagnostics under bioCSL. The company also managed to bring in healthy profits and hit a string of record share prices. However, the departure of longstanding CEO Dr Brian McNamee will mean investors will keep a close eye on the company and how it is steered by incoming CEO Paul Perrault, who takes the big chair in July.

ResMed is also breathing easy after a cracking year, with strong revenue increases even with the high Aussie dollar. It, too, saw a change of leadership, with Dr Peter Farrell’s son, Mick Farrell, taking the reins on 1 March this year.

Another star performer was Sirtex, which has been beavering away selling its SIR-Spheres for the treatment of liver cancer. Profits for 2011-2012 were up 49% and the first half of FY2013 looks to be going strong, with a 25% lift in revenues over the period. As a result, the company is in a stronger cash position and its share price soared a dizzying 193% through the 2012 calendar year.

While IPOs remain as rare as hen’s teeth, financing does appear to be slowly rebounding following a few anaemic post-GFC years, and the R&D Tax Incentive is taking some of the pressure of start-ups funding the pivotal proof-of-concept trials needed to attract funding. There is also the prospect of more acquisitions this coming year as more companies mature.

However, one feature of the coming 12 months will be continued volatility, says Lavelle. Although, on the up side, many of the companies that encountered setbacks last year may finally break through in 2013, thus turning the tide of confidence and bad news.

One thing to watch out for in 2013 and 2014 will be the next wave of biotechs, says Santiago. The GFC saw a great deal of start-up funding evaporate. Yet research has continued, and there are likely to be many terrific discoveries that are ripe for commercialisation just waiting to hit the market.

2012 was hardly the year the life science sector had been hoping for, but amongst the setbacks and the continued economic and policy instability, there are still the seeds of success just waiting to sprout. On the whole, the sector is in much the same position it was in 12 months ago, with the same challenges and opportunities, and with the same prospects of breakthrough success in 2013.

Image credit ©iStockphoto.com/Eduard Härkönen