Opinion: Why we're backing off from biotech

Dump the drugs? No -- but dump the stigma of 'biotech' and look for proper recognition from the investment community, writes CogState CEO Peter Bick.

"There's no secret. You just press the accelerator to the floor and steer left." -- Bill Vukovich (1918-1955), explaining his success in winning the Indianapolis 500 motor race

There has been a lot of talk about biotechnology in Australia, especially in the last few weeks. Experts have summoned statistics to either support or attack the industry. Conferences and panels rediscover the same issues every few months, putting spin on the arguments they wish to support. Audiences listen to this talk and nod in agreement -- and nothing changes.

It really isn't that complicated, as Bill Vukovich indicated -- you need to walk the walk, not just talk the talk in order to build a successful biotechnology industry in Australia.

Biotechnology companies are competing to raise the $50-150 million it takes to bring each drug through expensive clinical trials, to market. In the US, publicly listed biotechnology companies generally raise US$50-150 million before tackling a Nasdaq listing, and start their life as a listed company with a market capitalisation well north of US$100 million. US investors are faced with wondering if they should invest in a company which generally has a drug in late development (two to five years from marketing) and a deep pipeline of back-up drugs.

In Australia, most biotechnology companies list after raising less than $20 million because there is less venture capital available, and their average market capitalisation is well south of $50 million, if they are lucky. There is nothing wrong with this, but the trouble is that it still costs US$50-150 million to get to revenues, so where is this money going to come from? This is the debate -- will (or should) investors in Australia invest in companies which are five to 10 years away from making any revenues (as opposed to two to five years in the US) and which still need to raise up to another US$100m in order to even try to make revenues?

My company, CogState (ASX:CGS), last week announced that it will be shedding the anvil of being a biotechnology company. We can no longer be tarred with this epithet -- we are a clinical information technology company. We sell software. After a year of trying to convince Australian investors that we could sell software and develop drugs, we have decided to focus on selling software and will out-license our two drug development programs.

Our hybrid model of selling something while also doing drug development (to partially offset the costs of drug development) didn't sell in Australia -- no matter how promising our drug programs were. Our revenues from selling clinical software were growing and I was told time and time again to 'dump the drugs' and thereby get the recognition we were lacking. Recognition means a stock price valuation above our cash position. Without the 'stigma' of being a biotech company, we are told that we may start to see the market recognise the enterprise value of our cash flow business.

So how can Australia manage to keep alive a truly innovative and promising stable of science which constitutes our fledgling biotechnology industry? How can we give these companies a chance to make the huge home runs which await a company that gets a drug to market? Bill Vukovich would give Australia the following hints.

First, define what biotech really is, so the medical device, diagnostics, and medical software companies in Australia can be seen for what they are and not tarred with the biotech brush. Biotech means companies involved in drug development, full stop. This will free medical device, diagnostics and medical software companies to raise capital (generally much less than is needed for biotech companies), appreciate in market capitalisation, and score runs for their investors. Such companies generally have a shorter time to market than companies which develop drugs, but also need capital and at present are suffering from the biotech stigma. A few successes of the ResMed type (rather than what is seen currently as exceptions) will lift the whole medical sector.

Secondly, if you can't change the amount of money it takes to bring a drug to market (and you can't), then cut costs which you can control. How can this be done? Bill would say: "Simple! Just merge with another biotech company." Australia has more than 400 biotech companies and has seen little to no consolidation, which is ridiculous. Two, three or four companies put together will save huge duplicate costs -- let them discover the cure for cancer or Alzheimer's disease together, rather than each failing to do so alone.

In my opinion, the main problem for Australian biotechnology is its fragmentation. Everyone has unrealistic views on valuations for their own company and roundly undervalues their competitors. Egos, 'invented here' syndromes (I am, after all, also a psychiatrist by training), and resistance to change are standing in the way of a consolidation which would deliver success to Australian biotechnology.

So don't dump the drugs -- dump the CEOs who stand in the way of what needs to be done.

Dr Peter A Bick is a former US Venture Capitalist and CEO of a US medical device company. He was also president of Quintiles in the US before coming to Australia to run CogState (ASX:CGS).