The ASX: A haven for foreign biotech companies?

The Australian Stock Exchange has created a market that attracts not only local biotechnology companies, but also gives opportunities to foreign companies that would be unable to attract capital in their own markets. Helen Schuller reports.

The word is out -- the ASX understands biotech.

Last month's launch of the ASX/AusBiotech code of reporting practice for biotech showed that the Australian bourse isn't afraid of concepts like R&D, M&A, or phase I, II, and III clinical trials.

And Australians' well-known affinity for the occasional punt means there is a good supply of investors large and small, retail and institutional, ready to take a gamble on the latest patch of blue sky. They've tried their hand at digging for gold, diamonds, oil, and now have the taste for medical devices and life sciences from any emerging market.

"Australia could become a Mecca for mid-size biotech companies who are not quite big enough for the more established markets," says Alison Coutts, director of business development at specialist biotech merchant bank EG Capital. "New biotech companies could come [to list] from anywhere in the world where their technology is sufficiently good."

Harry Karelis, managing director of Titan BioVentures, the investment manager of Biotech Capital, agrees. "Australia has a strong history of retail investors taking risks with the resource markets, which make the conditions ideal for small struggling biotech companies who need $3-15 million to take their product to the next stage of development."

Creating a presence

Biotech companies from New Zealand, Singapore, the US and UK are currently represented on the ASX. "They come because it is a local market for South-East Asia and the Pacific and there are buyers and sellers who are interested in biotech," says consultant David Blake of investment newsletter Bioshares.

But according to Coutts, foreign companies need to be accessible to the market and shareholders. "They are more likely to be successful if they have the required road-shows and appropriate sponsors."

New Zealand's Neuren, which listed on the ASX in February this year and raised $15 million in its IPO, has a solid profile in Australia. "I have met [Neuren CEO] David Clarke more times than Australian-based CEOs this year. He knows that you have to get out there and talk to people -- that being a CEO isn't a desk job," says Blake.

Clarke himself agrees. "You have to create a presence. The New Zealand universities, institutes and doctors aren't known in Australia, but that's fine. It is easier to get from Sydney to Auckland than it is from Sydney to Perth."

He believes accessing the ASX is a logical step for NZ-based companies. "Basically it's so close legally, commercially and culturally. There is much more liquidity in the ASX than in the New Zealand market. There are investors and analysts who understand the biotech sector and the rules and procedures. There are five listed biotechs in New Zealand -- while Australia has the depth of infrastructure and people who can take it to the next level."

Blake feels that foreign companies have the same disadvantages as Australian companies attempting to go overseas. "They are not local, they have to adapt and live with other people's rules, including accounting rules and regulations -- but the work and effort is worth it."

He admits it's not smooth sailing for all. Biotech Capital's Karelis is also critical that "some foreign companies... treat shareholders with contempt -- they take their money and then don't do good investor relations."

A healthy appetite

Steven Fang, CEO of Singapore-based, ASX-listed Cygenics, says the company thought carefully before entering the Australian market. "We did extensive homework in regard to opportunities and challenges in the Nasdaq, AIM and Singapore. What swayed our decision was we felt the ASX was a close enough market to Singapore to have management and effective communications," he says.

"I think the sector makes it very comfortable for foreign companies to participate. The people that we have met have been an exceptional advantage. There are a lot of good support services, analysts, audit firms, legal firms -- they are very professional and have made us feel at home."

Fang was also surprised by the appetite for biotech among Australian investors. "When we listed we wanted to raise $15 million. We had interest worth $30 million and took $17 million."

But Fang admits the company had hoped for easier access to finance since listing. "We are disappointed that the market goes through cycles," he says. "We have been affected by weak liquidity and the ups and downs of the market -- but it is coming back. You need to deliver on milestones and we have been very focused -- it is sensitive to those promises."

Blake feels it is also about a global market "with companies doing the right thing in the right spot".

Living Cell Technologies managing director Paul Tan believes his company is an obvious example. "This business is for the international market and to do it well you need the best expertise anywhere in the world," he says. "LCT was originally started in New Zealand in 1987. The company then moved to Adelaide, due to contacts with investors and clinicians, before listing on the Newcastle stock exchange and then the ASX in late 2004. Our corporate head office and scientific panel are now based in Melbourne, our research and technology unit is in Auckland, the product development and regulatory unit is based in Rhode Island, USA and Perugia, Italy, and our chairman Michael Yates is based in the UK.

"Meetings are conducted via teleconference. Where it is irrelevant -- you are always only on the end of the telephone."

The incubator

NeuroDiscovery listed on the ASX earlier this year and raised $1.5 million to acquire UK-based company NeuroSolutions. According to NeuroDiscovery executive director David McAuliffe, the ASX offers UK companies an alternative to VC funding.

"There are many UK private companies that aren't big enough to list on the AIM or Nasdaq and they don't want to raise money through a venture capitalist because they take too much of a share of the company from the founders. VCs are very aggressive on evaluations and first-round investments," he says.

"There is a real opportunity in Australia -- founders can retain more of their company, and utilise the capital markets to incubate the company to a suitable size and level of development before bringing it back to the AIM."

McAuliffe was also one of the founders of pSivida, whose pSiMedica subsidiary also came from the UK to the Australian market to raise funds.

The US also has a small presence -- artificial heart firm HeartWare raised AUD$32 million to fund further commercialisation and new product development in January this year.

"At the time of listing HeartWare was too early in its state of development in the US to list on the Nasdaq," says HeartWare's director of corporate development, Howard Leibman, who formerly worked at EG Capital. "Our only option was a further round of VC in the US and at that point we had already raised US$32 million and needed to raise a further $25 million."

"Through early discussions with Australian clinicians regarding their involvement in a clinical trial with HeartWare, we became aware of an opportunity to list on the ASX. There is clearly a reasonable appetite for risk among the Australian investing public, and a clear understanding of the potential rewards that might be gained by backing a technology in a relatively early stage."

Leibman also feels the market understood the product that HeartWare was offering. "The ASX includes a number of stellar examples of medical device companies that have returned significant value to shareholders -- the obvious examples are ResMed and Cochlear."

Becoming American

Access to VC funding has also led Australian companies to the US, where they must become an American company so that they can access the capital. Both ResMed and Sunshine Heart left Australia to access funds and then returned as US companies entering the ASX.

Crispin Marsh, director of corporate affairs at Sunshine Heart, explains: "Sunshine Heart was started in Australia by Dr William Peters, a Kiwi then living in Melbourne, and myself with an office in Sydney. The business was started through the formation of an Australian company, Sunshine Heart Company (SHC) and the initial research was done in Sydney in-house and through two universities here.

"The shareholdings in SHC were 'flipped up' into a US company (Sunshine Heart Inc) when we received funding from Three Arch Partners, a US venture capital company. They could only invest in a US entity, so to get them into Sunshine we went through the 'flip-up' process. This left the operating Australian company (SHC) as a wholly-owned subsidiary of Sunshine Heart Inc.

"When we needed to raise further money the choice we identified was to raise VC money in the US or to list in Australia. When we went through the exercise it came out that the advantages of Australia won out.

"We were, in an operational sense, Australian -- the founders were locals, and we had received support from the Australian government. Even though it was a US incorporated company it had its roots in Australia. This made it more attractive for us to raise money here rather than in the US."

The future

Will Australia continue as a haven for foreign companies? The general consensus is yes, but it may not all be smooth sailing.

"A problem for the sector in the future will not be lack of funds but lack of managerial experience," says Karelis. "Companies will continue to come to Australia but there aren't enough CEOs, chairmen and managing directors to lead the companies."

Neuren's Clarke is optimistic that more New Zealand companies will come to feed at the ASX table. "I'm sure there will be more seeking capital in Australia."

The latest NZ firm to have lodged a prospectus to list on the ASX is medical device company Brainz Instruments, which develops monitors for the detection of brain injury. Brainz plans to list in mid-December and is hoping to raise $10 million. Like Neuren, Brainz has spun out of NeurenZ and the University of Auckland.

Others believe there will be further opportunities for Asian biotechs.

"In Australia there is not a shortage of capital, and north Asia is in the same time zone. It won't take long before a smart banker sets up shop in Korea and brings a company across from Seoul," says Blake. EG Capital's Coutts agrees, "If it all goes well and the sector generates success we might get a Korean company or a Japanese company -- these things happen when capital markets and sectors go well."