The biotech report cards

As the new year begins, market analysts are sounding the same warnings that they did in 2002 -- that Australian biotechnology companies must consider strategies like mergers and acquisitions and alliances to survive.

The difference this year, according to long-time market observer Dr Lisa Springer at PricewaterhouseCoopers, is that the long bear market for biotech has forced CEOs to finally heed the warnings and act. As a result, she predicts, 2003 looks like being the year Australian biotech thinks outside the box.

Springer, who in January signed off on PwC's fifth quarterly BioForum report, says the perennial shortage of ready cash for the sector, combined with jittery investors both locally and overseas, will contribute to the sector's impetus towards M&A and deal-making.

The latest BioForum reveals that almost half of the 74 ASX-listed companies on PwC's biotech index have cash reserves of less than $5 million, pointing the way to severe attrition within the sector unless drastic measures are taken.

Small companies, Springer says, run the risk of raising $1 million and feeling too confident, but such small-scale achievements were not enough and cash injections like Peptech's recent $10 million capital raising were all too rare. To make themselves attractive, companies firstly have to stop thinking small and grow bigger in several ways, particularly through their R&D portfolios and their trained personnel, she says.

Before they back a company, Springer says, capital markets look at how quickly a company can get to market. To be successful, biotech companies need to boost their workforces with an experienced CEO, an effective regulatory expert "to make the development pipeline work", and a critical mass of scientists.

Renewed interest

However, she says, the market is beginning to show a renewed interest in the biotech sector, thanks to recent key events, including Peplin's alliance with US company Allergan, placements by Peplin, Meditech, Medica Holdings, Prima BioMed and Peptech, and BresaGen's acquisition of important stem cell patents.

"There are definite signs that the capital markets are starting to pay attention to the sector once again," Springer says. "PwC believes this momentum is long overdue for the sector."

She says effective clinical trials are another way to win market interest. She adds that many Australian companies have not used their cash wisely enough to complete successful trials, but admits that being short of cash was a handicap for many firms.

"But if you're a biotech and you want to add value, you've got to have something to take to the clinic," she says. "If you can go to a pharma and present clinical results and lab results, that's a big carrot. Phase II is realistic -- and you only need to do it once.

"Australian companies need to have at least half of their products in late pre-clinical or clinical trials and strong technical and commercial personnel."

Successes wanted

Dr Kelvin Hopper and Dr Lyndal Thorburn, the authors of the 2002 BioIndustry Review, share Springer's view. Their report's look at the last 20 years of biobusiness in Australia left them surprised at how few companies have made a big impression on the financial markets.

"We need good examples of companies that actually made it, became global, branded companies," Hopper says. Hopper and Thorburn, as the respective principals of consulting firms Aoris Nova and Advance Consulting, are seasoned industry observers.

Their BioIndustry Review -- its first issue was in 2001 -- differs from the PwC report in several ways, most importantly in its regard to unlisted companies, the services sector and government programs. While the PwC BioForum is a review of the performance of a select group of 74 ASX-listed companies over the first quarter of the 2002-03 financial year, the BioIndustry Review, based on extensive surveys, is a look back at the last 12 months and beyond, and the key events and trends of the Australian bioindustry in 2002.

Like Springer, the Review's authors find there is a need for Australian bioindustry to form alliances, particularly with overseas partners.

But finding the definitive model for a successful industry is proving difficult.

"If you look at the top three [listed biotechs], two [ResMed and Cochlear] are manufacturers of devices and the third [CSL] was enormous before it was privatised," Thorburn says. "Behind them is a group of tiny companies, mostly in therapeutics.

"I'm concerned about the model and whether it will work in the long term. We keep going for the high return stuff but we're not recognising the high-risk stuff."

While their report applauds recent government initiatives to boost start-up biobusiness, Thorburn and Hopper say support was lacking at the practical implementation end of the scale.

But better management is making biotech more attractive to the investment sector, they say.

"I think there are a lot more serious biotech investors in the market," says Thorburn.

"Venture capitalists say they have money and are looking for projects," Hopper says. "Valuations are coming down and VCs are finding they can cherry-pick the ones that are best.

"Everyone seems to have a good model and says they can do it better, but I think overseas companies are also struggling. If the talk of the VCs is accurate, then Australia is not doing so badly."

The key ingredients of good companies, good technology and good government policy are in place, Hopper says, leaving him optimistic about the industry's future. But convergence of the ingredients is still needed for success.

KEY FINDINGS

BioForum

• In Australia, there were 11 M&A transactions worth $139.8 million, up from eight deals worth $78.4 million in the previous quarter.
• The IPO window remains firmly closed in Australia and the US, with no biotech listings over the last quarter.
• The number of partnerships in Australia increased this quarter to 17 from 10 last quarter. However, only two involved Australian entities exclusively.
• Australia continues to see few positive clinical trial announcements, with Chemeq and Metabolic Pharmaceuticals the only companies to announce results this quarter.
• Some regulatory approvals transpired. Peptech announced the approval of Centocor's Remicade by the FDA and BresaGen announced FDA approval for its cell delivery device.

BioIndustry Review

• More than 30 new companies formed in 2001-02, half the number formed in 2000-01. Most are based in Victoria or Queensland.
• Most firms target human therapeutics and diagnostics, and there are few pure genomics or proteomics companies in the molecular biology area.
• 50 US patents were granted to Australian biotech firms in 2002.
• The research sector remains the powerhouse of biotech.
• State governments lead initiatives, but there is divergence in strategies from state to state.

For more information about The January 2003 BioForum, call PricewaterhouseCoopers on (02) 8266 0000, or for the 2002 BioIndustry Review, call Aoris Nova on (02) 9209 4231.