Australian biotechs must merge or perish: Ernst and Young

Australia's biotechnology companies will have to merge or perish, according to leading industry analyst Ernst and Young.

Ernst and Young director of innovation and incentives, Dr Craig Fowler, said lack of capital to support the burgeoning industry was likely to lead to a spate of local and international mergers and acquisitions in the mid-term.

But he said it was not a story most chief executives would be keen to hear.

"Quite reasonably, I think, a lot of very hard-working, dedicated CEOs and scientists are working feverishly to build up companies and would be loath to dilute their influence and activity," Fowler said.

"But there may come a time when a sprinkling of these find it more difficult to raise capital and find cash burn becoming faster, and they will have to start thinking about discussions with other groups."

Fowler said Ernst and Young's last Australian biotech industry report revealed that while a relative comparison of the local and overseas markets showed Australia had as many, if not more, listed biotechs as the United States and Europe, an actual comparison showed a massive size difference.

He said that comparing actual revenue, market capitalisation and R&D expenditure, local biotechs were typically between 100th and 120th the size of counterpart US companies.

This meant that, on the back of the rash of public share offerings in the sector 18 months ago, the local market would probably have to undergo some form of rationalisation.

"There are so many innovation and incentive programs encouraging start-up biotech companies, and all of these companies are going to need a financing line either at start-up or at a later stage," Fowler said.

"What we don't know is to what extent do we have enough capital in this country to cover it, and whether these companies are of sufficient size to cut it in the overseas market."

He said that when compared to similar European or US companies, local entities had market capitalisations that were 50 to 100 times lower.

"The stand-back observation might suggest that there may be too many, and that in time some of the Australians will look among themselves and say there is a great opportunity to work together," Fowler said.

"They may also find more interest from overseas companies taking a serious look at our IP and noting that the Australian dollar is relatively weak."

He said that while evidence of rationalisation had so far been scant, the recent facilities buy-out of Biotech Australia Group by GroPep was a recent example.

A more acceptable option for many owner-founders might be alliances or cooperative mergers with international biotech interests, he said.

Fowler would not be drawn on the degree to which the local industry needed to be cut, saying the market would work the number out for itself.