BIO 2011 special report: Australian biotechnology comes of age

When Mesoblast announced in December last year that US middle-weight pharmaceutical company Cephalon was pitching to acquire a 20 per cent stake in the regenerative medicine company at an eyebrow raising 45 per cent premium, along with a cash payment of $130 million and potential milestone payments of up to US$1.7 billion, sentiment within the Australian biotech industry changed overnight. No longer was biotech the realm of high hopes and speculative returns, it was now yielding tangible results with real dollar figures attached.

And Mesoblast wasn’t the only company to share some good news. Cephalon also took a shining to ChemGenex and its targeted treatment for chronic myeloid leukaemia, looking to acquire the company for a neat $159 million in cash.

In other acquisitions, Dutch sample and assay company Qiagen sought to pick up diagnostics specialists Cellestis for US$355 million in April. Perth-based iCeutica was also snapped up in April by its US partner, Iroko Pharmaceuticals, for its SoluMatrix reformulation platform for an undisclosed, but apparently tidy, sum.

Acrux took its testosterone replacement therapy, Axiron, into the US market care of a partnership with Eli Lilly, fetching the Victorian biotech US$137 million in milestone payments in the process – $100 million of which immediately went out as a singularly magnanimous 60c-per-share dividend.

Sydney-based Pharmaxis recovered from its regulatory wobbles in Europe to receive the tick of approval from the Therapeutic Goods Administration back home for its cystic fibrosis treatment Bronchitol. Living Cell Technology received regulatory approval in Russia for its xenotransplantation-based type 1 diabetes treatment, boding well for further regulatory hurdles here and abroad.

Sirtex saw profits from the sale of its anti-cancer treatment, SIR Spheres, rise. Biota is reaping growing royalty payments from GlaxoSmithKline for Relenza, and secured a tidy $230m deal from the US Health Department for development of its anti-flu drug, Laninamivir. Several companies have also posted some very promising clinical trial data, including QRxPharma, Bionomics and Mesoblast – the results of which helped the latter get over the line with Cephalon. There were even a couple of IPOs, breaking the post-GFC drought.

According to PricewaterhouseCoopers numbers, the biotech ex majors (all those excluding giants CSL, Cochlear and ResMed) grew by almost 24 per cent over the past six months, with medical device ex majors nudging 16 per cent – both outperforming the wider ASX after a bumpy second half of 2010.

According to Anna Lavelle, CEO of AusBiotech, the timing of this confluence of good news is no accident. “These are some spectacular results,” she says. “What this is reflecting is the seven to 10 years of investment in the front end to deliver these outcomes.”

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Unlike many other industries, biotechnology is inherently a slow-moving sector, with a regulatory framework that demands products be meticulously trialled and tested before reaching the market.

As a result it can easily take the best part of a decade for an innovation to reach the point where the market rewards it with solid returns. Given many of the companies that just cut their deals or saw regulatory approval were founded around a decade ago, it’s not unexpected to see some of them bearing fruit today.

Confidence

One of the impacts of this run of good news has been to change the mood in the market towards the life sciences industry at large. As PricewaterhouseCoopers analyst Craig Lawn puts it: this industry runs on confidence, and confidence is at a new high on the back of these results.

While it’s been a long time coming, the recent run of deals with big dollar figures attached shows that biotechnology isn’t just talk, but can deliver the goods to investors and consumers alike.

And according to Lawn, the good news may not have finished yet. “There’s a strong sense there are a significant number of biotechs that are close to major clinical trial results or major announcements,” he says. “From the clients we speak to, I can see the next quarter having a similar amount of positive news. And momentum will continue as these announcements are made.”

David Blake from Bioshares agrees that we likely haven’t seen the last of the good news from the biotech industry. “I think this positive sentiment has a strong chance of being sustained. We may have even turned a permanent corner,” he says. “I know that’s bold, but more good news from the likes of Acrux, Mesoblast, Biota, Pharmaxis and others will be confirmatory of that prediction.”

For many people the life sciences industry has been seen as one of big claims and tremendous potential – imagine the returns on a cure for cancer – but one that is plagued by an uncompromising regulatory landscape and a lengthy product development cycle that can suffer from any number of pitfalls.

This makes it particularly hard to pick a potential winner early on, which is precisely when the startup needs an injection of funds to embark on the development process.

But the fact that some biotechs are now delivering returns to their investors not only means that some of the claims have been fulfilled, but it also means good things for the rest of the industry.

In fact, it has a doubly positive effect: money flowing into biotechs not only allows them to pursue more trials and move more products down the pipeline; but money flowing back to investors also has a greater chance of being reinvested in biotech.

“Some of that money may see its way back into early stage biotechs,” says Blake. “People might reinvest it keep it in the biotech sector. When you can do that again and again, you have a viable sector, with companies reinvesting their earnings and investors reinvesting their gains.”

According to Lavelle, the investors are also becoming more informed about the sector, and starting to see its unique charms. “Investors now feel they understand the sector,” she says.

“They’ve become connected to the sector. They see that it is complicated but that it’s also interesting and important. A lot of people see the X factor, that extra interest level you don’t get when investing in brown coal. Of course, they want to make money, but they’re also interested in the outcome for the community and the patient cohort.”

Read part II of this feature: The third wave of Australian biotechs