BIO 2007: Oz biotech looks set for a boomer

The volatile nature of the biotechnology industry, not just in Australia but worldwide, is perhaps best illustrated by the results of the last quarter of 2006 and the second of 2007, as measured by PricewaterhouseCoopers' (PwC) BioForum report.

The 2006 result saw a 14 per cent plunge in the share price of publicly listed biotech stocks and the consensus of opinion was that investors were far more interested in the immediate returns to be gained from resources and property. Six months later and there was a trend upwards of 20 per cent, with share value growing to $27 billion.

"The overall health of the Australian life sciences sector improved significantly during the 31 December 2006 quarter," PwC's life science partner, Andrew Sneddon, says. IPO activity was slow with only one listing but indicators are there that the market will improve significantly this year, he says.

Veteran biotech watchers such as Sneddon point to the obvious for the improvement, including a number of successful partnerships and deals such as Peptech's sale of Domantis to GlaxoSmithKline for $178 million and CSL's acquisition of Zenyth Pharmaceuticals, together with positive clinical and regulatory results.

Alison Coutts, director of business development for biotech brokerage firm eG Capital, agrees, also pointing to a blip on the radar that occurred in 2005 and had a major knock-on effect in the following year. This was when the Queensland Investment Corporation (QIC), Australia's second largest wholesale funds manager, decided to pull out of the market.

"You could call that an exogenous factor," Coutts says. "I can't see that sort of thing happening again because no single institution has such a large degree of holdings."

While 2006 as a whole saw only a few IPOs and not a huge amount of initial capital raised, secondary raisings were much healthier, perhaps a sign of a maturing market. "There are some very good stories there to tell to support [biotech]," Coutts says. Companies such as Sunshine Heart, Progen, Prana Biotechnology and Clinuvel have all had substantial raisings recently, despite some setbacks.

Prana is an interesting one. "[Prana] got absolutely smashed when they had to pull [lead compound] PBTI after it was found to have some manufacturing issues and these could have been overcome had they had sufficient resources in manufacturing to deal with it but the market was unforgiving," Coutts says. "But they had PBTII ready to go." Prana went from one of the bottom ten performers in 2005 to the top ten in 2006.

Licensing the future

While variability in share price is always going to be a feature and few IPOs were issued last year, of a great deal of interest to the market is the massive rise in licensing deals over the last few years, not just in Australia but globally. Figures from US biotech consulting firm Recombinant Capital show the value of global licensing deals at US$57 billion for 2005, and Australian companies are getting in on the act. And the reason?

"It is pharma, desperate for pipeline," Coutts says. "[US trade publication] Genetic Engineering News reported that $100 billion worth of drugs are coming off patent in the next five years. That's what's driving it all. Pfizer is laying off 20 per cent of its staff, wholesale and across the board. They don't have the necessary in-house to keep employing all of these massive numbers of people.

"The rate of drug approvals is too low, the cost of development is too high and something has got to give. They are searching about for areas that have a lot of the risky stuff already done - most of the risk is pre-clinical and as you go further along the pipeline it gets less risky. To them it makes a lot of sense to in-license even quite late along now. It's not just licensing deals - they've moved along, but mergers and acquisitions also have increased."

She predicts much more activity in this area - although "there are a lot of pickings here that are not yet on the international radar of big pharma or big biotech" - and says there is evidence that the sector has been out of favour with local investors but is bouncing back. "We've seen it: we've seen the volume of trades going up hugely, we've seen more coverage in the mainstream press and that was just completely dead, 18 months to two years ago, and we've seen a lot of prices go up enormously."

Andrew Sneddon is also confident that the future looks enticing for local biotech. "Good success, good results and the outstanding performance of lead indicators suggest a continued strengthening of the Australian life science sector over the next 12 to 18 months," he says. He also says investors looking for strong returns should take a closer look at the agricultural biotechnology sector, in which Australia is a world leader, as the top global markets are generating double digit growth.

Retiring external licensing coordinator for Merck Sharpe & Dohme, Professor Graham Macdonald, believes a greater understanding of the sector from investors would cement its position. "One of the things that would push it ahead enormously would be a greater understanding by investors of the timelines and the sort of investment quantity needed in biotechnology - basically they get too little for too short a period," Macdonald says. "The effect of that is that they have to go for public offerings really too early, so that gives the whole biotechnology sector a bad name for investors, which is disastrous.

"The other thing is that they bring things to us, to industry, too early. They are left with this desperate time between when they begin to run out of money and the time we can invest in them, without an effective investment market to go back to. They keep going back to the stock exchange to ask for more money and with not much to show for it. It's not just difficult for individual companies - it makes it difficult for the entire industry. We have to turn biotechnology into a prime investment and that will come through better investment understanding and more success."