BIO 2008: Oz biotech - state of the nation

'2007 should be a corker of a year' was the bold claim of the 2007 BioIndustry Review, published early last year by Australian corporate advisory firm Innovation Dynamics.

One of the authors of that review, the company's managing director, Dr Lyndal Thorburn, has a laugh about it now but it was not as if she was alone in her predictions.

'Biotech looks set for a boomer' was this reporter's headline in the corresponding issue last year, but that booming corker seems to have turned into a bit of a fizzer.

Australian biotech companies are doing it tough in two respects: share prices have plunged and investors are still nervous about what is widely considered a high-risk sector, particularly when they are still getting good returns from the resources sector. The good news, according to the analysts, is strong fundamentals and the long-awaited maturing of the market.

Innovation Dynamics' Thorburn, and the company's executive chairman Dr Kelvin Hopper, are reasonably upbeat about prospects, particularly as a number of companies are moving into late-stage trials and should soon have product on the market. The global credit crunch and looming recession should keep the market depressed for the rest of this year but they believe there will be some surprises.

"With the resources boom, everyone thought that the money from that would flow into the economy and then into the [biotech] industry, but it didn't happen," Hopper says. "People with money in resources are sitting on it and keeping it in mining, and it's not going into high-risk ventures like this. The indices for biotech have gone down for the whole year - from the start to the finish - and now we are facing more hiccups going forward.

"The lesson from [the 2008 BioIndustry Review, released in February] is that despite all that, these companies are forging ahead with clinical trials and developing product, so I think there will be some surprises coming up but they will probably be below the radar.

"We have been monitoring the industry for many years and we believe it is poised for real growth as the top companies start to earn revenues for the first time."

It is an analysis that life sciences analysts from PricewaterhouseCoopers agree with. PwC partner Craig Lawn, in a commentary on the biotech indices in the second quarter of financial year 2008, with extra data from January this year, said while a significant hit from the credit crunch saw a major plunge in biotech shares, the sector still had strong fundamentals and will ride out the storm.

"Smaller companies are definitely feeling the force of the market downturn more than their larger counterparts and the flight to quality away from perceived risk will continue," Lawn says.

"Despite the outward volatility of the market, the fundamentals of the sector are still strong. There are opportunities for intelligent investors to make gains if they look at investments on a long-term basis and focus on companies with solid performance, good track records and strong stories."

Small cap stocks are definitely feeling the pinch but are pretty much used to the peaks and troughs of capital investment. Dr Jackie Fairley, CEO of Melbourne-based Starpharma, says her company, like all stocks in the market, has suffered.

"Small cap companies have suffered more than the large ASX200 stocks and Starpharma was off a high level," she says. "Relative to some of the falls that others have had we haven't been as hard hit, but we certainly don't believe that our shares are trading at fair value at the moment."

Fairley says she believes it fair to say that with mining and resources having such a good run in 2006 and 2007, the demand that would otherwise have been applied to some of the other small cap companies has been soaked up. "But we are starting to see the signs of increasing interest in the biotech sector in Australia and certainly talking to investors in the US, that is the case. There are some pretty good buys out there, including Starpharma."

The good news

The good news lurking underneath all of the drama is that more Australian companies are in clinical trials than ever before and some are in late-stage trials, with product on the verge of being marketed. According to Innovation Dynamics' figures, nine Australian companies are in Phase III trials and the focus of the stronger performers is now firmly set on international alliances.

Innovation Dynamics' yearly reports have proved hugely valuable as they contain data from both listed and unlisted companies. The financial performance of listed companies is there for everyone to see but the private sector is known to hold its cards very close to its chest. Lyndal Thorburn, who manages the unlisted sector information gathering for the company, has an old-fashioned way of getting information out of private companies, however - she rings them up and asks them.

---PB---

Innovation Dynamics' Drug Pipeline database shows that there are over 450 drugs in development by Australian biotechnology and pharmaceutical companies, with 189 compounds in human clinical trials. 54 per cent of those in trials are in phases II and III.

"Our new data indicates that the biotechnology industry is clearly maturing, with more companies moving forward into phase III trials and looking toward reaching market," she says.

"Our analysis has revealed an eight per cent increase in the number of drugs in development since the same time last year. The most significant increase was in oncology, already the largest therapeutic area, rising 29 per cent in 12 months.

"Neurology and analgaesia also showed a significant increase, rising 16 per cent in the last 12 months."

Thorburn says the majority of these trials are being sponsored by public companies but that 21 private companies carried out clinical trials in 2007. Most of these companies also had a portfolio of drug candidates in preclinical development as well.

The current period of belt-tightening may even be a blessing in disguise. Venture capital funding for high-risk stocks like biotech is always tight, Kelvin Hopper says, and the forecast for the future is going to be very hard. This may put a dampener on start-up companies and spin-outs from universities, which might not be a bad thing.

As Thorburn puts it, venture capitalists have long said there are too many unpromising deals out there. The figure of VCs investing in only one in every hundred start-up ideas is perfectly true, she says. One new VC, Terra Rossa in South Australia, is investing in six in a hundred and "that's incredibly high", she says.

For Hopper, what the current crisis does is, given the amount of small companies formed and the downturn, show the way forward. "There have to be more mergers and acquisitions," he says. "Companies in Australia are working in various areas and they often can't find a matching deal, but where they have done I think it has worked out reasonably well."

The best example is the merger between Peptech and Evogenix into Arana Therapeutics, which has been successful and widely applauded.

"There has been an increase in alliances and that's what I think is a strength of the industry, alliances within but mostly outside of Australia," Hopper says. "And that's what will drive companies into the market."

Secondary financing has been reasonably strong, with PwC tracing a surge in the second quarter, totaling $245 million. However, Craig Lawn says there may very well be a lag effect with initial public offerings drying up and secondary financing tightening.

"Due to market conditions the opportunity for increased mergers and acquisitions activity should arise as life science companies become more affordable and the pressure to amalgamate increases," he says.

"CEOs of life science companies may need to be more pro-active when it comes to M&A activity, especially where reducing cash reserves in a tight share market highlight the risk of being left with insufficient funds for R&D."

---PB--- Towards the bio-economy

The effects of the election of a new government in November 2007, with a different ideology from the last, is yet to be determined, but more should be known at the end of the year.

Australian biotech is hugely reliant on commercialising R&D from public sector bodies, such as the universities, medical research institutes and the CSIRO. It is also hugely - some would say overly - reliant on start-up grants such as the previous government's Biotechnology Industry Fund (BIF) and Commercial Ready and Commercial Ready Plus grants system, which the new Labor Government has axed.

The new government has promised nothing new until after its wide-ranging National Innovation Review is completed at the end of the year. The new Minister for Innovation, Industry, Science and Research, Senator Kim Carr, has appointed innovation specialist Dr Terry Cutler to head up the review, which will examine all aspects of the national innovation system and in particular whether Australia's national innovation priorities are aligned with research priorities.

The government is looking hard at streamlining the multitude of federal and state industry funding programs, of which there are 169, some affecting the biotech sector. It is also very keen to encourage more private investment, not only in biotech but in the public research agencies as well.

Carr told ALS that he wants to encourage not just new collaborations within the public sector, in particular on an interdisciplinary basis, but also between the public and private sectors. He is also intent on developing international relationships and has moved to allow international students more access to Australian educational offerings.

Lyndal Thorburn sees the Innovation Review as a real opportunity to make some changes to the innovation system but points out that the panel will be getting a lot of advice from a lot of different people. "The review is very focused on the big picture and looking far ahead, which is a good thing," she says.

That future could be the bio-economy, the long-mooted evolution in which biotechnology is the next big thing after information technology in having an effect on every sector in the economy.

"A lot of the work we have been doing in the last couple of years is looking at tracking that - the incursion of biotechnology processes and products into traditional sectors like manufacturing, waste management, textiles, agricultural industries - beef and dairy in particular - water and climate change," Thorburn says. "I certainly think there is a match there."

So, are we seeing the long-vaunted maturation of the Australian biotech industry? "It has taken 15 or 20 years to build the industry and at this stage a lot of the ground work has been done," Hopper says. "We sense that there is a trend towards smaller licensing deals rather than start-up companies, and we think there is a lot of research that is being held back [in the universities] at the moment or it is being licensed. But the research is still pumping through and is looking as good as ever."

---PB--- Stocks to watch

The standout biotech stock for 2007 was CSL, but that's not news to anyone. CSL has long been Australia's most impressive biotech company and is proving remarkably attractive to investors.

It has managed to boost its market capitalisation a massive $9 billion from 2006, largely due to its thriving monopoly on blood products, revenues coming through from blockbusters such as Gardasil, and a very healthy drug pipeline.

Of the other majors, Resmed had an up and down year but is healthy, as is Cochlear.

Ex majors, Innovation Dynamics likes the look of many companies in late stage trials and all of those in the top ten in terms of market cap. "ChemGenex, Pharmaxis, Avexa and Progen; Mesoblast is going well, as is Cellestis, the diagnostics company, and Arana. Biota is always a good company and Solagran has done well," Hopper says.

Australia and the world

Innovation Dynamics noticed an odd trend towards more licensing deals and alliances with European companies in 2007 but is not sure if this is long-term. Certainly, Australia has always concentrated on the US for opportunities and very much still does. What does concern Hopper and Thorburn is that Australia is yet to break through in south-east Asia.

Hopper is the executive director of BioFusion Capital, which was set up with strong objectives in the Asia-Pacific region and an eye on building the bridges between Australia and its neighbours.

"The universities and certain governments are very keen to get technology in but it's very hard," Hopper says. "The universities here don't want to sell their start-ups to south-east Asia - they'd much rather sell to Philadelphia or Germany.

"At the moment people see sophisticated technology going into sophisticated markets, but in the meantime China and India are developing their own internal resources in research and development so I think it's going to be a bit of a crunch time in the future and it will be interesting to see whether Australia can compete in that market."

And of course we can't forget our southern neighbours as well. Innovation Dynamics includes an overview of the New Zealand biotech industry in its annual BioIndustry Review, and despite New Zealand's small population, Lyndal Thorburn says she is impressed.

"They have really got their act together on the agricultural side," she says. "What intrigues me is that there is a lot of money going into human therapeutics but I can't see much coming out the other side. They need to get that medical stuff out there."