From in vitro to in vivo: Australian biotech grows up

Australia's biotechnology industry is entering a new phase of growth as companies begin to reach major milestones including clinical trials and significant deals and partnerships with larger biotechs and big pharma.

There are currently at least 15 Phase I and II clinical trials underway for therapeutics under development by Australian companies and their partners, as well as a couple of Phase III studies, and more trials are expected to commence this year. And the last 12 to 18 months have seen a significant increase in the number and magnitude of deals being reached by Australian companies.

Following the US market, which has shown a significant recovery in the biotech sector in the last 12 months, the Australian sector has also rebounded after a couple of slower years. In the first three quarters of the current Australian financial year, which ends on 30 June, the market capitalisation of the sector has topped AUD$4 billion, according to a recent report by PricewaterhouseCoopers.

Also paralleling the US, the IPO and financing windows have reopened since the last quarter of last year, with 14 biotech and medical device companies listing on the ASX raising a total of AUD$141 million, with another 10 companies scheduled or planning to float in the remainder of the 2004 calendar year.

As with IPOs in the US in the same period, some have been more successful than others. A lack of access to substantial levels of private equity in Australia has forced a number of companies to float much earlier than would be seen in other biotechnology markets, resulting in low market capitalisations.

Upwards of AUD$700 million has also been raised by listed companies through placements and share purchase plans, including a $438 million placement by CSL to help finance its acquisition of Aventis Behring. On average, however, companies are raising smaller amounts, usually less than $10 million, to avoid having to obtain shareholder approval.

"I think it is good to be able to get money into these companies by hook or by crook," says Alison Coutts, a director at Sydney-based boutique investment bank eG Capital, which has handled several recent floats and placements. "Here we have the opportunity, if a company is sufficiently advanced, to list relatively early. It's a risk for Mum and Dad investors but we haven't seen too many abject failures yet.

"I actually think the model we have in Australia is very good for a fledgling industry -- companies are able to raise money and do placements -- but we need to keep moving forward. To be truly globally competitive a lot of the small companies need to get bigger -- there are a lot of holes to fill."

Biotechnology analyst David Blake, who co-edits Bioshares, says it's time for Australian biotechs to get a much better handle on what their capital requirements are, rather than raising small amounts of funds, particularly as many companies move toward starting clinical trials. "The biggest challenge for the sector is figuring out what realistic capital requirements are and communicating that to investors. The more clinical trials the higher the chances of success and thus risk is reduced and value is returned to shareholders -- you can't have too many trials," he says.

"The sector hasn't come to that point of maturity, to analyse itself and go to the capital markets and tell them exactly how much they need and why. Money shouldn't be a limitation to success."

Bob Moses, a former VP at CSL, and now chairman of several Australian biotechnology companies including Amrad and Antisense Therapeutics, believes that companies are better served if they can hold off listing on the ASX until they have matured somewhat -- ideally until they reach the clinic, where more substantial levels of capital are typically required.

"The majority of biotech companies can be better developed in a pre-IPO environment, where they don't have the intense focus on the next three to six months that comes with a listing," Moses says. "But pre-IPO investors in Australia are sometimes too interested in the IPO date -- the investment is often driven by the expectation of an imminent IPO."

Moses believes that Australian biotech companies still need to build their credibility, especially when seeking international partners. "The quality of science here is second to none in the world," he says. "But it's not the science, it's what we do with the science that tends to do the most damage."

Moses sees the industry here dividing into two camps -- one that relies on high quality science and integrity in dealings with the capital markets and big pharma companies, and a second group that relies on hype to boost itself.

"In the first group we have a core of companies that are absolutely world-class in terms of science, and that are beginning to move towards professionalism and maturity," he says. "The second group will see more share price volatility. Ultimately these companies do a disservice to everybody. Over-hyped companies leave a trail of wreckage behind them and leave genuine investors gun-shy about investing in the sector."

But Moses believes that eventually weaker companies will be weeded out as a result of pressure from capital markets, particularly those overseas. And recent moves by the Australian stock exchange to develop guidelines for biotechnology company announcements to the market should also prevent companies from over-hyping their achievements, he says.

Deal flow

Australian biotechnology companies, many of which were launched in the heady days of 2000-01, are also starting to actively show signs of connecting with the international biotechnology and pharmaceutical scene, with more and larger deals and partnerships appearing.

In the last 12 to 18 months, there have been a number of lucrative deals including Amrad's deal with Merck to develop therapeutics for asthma based on the IL-13 receptor, which has already netted the company US$11 million out of a potential US$112 million plus royalties; the recent deal between Prima Biomed subsidiary CancerVac and Canadian company Biomira, worth AUD$20 million in milestone payments for Cancer Vac's cancer therapeutic vaccine; and the deal between Acrux and VIVUS to commercialise development of two hormone-based products for female sexual dysfunction and menopause to be delivered using Acrux's proprietary delivery system, worth US$13.3 million.

Another important deal occurring last year was Meditech Research's substantial partnership with Danish company Novozymes to develop the company's HyACT technology, which uses hyaluronic acid in complex with chemotherapeutic drugs to more effectively target tumour cells, which will see the two companies collaborate to develop new applications based on the technology, and funding of Meditech's current Phase II clinical trial of lead compound HyCAMP.

Benitec augmented its patent position by coming to an agreement with the CSIRO and the Queensland Department of Primary Industry over overlapping claims for DNA-delivered RNAi technology. The Queensland-based company will pursue human therapeutic applications, while CSIRO will take responsibility for non-human animal and plant applications, and QDPI will pursue applications in agricultural production. Benitec also licensed the technology to Promega for the development of DNA-delivered RNAi products, of which the first -- a series of gene-silencing vectors -- hit the market in March.

Carbohydrate chemistry company Alchemia entered into an agreement with American Pharmaceutical Partners to develop a generic synthetic heparin, expected to be available by the time Sanofi's Arixtra loses its patent protection. The company already has a process development and manufacturing with Dow Chemical.

Norwood Abbey subsidiary Norwood Immunology-, which is due to list on the London stock exchange's AIM exchange shortly, signed an agreement with TAP Pharmaceuticals to commercialise Norwood's use of GnRH analogues such as TAP's Lupron for regeneration of the thymus in patients with immune deficiencies caused by bone marrow transplantation procedures, cancer or HIV/AIDS.

Cautionary tale

One of the key criticisms of the Australian biotechnology sector in the last 18 months has been a lack of merger and acquisition activity coupled with the large number of small companies. Industry watchers also point to last year's failed takeover bid of Sirtex launched by US company Cephalon as a cautionary tale for companies with M&A aspirations. "I always thought that Sirtex should have accepted the Cephalon bid," says Bioshares' David Blake. "Perhaps the company and its shareholders didn't understand the challenge of selling [its product] into the North American market."

At the upper end of the biopharmaceutical spectrum in Australia, CSL has been very busy this year with both an acquisition and a divestment. Its acquisition of Aventis Behring, which it will merge with its ZLB Bioplasma division to become a world leader in plasma therapeutics, has recently been completed. "This is pretty significant, as it shows that there is [at least] one company here with the ambition to become the top player in its sector, and it looks like it will achieve that," says Blake. "This is important for smaller companies as it can elevate Australia as a player."

But analysts, including eG Capital's Coutts, note that the restructuring of the company, which includes its recent divestment of its animal health business to Pfizer, may result in a lack of attention to its other activities, which includes the development of a vaccine for prevention of cervical cancer in collaboration with Merck, currently in Phase III trials.

Recent activity has suggested that companies are beginning to take note, with two major mergers announced in recent weeks, between AGT Biosciences and US company ChemGenex (see below), and between two Australian stalwarts, Peptech and Agenix. Other M&A activity includes Life Technologies' (formerly Gradipore) recent acquisition of a plasma therapeutics business from Atlanta-based Serologicals. And California-based Axon Instruments, which is listed in Australia, is in the process of a $140 million takeover by Molecular Devices.

Clinical activity

Australian companies are also starting to move from pre-clinical development into clinical trials activity, with a number of companies having recently started or due to start Phase I and II clinical trials in a variety of areas.

Trials to watch closely include Serono's Phase II trial of Amrad's drug emfilermin as a treatment for improving embryo implantation in assisted reproduction, which is due to be announced later this year. Earlier results from trials of the drug, a recombinant form of leukaemia inhibitory factor (LIF), indicated that the likelihood of pregnancy increased in couples where there was a female factor responsible for infertility.

Meditech's HyCAMP, a hyaluronic acid-irinotecan complex being tested in colorectal cancer patients, has also delivered promising results in the first stage of its Phase II clinical trial. Significant reduction of toxic side effects including diarrhoea and neutropenia has been reported prompting the company to expand the number of patients enrolled in the full trial to improve statistical analysis.

Progen has three trials underway for its anti-angiogenesis small molecule drug PI-88, which has just been awarded orphan drug status by the FDA for use as a treatment for malignant melanoma, and a fourth likely to start soon. The trials cover the drug's use in metastatic melanoma as a single agent therapy, advanced non-small cell lung cancer in combination with chemotherapy, and as a single agent therapy in multiple myeloma, while the fourth trial will look at the drug as an adjuvant treatment in post-operative primary liver cancer.

Recently listed company Pharmaxis is busy with a Phase III clinical trial for Aridol, a diagnostic lung function test, and two Phase II trials for Bronchitol, a therapeutic for cystic fibrosis and bronchiectasis.

Other ongoing trials include:

• Starpharma's Phase I trial for its anti-HIV gel based on dendrimer nanotechnology.
• Metabolic Pharmaceuticals' Phase IIb trial on weight-loss peptide AOD904, which is expected to yield results in the third quarter.
• Solbec Pharmaceuticals' Phase I/IIa trial on a drug to treat solid tumours including mesothelioma and malignant melanoma.
• Phase I results for Antisense Therapeutics' multiple sclerosis drug.
• Australian Cancer Technologies has also initiated a Phase II trial of its anti-idiotypic therapeutic cancer vaccine Pentrys (formerly known as Pentrix).

More trials activity is scheduled, with unlisted company Xenome waiting for the go-ahead on a Phase I trial for its cone shell venom-derived pain drug, and Peplin Biotech waiting for partner Allergan to resubmit three INDs for its skin cancer drug PEP005 following recent discussions with the FDA about increasing the scope of the protocols.

Merge and deliver

AGT Biosciences, a genomics company that has focused on target identification and validation in a range of disease indications, has announced a merger with US-based ChemGenex Therapeutics, a drug discovery and development company with two drugs in clinical trials to form ChemGenex Pharmaceuticals in a $14 million deal. The combined company will have the capabilities to develop small molecule therapeutics from target identification through to clinical trials, particularly in the areas of oncology and inflammation.

"Our aim is to build a truly genomics driven company, but also a fully integrated company," says CEO Dr Greg Collier. While AGT is bringing its existing deal with Merck to identify targets for obesity and diabetes drugs, and a yet to be partnered series of targets for depression and anxiety, ChemGenex has two promising cancer drugs in Phase II clinical trials and a pre-clinical pipeline of prospects following close behind.

"We'll still maintain our partnership strategy for big disease areas like diabetes and obesity or depression and anxiety, but in smaller areas, that big pharma doesn't want, there are opportunities," Collier says.

Meanwhile, Peptech and Agenix stand to really gain from their proposed merger to form a $400 million-plus company with a combined portfolio encompassing animal health, imaging, therapeutics and diagnostics. eG Capital's Alison Coutts says the Peptech-Agenix merger is a great deal from a fundamentals point of view, but notes that it might take the market a while to realise the potential of the merged company.

Biotech analysts are looking favourably on the deal, saying that it sets a benchmark for the industry, and marks a new phase of maturation for Australian biotech. "This is not just about two companies -- it's an industry-significant event, that benchmarks the entire sector," says Bioshares analyst and co-editor David Blake. "Mergers are always easy to talk about but incredibly difficult to do. This says that the sector has people capable of delivering on it -- it's a deal that makes sense."

Coutts says there are plenty of opportunities for Australian companies to get together with other local and international companies and to look at other opportunities for branching out. "It's a matter of will, and of working out how to get across geographical barriers -- the technologies are international and have to be treated as international," she says. One company that has flagged itself as looking for the right M&A opportunities is Biota, which has been looking for the right match for 12 months. CEO Peter Molloy says that improvements in the economy have slowed the process down, as companies adjust to the turnaround in the economy and alternative financing strategies including IPOs, but the company is still actively evaluating a number of opportunities, despite its recent decision to sue GlaxoSmithKline, its marketing partner for flu drug Relenza, for failure to support and promote the drug since its launch in 1999. "When there is volatility in the price it can be hard to do mergers," he says. "But we're still confident that we'll be able to do this."