Strategise to survive: PwC analyst

As the new year begins, market analysts are sounding the same warnings that they did in 2002 -- that Australian biotechnology companies must consider strategies like mergers and acquisitions and alliances to survive.

The difference this year, according to long-time market observer Dr Lisa Springer at PricewaterhouseCoopers, is that the bear market for biotech has forced CEOs to finally heed the warnings and act. As a result, she said, 2003 looks like being the year Australian biotech thinks outside the box.

Springer, who has just signed off on PwC's fifth quarterly BioForum report, said the perennial shortage of ready cash for the sector, combined with jittery investors both locally and overseas, would contribute to the sector's impetus towards M&A and deal-making.

The latest BioForum reveals that almost half of the 74 ASX-listed companies on PwC's biotech index have cash reserves of less than $5 million, pointing the way to severe attrition within the sector unless drastic measures are taken.

Small companies, Springer said, ran the risk of raising $1 million and feeling too confident, but such small-scale achievements were not enough and cash injections like Peptech's recent $10 million capital raising were all too rare.

To make themselves attractive, companies firstly had to stop thinking small and grow bigger in several ways, particularly through their R&D portfolios and their trained personnel, she said.

Before they backed a company, Springer said, capital markets looked at how quickly a company could get to market. To be successful, biotech companies needed to boost their workforces with an experienced CEO, an effective regulatory expert "to make the development pipeline work", and a critical mass of scientists.

Springer said that in her opinion, small listed biotechs should be asked to meet milestones to remain on the list. "The only reason the investment community will take an interest is if you're on the index, and to be on the index you've got to get bigger," she said.

However, she said, the market was beginning to show a renewed interest in the biotech sector, thanks to recent key events, including Peplin's alliance with US company Allergan, placements by Peplin, Meditech, Medica Holdings, Prima Biomed and Peptech, and BresaGen's acquisition of important stem cell patents.

"There are definite signs that the capital markets are starting to pay attention to the sector once again," Springer said. "PwC believes this momentum is long overdue for the sector."

She said effective clinical trials were another way to win market interest. She added that many Australian companies had not used their cash wisely enough to complete successful trials, but admitted that being short of cash was a handicap for many firms.

"But if you're a biotech and you want to add value, you've got to have something to take to the clinic," she said. "If you can go to a pharma and present clinical results and lab results, that's a big carrot. Phase II is realistic -- and you only need to do it once.

"Australian companies need to have at least half of their products in late pre-clinical or clinical trials and strong technical and commercial personnel."

Hiring more effective management had remained a concern in the biotech sector for some time, Springer said, and was finally starting to occur, "but a lot of people are coming from a big pharma background, and they're not always the right people to run a small biotech."