On a windy, overcast day in November last year, 27 biotech CEOs, led by the head of Biotech Australia, Lorraine Chiroiu, arrived in Canberra for their annual meeting with the minister for industry and science and a day of presentations from a shuffle of bureaucrats.
This year’s gathering was especially significant – there was a new Labor minister, Ed Husic, and both the government and Biotech Australia had just published strategy documents for the future of the industry in this country. Perhaps most importantly, the COVID-19 pandemic had indirectly, and unexpectedly, led to a 40 percent increase in the number of Australian biotech companies, from around 1000 to 1427.
That happened largely because the revenue of universities had collapsed during the pandemic due to the disappearance of foreign students. University bursars, desperate for cash, created hundreds of new companies to commercialize inventions from their laboratories.
A few problems with that: It takes seven to 10 years to get a biotech business to break even, and longer to get any serious cash revenue. Australia has a well-known shortage of both capital and people, which the industry body’s March 2022 strategy document Biotechnology Blueprint – A Decadal Strategy for the Australian Biotechnology Industry, was aimed at addressing.
The Phase-3 challenge
Lorraine Chiroiu estimates that the 40 percent increase in the number of biotech businesses in Australia will require an extra $1 billion in capital, as well as a lot of skilled staff. Most companies just give up. I talk to a lot of small- to medium-sized company CEOs for my other job with the investment newsletter, Eureka Report, and a common aim of the biotech CEOs that I talk to is to get noticed by big pharma and sell the business to one of them – that is, to a major global pharmaceutical company, which usually means American.
That goes for both drug developers and medical device firms, and usually, the drug developers are simply aiming to get through Phase 2 trials and sell before they have to raise a large amount of capital needed for Phase 3.
It is surprising, considering that Australia has one of the largest buckets of capital in the world – its superannuation pool of $3.5 trillion and growing rapidly. This is why one recommendation in Biotech Australia’s ‘blueprint’ is especially germane: “Consider a fund of sufficient size to enable phase-III-ready assets to access superannuation funds, redefining success to partner or sell later rather than currently after phase II.”
That fund could be Labor’s $15 billion National Reconstruction Fund, co-investing with super funds, although its mandate is broad, not specialised to biotech alone. The model might be the Victorian government’s $2 billion Breakthrough Victoria fund, which co-invests in start-ups and was launched in September last year.
A few days after the visit from 27 biotech CEOs last November, Ed Husic told the National Press Club that the NRF “will be empowered to invest through a combination of loans, guarantees and equity, including with institutional investors, private equity and venture capital”.
And: “Governments can and should strategically and thoughtfully invest in the industries of the future.” How that’s going to work, exactly, is still being worked out, but medical science is one of the seven priorities of the NRF.
Nevertheless, the challenge in growing a proper biotech industry in this country shouldn’t be underestimated, even with one of the world’s biggest savings pools for capital.
Investing in success
Australia only really has three world biotech success stories – CSL, Cochlear, and Resmed, valued on the share market at $139 billion, $14.7 billion, and $13.3 billion respectively. CSL is 14th on the league table of world pharma, and the three of them together are worth less than a quarter of the world’s biggest, Johnson & Johnson.
The reason those companies became Australia’s trio of global biotech champions is that they took their products through to the market without selling out – that is, they managed to raise the capital required to do that, mostly through internal cash flows.
However, 80 percent of the rest of the industry is “pre-revenue”, which is a nice way of saying they burn cash, they don’t generate it. For example, last week I spoke to Michael Winlo, CEO of a company called Emyria, which is trying to commercialise MDMA (ecstasy) for treating PTSD and other mental illnesses, as well as cannabis. The company is burning $500,000 a month, has $2.7 million in the bank and is years from commercialising its treatments.
Or Rhythm Biosciences, whose CEO, Glenn Gilbert, I spoke to recently, and they are also burning cash. Rhythm is developing a world-leading blood test for colon cancer to replace stool samples, but had a setback recently with its Therapeutic Goods Administration approval.
Both Rhythm and Emyria have good products and will get there eventually, and a few companies are getting somewhere now.
Avita Medical, which is commercialising the plastic skin invention of former Australian of the Year Fiona Wood, saw its share price surge nearly 50 per cent in February when it announced surprisingly strong sales in the United States.
And Neuren Pharmaceuticals also had a 50 per cent pop in its share price a fortnight ago when it announced that its US partner Acadia Pharmaceuticals has received Food and Drug Administration approval for their drug DAYBUE, the first treatment for the devastating genetic condition suffered mainly by girls called Rett Syndrome.
Another Aussie success story is Pro Medicus, which sells radiology software in the United States and is now capitalised at $6.7 billion, having seen its share price increase 140-fold in 10 years. It reported revenue of $57 million and profit of $27 million in the latest half year.
So Australia is not entirely a wasteland of undercapitalised biotech firms burning cash and living hand to mouth as they try to get big enough to be noticed by big pharma so they can sell out.
And it wouldn’t take much of a nudge from the government to create a very vibrant and economically significant industry.
The fact is that Australia also has a strong propensity for innovation, thanks largely to the brilliance residing in our universities and research institutes, including the CSIRO.
It also has a lot of capital sitting in super funds that is currently being invested in infrastructure, banks and mining companies.
The government just has to put those two advantages together with a bit of oil.