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by Cynthia Robbins-Roth, Ph.D.
Darwin Would Be Proud
Australian Biotechs Should Rethink Financing Structure
By Cynthia Robbins-Roth
BioWorld Today Columnist
I recently returned from the Southern Cross Equities Second Annual Biotech extravaganza, DNA, Devices and Dealers 2005 in Sydney, Australia. I came away impressed with how the Australian biotech scene has been surviving and growing under the Darwinian pressures that have clamped down increasingly on the U.S. biotech sector - especially preclinical companies.
The Aussie view of their situation is much different - they are focused primarily on finding ways to get the local investors to behave more like Bay Area VCs in the 1980s and 1990s. You remember those days, full of firms raising $50 million in private cash while still in animal testing, then the thrill of a $150 million IPO. Sigh . . . Who could blame them for wanting that jackpot?
There is a dearth of private investors willing to pony up more than A$1 million (US$763,050) or so to any given company. Consequently, the Australian stock exchange is packed with public companies that raised A$20 million in their IPOS - if they were lucky.
The entire Australian biotech sector represented by the 100 public companies in the Southern Cross Equities Biotech Index (www.biotechbuzz.com.au) resides in the infamous roach motel of small-cap stocks (less than $500 million market capitalization). Market caps of less than A$50 million are common. Stocks tend to trade for less than A$1/share.
How did the Australian public market turn into a home for undercapitalized firms that should still be private? A brief perusal of the stock pages in the Sydney paper reveals that much of the Australian stock exchange works this way, with stocks in most sectors trading for pennies.
Historically, the big investment plays were primarily in resources - groups raising money to dig holes in the ground. It doesn't take that much money to dig a hole and see if something valuable - opals, gold, diamonds, oil, etc. - is in there. If the hole contains something fabulous, you go raise more money to fully exploit it. If the hole is empty, you haven't spent that much time or cash. You can go dig another hole, or give it up altogether without leaving much infrastructure dangling.
Investors are used to rapid, low-cost operations to generate return (or not). They also are used to straightforward business strategies that did not require Ph.D.s in molecular biology to analyze. Biotech doesn't fit into the "digging holes model very well. It takes a lot of money to dig far enough to tell if you have something valuable, and that value can disappear suddenly after you have spent lots of cash.
The end result: a miniscule local private equity community and almost no mezzanine investment. Companies tend to be chronically undercapitalized throughout their lifecycle and go public very prematurely simply to access cash. In spite of that tough environment or, more accurately, because of it, Australian biotech teams have had to figure out how to create operating entities to move science forward without the slush funds available to their U.S. brethren.
A quick look at the top 10 public biotech companies in the Southern Cross Biotech Index shows some pretty interesting companies that would be appealing even in the more crowded U.S. sector. The top companies have broad technology platforms capable of generating multiple products and aimed at creative market applications beyond the classic pharmaceutical markets. They also have business strategies aimed at creating an international presence via subsidiaries, partners, and listings on international exchanges.
The Aussies are tackling the lack of homegrown management with biopharma experience in several ways. Some are recruiting ex-pats back from the U.S. biotech sector (Metabolic Pharmaceuticals, Agenix and Acrux). Others are merging with small, complementary U.S. firms (Chemgenex) or setting up subsidiaries in the U.S. (Novogen's Glycotex unit) to try and tap into the U.S. financial community.
Living Cell Technologies has a branch in Rhode Island - run by a founder of Cytotherapeutics - and another in New Zealand. Partnerships with larger U.S. and European biopharma companies provide access to experienced teams and infrastructure for Aussie firms including Prima Biomed (with Medarex), Regenera (with Alcon), and Bionomics (with Genmab).
Unfortunately, the Aussie sector still is hoping that it is possible to "educate" its homegrown investors and the government (state and national) into providing the large capital influx needed to duplicate the old U.S. business model. Given that young companies are having a hard time luring U.S.-based investors, who theoretically are as educated about biotech as possible, into coughing up the big bucks, I think the Australian sector should re-think their request.
The tough Darwinian pressures they have survived to date and their location strategically close to the current hot spots for entrepreneurs and investing - India, China, Singapore and Korea - might actually give them advantages over the Bay Area firms trying to start up another early stage biotech company. Investors here are still pretty reluctant to give over large sums if the payoff is a decade away.
Australia's biotech industry has the opportunity to build one of those new models we have been discussing all summer - and realistically, it has to. The science is there; now it's time for a new approach to driving commercialization forward.
-- September 28, 2005
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by Cynthia Robbins-Roth, Ph.D.
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