In our last blog post, we laid out the Australian biotech foundation and a few of its shortcomings. Here we focus on what it has done well.

Certainly biotechs can be built successfully in Australia. One company (Acrux) grew from a $20 million market cap to $500 million over 15 years, and another (Mesoblast) grew to be worth $2 billion. Australia is doing many things right.

Partially this is because the government has played its role well. Initially Australia’s government looked at biotech as a lucrative export opportunity, and it put in place a grant system and tax benefits for anyone investing in high-risk start-ups. For instance, companies with less than $20 million in turnover yearly can get a 45% tax refund on eligible R&D expenditures (more information here).

Some of the other government initiatives have been the Innovation Investment Fund (IIF), since closed; the Innovation Investment Fund-Follow-on (IIFF), also closed, and the Early Stage Venture Capital Limited Partnerships, which offer tax breaks for limited partners. Pre-Seed plans helped create the first batch of biotech entrepreneurs, and today the government still strives to make things easy – it can take just minutes and less than $1,000 to do the paperwork to set up a firm.

The government has also invested large sums in infrastructure made available to the public on a fee-for-service basis. The National Collaborative Research Infrastructure Strategy (NCRIS) program provided $542 million from 2004 to 2011 for subsidizing infrastructure in private drug discovery firms and contract research organizations (CROs). NCRIS has in some cases subsidized the cost of installing/purchasing advanced biotech infrastructure in private CROs or R&D biotechs with a CRO wing.

State governments have also helped to create a few clusters. In Melbourne, for instance, the government of Victoria has supported the development of The Walter and Eliza Hall Institute of Medical Research, Burnet Institute, The University of Melbourne, Monash University, Royal Melbourne Hospital and the Royal Children’s Hospital – many of which are in close proximity to each other. Clusters allow companies to share facilities and draw a better hiring pool. Clusters also help promote collaborations, and sometimes consortia formed in a cluster may earn state government funding.

Australia has a unique system of about 60–70 public collaborative research centres. Called the Cooperative Research Centres (CRC) program, it supports end-user-driven research collaborations to address major challenges facing Australia. The CRC Program links researchers with industry to focus R&D efforts on progress towards utilisation and commercialization. In 2014–15, there were 35 CRCs in a range of areas such as healthcare, natural hazards management and the aerospace industry.

Most biotech start-ups originate from these centres, meaning the spin offs have essentially been financed by public universities. There is no regulation on who owns an invention – the scientist, their department or their organization – and thus the company founder and inventor have been able to own IP rights rather cheaply. This has changed, with most universities adopting the equal splitting of IP rights among 3 parties: the research organization, the relevant department and the inventor scientist.

Thus, some 75% of the companies that are on the stock market are university spin-offs. Yet, partnering with the institution that spun out a company is the most common collaboration for a start-up, because the university expects that money will be pumped back to it through fee-for-service work from the spinout. This is often the cheapest way to get things done for a startup, but it is hardly ideal, as academic scientists often do not feel comfortable working in a fee-for-service arrangement and being told what they should do, nor do they understand the pressure of time and the corporate work culture.

Next post: Finance

Szymon Jarosławski and Gayatri Saberwal

Acknowledgments

This article is based on interviews with 14 senior people in, or associated with, companies in Australia, whose comments have been edited for clarity and brevity. We are extremely grateful to the interviewees, who gave freely of their time and their insights.  This work was supported by a grant to GS from the Institut Merieux, France. SJ was supported by France Volontaires, France. Neither organization played any specific role in this study.

Australia has grown a busy biotech sector, but what awaits bioentrepreneurs in this small, geographically isolated country? 

The Australian biotech industry was born in the 1980s, after researchers at the Walter and Elisa Hall Institute in Melbourne discovered colony stimulating factors (CSFs). However, that discovery was left unpatented, and it was Amgen that earned billions from drugs based on the technology. This was not the last mistake made by Australia’s biotech sector, but even with the larger issues that plague it today, Australia has a long list of native benefits to offer and one of the world’s more robust biotech sectors. Over a series of blog posts, we’re going to discuss what one should consider before launching a biotech in Australia.

First, the downside

Historically, the mining industry has been an important contributor to Australia’s gross domestic product (20% in 2014), so the country has a long legacy of risky investments. But in biotech’s early years, Australia’s investors often didn’t understand the risks associated with drug development, and many didn’t understand the difference between research and development – putting in just enough money to finish the research, but leaving nothing for development.

Another mistake concerned going public too early. The Australian Stock Exchange (ASX) has a low bar for listing, and thus is amenable to smaller companies. A company with a post-IPO market cap of A$10 million can list, something unseen in the US where a firm needs to be worth $100 million before listing. This sounds like a positive – a more forgiving public market – but Australian firms are forced to go public early because of a weak venture capital (VC) environment in Australia. As of 2014, Australia’s 88 ASX-listed biotechnology companies were valued at more than A$51 billion. Without suitable market caps, many of these companies are unable to raise additional funds.

The VC environment, as a percentage of GDP, is far behind the US. The Australian government is aware that private VC money is inadequate and attempted to fill the financing gap through programs such as the Innovation Investment Fund (IIF), where funding was matched by private investors, and Commercialization Australia. As of February 2014, Commercialisation Australia had invested A$213M in 503 companies, but the program was abolished in May of that year.

This shortage of angel and VC funds means that the early Australian sector is dependent on government tax breaks and R&D grants to help generate funds. That helps, but many firms fail because they lack enough money to reach a critical size, and because of a dearth of experienced managers.

Australia also suffers from too many tiny biotechs. The vast majority of university technologies would be better off licensed out, rather than formed into a start up. These small biotechs are often left floating, poorly capitalized and without strategic direction. Many would benefit from merging, but that’s not as common as it should be, as management often doesn’t have great vision and are more concerned with the continuity of their salaries than the firm itself.

Australian bioetchs often suffer from unfocused development, in that they do not ask the go-or-no-go questions early enough. The reason, it’s been suggested, is that if a CEO doesn’t have shares in a company, he or she won’t have a wholehearted interest in its success, and thus considering shutting down the company simply imperils the CEO’s job. Yet another aspect is that those very small companies are founded on a single invention, which means that ending a project basically ends the company. Furthermore, given the full disclosure requirements of public companies, announcing the stoppage of projects would likely crush a company’s stock price. So companies soldier on and drag out their failure. Millions of dollars have been wasted this way in Australia.

There is another issue: for an industry to be viable long-term, of course, shareholders must make money, but even when this does happen in Australia, there haven’t been enough success stories to encourage reinvestment, so money is rarely recycled. Often, if a company fails, the CEO cannot raise funds for another.

It’s true there are a handful of good firms with nice stories, such as Mesoblast, Sirtex Medical, Impedimed and Clinuvel Pharmaceuticals, but medium-cap Australian stocks have been pounded on the exchange (Table 1), even as stocks in the US have flourished. So while Australia has companies that are providing employment and are profitable, it has room to improve.

Next post: what Australia has done well

Szymon Jarosławski and Gayatri Saberwal

Table 1. Market damage in 2014 (Go here for this article by Mark Pachacz in full; it has been excerpted below.)

Acknowledgments

This article is based on interviews with 14 senior people in, or associated with, companies in Australia, whose comments have been edited for clarity and brevity. We are extremely grateful to the interviewees, who gave freely of their time and their insights.  This work was supported by a grant to GS from the Institut Merieux, France. SJ was supported by France Volontaires, France. Neither organization played any specific role in this study.