Business development feature: Do you go with the pros?

By Melissa Trudinger
Wednesday, 30 October, 2002



Good ideas and good science are not the only things a biotechnology company needs to get itself off the ground. In order to raise the amount of capital needed to take a company from being a mere glint in the eye of a scientist to a successful, publicly listed biotechnology company requires a lot of behind the scenes planning and strategy, business acumen, and networking.

After all, there is a business plan to write, grants and funding to apply for, a team of suitably experienced board members and managers to bring on board and capital to be raised, all in addition to the science. There is also the question of making sure that the company has the best financial structure for its needs, and is taking full advantage of any tax incentives or deductions available.

But where can a company turn to get this kind of advice?

There are a number of options if a company doesn't have the requisite experience in-house. These fall into a couple of main categories.

The big global accounting firms are one source of assistance, providing service that span tax and audit services, corporate finance, and legal advice. They can assist a company at virtually every stage of its life cycle, but their assistance doesn't come cheap. Typically, the Big Four - Ernst & Young, Deloitte Touche Tohmatsu, PricewaterhouseCoopers and KPMG -- charge by the hour, and at several hundred dollars an hour it adds up pretty quickly.

David Black, account director at Deloitte Touche Tohmatsu in Sydney, says that for start-up companies, Deloittes can assist with business plans and applications to Federal government funding like the Biotechnology Innovation Fund (BIF) and R&D Start grants, as well as help the company raise finance by putting them in touch with suitable investors and getting the company 'investor ready'.

"We offer quite a range of services depending on the size and how established a company is," he says. As companies grow, Black says, companies like Deloittes provide tax and audit assistance, and can also be involved in the process of floating a company on the stock market. In addition, they can help with recruitment and other employee remuneration issues.

And he says that small companies shouldn't be afraid of working with big accounting firms. "Quite often people have the misguided impression that big firms cost lots of money," Black says. "But a lot of people who knock on our door are very early-stage."

But Diane Sutliff, manager, transaction services at KPMG says most biotech companies that walk in her door are growth-stage companies, as often the smaller companies can't afford the fees. And Dr Craig Fowler, Ernst & Young's life sciences and innovations director, the Big Four are especially important when companies start to build a global presence, outside Australia. "Companies get to the point where they can't use the small domestic providers," he explains.

Fowler admits Ernst & Young has problems working with small companies, as the firm does not accept payment in the form of equity and is not in the business of providing capital to small companies. But he also points out that Ernst and Young often helps small cash-poor companies by providing networking assistance and generally pointing them in the right direction for minimal cost.

"I really don't think we try to turn people away... but we probably wouldn't spend many hours with them," he says. Fowler also notes that the global network of consultants provided by a company like Ernst and Young could be of great benefit to biotech companies. "I don't think people fully recognise how extensive that network is," he said.

Small alternatives

The alternatives to the global accounting firms are the smaller, niche commercialisation consultants. There are a variety of these companies in Australia -- some merely providing consultant services, while others combine consultancy with venture capital. Many are providers of specialist services tailored to the biotechnology or high-tech industries. And these companies are often more flexible in the method of payment for services, taking equity positions or success fees, rather than hourly rates.

Dr Shirley Lanning director of business development at TSL group in Melbourne, says her firm provides a full range of commercial advisory services for the life sciences sector, spanning the gamut of financial, strategic and corporate advice. Their services are not just applicable to start-ups -- the company also works with research institutions, government funding agencies and investors, Lanning says.

One of TSL's clients is Acrux, a company that TSL helped to spin out of Monash University several years ago. TSL has helped Acrux through three capital raisings, and the company is now capitalised at around $100 million, according to Lanning. Acrux also has a major agreement with Pharmacia. "They've been excellent, they've helped us raise money in difficult times," said Tim Morgan, one of the company's founders and now a project manager.

TSL has also had a major role in structuring Acrux, from setting it up as a pooled development fund, to helping to structure the board. They've also provided strategic business advice, says Lanning, who has worked in the Australian and UK life sciences sector for over 20 years, focusing on commercialisation, communication and general mangagment.

Another TSL client is Stem Cell Sciences. In this case, TSL has worked with the company on its strategic business plan, corporate and strategic advice, and a private capital raising. "It's important for young companies to have a well structured business plan," says Stem Cell Sciences CEO Peter Mountford. While big professional service companies are important for major structural issues, he says, the smaller niche providers can have more biotech acumen.

"In an industry like biotech where there are many connected components, it's important to hook up with companies or groups that have similar interests and integrity," he says.

Another niche provider is Peregrine Corporate, an investment banking group that also provides corporate advisory services to companies. "The difference between us and big accounting firms is that they are fee driven, whereas we tend to get directly involved with the companies we are working with, says Richard Revelins, one of Peregrine's executive directors. "Fees are taken in the form of equity."

He says Peregrine tends to take a hands-on approach with its biotech clients, which include Prima Biomed, Prana Biotechnology and Premier Bionics. Peregrine tends to work with companies that are already in clinical trials with potential products. And because the company becomes a major investor in the companies it works with, Revelins notes, "we tend not to get involved in projects we wouldn't want to put our own money into."

In-house expertise

But many biotech companies use consultants and professional service providers on an ad hoc basis, instead preferring to use the in-house expertise they have in their executive teams. "As far as strategies for commercialisation, we certainly don't use the big four accounting forms," says Ian Dennis, executive director and company secretary of Genetic Technologies (GTG). However, the company does use Deloittes for tax and audit purposes, and also to help it leverage itself into the US with a Nasdaq listing.

GTG, he says, does its strategic planning internally, in part because it believes that consultants don't always have a good understanding of the company's business. But they have used commercialisation consultants Aoris Nova for specific projects, including the evaluation of acquisitions like GeneType. Dennis says it's important to choose wisely when using consultants. "A lot of these people, particularly the big accounting firms, try to offer everything to everyone, when they should be sticking to what they do best," he says.

Virax Holdings' CEO David Beames also relies more on in-house experience than consultants, citing years of experience in the management team and the wealth of experience on the company's payroll. "When it comes to commercialisation, we've tended to do it ourselves," he says. Beames explains that while Virax has worked with TSL, it had been a fairly targeted effort to raise capital.

Another company with built-in financial acumen is Promics. "My background is financial, so I did all of that myself," says CEO Alan Scott, who has an extensive history in the biotech industry. "But when you're talking about strategic alliances then we tend to use consultants." He says that strategic consultants are carefully picked by the company to best fit the needs of the particular project, but that usually they are very senior consultants with specific experience in drug development and commercialisation.

Do it yourself

One biotech executive with no time for professional service providers is Peter Bick, CEO of Melbourne company CogState. "Ninety-nine per cent of them are a waste of time and money," he says. "You shouldn't be in the business if you can't do it yourself." Bick, who admits that he is parsimonious about such things, was himself a consultant in the past and believes that working for equity is a more honest and acceptable way of doing charging for consulting. As a former venture capitalist, he also doesn't like the use of finder's fees in capital raising.

"People who charge by the hour are not the ones you want working for you," he says. But even Bick understands that consultants are required for some things. He believes that they are useful when one is trying to sell a company, and also when due diligence is required on an acquisition. "Then I go to the best person I can find -- leaders in their field," he says.

THE BEST LAID PLANS

According to TSL Group's Dr Shirley Lanning, the downfall of many a well-intentioned small biotech company is a vacuum in the business planning and market evaluation department. Crossing that gulf is often one TSL's first tasks when it sets out to work with a company, she says. "Many people come to us and say 'we need to raise capital', but they have no business plan, no research plan, and mostly have very scant or irrelevant market information," Lanning says. "That's another thing we advise on."

Other service providers across the spectrum agree with Lanning. But sometimes, says David Black, from Deloitte Touche Tohmatsu, there is no saving a floundering company. Many small, early-stage companies go out to investors without adequate preparation, and bad initial impressions can come back to haunt them, he says.

Professional services providers often want the same things that investors want -- assurances that the science is sound and backed by well-known scientists. "We would look at similar things to venture capitalists -- someone who has thought about it a lot, someone who has a good track record," Black says.

This is especially the case for providers that take equity stakes in the company in return for services. "The most important thing is that it all starts with the science and the people behind the science," says Richard Revelins, from Peregrine Corporate. He says that unless the science and the scientists involved are credible and the intellectual property position intact, Peregrine would not work with a company.

One positive development in recent years is that institutes and scientists have become more commercially focused, he notes.

But getting to the point where a decent business plan can be presented to potential investors can be a frustrating position for scientists with commercial dreams. Start-up company Pargenex Pharmaceuticals is putting all of its limited funding into proof of principle studies, says founder Thomas Cocks. He hopes that when the time comes to look for more capital, Melbourne University Private and Uniseed will help him formulate a business plan for his company.

-- Melissa Trudinger

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