How a code of practice can help manage biotech's conundrum

The new AusBiotech/ASX code of practice for reporting by life science companies, launched last week, is being hailed as an important milestone in the development of the Australian biotech sector. Here, Michael Aldridge, who was on the committee to review the code's first draft, explains why he believes the code is so important to the industry.

The new ASX and AusBiotech code of practice for reporting by biotechnology companies is an important and positive development for the industry and its investors.

The biotechnology industry, particularly that component involved in the research and development of products to address human disease, shoulders an important and serious burden. We are empowered to bring to the world therapies that address the diseases of humankind.

Delivery of this goal is expensive, complex and time consuming, and to that end patient investors put risk capital in our trust.

Our pact with providers of risk capital is that we strive to deliver medicinal products that by the significant pharmacoeconomic impact they have on the progression and/or cure of disease will deliver superior investment returns. In return, investors quite rightly expect regular reporting of the progress of their investee companies towards this magical goal. And, as in many other industries, investors typically measure the progress of each company against its peers in what is hopefully an objective and unbiased fashion.

Our industry faces a conundrum: by its nature it is quite complex, intangible and remote from most investors' daily experience. However, its products tend to touch all of our lives every day and address our lives' (literally) problems. As such there is often both a heightened level of investor excitement and confusion.

Managing this conundrum in an objective and open fashion is the primary goal of the ASX/AusBiotech code. In addition to our obligations to investors, the biotechnology industry has some other, no less important, disclosure concerns. For example, reporting on progress towards the delivery of a medicine, which may address a serious, or life-threatening disease for which there may be no therapeutic alternative, may provide important hope to sufferers of that disease. Clearly, an ethical concern for balanced and objective reporting is paramount.

There are others, of course, who need good information. Another example includes industry regulators who will be concerned to ensure that a company developing a product for which it will want to make therapeutic claims in what is often a highly competitive market does not misstate the competitive position of that product, in the absence of valid evidence.

In the context of these reporting requirements the ASX/AusBiotech code of reporting is an important development. It represents a comprehensive and objective set of guidelines for companies to use in reporting progress.

It is not mandatory, and at least at this stage in its development it should not be. Mandatory disclosure obligations, necessarily general in nature, already exist in ASX listing rules and the Corporations Law and are designed to protect investors in the case of material misstatements or omissions by companies.

Companies may opt out of the ASX/AusBiotech code, and given the breadth and depth of the topic that this code seeks to cover there will be instances where that is entirely appropriate. I can think of situations such as the highly competitive market for developers of generic medicines where their shareholders would be distraught to see a complete pipeline of products in development exposed for international competitors to see. I would hope that companies are honest and open about the good reasons why they may need to opt out of the code and investors support that position. This code is intended to maximise the efficiency of a market for risk capital, and companies that opt out may face an impact (positive or negative) on their cost of capital. That is their choice.

Nor is the code static. As an open format for a dialogue between a company and its investors it will benefit from continued use, adaptation and refinement.

The ASX/AusBiotech code provides a guide to companies in describing their progress towards an important goal, with specific metrics relevant to our industry. For investors it provides an objective format for evaluating a set of very diverse and complex disclosures.

We are a capital-intensive industry. To the investors who support this industry, we owe the clearest, most honest and objective description of the health of their investment. With that information they are able to make the most effective diagnosis. It's their money. Good health!

-- Michael Aldridge is managing director and CEO of Peplin (ASX:PEP).