Investment feature: the world's a stage

By Pete Young
Tuesday, 27 August, 2002


Drugs, vaccines, diagnostics and devices are the hotspots of the global biomedical market that Australia's biotech researchers are scrambling to fill with products.

The match-up between Australia's research strengths and its successes in those sectors isn't a perfect fit. It has a long legacy of expertise in medical research, yet the number of new drugs developed and taken to commercial release with ongoing Australian input more or less start and end with the anti-flu drug Relenza.

Australian activity in the drug sector could be changing thanks to the increasing trend by merging pharmaceutical giants to outsource their new drug R&D, says Prof Peter Andrews, co-director of the Institute for Molecular Bioscience. They now outsource up to 25 per cent of R&D in the quest to fill drug development pipelines. That plays to the strengths of the troupe of young Australian biotechs pushing drug candidates toward commercialisation.

"Nobody is going to start the world's largest pharma here but this trend is going to give biotechs a larger slice of the action," says Andrews. In other areas, such as medical devices and instrumentation, Australia can point to a lengthy list of corporate luminaries, among them Cochlear, ResMed, Vision Systems, Polartechnics and Optiscan.

Andrews notes Australia has done "exceptionally well" in both the devices and diagnostics markets. "My personal view is that Australians have always been inventive at putting things together out of string and sealing wax, going right back to the days of the stump-jump plough."

Workers in medical research labs who inherited that inventiveness are responsible for the beginnings of many of the device companies listed above. ResMed's sleep disorder products, for instance, came from technologies developed at Sydney's Institute of Respiratory Medicine, notes venture fund and biotech executive Kevin Healey.

Similarly, Australian strength in vaccines is underpinned by a long history of immunology research, particularly at Melbourne's Walter and Eliza Hall Institute.

Another area of Australian expertise, stem cell research, hasn't yet translated into commercial payoffs because the market is still nascent. However, ES Cell International and BresaGen are two Australian-affiliated companies that appear destined to make a global mark, thanks, in part, to stem cell research fostered at the Monash Institute of Reproduction and Development in Victoria.

Commercial leverage

Scientist-businessman Prof Ian Frazer knows all about the value of long-standing research strengths and how to achieve commercial leverage with the resultant IP. The director of the Centre for Immunology and Cancer Research (CICR) and his researchers have spent 10 years developing human papillomavirus (HPV) vaccines against cervical cancer in collaboration with CSL.

It has two vaccines in clinical trials at the moment in the US and Australia -- one a relatively conventional vaccine used as a preventative treatment, the other a vaccine which could be the first of a new breed for treating existing conditions.

Frazer is also CEO of Coridon, a start-up which has contracted expertise from CICR to improve the efficiency of the expression of proteins in cells. The technology could have therapeutic applications in cancer treatments and has attracted $5 million in venture investment. Frazer's vision of Coridon's future is one of a globally-oriented Australian company - not one that just wants to survive long enough to become an acquisition target of a larger player.

The company Frazer would most like to emulate is Genzyme, a biomedical company founded 20 years ago which now markets its products in 60 countries. With more than 5000 employees, US-based Genzyme is "very much larger" in size than Frazer is aiming for with Coridon. But the business path it has pursued and the way it has diversified its product range make it the ultimate role model for Coridon, Frazer says.

Niche markets

The magic ingredient factor for small up-and-coming biotechs is knowing their technology niche better than the risk-averse big pharmas. "Small biotechs tend to be more willing to adopt risks than big pharmas but the key is to spread those risks over as wide a range as possible. So the business model we are striving for has to do with having more than one egg in the basket," Frazer says.

Another key to success in pursuing global market share is the ability to avoid insular thinking and network with the larger community via strategic alliances in which the currency is often cross-licensing deals, he says. Australia is a long way from the world's huge markets as mapped in terms of population density so "basing the next Merck in Australia is not a model that is likely to work." On the other hand, producing value-added products for niche markets is working well for blood clot specialist Agen Biomedical, a subsidiary of Agenix. Agen's diagnostic products focus on human and animal diseases and it is commercialising a new technology in blood clot imaging called Thromboview.

As a measure of its success, Agenix shares now trade in the US over-the-counter market and its nine-month revenues to March this year hit a record $29 million. The company's success can't be ascribed to historical Australian strengths in the diagnostics field, said Agenix CEO Don Home. It was due more to potential rivals in Europe and the Europe focusing on other areas, leaving a niche open for Agenix to identify and exploit, he said.

PanBio, another Queensland-based diagnostic company, is a global leader in tests for mosquito-borne diseases. Its success was launched with a test kit for Ross River Fever and it has been helped by its geographical proximity to the diseases it diagnoses. Incorporated in 1988, PanBio's development of its first diagnostic kit rested partly on prior research work carried out at Queensland universities. But it also spent heavily on follow-up R&D. PanBio chairman Ian Sandford said it has committed 10 to 20 per cent of its annual budget to R&D for more than a decade.

The claim that Australia enjoys a one to two per cent share of the global biotech market is often cited as significant achievement and rightly so, says Dr Graham Mitchell, a principal of life sciences and technology consultancy Foursight Associates. "We've got a good seat at the international biotech table and we've had to do well in order to earn that seat," Mitchell says.

But he warns it may be hard-pressed to maintain its position, never mind improve it, especially in the high reward biomedical end of the table. "We often tell ourselves that we are highly competitive in medical and agricultural biotech. However, one has to be realistic about Australia's size relative to other countries in a very large global industry," he says.

"It is sobering to see the size of the biotech industry in the US. That doesn't mean we should slash our wrists or go into colonial cringe. But we do have to ensure we continue to do our one to two per cent very well." While Australia may find it testing to maintain its current levels of performance in the biomed part of the market, Mitchell believes it is being presented with an opportunity to expand its presence in the agricultural and environmental sectors.

In those two areas, "we have a lot of things going for us. We have a clean and green image and a track record in the more classical agricultural research fields that goes back over many years. I am hoping that in the future, agriculture and environmental biotech will get the attention that medical biotech gets at the moment."

The downside is that capturing larger slices of those sections of the global market doesn't pack the same economic payoff as the biomed sector, because their margins are lower. In fact, margins come down by an order of magnitude crossing the border from biomed to agricultural and another order of magnitude between agricultural and environmental.

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