BIO 2012: Australian biotechnology’s time to shine

This feature appeared in the May/June 2012 issue of Australian Life Scientist. To subscribe to the magazine, go here.

It’s been a turbulent 12 months, to say the least. The impact of the 2008 global financial crisis lingers, with it morphing first into a global recession and then cascading into a European sovereign debt crisis. The Australian economy has remained relatively robust, although this is largely due to the influence of the resource sector, which has proven a double edged sword.

On the one hand, the national coffers are such that the Labor government could (just) manage a surplus budget, but on the other the high Australian dollar and wavering consumer confidence has dealt a bruising blow to the manufacturing, export and retail sectors.

The ASX spend most of 2011 anaemically attempting to bounce back from the GFC, but slipped backwards after peaking in April to close the year 14 per cent behind where it started.

While the life science sector has consistently out-performed the All Ordinaries since the GFC, the life sciences sector floundered alongside the rest of the ASX through the back half of 2011, although started a slow and steady climb back towards the black through early 2012.

As of May, the ASX and life science indices have yet to return to their 2011 peaks, although the last quarter showed some promising signs of recovery. Possibly even signs of bullishness.

Throughout this year, Australian biotechs have been making headlines with multi-million dollar deals, landmark regulatory approvals and hefty mergers and acquisitions with sizable players around the world. Numerous products are in advanced stages of development, and the next 12 months will likely see even more good news emerge.

Thus, even with the two-tier domestic economy, wobbly international outlook and high dollar, confidence within the life sciences sector is high, as confirmed by the recent AusBiotech Industry Position Survey, released in April.

Over two thirds of polled biotech CEOs declared 2011 to have been a “good” or “excellent” year, up from just over a half in 2010. Fifty eight per cent expect to hire staff this year, fractionally higher than in 2011. And highlighting confidence about the future, a hefty 82 per cent expected their business to grow in the coming year.

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On the up

This confidence comes on the back of a string of good news, particularly in the first half of 2012. In January, Bionomics landed a deal with Ironwood Pharmaceuticals worth up to US$345 million for its anti-anxiety drug, BNC210, which is remarkable for a drug still in phase I trials. The company is also advancing its renal cancer drug candidate, BNC105, which is in phase II trials, along with other drug candidates for other indications (full story on page 28).

Sydney-based Pharmaxis continues to make pioneering steps towards becoming the first domestic drug makers to go from development to regulatory approval to manufacturing to marketing, all under its own steam.

It recently received the go ahead to market its cystic fibrosis treatment, Bronchitol, in the European Union and has distribution sorted there through Arvato Healthcare. It also won listing on the Pharmaceutical Benefits Scheme list back home. After its trials getting Bronchitol approved here and abroad, and listed on the PBS, it’s proven a landmark year for Pharmaxis.

Phosphagenics has also been making great strides with is cosmaceuticals range. It has signed distribution deals in number of countries throughout Asia, and is selling locally through retail giants Myers and David Jones, among others. The company isn’t losing interest in its more direct therapeutic products, however. It found funding last year for continued trials of its TPM/oxycodone patch to treat pain.

Mesoblast caused quite the stir last year after its groundbreaking deal with Cephalon to develop and market its off-the-shelf mesenchymal stem cell therapies. Over the past 12 months the company has continued to beaver away with trials for a range of conditions now that it’s flush with cash. It has the potential to develop multiple stem cell treatments, and land multiple lucrative deals, should all go well.

Starpharma has also made strides with its products in development, including VivaGel treatment for bacterial vaginosis and its dendrimer-docetaxel formulation as a breast cancer treatment. It has enjoyed strong growth in its share price, up 57 per cent since the beginning of the year.

QRxPharma, which is developing a range of pain treatments using a dual opioid combination, MoxDuo, is getting tantalisingly close to seeing market approval in the US for its immediate release formulation. If all goes as planned, it should get the tick in June this year. The company also brokered a partnership with Actavis to market MoxDuo in the US. Its other formulations are also advancing through trials.

Another company on the end run is Clinuvel, which is developing a drug, Scenesse, which stimulates the natural melanin in the skin, effectively triggering a tan. Its first indication is for the rare skin disease, erythropoietic protoporphyria, which causes extreme intolerance to light. It has filed with the European Medicines Agency for marketing approval, and already has confirmation that several European countries will reimburse the treatment.

Biota surprised shareholders by announcing a merger with Nabi Pharmaceuticals, a minnow US-based biopharma company that has struggled with its portfolio of immune boosting drugs. The new company, Biota Pharmaceuticals will then delist from the ASX and list on NASDAQ, relocating its headquarters to the US in the process.

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Layered

This looks a lot like a snapshot of an industry that is on the cusp of breaking out. However, that only tells half the story. The industry is polarised at the moment, says Dr Anna Lavelle, CEO of AusBiotech. “The top 30 companies in the industry are doing very well,” she says.

“They’re leveraging their start, which might have been 10 or 12 years ago, when the environment was better. These companies got in well before the global financial crisis when there were still government programmes to support them, such as Commercial Ready, which no longer exist.

“The question is: what about the young companies being established now? What about the start-ups from 2011 and 2012? How are they going to travel? The environment for them is much leaner than the environment around 1999 or 2000.”

With the recent push by the mid-tier companies, we’re beginning to see a new phenomenon emerge: a three-tier economy in the life sciences sector. On the one hand, we have the ‘majors’ – better known as the triumvirate of CSL, Cochlear and ResMed.

These are the established veterans of the industry, with long pedigrees and equally long reach into firm markets domestically and abroad. Over the past couple of years the majors have been chugging along, steadily making gains, although not without a few bumps along the way.

On the other hand, there has been what PwC, a consultancy, calls the ‘ex-majors’ – i.e. everybody else. This is a broad constellation of life science companies advancing a diverse range of products and technologies in various states of development. Compared to the majors, the ex-majors have traditionally done it tough. Financing has been scarce, the investment community wary of an inherently risky industry, and government support has ebbed and flowed (although in recent years it has mainly ebbed).

However, the last 18 months has seen the rise of companies such as Mesoblast, Pharmaxis, Bionomics, Starpharma and Acrux, among others, from being ‘ex-major’ players to landing sizable deals and sitting on the cusp of returning handsome rewards to their investors.

These companies constitute the second wave – or “major minors”, as Craig Lawn, PwC Life Sciences Partner and co-author of the quarterly BioForum Report, calls them. They represent the fruit born of seeds carefully sewed over a decade ago, and deftly nurtured through good times and tough, demonstrating that Australian biotechs have the gumption and know-how to compete on a global stage.

Meanwhile, some newer biotechs – those established within the last several years – are struggling. This is in large part due to the knock on effects of the global financial crisis and the dearth of capital floating around to support start-up ventures.

The AusBiotech industry survey found that a troubling 34 per cent of polled companies are holding less than 12 months of cash on hand. Nearly half of those surveyed intended to raise capital in the next year. But that capital isn’t terribly easy to come by these days for many companies.

In fact, 38 per cent of respondents pegged the economic and policy environment in Australia as being unfavourable for life science companies. Less than a quarter felt it favourable.

This highlights the issues felt in the industry concerning government support for the life sciences. Despite there being two significant policy wins over the last 12 months – the R&D Tax Incentive and the Raising the Bar bill that reformed patent law – many of the programmes that sought to give start-up biotechs a boost, such as Commercial Ready are long gone, with no whiff of their return.

Even the smiling faces that Lavelle expects once cheques from the ATO start handing back research and development tax credit cash aren’t enough to cover the frowns from the missing government support for commercialisation.

According to Lavelle, the government’s recent emphasis has been on traditional manufacturing – “it’s the new black,” she says – which risks overlooking the contribution made by the life sciences sector. This comes in spite of the fact that many biotechs are involved in domestic manufacturing and export. Some, such as Cochlear, even tout the kinds of assembly lines in front of which politicians enjoy posturing in fluoro vest and hard hat.

Lawn agrees that the economic and policy space are not entirely conducive to being an early-stage biotech. “The ecosystem is broken for life science companies,” he says.

“The ecosystem used to start with research institutions creating great research. Then venture capital, small private equity and angel investors would pick the best and fund it through rapid growth. Out of them, a percentage would list. The market would back them for a period of time and they’d either succeed or fail. But that ecosystem is now broken.

“There’s a concentration of companies that survived the GFC with cash, a pipeline of great products and who are doing quality research. They’re good news. But the rest of the ecosystem isn’t continuing. The level of interest and appetite from a number of investors is reducing.”

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Road to success

Thus there are three paths into the future, and which one is followed depends largely on when the company was established. For the big three – CSL, Cochlear and ResMed – who were established decades ago, we can expect continued success, contingent on the conditions affecting the rest of the economy, such as the high dollar and general market wobbles.

For the mid-tier, which were established around 10 years ago – the so-called “major minors” – it’s time to shine. The next 12-24 months ought to be filled with plenty of good news stories as more products hit the market, more deals are signed and money starts flowing back to investors.

For the more recently established outfits, it’s going to be struggle street for some time to come. However, there is hope that as the mid-tier score more wins and gain the confidence of investors, and as they begin to inject money back into the ecosystem, more of that money might be directed towards smaller life science companies.

Overall, there’s hope that the life sciences industry will be perceived as a winning bet by the wider market. Lavelle is certainly positive that the industry is in a better place than it has been for the last few years.

“We’re moving towards sustainability in the industry,” she says. “We’re not there yet, but we’re a lot better off than we were in 2008 when everyone was knocked sideways by the GFC. The recovery has been remarkable, and probably greater than would have been predicted at the time.”

Lawn also sees a bright future for biotech. “There is a clear maturation of the sector, with a bigger group of mid-tier companies that should continue to do quality deals on a consistent basis. However, the overall ecosystem from cradle to grave is still not fully robust for a long term sustainable flowering industry.”

Some in the industry, on the other hand, are unequivocally positive, particularly about the prospects in the mid-tier. When asked to offer his sentiment on the state of the life sciences sector, Stuart Roberts, Senior Analyst at Bell Potter, put it simply: “I’m bullish.” Whether that sentiment turns out to apply to the wider market, only time will tell.

This feature appeared in the May/June 2012 issue of Australian Life Scientist. To subscribe to the magazine, go here.