© 1999 Wiley-Liss, Inc.

DRUG DEVELOPMENT RESEARCH 46:167–170 (1999)

Strategy Overview

Financing Biotechnology Ventures in AustraliaBrigitte Smith* and Geoff Brooke

Rothschild Bioscience Unit, Melbourne, Australia

ABSTRACT Australia has a strong history of financing biotechnology ventures, with successful biotech-nology companies including CSL, Biota, and AMRAD. These companies reflect a pool of extremely talentedand productive Australian scientists, whose early primary research and later commercialisable research haslargely been funded by the Australian federal government. The Australian stock exchange is relatively recep-tive to biotechnology companies, although at lower values than in international markets that provide pub-lic finance for more developed biotechnology ventures. The great financing challenge for Australianbiotechnology companies is bridging the gap between world-class commercialisable primary science andlisting on the public market. Recent federal government initiatives have drawn significant resources to theearly-stage venture capital sector to address this problem in an attempt to make available resources toseed and early-stage ventures with the discipline of experienced venture capital investors. While this is avery positive step, structural problems in the tax structure and lack of relevant skills in management forearly-stage biotechnology companies will continue to challenge Australian biotechnology ventures. DrugDev. Res. 46:167–170, 1999. © 1999 Wiley-Liss, Inc.

Key words: biotechnology; research and development; finance; Australia

Strategy, Management and Health Policy

Venture CapitalEnablingTechnology

PreclinicalResearch

Preclinical DevelopmentToxicology, FormulationDrug Delivery,Pharmacokinetics

Clinical DevelopmentPhases I-IIIRegulatory, Quality,Manufacturing

PostmarketingPhase IV

INTRODUCTION

Australian scientists are world leaders in a varietyof areas in the biotechnology sector. This article describesthe quality of Australian scientists and then outlines thevarious stages of financing, from basic research in aca-demic institutions through to public listing of biotech-nology companies. In this context, Australian venturecapital investment in biotechnology ventures is described.While some successful Australian biotechnology compa-nies have been financed in the last decade, there has beenlimited early-stage investment.

Recent federal government programs that seek toaddress this constraint are described and the challengesthat still exist for early-stage biotechnology ventures areexplored.

AUSTRALIAN BASIC RESEARCHAustralia has a strong history of well-organised sup-

port for medical and agricultural research, largely fundedby peer-reviewed research grants. Globally, Australia is rela-tively strong in government agency and university R&D,ranking fifth in the world on this measure as a percentage

*Correspondence to: Brigitte Smith, Rothschild BioscienceUnit, One Collins Street, Level 10, Melbourne, VIC 3000, Australia.E-mail: brigitte.smith@rothschild.com.au

1Science & Technology budget statement 1996/97.2The Australian Society for Medical Research, 1997.3Towards a Strategic Plan for the NHMRC: June 1995 to De-

cember 1996, National Health and Research Council, 1995.

of GDP.1 The targeted research budget in Australian uni-versities, mostly funded on the advice of the AustralianResearch Council (ARC), was $427m in 1997–1998.2

Extensive funding of early-stage basic research hashad the result that Australia has more world-class scien-tists per capita and generates more inventions per capitathan almost any other nation on earth. Australia’s healthand medical researchers produce about ten times moreknowledge than would be expected for the size of ourpopulations and the money invested. Australia has fourNobel Laureates in medicine and Australian scientistsare regular recipients of the world’s most prestigious re-search awards.3 In both domestic and international pat-

168 SMITH AND BROOKE

ents per capita, Australia is one of the world’s most pro-ductive nations.4

GOVERNMENT SUPPORTED PROGRAMS FOR MORECOMMERCIALLY ORIENTED RESEARCH

Australian basic medical research has been chan-nelled into commercially relevant applications through avariety of programs and corporate arrangements. The nowdefunct R&D syndication program provided tax incen-tives for corporations to invest in high-risk R&D and tech-nological innovation, creating funding for a wide rangeof commercially relevant research programs. The mostsuccessful of these syndicates involved corporate part-ners with genuine commercial interest in the resultingresearch. Many of Australia’s existing biotechnology com-panies have gained important R&D funding throughR&D syndication.

Targeted pharmaceutical industry R&D schemessuch as the Factor (F) scheme and tax concessions forR&D continue to provide an incentive for large corpora-tions to invest in commercially oriented Australian R&D.Australian research is an attractive proposition for inter-national drug development organisations, with highlyskilled, yet relatively low cost scientists and facilities.Many collaborations exist between academic institutionsand international corporate partners for materials devel-opment, natural product screening, and other aspects ofdrug development. Such collaborations are fertile groundfor the development of new biotechnology ventures withhighly commercially relevant science and an internationalnetwork of contacts.

A cornerstone of commercially oriented bioscienceresearch in Australia is the Cooperative Research Cen-tre (CRC) program. The CRC program creates good co-operation between Australian universities, researchinstitutes, and companies aiming to exploit biotechnol-ogy research. CRCs provide a government sponsoredforum for such cooperation, with corporate funds matchedby government funds. Total committed funding for CRCsis A$854M.5

SOME SUCCESSFUL TRANSFER TO DRUGDEVELOPMENT AND INDUSTRY

This basic and commercial-stage research strengthhas spawned a number of small companies working atthe forefronts of biotechnology in Australia and contrib-uted to major biotechnology successes in the international

sphere. Some recent examples of high quality science-driven Australian biotechnology companies are AMRAD,Biota, and EnCompass.

AMRAD Corporation is a research-based pharma-ceutical company. The core business of AMRAD is phar-maceutical discovery and development to produce newcompounds as innovative medicines for sale on worldmarkets. The company has established pharmaceuticaldiscovery programs focusing on neuroscience, virology,and cytokines and sources its projects from a number ofAustralia’s leading research institutions. Following a 1996listing, AMRAD’s current market capitalisation isA$150M.

Biota Ltd’s aim is to discover significant new hu-man pharmaceuticals through the application of struc-ture-based drug design. The company’s focus is on viralrespiratory diseases and cancer. Following a 1990 listing,its current market capitalisation is A$350M. Biota’s de-velopment partner, Glaxo Wellcome plc, has recentlyapplied for approval from the European and Canadianregulatory authorities to market the inhaled anti-viralmedicine, Relenza™ (zanamivir) for both the treatmentand prevention of influenza.

EnCompass Bioinformatics Pty Ltd was recentlyfounded by the University of Sydney and has a strategicalliance with Sun Microsystems. EnCompass focuses onbioinformatics service delivery to the global bioscienceresearch community. The new company has grown outof the Australian National Genomic Information Service(ANGIS) which was established in 1991 as a subscrip-tion funded internet-based bioinformatics service for thebiological research community; it has significantly pen-etrated the local market. The company plans to launchits new products in North America and Europe.EnCompass is currently private, following first-roundventure capital investment.

In other examples, due to perceived lack of venturecapital or perhaps simple commercial inexperience, Aus-tralian technologies have been licensed at a relatively earlystage to international corporations. However, there is nowa groundswell of opinion in Australia demanding retentionof more of the value from the country’s scientific assets.

PUBLIC MARKETS

A number of companies that have made it throughto public listing have been successful, albeit with valua-tions significantly lower than those realised by similarcompanies on NASDAQ. For example, there are morethan 30 bioscience companies that publicly traded on theAustralian Stock Exchange (ASX), and the ASX Health& Biotech Index (the largest 10 companies by marketcapitalisation) is capitalised at $5B with a 7-year IRR of22% versus the general market index of 17%, making thesector attractive to investors.7

4DIST analysis based on ABS, OECD, and national sources,Science and Technology Budget Statement, 1997–1998.

5Ashley Goldsworthy, Research and Development — Harness-ing Australia’s R&D potential, March 1998.

AUSTRALIAN BIOTECHNOLOGY 169

The bioscience sector, however, represents littlemore than 1% of the ASX.6 There are fewer commercialsuccess stories in the biotechnology sector relative to thesize of the economy and the intellectual capacity of theresearch infrastructure than in the United States or Eu-rope. Average Australian biotech companies are smallerand employ fewer people than their North American andEuropean counterparts.7 Lack of early-stage venture capi-tal and experienced management teams have been iden-tified as key factors in the relative weakness of theAustralian biotechnology sector. This is reflected in theform of biotechs listing — either spin-outs of big compa-nies with infrastructure in place or floated much earlierthan they would be elsewhere.

AUSTRALIAN BIOTECHNOLOGY VENTURECAPITAL INVESTING

There have been numerous venture capital invest-ments made in Australian biotechnology in recent years.In the year to June 1998, 27 venture capital investmentsof A$44M total value were made in health, bioscience,environment and agribusiness in Australia.8 This figureis dwarfed by the investment in Australian basic researchand academically oriented research. There are a numberof venture capital investors in the Australian biotechnol-ogy sector, including funds advised by the Rothschild Bio-science Unit, Nomura JAFCO, and the AustralianTechnology Group.

In an attempt to focus venture capital investors onearly-stage start-up companies rather than growth of ex-isting companies, the federal government recently estab-lished the Innovation Investment Fund (IIF) Program.The program seeks to address the limited availability ofhigh risk venture capital for small firms. Together withprivate sector funding, the initial A$173M provided bythe government will create an overall investment pool ofabout A$260M, to be managed by five professional ven-ture capital groups.9 Funds raised under this scheme areclosed and starting to make their first investments. AnA$42.5M fund managed by the Rothschild BioscienceUnit is dedicated to bioscience investments, while threeof the remaining funds are also interested in making in-vestments in the sector.

OTHER SOURCES OF FINANCE FORBIOTECHNOLOGY VENTURES

In recognition of the need to encourage investmentby Australian companies in R&D, the federal government

has launched a highly successful program to assist smalltechnology-based companies such as biotechnology ven-tures to fund R&D. These programs provide a usefulcomplement to venture capital funding for start-up com-panies, providing 1:1 matching for R&D programs of highcommercial relevance. This program is of particular as-sistance to small companies who cannot take advantageof tax-based R&D incentives and will provide more thanA$700M over the next 4 years.10

Corporate partnerships are another importantsource of finance to early-stage companies. These part-nerships provide important validation of the venture’stechnology, marketing, and manufacturing infrastructurein addition to dollars. All of Australia’s major biotechnol-ogy companies have partnerships with global pharma-ceutical and biotechnology companies, some at the onsetof operations.

CHALLENGES AHEAD

While there is now an increased supply of early-stage venture capital in the Australian biotechnology sec-tor, and a growing portfolio of successful biotechnologycompanies in the market to encourage others to investin, work in, and collaborate with emerging biotechnol-ogy companies, some significant barriers to the successof Australian biotechnology ventures remain.

Institutions are not attracted to invest in early-stagebiotechnology ventures for a number of reasons. Thisleads to difficulties for biotechnology ventures in rais-ing later-stage financing. A lack of critical mass is onefactor; there are insufficient numbers and sizes of com-panies in the sector to attract any significant specialisedcoverage by analysts, as required by institutional investors.This will change as the sector grows. Capital gains tax lawsare also a barrier to investment in early-stage biotechnol-ogy ventures, as the tax on profits made from trading inhigh-growth technology-based companies makes it moreattractive for investors to own and hold positions in largecompanies that pay tax-credited dividends.

The other major barrier to the success of biotech-nology ventures is the lack of management with relevantskills required for success in high-growth biotechnol-ogy companies. Australians are less attracted to work instart-up biotechnology ventures than their American andEuropean counterparts and have less experience in suchventures. However, a number of the more successfulAustralian biotechnology ventures are run by scientistsand entrepreneurs that have spent a considerable partof their working lives in the US biotechnology sectorbefore returning to Australia. To create a more mature

6ASX Index Service, September 1997.7Lyndal Thorburn, Innovation by Australian Biotechnology

Companies, 1998. NSW Biotechnology Industry review, 1998.8AVCAL Venture Capital Survey, September 1998.9DIST, Competitive Australia, March/April 1998. 10DIST, R&D Start, 1998.

170 SMITH AND BROOKE

biotechnology industry, we need to generate sufficientlyexciting opportunities to bring experienced biotechnol-ogy entrepreneurs to Australia and to train Australianscientists and business people to effectively capitaliseon the wealth of biotechnology expertise produced byour world-class researchers.

CONCLUSION

Traditionally, it has been difficult, yet possible, to fi-nance high-quality Australian science in biotechnology ven-

tures. It is now becoming less onerous to do so. While thefundamental basis of biotechnology — good science — re-mains extremely strong in Australia, other factors that leadto successful biotechnology ventures, especially strongmanagement skills and availability of capital, require moredevelopment. Nevertheless, more early-stage venture capi-tal, a growing body of successful companies, experiencedentrepreneurs, and commercially oriented scientists aremaking it easier to finance and grow successful Australianbiotechnology ventures.