AFG Venture Group Dispatches

Corporate advisory and consultancy in Australia, South East Asia and India.

2011 – Another Big Year for Australian Biotech

David Langsam
Editor, Biotech Daily

Australian biotechnology companies are on a dramatically upward trajectory, which – barring major global upheavals – shows no sign of abating.

2011 is going to be a very big year for biotech, primarily because most of the Biotech Daily Top 20 Index (BDI-20) companies have several major milestones during the course of this year.

Despite a small fall in the broader Biotech Daily Top 40 Index (BDI-40) in February, primarily due to an easing in Heartware’s share price from a record high, the index has tripled in value since the 2009 financial crisis and has more than doubled since its inception in July 2006.

By comparison, the benchmark S&P ASX 200, comprising Australia’s 200 largest companies by market capitalisation, remains below its June 2006 mark and is still recovering from the 2009 financial crisis, proving Biotech Daily’s dictum that size isn’t everything.

BDI-40 v ASX200 Jul 1, 2006 to Mar 31, 2011

Indeed, we go much further, placing market capitalisation as the very last parameter for inclusion in the Top 40. Some formerly much-loved giant airlines have shown how little size matters when it comes to share price improvement.

Instead we start with ‘interesting science’, which ranges from several new approaches to cancer by companies such as Sirtex and Bioniche, along with Benitec and Antisense’s RNA-interference technologies, Living Cell’s xeno-transplantation of pig cells for type 1 diabetes, Tissue Therapies’ wound healing molecule, Mesoblast’s adult stem cell technology and Impedimed’s lymphoedema test.

(We respect Cochlear’s high-tech ear implants, CSL’s blood products and vaccines and Resmed’s technology, but exclude the Big Three from the index, as they would distort it.)

Supporting our attitude to ‘science first’, representatives of Glaxosmithkline, Merck, Pfizer and Roche told Ausbiotech’s conference last October, that they were only looking for the best science in the world. That is the starting point.

But innovation carries a very high risk to reward ratio. The industry seems to accept that if nine of 10 technologies fail, the one that gets through will make more than enough money to compensate those failures two or three times over. We have at least 20 companies that do not look like failing.

The second inclusion parameter is benefit to human health. While both appear to be philosophical and altruistic they have significant ulterior advantages. Best in science means it is not just a better mouse trap, the technology will be ground-breaking and the state-of-the-art market-leader. Benefit to human health separates potions from medicines and also allows a distinction to be drawn from animal health work, along with the controversial area of biotechnology for agriculture.

If a technology has a real benefit for human health and is not just a pill or cream to substitute for a healthy diet and an active life, it won’t be a discretionary expenditure.

Biotech Daily agrees with the US Food and Drug Administration on a high bar for diet products. Those over-the-counter remedies at your local pharmacy will never make our Top 40, until they run serious scientific trials and demonstrate, unlike glucosamine for joint pain, that they actually have efficacy.

And if they do have efficacy, like penicillin, governments will fund both their development and rebate the costs.

Then we look at the board and management and this is where Australian biotechs suffer the most. Seriously lacklustre directors keep reappearing on more and more boards. Often the founding scientist and his or her friendly accountant are at the core of the boards and then they hire trusted friends to join them, or worse, a mate who invested in the original start-up company wants to be an ASX company director.

Another emerging problem is the inclusion of directors from major shareholders. While the ceevees of these directors often look good and a shareholding should align the director’s interest with that of all shareholders, this is simplistic. The nature of a director’s shareholding can influence the strategy they want the company to take, who they want employed, the type of exit they want and many issues that can cause them to make decisions that are not in line with value maximization for all shareholders.

There are notable exceptions to the rule, especially at Cellestis and Mesoblast, where the founding scientists are both doing excellent work, but it is rare.

A related parameter is the likelihood to make money. This is largely dependent on the board making wise decisions and keeping a close eye on the science and finances, while not interfering on a day-to-day basis.

Phosphagenics is a favourite in this regard, because it combines interesting transdermal technology with cosmetic applications that we eschew – but the likelihood of large numbers of obese American women wanting to “rub away the fat” is very high and would then fund the work of greater benefit to humanity – the holy grail of a transdermal insulin and the equally lucrative pain drug patch. The company also has an excellent team.

And finally, when two companies are equal in science, benefit to humankind, board and management and likelihood to make a profit, the last arbiter is market capitalisation and trend.

That’s how we select the companies for the BDI-20 and BDI-40 and the former has been very stable for good reason. When Biotech Daily first began reporting on the sector in 2005, there were a handful of companies with product in the market or in phase three trials and a lot more in phase I and phase II development.

While timelines in biotechnology are at best glacial, we came in just as many of the early stage companies were maturing. The BDI-20 is now overwhelmingly composed of companies with first product in the market or in pivotal or phase III trials and nearly all the Second 20 companies are in phase I or phase II trials.

As for investment potential and garnering foreign big pharmaceutical company and deep pocket investors, nearly every company in the Top 20 has several major milestones in 2011 – and we don’t mean just a Mongolian patent or Lichtenstein ethics approval, but serious price inflection points.

Acrux, Alchemia, Pharmaxis and QRX all have major events this calendar year and then there are the virtually bankables – companies earning income and building their product and that includes Sirtex, Biota, Nanosonics, Universal Biosensors, Advanced Surgical, Compumedics, Genetic Technologies and Phosphagenics.

In between bankables and long shots are companies with much work to do, but real promise, including Bionomics, Circadian, Patrys, Phylogica, Prima, Starpharma and Viralytics.

Outside the BDI-40 are several very promising companies, some of them with product in the market but needing to overcome historical legacies including Resonance Health, Anteo, Ellex, Neuren and Avita.

They are not easy to pick, but if you can get your head around the science and forensically examine a company’s board, management and intellectual property position, the rewards can be huge. You could even contribute to saving lives or extending the lives of people with serious illnesses.

About the Author

David Langsam is the editor of the direct-emailed Biotech Daily, the only independent daily journal-of-record on Australia’s biotechnology sector. Biotech Daily is in discussions to create a BDI-20 Investment Fund. Go to www.biotechdaily.com.au.

Text, chart and table © Copyright David Langsam 2011

Pic © Jacqueline Mitelman

* David Langsam owns shares in Alchemia, Bionomics, Biota, Chemgenex, Impedimed, Neuren, Optiscan, Sunshine Heart and non-biotechnology stocks. Through Australian Ethical Superannuation he has an indirect interest in Atcor, Circadian, Pharmaxis, QRX and Tissue Therapies.

Big Caps
Cochlear
CSL
Resmed

BDI-20
Acrux
Alchemia
Bionomics
Biota
Cellestis
Chemgenex
Clinuvel
Genera
Heartware
Impedimed
Living Cell
Mesoblast
Nanosonics
Phylogica
Pharmaxis
Sirtex
Starpharma
Sunshine Heart
Tissue Therapies
Universal Biosensors

Second 20
Advanced Surgical
Antisense
Benitec
Bioniche
Cathrx
Cellmid
Circadian
Compumedics
Genetic Technologies
LBT Innovations
Optiscan
Patrys
Phosphagenics
Prana
Prima
Psivida
QRX Pharma
Uscom
Viralytics
Virax