I recently authored an Australian Business Foundation study of Australia’s biotech sector, Commercialising Australian Biotechnology. It explored the critical success factors and obstacles underpinning commercialisation of Australian biotechnology.
As expected, the key finding was that Australian biotechs lack money. Between 1996 and 2003, the total amount of Australian venture capital invested in biotech was about $130 million. In comparison, the average amount of venture capital invested in each US biotech that listed in 2003 was US$94 million. So the average single company in the US had as much venture capital invested in it, roughly speaking, as all Australian bioteches in the last seven years.
Of interest is the way the Australian biotech sector has adapted to the funding shortfall. The Australian Business Foundation study found that biotech companies are formed very early, often a long time before their research is ready for commercialisation. Australia has world-class science and projects in abundance, but some government policies encourage companies to form too early, before the science and projects are far enough along.
The Federal Government and States offer some grants to companies, not to projects, so when university research projects can’t access any more funding from the ARC, NH&MRC, or the universities, the research team may form a company.
This new company may get a grant, allowing continuation of the research, but the researchers find they also have to run a company, do paperwork, pay taxes, and work with a board of directors, perhaps well before they even need one. Essentially, they are trying to run companies on grant money. Once this money runs out they seek venture capital funding, often far too early in the project or product lifecycle.
If you talk to venture capitalists in Australia, many say, “there is plenty of money available, but few good investments.” The fact that companies tend to be formed prematurely may explain the VC’s view of the world.
The problem is exacerbated when the venture capital dries up and these tiny companies have to go public. They are able to raise $10 - 20 million but it is never enough, so most continue to struggle for funds throughout their lifetimes.
It is useful to approach the money problem from the demand side, as well as from the supply side. Our policy environment should discourage premature company formation. This is not to say that we should put obstacles in the way of a truly determined inventor - I would never discourage an entrepreneur.
On the supply side, many people are focused on raising additional funds for biotechnology, and some good things are happening. The Commonwealth and State Governments have finally amended an accidental provision of Australian tax law that made it very unattractive for overseas venture capitalists to invest in Australia. Other people are planning to invest in the sector. American investor Steve Burrill recently announced his plans to establish a $150 million biotechnology fund in Australia to take advantage of lower research and development costs and an abundance of good science.
Another very promising experiment is taking place at Murdoch University in Western Australia, which has sourced $10 million from a State Superannuation fund for allocation to biotechnology research. This is a tremendously good initiative. It doesn’t take a great deal of money to support early-stage research - remember that over 7 years only $130 million went into biotech venture capital in Australia.
We need to find more ways to mobilise private capital to support research and bring our science to market. There are many potential ways for universities and research institutes to bring together portfolios of projects that would attract investment. This needs to be positioned as investment rather than as philanthropy – it’s a way of attracting investment with the expectation of a return.
We need to find ways to allow Australian scientists to continue to focus on their science, rather than spending so much of their time searching for the funds that will allow them to continue their work. In a world of “omics” – genomics, proteomics, biomics, cellomics, etc – we need to focus on economics, both supply and demand, to assure a successful future for Australian biotechnology.
An abridged version of this article was published in the Australian Financial Review on 2 August 2004.