afr article - australian biotech booms at last

AFR article of interest. No direct discussion on ADO, but positive sentiment on the industry.

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Australian biotech booms at last

Lawrence Gozlan is a professional cynic. He is also one of the country’s most successful investors in the life sciences.

The two are not unrelated, says Gozlan, who runs Scientia Capital, a global investment fund focused exclusively on companies that develop medical devices and pharmaceuticals.

This is the stuff scientists dream of, a discovery that changes, or saves, lives. The journey from lab to market is a long one though, and paved with pitfalls: as many as nine in 10 ventures born out of a eureka moment fail at some point.

This helps explain why Gozlan, who typically invests in companies that have clinical data proving their product works but that are still some way from making money, spends a lot of time evaluating and then deciding “no”.

“I am bearish most of the time,” cheerfully admits Gozlan, who invests on behalf of wealthy individuals, including the Melbourne-based Lieberman family.

When it comes to many individual ventures, Gozlan remains a sceptic. But when it comes to the listed biotechnology sector as a whole, he is unusually upbeat right now.

“The first wave of biotech saw the likes of CSL, Cochlear and ResMed take off on the world stage. I think a second wave is on the way,” he says.

The second wave has been a long time coming. The sector had its time in the sun back in 2002 and 2003, was lifted by the tide as markets peaked in 2007 and was taken down as they foundered in 2008. In the past 12 months the Bell Potter Life Sciences Index has marched more or less in line with the All Ordinaries Index, which is down 13 per cent.

Gozlan knows how to beat the market though and has kept his backers happy with above benchmark returns. Moreover, he says this year is shaping up to be a stellar run, and there are some promising times ahead.

“There are teething problems; this is still a young industry,” he notes.

“Over the next three years though we are going to see several companies get their products launched. There’s a lot of interesting innovation coming out and some will make it all the way.”

The standout story – in terms of market value, at least – is regenerative medicine company Mesoblast. With a market cap of $1.9+?billion (just ahead of the Bank of Queensland) it is among the top 100 on the ASX. It is still a long way off selling any product but its swift trajectory has already made some people a lot of money.

Mesoblast’s “super cell” stem cell technology platform holds promise for a variety of chronic conditions where there is, in a term dear to the heart of all biotechs, a “large, unmet clinical need”.

This means plenty of affected people in countries wealthy enough to pay for new treatments. An example is congestive heart failure, which already affects 6.2 million people in the United States with another 670,000 cases diagnosed each year. The therapies available don’t fix the underlying problem so sufferers deteriorate to the point where they have a 40 per cent chance of dying in the next year.

The Mesoblast super cells hold a tantalising promise of regeneration, not just for failing hearts but a range of other conditions. The technology has the substantial backing of an American pharmaceutical company that has left Mesoblast with $240?million cash in the bank. This is enough, the company’s persuasive chief executive, Silviu Itescu, told the Bell Potter Life Sciences conference in Sydney on Wednesday, to take the super cells all the way to commercialisation.

Biotechs have long griped about feeling unloved in this country. In April, the 27-year-old Biota announced plans to move to the US. At the time the company’s chief executive said US analysts and its investment industry were “best placed” to appreciate the company’s major asset, a $231 million contract to develop a next-generation influenza treatment.

But other players talk about a shifting of the biotech ecosystem – which was once entirely focused on the US – outward towards Europe and Australia.

A few years ago, Mesoblast’s Itescu, who came home to Australia to found Mesoblast after working in the US, shelved plans to migrate the company to the Nasdaq.

“The dogma then was when you needed more capital the only place to do that was the US. I would say the exact opposite is true now,” he says.

“We are very comfortable here where we have access to a global investment pool and valuations are on a global scale.”

He shies away from the term “boom” because it implies a transitory state. Instead, he says, what we now have is a mature investment community backing the sector.

“I think we are going to see continued success of biotech companies that grow to become part of the larger index,” he says.

Not all are believers in the Mesoblast story but there is no doubt it has renewed interest in Australian biotech, both here and abroad.

When UBS analysts previously ran a biotech index it showed biotech stocks all tended to move together.

“That was at a time when there were few milestones to distinguish the quality stocks,” says Andrew Goodsall, head of healthcare research at UBS. “Now many can be measured by cold hard cash.”

Gozlan’s Scientia Capital is a fan of, among others, a company that manufactures a device that helps hearts pump; one working on a treatment for blindness caused by diabetes; and another that develops diagnostics technology.

Understanding enough science to identify winners in such diverse fields is one of the challenges of biotech, a sector crowded with many young companies – and some not so young – that need to raise more cash if they are to see the year out.

There are nine venture funds funding early-stage companies in this space but traditionally what the listed sector has lacked are institutions ready with the big money when it’s needed. This is typically when a company’s technology has been proved safe but large-scale trials are needed to prove the level of efficacy required to get the green light from regulators.

However, thanks to the likes of Mesoblast and others, the sector has acquired some critical mass in recent years and more is on the way, according to the Bell Potter Life Sciences team, an enthusiastic and vocal cheer squad for the sector led by senior analyst Stuart Roberts.

In the last 18 months, Bell Potter has been involved in raising more than $400 million in new equity capital for life sciences companies, and those investments have delivered on average a 30 per cent return.

“This is a boom in the making,” says Roberts, who believes that in two to five years there will be at least 10 life sciences companies capitalised on the ASX at more than $1 billion. Right now there is Mesoblast, three other device or drug companies with a market cap greater than or nudging $500 million, and a rash of smaller companies, most below $50 million.

“Every now and then we get a boom like the dotcoms in the late 1990s and people wonder where they came from,” Roberts says. “These booms are a long time coming. Life sciences will be the next.”

Global trends are at work here. An ageing population in First World countries expands the potential audience. The older you are, the more likely to have a condition – or multiple conditions – needing treatment. And big pharmaceutical companies, which have traditionally dominated pharmaceutical sales, have found themselves struggling to find new products after their research and development activities failed to yield new blockbuster drugs to replace those going off-patent.

One is AstraZeneca. Worth about $US52 billion, it is among the top 15 pharma companies globally. Australian managing director Mark Fladrich, whose 20-odd years with the company have given him a global perspective, says Australia’s biotech industry is ranked in the top four globally by the company as it searches for new investments and joint ventures.

“Australia is a hunting ground for us. There are a surprising number of companies starting up here, who have their roots here, and who potentially could be a major success,” Fladrich says.

In addition to the huge global companies that have traditionally dominated the pharmaceutical landscape, there is a new breed hoping to strike gold. One is the Nasdaq-listed Ironwood, which likes to describe itself as an entrepreneurial pharma company.

Late last year it struck a deal with an Australian drug inventing firm Bionomics, worth just $US3 million up-front but as much as $US345 million in the future, plus royalties – assuming the Bionomics-discovered anxiety drug Ironwood is now developing makes it to market.

“There are a number of areas where big pharma is not investing, despite patient needs and the commercial opportunity that results from those needs,” Ironwood chief scientific officer Mark Currie says.

“The history of this industry shows that one drug can make a huge difference. It just takes one and all of sudden a little company becomes a major company. But this is difficult work. If you get one that works, that’s an amazing thing and you want a second but they are not easy to find.”

He says there are natural synergies between biotechs here and in the US. “When we come and talk with companies here it feels like we are finding ourselves – but halfway across the planet.”

“We have broken some new ground here,” says Bionomics chief executive Deborah Rathjen.

“The pharma universe is expanding,” she says. “The big guys might be having problems but then there are companies like Ironwood that have [the] strength of pharmaceutical companies but share the sense of urgency of a biotech.”

But biotech remains an afterthought for most institutional investors. Many are put off by the science, figuring it would take a doctorate to understand the products involved. There are valuation issues. How do you know the worth of intellectual property which may, just may, become a prescription drug in years to come?

Last year the FDA, which controls access to the US market, approved just 35 drugs. Next month the ASX-listed QRxPharma hopes to become one of those that make it through this year, with a new formulation for acute pain relief. In a few years, the company believes US sales of its drug will be worth $680 million. And it has others in development.

QRxPharma CEO John Holaday is one of a growing number of American biotech executives who have found themselves working for, or invested in, an ASX-listed company.

“Australia is the second oldest biotech market in the world. It has a rich history in terms of developing new concepts and new ideas. But this is a risky business. There are between 120 and 130 life sciences companies on the ASX and, like us, they are trying to thread the needle, trying to be one of those 35 that gets through the FDA,” Holaday says.