leon serry in the media

The cleverer country

Date: October 08 2010

Leon Serry

We are the clever country, but governments need to do more to help us enjoy the fruits of our cleverness.

SWISS pharmaceutical companies Novartis and Roche are each bigger than National Australia Bank and BHP Billiton.

That two such enormous and successful companies have developed in a country with a population of only 8 million says a lot about the ingenuity and far-sightedness of the Swiss - who now have a pharmaceutical industry second only to that in the US. It also indicates the potential that exists in Australia, with a population of 23 million and a community of scientists acknowledged worldwide.

Crucial to the survival and prospering of Novartis and Roche is their ability to keep adding to their line of new products by in-licensing drugs from biotechnology companies and research institutes outside Switzerland that do not have the funds to take these drugs through to production and sale.

For Australian biotechnology companies it would be almost impossible to raise enough money to take their drug candidates through crucial phase III human trials, which are necessary before authorities give permission for a drug to be marketed.

This is despite the often ground-breaking ideas and access to excellent universities and research institutes such as the Walter and Eliza Hall Institute, the Baker Medical Research Institute and the Murdoch Children's Research Institute. The cost of such trials could be $120 million to $200 million. Few Australian institutional and retail investors are willing to invest this sort of money in phase III trials, even though drugs that reach this stage have about a 70 per cent chance of reaching commercialisation, with the potential for big returns.

The unfortunate consequence is that the likes of Novartis and Roche - and huge US pharmaceutical companies like Pfizer and Eli Lilly - could in the future make millions of dollars, and employ many thousands of people as a result of Australian ideas and research.

In all likelihood, Australian biotechnology companies will end up providing worldwide exclusive licences for their drugs to large international pharmaceutical companies in exchange for milestone payments and royalty streams of about 7 per cent. This will not create jobs in Australia, will not develop a manufacturing industry, and will not yield export income.

The international pharmaceutical companies will take the drugs through the final stages to commercialisation and reap the greater benefits.

The Australian government has supported biotechnology, particularly the early development of biotechnology companies, via various initiatives including the more recent Commercialisation Australia grants and loans program.

However, thereafter little help is forthcoming, with potentially huge rewards of early stage government support being lost if a project is licensed to an international pharmaceutical company for its final stages of development. (A successful pharmaceutical drug can easily achieve annual sales in excess of $1.5 billion, and some major drugs achieve sales in excess of $4 billion a year.)

This is not inevitable. While investors have shown support for phase II human clinical trials in the past, there is a need for the late-stage phase III trials to be funded locally via substantial capital raisings on the sharemarket.

The industry would be greatly enhanced if there was provision for a tax deduction to investors who invest in drugs that are entering phase III human trials.

In addition to enabling a biotech company to raise funds for the phase III trials, it would also provide incentives for investors to back early biotech start-ups knowing that if a drug was successful, there was a reasonable chance of securing funding for a phase III study.

If a compound is invented or discovered in Australia and successfully completes a phase II trial, then the company developing the compound should be eligible to obtain tax concession funding for its investors as follows:

■ Subscriptions for the cost of a phase III human trial should be eligible for a 100 per cent tax deduction, provided the investment is held by the investor for at least a year.

■ The compound has to be developed or discovered in Australia.

■ The tax deduction would not be available for nutraceuticals and vitamins.

■ The deduction would be available to both retail and institutional investors.

An additional point could be that in the event a biotechnology company receives a takeover bid, it would have to repay the tax benefit received by its shareholders (at a 30 per cent rate) together with interest to the Tax Office.

Eligibility for the tax deduction to investors could be capped at say $500 million a year, to be spread over the eligible companies, thus limiting the cost to government.

In addition, further significant funding would be secured if financial institutions and superannuation funds were required under legislation to allocate 0.1 per cent of their investable funds for the late-stage human trials of biotechnology companies. They would also receive the tax benefit for the late-stage trial funding.

In 2004, I presented this initiative, in separate meetings, to the then treasurer, Peter Costello, and minister of science Peter McGauran, as well as the Victorian Premier, John Brumby. Each of them applauded the initiative and concept.

However, to date, the government has not seized this opportunity. This is despite Australian governments having supported other local industries in this way in the past. The likes of Western Mining (now part of BHP) received a tax deduction for early funds provided by investors for its risky mining projects and Australians are now receiving the benefit.

Now is the time to invest in Australia's scientific resource.

We are the clever country. However, we must adopt a dynamic vision for science and healthcare - first, to improve the quality of life for all and, second, to create wealth for Australia that comes from being innovators and developers of pharmaceutical products.

Leon Serry is the founder and former managing director of Circadian Technologies.

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