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US genetics win a shot in the arm

November 03, 2004
AUSTRALIAN biotech companies not only have to be tough to survive. They usually need to win in the US as well.

That's why the dramatic patent victory in the US courts by the $150 million Australian company Genetic Technologies against the $5 billion US giant Applera Corporation was both a tremendous encouragement and a lesson to other Australian hopefuls.

And in the lead-up to the US Presidential election, the sight of CNN commentator Larry King promoting a vitamin breakthrough by another local company, Phosphagenics – which conducts its Food and Drug Administration approved human trials in Australia – was another boost.

However, I must warn readers that these stocks remain very high-risk – like all Australian biotechs they are not flush with cash, and they incur losses. But both are trying to develop an operating cash source to fund their research. Applera did not take seriously the royalty demands of Melbourne-based minnow Genetic Technologies and its executive chairman and founder Mervyn Jacobson.

Applera now realises it made a mistake – especially as the Australian royalty demands have been increased in the wake of the court's decision.









Genetic Technologies has the patented rights over what was once known as junk DNA. Jacobson took the patents out in the 1980s when most of the scientists of the day thought this aspect of DNA was useless.

Not only was he awarded patents in most countries, but Jacobson took out patent claim insurance with GE, because he realised that eventually a US drug giant would attempt a legal challenge rather than pay royalties to a tiny Australian company.

Connecticut-based Applera believed it could blow Genetic Technologies' patents out of the water, so it refused to settle prior to the hearing.

But in the all-important initial or "Markman" hearings, the US giant lost to the Australian company on every point it raised. Applera could, of course, continue the legal fight, but the GE insurance means that Genetic Technologies has the money to match them.

With a court decision supporting the Aussies, not only will Applera be required to pay higher royalties on its junk DNA research, but hundreds of other companies are now also likely to pay royalties.

Most of the patents run out in 2015 – some in 2010 – so Genetic Technologies will receive a substantial cash flow.

Genetic Technologies burned $5 million last year and has cash of $11 million, so the royalties are vital to take it into the black and justify its market capitalisation.

Genetic Technologies also received a boost from the Olympic Games. The company is a global leader in genetic testing, and was able to quickly and accurately analyse the samples taken from the Australian cycling team.

The results enabled Olympic officials to decide who to take to Athens.

DNA analysis, in both humans and animals, is likely to be a growth market.

Jacobson is advising the Chinese on dairy herd DNA, and that could develop into a major market for the Genetic Technologies techniques.

Meanwhile, like John Laws in Australia, CNN's Larry King also promotes consumer products. One of his clients is the US Zila Group, which has about 10 per cent of the US vitamin C market.

It is moving into Vitamin E supplements using the technology developed by Australia's Phosphagenics.

Vitamin E offers great benefits in healing and heart disease, but is not easily absorbed in the body.

Phosphagenics has developed a skin-applied or oral delivery compound which enables far more Vitamin E to be absorbed in the blood stream than conventional products.

Zila has the Australian product on Wal-Mart shelves – but to stay there, it has to sell. Meanwhile, Phosphagenics aims to use its patented skin-applied delivery compound to deliver other drugs.

In the next three months it will conduct human trials on morphine, where the side effects of the current delivery methods can be very severe on patients.

If the morphine human trials are successful, then the treatment of many terminally ill patients will be transformed. It is no easy process to take Australian technology from the laboratory to human trials and beyond. That is why most sell out to majors.

Just as Gene Technologies shows you must be ready for patent fights, so Phosphagenics is showing that Australian discoveries don't always have to be sold off early to big pharmaceutical companies.