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Bio Technology : July 2009
AusBioFEATURE Australian biotech facing crossroad By Winna Brown, Partner, Ernst & Young financing transactions would happen at optimal pricing when capital was not necessarily needed. While the global economic crisis was created by factors far beyond the control of Australian biotech companies – it had its genesis half a world away, in US subprime mortgage markets – the Australian sector’s long-standing models for company formation and financing have left firms ill-equipped to withstand these challenges. The problem begins with how new start-ups are formed. Most Australian universities and research institutions have incentives tied to the number of start-ups they generate rather than the quality of those companies. Consequently, the industry has a large number of companies formed around a single compound rather than a complimentary group of compounds, resulting in a larger group of companies competing for the same small pool of funds. Australia’s biotech funding model – both private and public investment – has historically been based on ‘drip feed’ financing that gives firms small injections of capital to fund operations for six to 12 months to avoid shareholder dilution. Winna Brown, Partner at Ernst & Young Email: email@example.com The daunting financing environment caused by the global financial crisis raises questions about sustainability – not just for individual companies struggling to survive, but also for the Australian biotech sector as a whole. As of December 2008, approximately 36% of listed biotech companies had less than six months of cash on hand, up from 13% a year earlier. Not surprisingly, this has led to corporate restructuring initiatives. Many companies are shelving early-stage R&D programs for at least the short term to concentrate on their lead drug candidates and reduce cash burn. Of course, the challenging circumstances will also likely produce an uptick in acquisitions as companies consolidate to survive or are taken out by competitors. Unfortunately, many of these transactions will happen at distressed valuations and unattractive terms. In an ideal world, M&A deals would be initiated to achieve cost efficiencies and clinical effectiveness, secure topnotch management teams and deepen pipelines, while 18 Australasian BioTechnology Volume 19 • Number 2 • July 2009 Unfortunately, this also forces companies to run very lean operations, which prolongs product-development times, makes retaining high-quality management challenging and – in difficult economic times – creates a real risk of insolvency. Australian companies have traditionally resisted consolidation, whether for reasons of board/management egos or shareholder dilution. In addition, they have often avoided making the difficult decisions to terminate projects that fail to meet milestones or have questionable commercial viability. These factors have contributed to the quandary facing many public and private companies today. More than 52% of listed companies have a market cap under A$10m (US$8.9m), and about 36% of companies have less than six months of cash left. Many of these companies could have benefited from consolidation prior to going public, making them more attractive to investors. As such, they might have raised venture capital, giving them access to a wider, more sophisticated, shareholder base. There are lessons in all of this that could help build a strong, sustainable biotech industry after the downturn is over.