Blue Sky BioTech
Can Nobel prize winner Barry Marshall and others commercialise science?
AUSTRALIAN Nobel laureate Barry Marshall used to think two years was a long time in science. In 1984, he was so eager to prove that a bacteria, helicobacter pylori, was the cause of peptic ulcers, he used himself as a guinea pig, swallowing the bacteria and making himself seriously ill. Since stepping from the lab into the board room, he’s learnt to be more patient.
In 2006, the Perth-based gastroenterologist founded Ondek, a biotech company that aims to use his Nobel Prize-winning discovery to develop a range of therapeutics. These include a probiotic drink, with a non-harmful form of H. pylori, which can deliver medication to suppress allergies.
Marshall is 24 months away from what he sees as the “the sweet spot”, for his patient investors. If the probiotic drink passes final safety trials – he sees it as a potential “billion dollar product” – it will be on pharmacy shelves in 2016, about the same time the company will float. “At that time we want to reward our original loyal investors,” Marshall says. They should get their initial investment back but get to keep half of their original stake.”
Australia has a poor record of capitalising on its world-class scientific and medical research. It’s not for want of innovation, as Australian medical research is booming but turning bright ideas into commercial success has been difficult in the small Australian market. Local investors have found it hard to value the blue sky in start-up biotech companies. But there are an increasing number of Australian-based scientists seeking to change that picture. The Deal spoke with three Australian biotech companies at different points on the journey to turning their scientific discoveries into commercial realities.
Sydney-based Sirtex has developed technology to deliver radiation therapy for patients terminally ill with liver cancer. It can’t cure cancer but its “microsphere”, or small-particle technology, is extending lives, almost doubling the rate of tumour shrinkage and remission in patients. Doctors can target tumours with the Sirtex product more accurately than with traditional methods. Its share price has taken off, from about $4 in 2012 to more than $20 this year.
But it was a very different story in 2004 when the company was running out of money. Gilman Wong was involved in business-building and marketing in the white-goods industry, before he was approached in 2005 to run Sirtex. Wong laughed when a recruiter suggested he could run Sirtex. Listed in 2000, the company was losing $1.5 million a year and had just $6m left in the bank.
Management was too “heavily weighted on the technical side, the science side”, says Wong who took over as chief executive in 2005. He says it had a product which was effective but it was too expensive. Addressing costs in the manufacturing process and across the business underpinned Wong’s turnaround strategy. “There have been no red numbers since, and we have grown our cash balance (to $52m),” he says. “Our market cap 10 years ago was $50m which has climbed to over $1 billion today,” Wong says.
Professor Silviu Itescu, the chief executive of Australian Secruties Exchange listed Mesoblast, was a world renowned medical entrepreneur even before setting up his Melbournebased stem-cell therapy company. Working at New York’s Columbia University in the 1990s, Itescu saw how biopharmaceutical companies in the United States forged close ties with universities and hospitals, helping to direct and commercialise research. As a physician scientist in the emerging field of stem-cell biology, he could see both the scope of the science and the commercial possibilities.
Returning to Australia, he founded Mesoblast in 2004, specialising in using stem cell technology to create a pipeline of therapeutic products. While its first products are still in the final phase of development, the company has already delivered a
tenfold return to founding investors which include Thorney Investments and the Telstra Superannuation Fund.
The company is developing a range of regenerative products derived from its proprietary Mesenchymal Lineage Cells. All in the final stage of testing, Mesoblast’s products aim to combat congestive heart failure, help repair damaged spinal discs and improve outcomes for people with life-threatening complications from bone marrow transplantation. Itescu says these products will eventually be worth more than the company’s current market capitalisation of $1.7bn.
He says congestive heart failure is the leading cause of hospitalisation and mortality in the West. In the US alone, there are more than five million people with heart failure and there are 825,000 new cases every year. Over time, these patients will inevitably be hospitalised and die. “If we can intervene in the sickest 40 per cent of that population and make a difference in delaying hospitalisation and death, that’s a product you can expect to warrant a significant premium,” he says. Itescu spends a lot of his time on planes as he builds a network of offices, research partners and investors in the US, Europe and Asia. Mesoblast is quickly outgrowing its Australian base, but he says it will always have a presence here.
Marshall agrees that it is difficult to manufacture biotech products in Australia with its distance from international markets. Ondek plans to license its probiotic product to other biopharmaceutical companies around the world while “keeping the really interesting part of the technology at home. It’s not like you are shipping out the entire technology and washing your hands of it. Having a small percentage of a global market that’s fabulous, it’s really big,” he says.
It’s these critical decisions that make or break start-ups. Marshall, who is also a clinical professor at the University of Western Australia, says it is vital to know when the men in white coats should step back and allow the business suits to take over. “The task changes when you get the product towards the market,” he says. “Now you have to prove the safety and the efficacy of the product. You have to present the right kind of data to the regulators. It’s just as much work as the research.”
Marshall has stepped back from executive duties as the company builds the next generation of managers. It is run by Jenny Harry, who has 12 years’ experience in the biotech business. Ondek has also lured expatriate Australian talent home like its head of immunology Alma Fulurija, who returned from Switzerland after a successful career in the fields of novel vaccines and immunology. Before joining Ondek, she worked at Cytos Biotechnology, voted Switzerland’s most exciting new biotechnology start-up float in 2005. Marshall says the right team is in place to take Ondek through its final phase of efficacy trials and a probable float within the next two years.
Researchers at the helm of start-ups “tend to spruik their products and can burn off investors because they sell a story which they later can’t deliver,” says Wong. “You need that passion and belief but you need someone who will play the devil’s advocate and challenge the decision-making. Meeting a medical need is not good enough, if the product costs ten times more than the current treatment it isn’t going to sell, so it’s not going to help anybody.”
The key element of success is “optionality”, developing several products and strategies, says Itescu. Many medical start-ups fail because they rely on a single product and the handful of success stories like Cochlear and ResMed have tended to be devicefocused. It’s a risky strategy to bet everything on a single wager. Mesoblast also has a pipeline of products that will tackle diabetes, inflammatory and auto-immune diseases. It expects sales of its heart products to reach $2bn a year in the coming years. “If we are successful in any of our first three products let alone the rest of our pipeline, then we are targeting major unmet markets and medical needs that puts us in a unique position,” says Itescu. “If you aren’t able to adjust and are fixated on one thing, you will potentially make some errors along the way. Optionality in the business is always the smart thing, optionality around having several partners and funding sources.”
Sirtex is creating a pipeline of products, some with potential beyond medicine. Its magnetic nanoparticle technology is already being used as a propulsion system for nanosatellites being developed by Michigan Technological University.
The companies have faced challenges in finding “patient capital” in Australia. Marshall says Ondek has subsisted on a combination of government grants and angel investors, including Sydney venture capital company Exto Partners, which he says keeps the company “lean and mean”. He would like more investors but they are not easy to find. “We don’t have enough people who have made money in biotech and are now looking for the next level,” he says.
While Mesoblast has found local institutions very supportive, other biotechs find Australian fund managers a hard sell as they struggle to understand the inflections of value that occur well before revenue in a medical start-up. “They haven’t been sufficiently exposed to success stories in the biotech space. They are more comfortable investing in areas they understand such as resources or retail where they can predict returns quarter on quarter,” Itescu says. He says Australian fund managers have to stop trying to pick winners in biotech and making short-term bets. “Early stage investors must take a portfolio approach. They have to buy shares in a group of companies, not just one at a time. This is a high-risk industry. By chance alone, the majority are not going to make it,” Itescu says.
Federal Industry minister Ian Macfarlane has claimed universities are part of the problem. Research grants should be linked to the number of patents registered by universities, not how many papers they have published in academic journals, Macfarlane told the Queensland Media Club in a speech which received an angry reaction from academia.
Marshall, Wong and Itescu doubt whether Macfarlane’s idea of tying government grants to patent approvals addresses the complexity of the challenge. While patent protection is vital to any business, they argue that research must be unfettered in its early stages to create the breakthroughs. But bringing business discipline to the table is just as important. Marshall says he would like to see the federal government provide incentives to researchers to take their ideas commercial much earlier. He says patent protection by universities is not the only answer because “universities are too greedy” when valuing the intellectual property. He says government should identify and encourage entrepreneurs within the university system. “At the moment, everyone in universities says, ‘Oh my god I didn’t get a grant, what if I don’t get a grant?’ If these guys could jump out and create a biotech start-up that would be pretty exciting. [Presently] there is not enough incentive to move out of the relative luxury and safety of the university system, and to stick their necks out.”
As Australia’s biotech industry matures, there will be more companies working with institutions sponsoring research and driving commercialisation. And our pension funds could become potential investors if they see the global profit potential from Australian scientific breakthroughs. US institutions are more than a decade ahead of their Australian counterparts, reflecting the maturity of the biopharma industry. There is “a harmony between academia and industry in terms of the value chain”, Itescu says. “There is tremendous talent in Australia but by its nature this is a high-risk industry. The majority of technologies will never make it to commercialisation just because of the inherent risk. Investors need to understand what those hurdles are: technology risk, regulatory risk, the safety of the product, can you manufacture cheaply enough, is the business model right?”
Gilman Wong’s Sirtex is developing a pipeline of products, some with potential beyond medicine
Sirtex Medical Limited
Mesoblast is quickly outgrowing its base, but Silviu Itescu says it will always have a presence here
Barry Marshall says it is vital to know when to replace the people in white coats with those in business suits