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Australia’s governments have been supporting medical research for a considerable time and we now have a worldwide reputation in a few areas, where we punch above our weight. There has been a recent emphasis on biotechnology and on growing an Australian industry to support future jobs growth. This has led to a greater awareness, more commercial activity from the research institutions and significant growth in new and expanded research facilities, particularly in Queensland and Victoria. It has resulted in increasing numbers of companies and, with the aid of the pre-seed investment funds, more qualified investment opportunities, with a better understanding of the important factors in growing a biotechnology company.

Venture capital

A few years ago, the IR&D board posed the questions: ‘Why are we not commercialising some of the inventions from our institutions?’ and ‘Why can’t we access superannuation money for early stage companies?’ The answer to both was that there was no venture capital (VC) industry in Australia.

The government had tried to develop programs previously without much success and a new approach was needed, which took the form of the Innovation Investment Funds (IIF).

This scheme was a relatively ‘hands off’ approach to encourage private or institutional investors prepared to invest in first-time funds managers. Its intent was to kick-start a VC industry, which could harness superannuation money to be invested in commercialising technologies from our research institutions.

The IIF has begun to achieve its objective, with the first licensed managers accessing institutional money for their subsequent funds, which are investing in early stage companies. Australia’s VC industry is now maturing, but has yet to provide the consistent returns to the superannuation funds to guarantee continued funding.

It will take a few more years of operation for these returns to be comparable with those in countries with a more established VC industry or, indeed, with the private equity industry in Australia, which is much more mature.

The continued support of the superannuation industry is also being compromised by current financial market conditions, which have dramatically cut the value of their listed assets, skewing the percentage allocation of funds in alternative assets such as VC.

Sourcing the money

So we now have VC, but how many of the start-up hopefuls can get funded?

The answer is about two per cent – although the success rate from research groups with solid reputations is higher. There are now seed funds that can invest up to a $1 million in a project or start-up company and, while there are only a handful of early stage VC funds able to support the growth of medical technology or pharmaceutical development companies, these can invest up to $10 to $15 million per company. Additionally, a handful of US funds have made investments in Australian companies alongside local managers who they know and trust.

The sort of company that will get funded is likely to have some good management, although often the team will only be filled out when funding is secured. It will have a clear barrier to the entry of competitors – usually patented technology – and a solid plan to get its products developed and tested in a clinical setting.

The pitfalls …

Companies looking for an investor should think about the value a particular investor brings. It is important for the company to do some homework on the investor – after all, the board member appointed by the VC firm may be working with the company for some years. It is also essential, if several investors are involved, that the investee knows that these investors have the same goals for the company.

Many a company has rued the day it accepted money from an investor only to find that the new investor had completely different ideas about its investment. This can lead to a dysfunctional board or, in one case, a complete restart for the company when an investor packed up its bat and ball and demanded its money back.

Venture investors usually invest in the field of expertise of their staff and provide their industry networks, advisers, operational expertise and management skills – as well as money. They will almost always take a board seat. It is important to find a syndicate of like-minded investors with deep pockets, as medical technology is likely to need a lot of development capital and the investors must be able to fund the company through several rounds.

Each round should raise enough to take the company to the next milestone that will add value. A rule of thumb might be a ‘seed’ round (just out of the research organisation), which should be enough to get to a compound or device that works in animals and is ready for formal preclinical studies. The series A should be enough to get the product to regulatory (preferably US Food and Drug Administration (FDA)) approval to do the first trials. Series B – usually priced by a new investor coming in – needs to be sufficient to undertake the safety and early efficacy trials.

A company has to have a very clear and realistic business plan, which takes into account these various funding rounds.

To list … or not to list

In the early stages, it is possible to find friends, family and ‘angel’ investors, although this is much easier with information than medical technologies. There are also pre-seed and commercialisation funds available.

Later, the choice is venture investors, listing on the Australian Securities Exchange (ASX) or, possibly, an international exchange. In Australia, where the market is used to funding small mining explorations, biotechnology companies have listed straight out of the university without looking for VC investors.

Listing brings its own issues, including the need for the CEO to be diverted by analyst briefings and investor relations, to provide a constant stream of announcements to investors and additional costs. It is much harder to find subsequent rounds of funding, unless the company is close to product with good news flow, particularly when, as currently, the financial markets lose confidence and many companies struggle along with small market capitalisations, ignored by both industry analysts and investors.

As a strategy for raising capital after a couple of rounds of VC funding, ASX listing has proved successful and companies, such as Pharmaxis, have been able to raise very large amounts of capital to fund the late-stage clinical development of their lead products.

However, even late-stage-listed product development companies can be affected by the vagaries of the international financial markets and investor sentiment and those that do not plan to raise money when the market is positive towards growth stocks can be left without sufficient funding or having to accept big discounts in order to find capital.

Non-dilutive funding

The May Federal Budget delivered a blow to companies planning to access AusIndustry’s Commercial Ready scheme, which was axed without warning, severely affecting potential R&D funding.

The R&D Tax Offset assists companies spending less than $1 million on R&D. Project funding is available from overseas granting agencies, and Australian companies have benefited from the Gates Foundation, the US Department of Defence and National Institutes of Health.

A lot of things have changed in the 10 years that venture funding has been available for early stage medical technology and pharmaceutical development. A number of VC-funded companies have reached the stage when their first products have been approved and are being launched.

There is now seed and early stage venture money available and companies can access up to about $30 million from Australian VC syndicates and introduced US funds.

While listing seemed an easy option for many early stage companies a few years ago, these companies are now struggling to find further capital. Listing is a strategy better suited to companies with products in late-stage development and a planned flow of news to investors.

Dr Carrie Hillyard FTSE is a co-founder of CM Capital Investments, where she is responsible for the Life Sciences group. CM manages over $260 million in three funds directed at life sciences and telecommunications technologies. She has experience through the complete product cycle, from basic research in cancer and endocrinology at the Royal Postgraduate Medical School, London University, to products on the market at Agen Biomedical. She has mentored entrepreneurs, consulted to the biotechnology industry, research institutions and commercialisation bodies and served on a number of government committees including the IR&D board and Tax Concession Committee. Dr Hillyard is a member of the board of CathRx Ltd, the Mater Medical Research Institute and a member of the Queensland Government’s Smart State Council.