Adrian Herbert
October 28, 2015

Commercialising medical research

Commercialising medical research

Biotech blush: Part of the MRFF should be earmarked for commercialisation

The federal government has transferred an initial $1.1 billion to the new Medical Research Future Fund (MRFF) and plans to start distributing some of that cash to boost funding for medical research.

The MRFF is to be built up to $20 billion over time with the Future Fund Management Authority given the task of investing to maintain the capital.

The government will allocate about $10 million from the fund over the remainder of the current financial year, and a total of $400 million over the next four years.

This is good news for medical research, but there is a strong argument that some of the funding should be directed to commercialisation of that research.

Bear in mind that $400 million is in addition to $3.4 billion the government has already budgeted for direct medical research over the next four years.

That is much the same amount that successive federal governments allocated to all technology commercialisation – not only medical technology – through the Innovation Investment Fund (IIF) program from 1997 to 2014.

There have been no new allocations to technology commercialisation since the IIF was officially killed off in the 2014 Federal budget. Labor has, however, committed to introduce a new commercialisation program if re-elected.

The McKeon Review of 2013 recommended the establishment of a translational biotech fund. The Coalition could demonstrate bipartisan support for commercialisation by establishing such a fund.

Introducing legislation for the MRFF in September, former treasurer Joe Hockey said it would “encourage innovation at all levels of health and medical research”. That, at least, appeared to leave the door open for funding commercialisation.

Allocating funding to commercialisation would help maintain growth of the wider medical technology sector, which has the potential to generate many more new jobs than research alone.

A translational biotech fund, funded from MRFF disbursements could be a first step in establishing a successor to the IIF which is needed to keep Australia on track to become an innovation nation.

It is to be hoped that this issue will be addressed by Prime Minister Malcolm Turnbull when he outlines his government’s revised innovation policy in a statement expected before the end of the year.

It has long been argued that at least $500 million would be needed to set up a really effective medical technology commercialisation fund. That could surely be funded from the MRFF without greatly reducing its impact on direct research.

The IIF program, which was established under the Coalition and later supported by Labor, has often been criticised for failing to provide returns. But the program was effective in helping establish a venture capital sector in Australia, small though it remains.

Funds supported by the IIF were, however, generally unsuccessful in providing the level of investment returns expected by institutional investors, mostly superannuation funds.

But much of the funding committed by the government over three rounds of the IIF and the Innovation Investment Follow-on Fund, which was a lifesaver to many developing technology companies after the global financial crisis, was returned and re-cycled and there are still returns to come.

The IIF was particularly successful in helping develop medical technology companies. These included now ASX-listed companies QRx Pharma (ASX: QRX), Pharaxis (ASX: PSX) and Acrux (ASX: ACR).

Since the demise of the IIF, the government has continued to share in returns from the program, notably through three highly successful venture capital exits from medical technology companies: Fibrotech, Spinifex and Hatchtech.

Fibrotech is the developer of a new class of drugs to treat fibrosis, tissue scarring which is prevalent in chronic kidney disease, heart failure, respiratory conditions and arthritis. Fibrotech was bought in May last year by global specialty pharmaceutical company Shire plc (LSE: SHP, NASDAQ: SHPG). Shire paid $US75 million with further conditional milestone payments to follow.

In June this year, chronic pain drug developer Spinifex was sold to Switzerland based global pharmaceuticals business Novartis, reportedly for $US200 million upfront and conditional milestone payments of up to $200 million.

Then in September, head-lice treatment company Hatchtech sold key rights to its Xeglyze product to India-based pharmaceutical company Dr Reddy’s Laboratories (NYSC: RDY). The deal involved an upfront payment of $84 million and future commercial milestone payments of $193 million.

As all of these exits were to overseas-based companies, further development and commercialisation of the technologies is likely to be carried out overseas minimising flow-on to the development of the medical technology sector in Australia.

But successful Australian drug development companies have always been most likely to be sold overseas. Most of the leading global pharmaceutical companies are based in the US or Europe so this is inevitable.

Australian drug developers that have proceeded to ASX listings have also mostly been acquired by overseas pharmaceutical companies before they have grown much larger and not all at favourable valuations. ASX investors have demonstrated limited appetite for the high regulatory and testing costs of developing new drugs.

Medical devices have much greater potential for listing locally and continuing to grow in Australia as illustrated by Cochlear (ASX: COH) and Resmed (ASX: RES).

But development of Australian medical technologies will not automatically be shifted offshore after acquisition. Global pharmaceutical companies are prepared to develop drugs where the best researchers, research facilities and trial facilities are located. Australia scores highly on each of those counts.

Meanwhile, there are many more medical technologies in the development pipeline. Investment in commercialising these will help build out our medical technology sector.

Interest of Australian institutional investors in investing in local venture capital has recently been re-kindled after the setbacks of the technology bubble period of the early 2000s. Commercialisation prospects in medical technology are a key part of that interest.

In April, venture capital firm Brandon Capital Partners raised $200 million for a third Medical Research Commercialisation Fund, the largest specific life sciences venture fund raised in Australia to date. Investors in the fund included Australian Super, Statewide Super, HESTA Super and HOSTPLUS Super.

About a quarter of that fund is to be used as seed capital to invest in up to 30 technologies with commercialisation potential. The remainder will be used to support the further development and commercialisation of the best of these.

A medical innovation investment fund could generate additional similar projects by investing in venture capital funds along the lines of the IIF program, with fund managers being required to raise matching funding from the private sector. This would double its investment potential.

As the three recent commercialisation successes mentioned here all illustrate, research funding is only part of the story. Once developed, promising technologies need to be nurtured and guided toward commercialisation which requires a very different skill set.

Adrian Herbert is managing editor of Private Equity Media, publisher of Australian Private Equity & Venture Capital Journal.

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