Biotechnology companies set to disappear as cash runs out

The fate of Australia’s biotechnology sector hangs in the balance, with many companies likely to disappear in the coming months as their cash reserves dry up.

 David Blake, editor of Australian biotech newsletter Bioshares, compiles a “survival” index that measures the cash position and prospects of 94 biotech companies. Only 21 companies had a rating above the level considered healthy and 25 companies had less than $1 million in cash at 30 September, 2008.

Apollo Life Sciences fell into administration late last year and several other life science companies have slashed staff and terminated projects. Blake is bracing for more bad news.

“It will get worse. Companies will disappear, projects will be terminated, employment will dissipate,” he says.

The problem is simple; cold hard cash.

Biotech companies take a long time to generate earnings, as they must pass through years of testing, trial and development. They usually burn through cash for some years before they actually have a product to sell.

But funding has dried up as a result of the credit crisis. Brigitte Smith, managing director of venture capital firm GBS Venture Partners, says venture capital funding has stopped, private investors are shunning the sector, and the sharp fall in biotech share prices – around 65% on average – means raising capital on market is near impossible.

“If you are one of those companies, the prospect of raising cash is just devastating,” Smith says.

She gives the example of Ventracor, which tried to raise $10 million last year in a rights issue only to find investors refused to stump up more cash. The board is now trying to sell the company or find a strategic investor.

Smith says life science companies need good assets, good management, a good strategy and spare cash to get through the next 12 to 18 months. “If you don’t have a couple of those factors, you are probably not going to survive. I think this is a Darwinian time.”

Blake says companies in the sector should be preparing for a prolonged downturn.

“There is a drought of finance that might not break for 18 months,” he says. “Until the financial system is stabilised, nothing is going to happen really for anywhere, for anything.”

Smith and Blake are also concerned that the other traditional funding option for life sciences companies – the Government – has also been effectively shut because of the Rudd Government’s decision to axe the Commercial Ready scheme in last year’s federal budget.

“It’s terrible, and with the benefit of hindsight the timing couldn’t have been worse,” Smith says.

Blake agrees. “It would have made a difference for small companies doing advanced projects. You know what? It was a half decent scheme. And it wasn’t a lot of money.”

The Government response

The Government had promised to look at replacements for Commercial Ready as part of its response to the National Innovation Review by innovation expert and CSIRO board member Terry Cutler.

A spokesman for Industry Minister Kim Carr says a response is currently being worked on, but a time for its release has not been set.

But Cutler says the Government’s response will be more of a policy framework and has urged the Government to consider immediate measures to stimulate the entire technology sector.

“Anything that might change the cashflow would have an immediate and positive impact,” he says.

“It’s always so hard to get governments to focus on SMEs. It’s easy for an ailing car company to get attention, but it’s not so easy for an ailing life sciences company. I think people are under-estimating the wreckage that’s going to be left, and the danger is that governments are going to underestimate that risk,” Cutler says.

“Some of that cash is dwindling fast, and these companies will disappear.”

Are mergers and acquisitions the answer?

Cutler is particularly worried about what will happen to the intellectual property developed by technology companies. “In an ideal world you would see some very active mergers and consolidation as a way to protect the assets.”

But merger and acquisition deals are hard to complete in the current climate and Cutler suggests the Government could look at measures to encourage consolidation.

One idea would involve allowing companies to acquire the accumulated tax losses of technology companies.

“You could do quite a bit by tweaking those tax rules applying to tech SMEs.”

Brigitte Smith would also like to see the Government do more to encourage the flow of funding.

“Instead of just supporting the car industry, support this technology sector that we want to grow and be part of Australia’s competitive advantage.”

She says that while the Government has set aside funds for venture capital – whereby the Government matches capital from venture capital firms on a dollar-for-dollar basis – there is a requirement for venture capital firms to set up a special fund (worth tens of millions of dollars) to access this money.

To help ailing biotech companies access funding faster, she would like to see a program set up where venture capital firms and government funds invest alongside each other on a company-by-company basis, rather than through a big fund.

The program could be managed by existing and qualified venture capital managers, and would involve the Government taking stakes in the companies, rather than just granting them money.

“That would be a specific response to the global financial crisis,” Smith says. “We want a mechanism that the strong, good companies are able to survive.”

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