Investors turn to innovation

11/08/2014 - 12:29

FEATURE: Biotech and IT companies are enjoying renewed investor interest, but these innovative businesses are facing a changing capital raising market featuring less government support and, in Perth, a drastic shift in the venture capital sector.

Investors turn to innovation
TECH SPECS: Albion Capital Partners principal Anthony Grist says interest this year has turned from biotech to ICT companies. Photo: Attila Csaszar

Biotech and IT companies are enjoying renewed investor interest, but these innovative businesses are facing a changing capital raising market featuring less government support and, in Perth, a drastic shift in the venture capital sector.

Western Australian investors are increasingly looking to divert capital into innovative biotechnology and digital businesses as high-risk, high-reward opportunities in the resources sector dry up.

While parallels have been drawn between mining companies and the potential payoffs from biotech companies seeking to commercialise medical innovations, and information and communications technology companies developing new online services –the sectors are vastly different.

A number of prominent investors from mining backgrounds are now involved in the biotech space, such as Chris Catlow, formerly of Fortescue Metals Group and Iluka Resources, who is now chairman of diversified healthcare group Admedus.

Admedus recently received approval to sell its cardiac tissue repair product in the US, and counts mining magnate Andrew Forrest among its backers.

However, Albion Capital Partners principal Anthony Grist, whose corporate advisory and investment company has a significant interest in biotech, said links with the minerals sector – such as junior resource explorers seeking reverse takeovers with biotech and digital companies – were only part of the picture.

In addition to reverse takeovers, Albion has capitalised on interest shown by public companies with healthcare knowledge to prompt the acquisition of biotech stocks to add to existing assets.

“Bringing in a listed entity already in the same industry as the introduced asset is often more efficient, as there is some alignment and knowledge already present on the existing board,” Mr Grist told Business News.

In partnership with boutique firm Forrest Capital, Albion helps match biotech companies with a management team and, depending on how quickly they need to raise funds or the state of the initial public offering market, helps them access capital on the ASX.

“The job of directors is to create wealth for shareholders, not necessarily blindly follow one industry type,” Mr Grist said.

“So, even if there does require a diversification away from the existing industry, as long as this is well researched, comes with the right expertise, and is disclosed, then hopefully this will add shareholder value where existing assets are not.”

Biotech requires specific expertise and Forrest Capital draws on its network of former scientists, life science fund managers and principals of successful therapeutic or drug development approval companies.

Last year, following the success of biotech companies in the US, Albion and Forrest helped finance and develop five Australian biotechs, including Oncosil Medical, Imugene and Cynata Therapeutics.

“This year’s been a bit quiet (for deals)” Mr Grist said.

“There’s been interest in biotech but it has softened a little bit and what’s taken its place is IT and cloud technology and internet technology.”

Fellow corporate adviser and Viaticus Capital principal, Gavin Rezos, agrees ICT plays are gaining more investor interest.

Mr Rezos said Viaticus had been involved with financing some biotech plays, but had not been involved with Australian biotechs in recent years.

“It’s because the biotech sector in Australia is developing better than it used to be, it’s getting more awareness in the market, but the awareness tends to be high net worths and retail, on which it relies on,” he said.

“The real institutional large money isn’t there.”

Mr Rezos said Australian companies perceived as lacking diversity of interests, while the tax advantages given to companies acquiring or merging with biotechs in the UK had left Australia out of the loop.

“If US companies do a merger or acquire a UK company, the US companies can save millions in tax,” he said.

Digital innovation

Viaticus’s three bases – in Perth, London and New York – are heavily involved in the ICT sector.

“It has become a much more institutionalised investible product and the smart money in Australia has been for the last 18 months investing in internet delivery and social media,” Mr Rezos said.

Digital finance companies such as Australia’s Paid International and the UK’s Wonga were “cutting banks’ lunches”, Mr Rezos said, because they tailored products and used technology to provide better customer experience.

“The key here is that the cost of data storage and the cost of data transmission is plunging while the ability and speed of transmission is rapidly increasing, and that’s what’s driving these investments,” he said.

“From our perspective, the internet sector is maturing rapidly without the inherent problems the biotech sector has.

“I think what the markets are going to realise fairly soon is that the biotech is a high-risk, high-reward but the reward is potentially nowhere near as big as the internet side.”

Albion Capital’s Mr Grist, who co-founded Amcom Telecommunications, is also a strong supporter of the ICT sector.

He cites virtual marketplaces such as realestate.com.au and carsales.com.au as successful examples of how products or services have been commercialised to the satisfaction of investors.

“I think tech is stronger at the moment in sort of raw terms right now,” Mr Grist said.

“Internet and IT technology is stronger than biotech.”

Biotech developments

However, AusBiotech WA branch chair Brian Leedman believes the future of biotech, especially in this state, was much brighter than people realised.

Mr Leedman, who has co-founded biotechnology companies and is involved with Forrest Capital, has devoted himself to developing Perth’s biotech sector.

“Four years ago ... biotechnology certainly wasn’t a sector that the investor community understood or appreciated,” Mr Leedman told Business News.

“We are seeing a huge revival of interest in the biotechnology sector.”

Mr Leedman started organising Perth lunches for stockbrokers to learn about biotech, initially attracting 50 people a few years ago. But this year, after attracting a record crowd, he is planning a second event this September.

“This year ... we had 186, which is by far the largest brokers’ lunch ever held in Australia for biotechnology, perhaps even the largest for any sector, so it was an unprecedented level of interest in biotech,” Mr Leedman said.

He is working on the premise that attracting investor interest will result in media coverage the government will notice and want to become involved in.

Mr Leedman insists the sector will grow without government support, but said WA needed to diversify from its base of resources, and biotech was a smart industry that could help.

At an industry event in May, Mr Leedman announced a piggyback solution based on the federal R&D tax incentive, which he said was well received.

“What I’d like to see is the state government provide an additional incentive of another 10 or 15 cents in the dollar for WA-based biotechnology companies that spend their R&D in Western Australia,” Mr Leedman said.

“It would be a huge incentive for biotechnology companies to be based in WA.”

He said while WA had impressive medical and research facilities, promising local companies often left the state to pick up experienced management and be closer to investors on the east coast.

“We have a very interesting dynamic,” Mr Leedman said.

“We have this surge of interest in the biotechnology sector with an unprecedented level of action occurring with Western Australian investors’ money, and yet those companies that are being formed here are being based on the east coast of Australia.”

Venture capital

One of Perth’s few venture capital firms, Yuuwa Capital, is quietly nearing the halfway mark of its $40 million 10-year fund, which is largely supported by the now defunct Innovation Investment Fund.

This milestone, and a federal budget decision to cancel new funding for the IIF, means Yuuwa is now focused on managing the companies it has already invested in, and is highly unlikely to take on any new projects.

“Even if they’re good projects we couldn’t invest into them,” Yuuwa investment director Liddy McCall said.

“That’s difficult, because there won’t be a Perth-based biotechnology fund.

“There may be some IT fund, you tend to get a bit more diversity around that. We would hope that a biotech fund springs up, but so far there’s no-one else.”

Yuuwa funds businesses including iCetana, which is commercialising AgWorld, a unique anomaly detection technology for video security surveillance that allows farmers to share data on the go.

It’s also backing OzSonotek, which is developing a next generation needle for cataract surgery.

Along with the defunding of IIF, Commercialisation Australia, which focused on providing capital and support for early stage innovation companies, was also a victim of the Abbott government’s recent budget cuts.

Together the programs provided $528 million and generated $222 million of 'in-kind' private sector donations.

They are due to be replaced by a $484.2 million Entrepreneurs' Infrastructure Program, which it is hoped will maintain some of the best features of its predecessors. 

Ms McCall said innovation would continue with reduced government support, but Perth-based biotechs in particular would struggle to raise seed and early stage funding.

“It’s very difficult to get someone to invest into a Perth-based technology that is nowhere near going into the clinic. To treat humans … it’s a long road,” she said.

Ms McCall said while biotechs sometimes signed deals with multinationals, contractual clauses usually forbad the use of their name in announcements, which meant the deals often escaped media and investor attention.

Without sufficient funding to develop ideas, she predicts more research will have to be published openly without the protection of intellectual property.

“It will be picked up and used by anyone to develop their projects, whether it’s overseas or interstate, and it won’t be something that generates commercial returns back to WA,” Ms McCall said.

WA patent attorney firm Wrays has noticed a decline in the number of state-based provisional patent filings, which it considers a barometer of local innovation.

Director Todd Shand said 60 per cent of Wrays’ work used to be with WA-based companies, but now due to demand, it only made up 40 per cent, with the rest focused on enforcing the rights of overseas companies.

Universities

One of Perth’s most recognised innovative companies is Scanalyse, developed within Curtin University and bought by Finnish mining processing services supplier, Outotec, in 2013.

Curtin IP Commercialisation director Rohan McDougall said he was confident of similar success from the promising number of projects currently under development.

“We have 11 (companies) at the moment at various stages of development, some of them from selling products internationally to those that have just been launched and there’s a number of companies that we’re very excited about,” Mr McDougall told Business News.

“Certainly there’s significant opportunity for a repeat of the Scanalyse story.”

Curtin will hold its annual commercial innovation awards this month after attracting a record number of applicants.   

Mr McDougall said Curtin had previously received Commercialisation Australia funding, and called its winding down disappointing, but said the university would continue to be an investor.

“Curtin itself is a relatively significant investor in this space so we have funds every year to invest in early stage prototyping, proof of concept, pilot trialling, that can be applied to taking research outcomes and developing them more into a form that’s more palatable or attractive for industry or investors,” he said.

Mr McDougall said Curtin would continue to partner with high net worth individuals, angel investors and industry members to identify alternative sources of funding.

He said there could be greater incentives for universities nationally to invest in innovation and commercialising services or products.

Currently, universities largely measure success based on academic publications and competitive research grants, but Mr McDougall said there was scope to balance that by measuring impact and rewarding companies commercialising products and services.

“Universities have to be incentivised through their funding mechanisms to do this work or there’s going to be limited amount of attention they pay to it,” he said.

Curtin was committed to developing innovative companies for a number of reasons, however.

“(Curtin) is not well incentivised to commercialise things, but it does it because ultimately Curtin’s position is around being relevant to the community and industry in particular and so it has taken a position that it will be active in this space,” Mr McDougall said.

He said having commercial innovation awards and successes like Scanalyse had helped lift the profile of WA-based companies pursuing innovation, and the state’s resources sector also provided opportunities.

“One of the advantages of Perth is we do have big corporates in town who can act as a cornerstone customer for early stage businesses, if they’re willing to source and work with local technology providers,” Mr McDougall said.

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