Sent: 15-09-2009 10:51:01
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Investing in Australian Drugs
The reluctance of Australian investors to fund early stage drug trials might be due to a combination of culture, history and economics. We already have proven ways to lose money.
The director of the Cancer Research Centre at the University of New South Wales recently bemoaned the lack of funding in Australia for early stage drug trials in an Australian Financial Review article.
The AFR article argued that superannuation funds should be encouraged to invest or, more broadly, the government should offer tax breaks to encourage the flow of funds to back the possibility that Australian drugs might succeed on the world market.
Australian scientists and medical researchers often appear to fight above their international weight. Although not frequent, Nobel prize winners bob up often enough to keep proving that Australia plays a disproportionate role to its size in the global scientific community.
It seems a pity not to successfully commercialise the intellectual capital behind this analytical success.
Governments have caught on and jostle with one another to fund and attract medical research to their local institutes. The Victorian government, for example, is streamlining the drug trial approval processes within the state to attract more large pharma money and to assuage the feelings of local researchers who had been complaining that the old system had been too cumbersome and costly especially for multicentre international trials.
Early stage drug trials can be very costly. Tomas J. Philipson and Eric Sun in "Is the Food and Drug Administration Safe and Effective?" (Journal of Economic Perspectives, Volume 22, No. 1) offer some estimates. According to their paper, the average spend on a three phase clinical drug trial leading up to FDA approval in the USA was US$125.2 million. The average duration of clinical trialling was 6½ years. The probability of an investigational drug making it all the way to approval was estimated at just 8%.
It is probably true that development of a venture capital industry in Australia lagged its development in some other countries. To that extent, medical research is disadvantaged but no worse off than other businesses in Australia.
In any case, venture capital might not be the best vehicle for drug trial funding. Large pharmaceutical companies might be better able to get the economies of scale that come with managing many drug trials simultaneously. Risk of failure might be better managed through a large portfolio of trials.
Global pharmaceutical firms are themselves being pressured to reduce the proportion of their revenues being spent on research. One response has been to find more diseases for existing drugs: increasing numbers of drug trials are designed to find a larger number of applications for drugs that are already in use and approved for other purposes. This might offer fewer financial risks.
The global pharmaceutical companies are probably also in a better position to take advantage of increasingly sophisticated genetic research capabilities by building databases of tissue samples sourced from around the world and from which inferences can be drawn about the likely effectiveness of their drugs and, perhaps, how modifications to existing drugs can improve efficacy.
Even with an exciting new discovery under their arms, few Australian pharmaceutical companies have been able to match their international counterparts. Access to large markets, distribution infrastructure and funding to break through these barriers have all stalled progress.
All these factors put the Australian industry at a disadvantage. Moreover, its relatively poor track record in commercializing its scientific and medical discoveries has meant that Australian investors have been wary about making funding commitments.
That is not to say that Australian investors have been unprepared to fund early stage companies. If anything, they might have been too ready to embrace risks.
Since 1960, according to the Australian Bureau of Statistics, $56 billion has been spent on mineral exploration in Australia, including $27 billion in the last 10 years. This does not include funds raised in Australia but spent on exploration efforts outside the country.
By most financial tests, this spending would have been hard to justify but reflected the pervasive optimism which motivates this activity.
Mineral exploration in Australia is sometimes carried out by private companies and individuals but even very early stage exploration is carried out by ASX listed entities without any other form of business. An industrial company could not think of coming to market at a similar stage of its development (i.e. having leased a vacant lot of land and still considering what business activity is going to occur on the site).
This might explain why the venture capital industry was apparently so slow in getting started here. The Australian resources industry had already had a huge influence on the shape of the Australian financial market by siphoning off capital from more risk friendly Australian investors.
This leaves the budding pharmaceutical companies at a distinct disadvantage: if we want to play lotto with our investment funds, we already have a proven way regulated by the ASX. Why change?
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