Putting biotechnology under the microscope

As some of the gloss fades from dot.com stocks and the Internet, investors are increasingly turning to the potentially lucrative biotechnology market. But, as John Wilkinson reports, although the risks are high, so too can be the returns.

Eminent Australian scientist Sir Gustav Nossal said the formula for success in scientific research involves "combining teamwork and high (appropriate) technology in a bubbling cauldron of ideas".

This 'cauldron of ideas' could as easily describe the current global biotechnology sector.

It is a sector that investors, fund managers and governments have all welcomed as the business of the future.

Biotechnology can offer big rewards but, in line with all investment philosophy, the risks are huge as well.

The sector is not so different to information technology. The developments are technically at the forefront of science and returns for the winners are huge.

However, the main difference is the development time-scale.

A new computer program can be developed in months. A biotechnology project takes, on average, about 12 years to bring to production and the research can go out of the window at any stage if problems are discovered.

Another difference between IT and biotechnology is that the research costs millions of dollars, and the production costs are even larger.

Australia's biotechnology skills are recognised as being very well-developed. The problem is that Australia lacks the large global pharmaceutical companies to take good ideas on to production. However, researchers still gain benefits, as international co-licencing deals are now part of the norm.

Melbourne-based Austin Research Institute deputy director Professor Mark Hogarth says the commercialisation of research is now a very important part of any organisation's operations.

"This is an integrated facility that will go from genes to drugs. We must look after the intellectual property as a way of adding value," he says.

Just how much value? Hogarth offers this example. The market for drugs to treat rheumatoid arthritis is currently worth $10 billion, but that is likely to grow to $20 billion in the next 10 years.

GroPep, an Adelaide biopharmaceutical development business has announced a 65 per cent rise in revenue to $6.4 million for the year ending June 30.

The company, which makes growth cells, has grown out of a research institution background. It is a joint venture between CSIRO and Adelaide University.

The Austin Research Institute has formed a joint venture with Victoria University to create the Victoria Institute of Biotechnology.

"The centre will be targeting areas like inflammation and developing drugs to treat these conditions," Hogarth says.

While Australia is not the global centre for biotechnology - the US has that crown - much of the leading-edge research is undertaken in this country.

Hogarth says it is important that Australia builds the next generation of research centres now to catch the next level of research.

"There is a danger that Australia will be left behind in the next wave of biotechnology," he warns.

"We can add-value in the medical area by designing drugs that affect the activity of gene products," he says. "The vision is now to capture that value."

An important area of research at the new Victoria Institute of Biotechnology will be X-ray crystallography, which uses X-rays to look inside crystals to see the shape of proteins generated by genes. This enables researchers to design drugs to treat an inflammation caused by the proteins.

In addition to research into inflammations, the institute will also look at cancer, transplants and viral disease.

GroPep managing director Dr John Ballard says while initial research in biotechnology tends to come the academic sector, there is still room for Australian companies to commercialise niche products like growth cell cultures.

"We produced a small amount of growth cells and sold that to research workers," he says. "From there we ploughed back the revenues to develop the company."

GroPep now exports 95 per cent of its products and has recently signed research agreements with Nestle to co-develop cheese whey-derived growth factors for nutritional and pharmaceutical applications.

Ballard says the company has found a niche and developed it with a reasonable amount of capital.

"If you try to develop something like a cancer drug, then it requires millions of dollars of research and testing that may not be commercially viable at the end," he says.

"If you do find a big drug, then inevitably you have to go to overseas to commercialise it, and you are not in control."

The US is the accepted centre for the biotechnology industry. According to Foresight, a Melbourne-based scientific and medical consultancy, there are 1250 companies , in the US, with a total market capitalisation of $A230 billion. The industry has sales of $A19 billion and a research and development bill of $A15 billion.

Research into molecular biotechnology has centered in the US and, to a certain degree, in the UK.

According to a US-based Wellington Management report on global health care, earnings in the pharmaceutical and biotechnology industry is positive, with double-digit growth.

The fund manager sees biotechnology as a new science where a number of innovative companies are looking to build expertise and a solid business.

The growth areas Wellington sees are in treatments for cancer, Alzheimer's and asthma, with some companies reaping very large returns.

The returns for fund managers in this sector are also looking good.

The Goldman Sachs Health Care Index has a one-year return of 38 per cent and a three-year return of 34 per cent.

Wellington, whose fund is marketed in Australia by J B Were, has achieved a 50 per cent return on one year performance and 38 per cent on three year.

Some of this above-benchmark performance may come from the fact that Wellington has had ahealthcare(biotechnology)fund since December, 1984 and has achieved a 28 per cent return over that period.

Like technology funds, the risks are high and unless the right companies are picked, there will be some investment disasters in the future.

Now for the big question: which are the good companies? That boils down to track record and their aims.

Most industry observers agree Australia will produce good niche biotechnology companies, while also developing innovative research.

The big dollars from the sector will come from major drug commercialisations, something that will happen either in the US or Europe.