ADELAIDE, Australia – Australian biopharmaceutical companies engaged in drug development shouldn't waste their time trying to build a flagship company in Australia, said Race Oncology Ltd. CEO Peter Molloy. Rather, they should focus on partnering with big pharma as early as possible, he told the Ausbiotech conference.

Aside from CSL Ltd., Australia hasn't created any flagship drug development companies that can prove the model can work, he said, and Australian companies may never market a product, but they can create value, he said.

They create value within the R&D value chain by engaging in drug discovery and development, but the market for them is not the target indication but the pool of demand by big pharma for doing deals.

"Drug develop biotech firms exist because big pharma no longer has the capacity to do discovery and development," he said, noting that big pharma focuses on commercialization and end of development with big phase III trials.

"Biotechs exist because investors are willing to put money into consistently loss-making firms in pursuit of that value."

Molloy tracked 38 biopharma firms that listed on the Australian Securities Exchange (ASX) between 2003 and 2016. He said that 12 of the firms exited before 2016.

The sector peaked in Australia in 2011. However, that peak was largely attributed to what he called "the Mesoblast effect," which saw the company double in value overnight to A$2 billion (US$1.5 billion) in 2011. It's now down to about A$500 million.

The average market value per firm is the same now as it was in 2004, he said, but the annual cash burn is around A$10 million compared to A$2 million in 2004.

Performance can't be evaluated, he said, because many companies will never create a product or generate sales. However, the pipeline is the real value, and value creation is the value perceived by shareholders, which is subject to all kinds of shocks.

Australia has suffered a short-term depression, he said, but significant latent value is still created even if it's not translated into share price and market value.

The top five ASX-listed companies represent 73 percent of total biopharma pipeline value (excluding CSL), he said, pointing to rising starts Mesoblast Ltd., Clinuvel Pharmaceuticals, Starpharma Ltd., Viralytics Ltd. and Bionomics Ltd.

There have not been "massive value creators," he said, adding that most companies sold when they were distressed or when they peaked.

"Dilution is your enemy," he warned Australian biopharmas. "We don't raise enough money, and grant funding doesn't really exist in Australia. The best nondilutive funding comes from pharma deals."

Drug development firms only exist "because investors are willing to risk capital in pursuit of a substantial payday," and pharma deals are the ultimate measure of pipeline value.

"Focus on the market," he said, which is the pool of demand from big pharma. He warned that 300 to 400 deals are signed in a year, and 10 times as many biotechs are fighting for the same deals, so if "you're exploiting a platform or target that is not hot, think again," he said.

Companies should start business development courtship early. "Deals are not landed," he said. "A deal is the outcome of a systematic professional project that takes place over three to four years."

In addition, if a candidate drug cannot be advanced quickly enough to leave at least 10 years of patent life left after it is approved, the value of the deal declines rapidly.

Big pharma appetite is stronger than ever, he said and "massive trade sales will continue" as a fundamental driver of the value chain.

Must-haves to attract investors

Anne-Marie Birkill, partner of venture capital firm Oneventures, said there are a few "must haves" for Australian biopharma companies to attract U.S. investors:

• • a lead program that addresses a significant unmet need;
• • novel science against a novel target and a well-conceived strategy;
• • a management team with a skillset sufficient to get the company to a significant milestone (often lacking in Australia);
• • a well-executed intellectual property package.

Birkill said "nice to haves" for attracting VC money include promising preclinical data, encouraging PK/PD data in animals, reasonable clarity of the regulatory pathway, an attractive operating model, and a reason for the investor to believe he or she will survive subsequent financings.

On the positive side, deal sizes have soared for biopharma, but not so much for devices. She said oncology and neurology represented the biggest exits and the shortest median years to exit.

Device acquirers, on the other hand, are focusing more on late-stage products, and the time to exit for device companies has been extended.

"If you are a young Australian company, the opportunity has never been better, with earlier investments possible," she said.