Tuesday, 25 July 2017 Sydney
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Life sciences sector shines in Australian private equity and venture capital industry::

By AVCAL CEO Dr Katherine Woodthorpe

 

AVCAL, the Australian Private Equity and Venture Capital Association, is a believer in the maxim that innovation is the cornerstone of business growth.

 

Both private equity (PE) and venture capital (VC) play an important role in Australian’s innovation ecosystem, albeit often at difference points on the innovation spectrum (VC at the start-up phase and PE at the growth phase).

 

PE and VC are important sources of funding for capital-hungry innovators wanting to grow businesses and further develop and commercialise their intellectual property into viable products and services. Australia now has just 10 VC firms making new investments out of 30 firms operating here.

 

If Australia wants to remain an engine room of innovation we need to see some significant changes on the policy front and in the area of tax regulation. We need a national framework in place that makes both PE and VC investment vehicles attractive for investors in an increasingly competitive and global investment environment.

 

For both PE and VC, we need tax certainty for investors because the some of the current arrangements are complex, unclear and subject to interpretation, which is a disincentive to attracting the capital our country needs to fund its growth and prosperity. For VC we need greater policy support to encourage the collaboration between our researchers, the commercial sector and investors.

 

PE and VC activity peaked in 2007 and, like many industries, suffered heavily from the global financial crisis. For the PE sector there have been signs of this turning around in recent months and the increased activity appears set to continue in the face of the difficulties of raising capital in conservative markets. The investments you see today are mainly from “dry powder” that needs to be spent. But the VC sector continues to face significant funding challenges as GFC-affected investors look elsewhere seeking liquidity and stable returns.

 

As Australian super funds have grown in size they have become less willing to write smaller cheques, given Australian VC is just 0.22% of the size funds under management by the Australian super industry. Having domestic institutions invest more locally, rather than offshore, works in the national interest by supporting local innovation and commercialisation initiatives as well as providing returns to local investors. This is a win-win. We need a national effort to incentivise Australian capital staying in Australia, in addition to attracting foreign capital.

 

In the face of these challenges, one area that has emerged brightly has been the life sciences sector. Research investment in the life sciences continues to grow, and Australian VC has supported many world-class companies including Cochlear, Resmed, Pharmaxis, Neuromonics, CathRx, Verva Pharmaceuticals and Chemgenex.

 

Chart -Australian VC Life Science Investments Financial Years 2006-2010

 

 

 

 

 

 

 

 

 

Source: AVCAL PEREPAnalytics, AVCAL/Crescendo Deal Metrics Study

* FY2010 figures are first half FY2010 only

 

It is partly due to the support of VC over the past decade that the life sciences industry has grown to the extent that it has. The global biotech and pharmaceutical industry recognise the quality of products that have been developed in Australia and have paid several millions of dollars for a number of VC investee companies, such as Arana and Peplin (see case study box). Foreign VCs regularly co-invest alongside Australian VCs.

 

Life science investments have grown in recent years and held up in the face of the GFC. The number of investments has grown from over 50 in FY2006 to about 90 for the first half of FY2010. Unfortunately, however, the total amount of funding has not kept pace and many of these investments are for follow-on funding into existing ventures, not new undertakings.

 

Life sciences now form the main asset class for VC firms, at approximately 43% of funds invested, followed by ICT at 31% and energy and environment with 13%. For PE, the life sciences sector is also significant. Notable PE investments in life sciences include iNova Pharmaceuticals, medical device company Lomb Scientific and Lifehealthcare.

 

The recent, independent evaluation of the Commonwealth Government’s Innovation Investment Fund (IIF) program, which supports VC funds, found that “in the absence of the IIF program, the needs of these innovative and potentially high impact businesses would remain unfilled” and “it is likely that fewer businesses would have started up, and of those that did, their activities would have been more limited in both scale and scope.”

 

Unfortunately there has been no indication of any on-going policy support of this kind once the IIF program concludes this year, notwithstanding the Government’s own praise for the program and acknowledgement that innovation is central to national prosperity. This is in contrast to VC support initiatives in other countries such as NZ, the UK and the US which have all recently enhanced or extended their programs.

 

Governments around the world recognise the importance of supporting their VC industries as demonstrated by policies to assist their VC industries to help build a high growth, high value economy for the future. The Federal Government is to be applauded for its recent announcement of a proposed tightening up the eligibility requirements for R&D tax concessions so that most of the tax breaks will go to genuine R&D initiatives rather than some of the ‘business as usual’ programs of big business.  However, although this assists with cash-flow, it neither provides enough capital for early stage companies to achieve their potential nor all the additional value-add that VC investment brings to a growing company.  The imminent ending of the IIF program, with no replacement mooted, is a very worrying scenario for companies who need significant capital to become a sustainable enterprise.

 

Australia is recognised internationally as attractive for PE and VC investment, and we have a rich history of innovation and entrepreneurship. We need to ensure that Australia remains competitive and attractive in the face of growing competition and to prevent some of our brightest ideas and people going offshore.

 

Case study

GBS Venture Partners invested with its 4th fund in biotech company Peplin in a great example of how venture capital funds add value to the innovation chain. This initiative and exit won GBS the AVCAL Best Early Stage Portfolio Company Award in 2010. Peplin develops new treatments for skin conditions and skin cancers and is focussed on advancing and commercialising innovative medical dermatology products.

GBS led a syndicate of US and Australian investors to provide a total of AUD$36m, with GBS investing over AUD$11m, to support phase 3 trials in aktinic keratosis (or sunspots), a pre-cancerous condition with at least one lesion predicted to occur on 40-60% of Australian adults. An exit value of over AUD$300m was achieved, the highest ever for a pre-market dermatology company and among the highest ever for any Australian biotech company when it was acquired by LEO Pharma in 2009. The exit represented an IIR of 127% and 2.35x money invested.