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How to capitalise on Australia's academic success

Wednesday, 11 November 2015
How to capitalise on Australia's academic success

By Michael Panaccio, Investment Principal, Starfish Ventures

Australia is renowned for its wealth of high-calibre universities and research institutions, with medical breakthroughs like penicillin and the bionic ear bolstering our reputation as leaders in the academic world.

And rightly so, considering the Federal Government is this year investing $9.7 billion in R&D -- the majority of which directly or indirectly flows through to university laboratories.

The $20 billion Medical Research Future Fund legislation, which was passed in August, will further cement our R&D status for the next 20 years.

But how do we measure the return on investment from our taxpayer dollars? Is it by continuing to develop iconic 'Australian made' medical devices and life-saving drugs? Or is it by simply producing quality research papers and maintaining a healthy academic reputation?

As both a venture capitalist and a scientist, I’d argue there is little point building an engine room for cutting-edge innovation and clinical breakthroughs if there isn’t an equally strong commercial ecosystem to make those ideas a reality.

Unfortunately, that’s the situation Australia currently finds itself in. There’s a gaping hole in available capital investment and commercial willingness to translate our preeminent research capabilities into a vibrant life-science startup ecosystem, despite the potential for this to be a key economic driver.

We do still continue to produce successful life science companies, just not at a rate that matches our investment in research.

In August, Melbourne University founded head lice treatment startup, Hatchtech, signed a deal worth up to $279 million. This is the third major deal in the past 12 months after University of Queensland biotech, Spinifex Pharma, received $US700m in June and Melbourne University drug developer Fibrotech signed a deal for up to $500m late last year.

One of the major barriers between a breakthrough scientific paper and one of these massive exits is that it’s an expensive and lengthy process taking a new drug or medical device through multiple animal and human clinical trial phases.

While IT entrepreneurs can build software in their garage for $20,000 and be successful, in the life sciences, your garage is not an option: it can cost up to $200m to prove a product is ready for the market.

It’s a high-risk, high-reward investment, with each successful clinical trial phase significantly increasing the value of the company, yet also risking complete failure. It’s an attractive and rewarding investment for VC firms with the specialist medical knowledge and ability to invest large amounts, yet it seems in Australia that firms of this size and experience are in short supply.

We rank just 81st in the world when it comes to innovation efficiency -- the bang for buck we get transforming innovation investment into results -- according to the CSIRO’s latest review.

The former Labor government’s Strategic Review of Health and Medical Research, released in April 2013, also identified this shortcoming. It said that despite our significant upfront investment in research, commercialisation was “a necessary step to deliver research benefits to the community, and has the potential to create economic benefits including high-value jobs”.

Yet the Federal Government decided to scrap Commercialisation Australia and the Innovation Investment Fund in the 2014 budget, further highlighting the lack of political understanding and foresight on this issue.

But it’s not just the government’s fault. It’s a long-running problem that stems from the fact that our university system follows in the footsteps of the UK, where it’s historically been frowned upon to commercialise research. As a consequence, some of our most talented medical minds don’t want to be involved in the business of taking their research to market, viewing it as a career-limiting move.

In the US, on the other hand, commercialising research capabilities is encouraged. As such, their life-science economy is booming with more than 100 biotech initial public offerings in 2014, up from 49 in 2013.

Aside from the $US8.7 billion raised by these companies, the flow-on effect is that the infrastructure to support these companies continues to get stronger in the US. There are literally hundreds of labs and equipment available for lease all around the country, while back home there is a real lack of public or private infrastructure available.

If an Australian scientist wants to become an entrepreneur, their only choice is to build a lab from scratch, which is an extremely costly exercise.

The financial disincentives for the few Australian researchers who are able to achieve investment don’t end there. Most Australian universities work off a reward system of a third of the capital going into the university coffers, a third for the university department and a third for the inventors (which is often split again between the scientists who worked on the project). So by the time the funds are raised and products developed, the inventors third is diluted to just a few per cent of the overall company.

In addition, the entrepreneurs must put their academic careers on hold and will likely watch their colleagues who have remained focussed on academia and publishing papers, rewarded with promotions.

Compare this to the culture of Stanford University, which produces more entrepreneurs than any other university in the world. In return, Stanford’s successful entrepreneurs have helped the university build $21.4bn in endowment funds, which contributed 21 per cent of the university's income in the 2014- 2015 financial year.

Australian universities need to follow the US' lead and provide the financial and career incentives that reward rather than punish life-science entrepreneurs. By rethinking the science curriculum, we can teach students about both the business and medical worlds and lay the foundations for a viable life-science industry.

Michael's article was originally published on Business Spectator.