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Darwinian Economy Will Mature Australia’s Biotech Industry




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Video title: Darwinian Economy Will Mature Australia’s Biotech Industry
Released on: December 18, 2008. © PharmaVentures Ltd
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As a co-founder of Australia’s leading life science Venture Capital firm, Brigitte Smith talks to Fintan Walton about the opportunities and challenges she foresees in the coming months. The firm has recently been in the process of raising a new fund and have so far achieved AU$100 million, which they will be investing in promising companies, proving that there will still be funding around. However the reality for many small biotechnology companies with low cash reserves is not promising.
Nature of the funds
Fintan Walton:
On this show I have Brigitte Smithwho is from GBS Venture's or Venture Partners here in Melbourne. Welcome to the show.
Brigitte Smith:
Thank you.
Fintan Walton:
You've been on our show before and we'd like to welcome you back. As a venture capitalist investing in a number of biotech companies here in Australia you build up a number of funds over the years. GBS Venture's came out of the Rothschild in 2002 with yourself and Geoff Brooke. Could you tell us first of all about the actual funds that you've got historically?
Brigitte Smith:
Yeah.
Fintan Walton:
And the nature of those funds?
Brigitte Smith:
Yeah. So in 1998 we've raised the Australian BioScience Trust under the Federal government scheme. That's a $42.5 million fund and it's now fully invested. The best investment out of that fund was Pharmaxis which we made a 17 times return on which meant that fund overall performed really well, so that was a start.
Fintan Walton:
Yeah.
Brigitte Smith:
$62.5 million in 2001 just got Bioscience ventures II, $30 million in 2002 which was another government sponsored fund which does seed investing and 2005 $150 million and the money is all from superannuation funds or pension funds.
Fintan Walton:
Right and in this year you've you're closing out of fund?
Brigitte Smith:
Yes. So we done a couple of closes on the first funds so we now have more than a $100 million and we will continue to we got some new commitment for this week so that should close up a bit north of the fund that we invested, that we raised last time so we're currently investing that fund we've made three investment so far.
Raising funds and bringing overseas investment into Australia
Fintan Walton:
So the climate, obviously the first question that people ask in the current climate are people -- is it difficult more difficult now to try and raise money into get into a fund?
Brigitte Smith:
It's the most difficult it had ever been.
Fintan Walton:
Right.
Fintan Walton:
It's taking longer and it's been more difficult than any other previous fund raisings and I've been intimately involved with each of the fund raisings but we still got there. So I think some of our investors very committed to venture capital and they believe in life sciences in Australia so they're willing to sign up.
Fintan Walton:
Okay. So you've got obviously a number of funds and each of those funds you tend to go in obviously not just on the single round but you're looking at multiple round presumably?
Brigitte Smith:
Yeah. So we usually are early side investor series, our investors and we look to have about 30 to 40% of our commitment to that company in the first round of financing so we don't commit that all contractually upfront but we reserve pretty heavily.
Fintan Walton:
Right.
Brigitte Smith:
And what that means is that even though the financial environment is horrible well our portfolio companies are well supported because we have pretty good reserves to follow on grant for financing for them.
Fintan Walton:
Right and you've also just announced last week financing around for Peplin.
Brigitte Smith:
Yeah.
Fintan Walton:
A local company here in Australia?
Brigitte Smith:
Yeah.
Fintan Walton:
Was that on your own or would did you come in with other investors?
Brigitte Smith:
So it's syndicated with MPM which was an existing investor in NEA which is a new investor in this around. So US$24 million which was a lot more Australian dollars when we closed it then it was two-months ago when we negotiated it.
Fintan Walton:
Right.
Brigitte Smith:
But we think it's a great company. It's a pretty advanced and
Fintan Walton:
It's got a Phase III product?
Brigitte Smith:
Phase III product in treating Actinic keratosis.
Fintan Walton:
Keratosis.
Brigitte Smith:
Keratosis. Thank you so much.
Fintan Walton:
And but that's encouraging because clearly people look at the biotech and seeing and to see that companies can't sell, raise money not just obviously from local venture capital but also from overseas as well?
Fintan Walton:
Yeah, look I think company's like to be a little bit realistic too. The processing of that financing was half the share price two-years ago when the product was in Phase II, so I think there are tremendous bargains to be had in the current market.
Fintan Walton:
Right. And that's always evaluation issue?
Brigitte Smith:
Right.
Fintan Walton:
Which is always part of the enjoyment in negotiating such deals?
Brigitte Smith:
That's right.
The basis for investments overseas.
Fintan Walton:
But when we come back to your venture funds and so forth you've also had investments in companies of overseas and what's the basis for investments overseas?
Brigitte Smith:
So we look for companies were they are doing either in licensing Australian or New Zealand technology or they have some substantial operations which are usually clinical operations in Australia and New Zealand because Australia is good place to do first amend studies and so US syndicate partners sometimes approach us and so we want to do first amend studies in Australia do you want be the party on the ground that supports the company and invests.
Fintan Walton:
Right.
Brigitte Smith:
And more usually we have Australian technology and we think this company is gonna make more than the Australian market can provide so we syndicated with offshore investors.
Fintan Walton:
And an example of that would be the Kalobios an investment that you've got?
Brigitte Smith:
Right.
Fintan Walton:
And you sit on the board of that company in California?
Brigitte Smith:
Yeah usually we, whether it's in Australia or US entity [ph]we usually an active investor and we sit on the board?
Fintan Walton:
Right.
Brigitte Smith:
Across our portfolio.
Fintan Walton:
And the other thing that you did personally recently was you spend some time in California what was the reason with that?
Brigitte Smith:
There were two parts, one was personal I wanted to take my family and live in California and see what that was like. My parent -- my children think that I go to America to buy pajamas for them.
Fintan Walton:
Okay.
Brigitte Smith:
So I thought they just needed to understand it would be better.
Fintan Walton:
Okay.
Brigitte Smith:
But really it was learning how the US ventures space worked by out of the US venture firm and have a bit more inside than I would get by flying across for quarterly board meetings.
Fintan Walton:
Right. And as we just talked about Peplin bringing, getting investors come in out from overseas into Australia co investing you just have a syndicated financing round is that becoming more popular or was that more difficult to do?
Fintan Walton:
It's becoming more popular definitely. So we've always tried to syndicate our investments offshore and I think probably 10-years ago in late 1990's people would just say where is Australia? What you are talking about? And now we've done four, five deals with the number of the parties that we syndicate with and they're quite receptive and their tolerance for the Australian flavor is increasing all the time so all to start it doing an investment in a company that was Delaware incorporated that we are a investor with Australian technology and they've moved to actually invest in the Australian public entities which -- so they are taking on the Australian public market, the Australian legal frame work.
Fintan Walton:
They are getting a taste?
Brigitte Smith:
Yeah. So, so just getting more comfortable and familiar with the market.
Fintan Walton:
Right.
Brigitte Smith:
So that was Chemgenex which was last year.
Fintan Walton:
Okay. The other thing of course looking at in the general scene for venture capital here in Australia number of people have tried to raise funds from overseas trying to get those off the ground here and they have been unsuccessful do you think that will ever be a possibility for companies like yourself to do that?
Brigitte Smith:
I think if the market went as earlier it was as it is at the moment that we might have been successful in raising money from offshore for this fund, yeah. But markets are pulling back in, the reason the Australian dollars tilt [ph] is because everybody thinks that it's less safe than the US dollar and so I think the current environments are really hard place to be raising money offshore for venture capital funds but it might improve as things normalize and we just we don't know what the normalization is gonna look like yet.
Cutler report and the concept of Grants, Loans and debt financing within Australian biotech industry
Fintan Walton:
Yeah, yeah. And we come on to the biotech scene here in Australia in a moment. But before we do that this is the cutler report which was part of the government initiative to look at innovation there are couple there are many aspects in that particular report but I wanted to get your reaction to some of the recommendations from that one is the concept of grants and in the form of loans into biotech companies?
Brigitte Smith:
They are loans rather than grants.
Brigitte Smith:
Well they are grants yeah they are actually are the loans effectively dressed up as grants so are we- our investors will likely to like that or not? Those are concern that with biotech companies having debt on their debt liability on their balance sheet may become they may become less attractive to investors? What's your view on that?
Brigitte Smith:
I think it's great having another source of capital. I think it will depend on the fund printed [ph] associated with getting those concessional loans but I think it's really attractive it will depend on the size. What strings are attached to them? What interest rate is attached to them? If any but there is absolutely nothing wrong with paying back government sponsorship. The government doesn't own biotech companies that much of a hand up but I think being out to secure the debt at the right time and get through with clinical trial is great.
Fintan Walton:
Right. And obviously in the United States and debt financing in biotech is much more common than here in the Australia?
Brigitte Smith:
Yes. So probably 70% or 80% of ours, of our US assets have debt facilities in place, so it's absolutely common place. Which is somewhat surprising, I think to some people in Australia but it it's quite normal in that place [ph].
Brigitte Smith:
But it comes from a private sources of debt, not -
Brigitte Smith:
Yeah.
Fintan Walton:
Not from government?
Brigitte Smith:
No absolutely right. So it's Silicon Valley Bank. There are a whole lot of debt providers who work hand-in-hand with the venture industry and yeah.
Fintan Walton:
Right. So then moving into the biotech
Brigitte Smith:
And we don't have that here, which is why the government filling in that gap is probably a smart thing to do.
Fintan Walton:
Right, okay.
Brigitte Smith:
Sorry.
Darwinian Economy will develop the Australian biotech industry
Fintan Walton:
No that's fine. And what we like to talk about next is the biotech industry here in Australia, clearsly it's not just only in Australia that there are tough times for biotech. In Europe and US the IPO markets basically dried up. But when we look at biotech here in Australia we've obviously got the markets of time [ph] as you said the Aussie dollar is going down. What's your view of what's going to happen in biotech here in Australia over the next year?
Brigitte Smith:
That will be pretty Darwinian I think so there are more than a 120 listed biotech companies and some of the biotech analysts do a survival index of those companies and there are lots of them that have less than six months of cash. So there is not going to be a lot of opportunities to raise cash in the next six months, I think most people would agree so, so they'll either get bolt or they'll get wound up and I think the number of companies will drop at the bottom end. But at the top end of the market most companies actually have pretty good cash reserves that will save them through 12 to 18 months of operations. And you know there are good companies in Australian market now that have good late stage clinical assets and that's a different picture than we had five-years ago in Australia, so
Fintan Walton:
Right.
Brigitte Smith:
So I think those companies will be able to raise money perhaps on more challenging terms than in the past but you now expect them to do well and for the sector to continue to mature and actually have some products that are being sold quite soon.
Fintan Walton:
So what is your behavior going to be likely over the next year. Are you going to solely invest in companies that you have already invested in and do follow through?
Brigitte Smith:
Absolutely not, no.
Fintan Walton:
Now you still going to look for new investments?
Brigitte Smith:
Yeah and new fund has been raised to invest in new investments. So we are looking to invest in 10 to 15 investments over the next two to three-years.
Fintan Walton:
And this would be on a what a seed level or ?
Brigitte Smith:
No right through, right through. So Peplin is the first investment of that fund and that's quite an advanced company. Elastagen is a seed deal straight out of the University of Sydney and the other was Nuon with was the series bay investment. But for the most parts our investors don't want us to invest one fund in another funds investments because there are all sort of conflicts of interest, so we are actually actively looking for new investments at present.
Fintan Walton:
Right. Now as you said earlier there is going to be a lot of companies running out of cash, are we going to see acquisitions taking place?
Brigitte Smith:
Everybody has been talking about there being a lots of acquisitions in Australia for a long time and they haven't happened yet, so maybe this pressure will cause that to occur. But would be better if acquisitions happen not when people were financially stripped and desperate but because there are good idea.
Fintan Walton:
But that's also the question is whether people are driven
Brigitte Smith:
Yeah.
Fintan Walton:
To do acquisitions because the price is low usually
Brigitte Smith:
Okay, yeah sure.
Fintan Walton:
In this space it's going to be good technology, it's going to be good innovation and they are usually well funded anyway?
Brigitte Smith:
Sure, okay. So acquisitions by the pharma industry.
Fintan Walton:
Yeah.
Brigitte Smith:
Yes. So I am waiting to see but I would anticipate that the values are a lot better than they have been for several years and the assets are more advanced so that should be much more compiling than it has been in the past.
Fintan Walton:
So that the healthy companies are more likely to be acquired than the ones that are being starved for cash?
Brigitte Smith:
I think so, yeah.
Future look of Australian biotech industry
Fintan Walton:
Right. And so as you've just said you've been in this industry for many years as an investor in 2008 and looking out into 2009, 2010. What's your view? Do you think the what's going to happen to the Australian biotech industry over the next two, three years?
Brigitte Smith:
Not a lot of new companies getting founded, I think. But the but there are strong companies that exist will get there. I think now Chemgenex, Sunshine Heart, Pharmaxis a lot of companies are gonna make it through in the next few years, get to revenues or get to really in advance stage and the industry would be a much more mature industry than it has been in the past.
Fintan Walton:
But is it going to be, is it going to be a dramatic change over the next year?
Brigitte Smith:
Yes.
Fintan Walton:
I mean, because always it's changing.
Brigitte Smith:
A lot of the little companies are going to die, I think that's the
Fintan Walton:
The bottom line base?
Brigitte Smith:
That's the bottom line, yeah.
Fintan Walton:
Okay. Well thank you very much indeed for coming on the show.
Brigitte Smith:
What a happy night.
Brigitte Smith
Founder and Managing Director
Brigitte Smith, founder and Managing Director of GBS Venture Partners Ltd, has fifteen years experience in venture capital, business strategy and start-up company operations. Brigitte Smith has been investing and managing investments for GBS' $400million of life science specialized venture capital funds for the last nine years. GBS is Australasia'a leading life science venture capital group. The GBS team has completed more than 30 medical device and life science investments over the last eight years. Brigitte Smith is on the board of GBS portfolio companies, Applied Physiology Pty Ltd, Cortical Pty Ltd, Dynamic Hearing Pty Ltd, Kalobios Inc, Neuromonics Pty Ltd, Proacta Therapeutics Inc., Tivamed Inc. Prior to founding GBSBrigitte Smith worked in the US and Australia in operating roles with early stage technology based companies, and at Bain & Company as a strategic management consultant. Ms Brigitte Smith has a Bachelor of Chemical Engineering (Honours) from the University of Melbourne, a Master of Business Administration (Honours) from the Harvard Business School and a Master of International Relations from the Fletcher School of Law and Diplomacy, both in Boston, USA. Ms Brigitte Smith is also an adjunct lecturer in Entrepreneurial Finance at the Melbourne Business School.
GBS Venture Partners Ltd
GBS Venture Partners is a leading life science venture capital group resulting from a November 2002 management buyout of Rothschild Bioscience Managers Limited from NM Rothschild & Sons (Aust) Ltd. GBS invests in and adds value to unlisted high growth companies involved in innovative technologies such as human therapeutics and diagnostics, animal therapeutics and diagnostics, medical devices, health information technology, agribusiness and food and environmental technology. GBS invests at the seed, start-up or early expansion stage of company development. The company manages four funds The Australian Bioscience Trust - a $42.5 million fund raised in October 1998 under the Australian Federal Government's Innovation Investment Fund (IIF) program; GBS Bioventures II - a $64.5 million fund raised in July 2001; The Genesis Fund - a $30 million fund raised in October 2002 under the Australian Federal Government's Pre-Seed Fund (PSF) program; GBSBioventures III a $150 million fund raised in April 2005. It uses these and other funds under management to make a significant commitment to building life science based companies based on Australasian technology. The GBS team has been investing in Australasia since 1996 and played founding roles in companies with a combined market capitalization of more than $1 billion.