PERTH, Australia – Australia’s largest life science investment fund is pressing the government for an urgent COVID-19 response package to support the country’s AU$170 billion (US$117 billion) life sciences sector that is struggling to survive in a post-COVID-19 ecosystem.
Although Australia has come out of the COVID-19 pandemic with only 102 deaths, and many have praised the government’s response, in hindsight “the lockdown was too severe and the economic consequence too far reaching,” Brandon Capital’s founding partner and managing director, Chris Nave, told BioWorld. Brandon Capital’s later-stage portfolio companies have been seriously impacted, he said, and even global companies that are trying to sell into hospitals have been decimated. Clinical-stage companies in phase II or phase III saw their programs ground to a halt.
“The consequence of that is that you have a large team hired to run your phase III programs, and all of sudden, they just couldn’t do their jobs. And, it was unclear when we would be able to start those programs again, so we had to move swiftly, and we had to cut staff really deeply to preserve the cash that those companies had in the hope that when the COVID cloud clears, we could re-hire everyone.”
This is where the government program missed the innovation sector, he said, because some companies had to lay off 50% of their workforce, and they were ineligible for the government programs because they weren’t earning revenue, even though they couldn’t run their core business.
“We’re trying to make sure the government considers the innovation community in its next wave of Jobkeeper.”
Legislation was passed by the Australian government in April for the Jobkeeper payment that was part of an AU$130 billion package to help businesses keep people in their jobs and restart when the crisis is over. Employer eligibility for a business with a turnover of less than AU$1 billion is for those whose turnover has fallen by more than 30% for at least a month.
“The Jobkeeper scheme was a terrific announcement, and everyone was hopeful that it would enable those companies that can’t continue with their clinical trials to hibernate or preserve their cash but keep their skills intact,” Ausbiotech CEO Lorraine Chiroiu said.
The program was seen as a lifeline of sorts, but then came the realization that the criteria required a drop in revenue, and the “vast majority of our biotechs don’t have revenue.”
In fact, 86% of Australia’s biotechs are pre-revenue, she said. “We’re looking for a different treatment of biotech companies to allow for that.”
Ausbiotech is seeking a class ruling on the Jobkeeper payment scheme to provide the certainty that biotech companies need to continue to advance.
“It’s quite a juxtaposition for the government to be talking about the new economy and new job creation and the contribution that innovation can make to that, but at the same time they’re not creating programs to help those companies survive,” Nave said.
With the majority of the county’s biotech and med-tech companies not eligible for the Jobkeeper wage subsidy, coupled with vital investment capital rapidly drying up, R&D companies are in trouble and many will struggle to survive the current crisis without access to government support, Nave said.
Lifeline needed now
“While I’m confident this is not a deliberate omission by the government, biotechnology is a unique sector and therefore requires a unique response,” Nave said. “If a lifeline is extended quickly, the sector will be in a position to deliver on its potential of providing significant wealth and medical benefits to Australia in the years after this crisis has passed.”
The investor community expects high-net-worth investors will leave innovation in the short term, he said, as people move to safe harbors to protect what they have.
“With the retreat of capital from the high-risk sectors, we’re telling government that it needs to become a co-investor alongside the capital that is still going into the market. This is exactly what the U.K. government has done,” he said.
The government should also fast track R&D tax incentive (RDTI) payments for the 2019-2020 financial year or provide quarterly installments based on projections from July 2020, Nave said.
Under the scheme, which provides a 43.5% rebate for R&D investment by businesses with a turnover of less than AU$20 million, companies must have pre-registered R&D activities for this year that are offset in their annual tax returns for the year ending June 30. Most companies will not receive the cash rebate for this year until October to December, or early 2021, which is too long to wait for cash-strapped companies.
The life sciences industry is urging the government to scrap the controversial legislative changes to the RDTI agreed in the April 2019 Federal Budget that would cut AU$1.35 billion to the program and were due to be passed into law before June 30.
“Capital availability is going to be a major challenge for innovation industries over the next six to 12 months, and uncertainty around pillar programs like the RDTI further erodes investment confidence,” Nave said.
“For the next six to 12 months it’s going to be challenging for biotech and all innovation companies to raise capital from their traditional sources – superfunds, venture capital, private equity and high-net-worth individuals – as all have experienced financial challenges due to COVID-19,” Nave said.
To overcome that short-term credit crunch, government-backed capital should be used to bridge the funding gap and access capital from the Medical Research Future Fund (MRFF) and RDTI scheme, he said.
Nave pointed to CSL Ltd., Australia’s largest biotech company, which overtook The Commonwealth Bank and BHP, the world's largest mining company, to become Australia’s most valuable company earlier this year.
“While this was a watershed moment for Australia and shows a vision of what biotech can deliver, it’s important to remember that CSL is over 100 years old and it is 26 years since it was publicly listed,” Nave said.
“It takes decades to build a global biotechnology company and it is often well over a decade before a biotech is generating revenue.
“In our current situation, we could see promising companies on the same path as CSL lost for good due to a short-term liquidity crisis at the expense of future job and wealth creation. This would be an absolute tragedy for the nation.”
As an investor, Brandon Capital is firstly focused on protecting the companies in its portfolio, Nave said. It is also looking at those companies in its portfolio to see if there are other short-term strategies that they could pivot on to shorten their runways.
Nave said his team is also looking at opportunities to invest in, realizing that this crisis could also present some attractive opportunities.
Last year, 161 life science companies were listed on Australia’s Securities Exchange (ASX) with a combined market cap of roughly AU$170 billion, employing just under 250,000 Australians.