Australasian Biotechnology (backfiles) AusBiotech ISSN: 1036-7128 Vol. 8, Num. 5, 1998

Australasian Biotechnology,
Volume 8 Number 5, September/October 1998, pp. 280-288

Innovation by Australian Biotechnology Companies

Lyndal Thorburn, Macquarie University, c/- PO Box 629, Queanbeyan NSW 2620

Australia has followed the US pattern in that small startup firms have been commonly used as a vehicle for commercialisation of biotechnology. Little is known, however, about Australia's dedicated biotech companies (DBCs), defined as companies whose main activity involves research, development or application of new biotechnologies (Fayle and Playne 1993). This is partly because biotechnology is not counted separately in Australia's industrial classification scheme (ANZSIC) and partly because the companies are small and generally have a low profile.

This paper reports on part of a study which has traced the activity of these companies as a group. It draws on a 1996 survey of 60 DBCs to present information on their location, target industry sectors, R&D activities and external sources of innovation. The latter are classified by type of input, location and type of linkage.

This study of DBCs commenced in 1995 as part of a PhD research program. Fifty seven companies whose main focus of activity involved R&D in, or sale of products and services derived from, new biotechnologies were interviewed out of an initial list of 75 companies, the latter derived in part from the 1993 Australian and New Zealand Biotechnology Directory (Playne and Arnold 1993)², supplemented by informal sources. The full list of 75 companies approached for the study is at Attachment A.

Identification of biotechnology companies (and those in other technology-based sectors) poses some difficulties in that there are many reasons why a company may be established as a separate legal entity. These include reduction of risk for parent corporations (including isolation of intellectual property), a desire to gain access to grants, concessions, or equity investment, or a need to obtain Australian company status if the parent corporation is based overseas. The existence of a legal entity which also has at least one employee is the usual criterion used by the Australian Bureau of Statistics and the Australian Securities Commission.

In the case of high tech, however, "virtual companies" are becoming more common. This means that a company with few or no staff may have a large turnover and substantial R&D performed on its behalf, but without operating its own laboratories. This may be true of spinoff companies in particular, where intellectual property is held in a company in order to attract investment and the company may not become truly active for some years. It is difficult, therefore, to make a priori decisions about the "validity" of any particular company. In the case of the list at Attachment A, four companies had no employees at the time of interview. Their inclusion was validated on the grounds that all were spinoffs from university research where the nascent company was expected to grow and employ people once its research program had developed further.

Respondents were interviewed in mid 1996. Data on three other companies which refused an interview, but on which some information is available because of their status as public companies, was included where possible, so the final database totals 60 companies. Respondents were questioned about the genesis of their company, R&D, sources of innovation, and other issues.

Since these interviews, a more complete picture of the growth of Australia's DBCs has been developed. The paper deals first with the rise and fall of DBCs to the present day, drawing on a database that is current to July 1998. It then returns to the sample described above and uses the interviews conducted in 1996 to analyse some indicators of innovation and R&D activity.

Modern biotechnology industry in Australia was spawned in the early 1970's when our first true biotechnology companies were established in Melbourne, and groups within the CSIRO and universities began to bring back biotechnology techniques from the USA and Europe.

A total of 164 DBC startups have been identified. The earliest of these is a company which was set up in 1966 (but it did not move into biotechnology for a decade after its establishment). The pattern of startups appears to follow the general trend of the economy, with a peak in the boom period of the mid 1980s followed by a decline after the 1987 stockmarket crash and subsequent economic slowdown (Fig 1). This same trend has been observed in stock exchange listings of technology-based companies over this period (Andrews 1998).

Growth in DBCs has been particularly strong since 1995: since that time 42 new biotechnology companies have been established. This is one quarter of all known startups, and many are in newer fields such as bio-engineering, cosmetics, genomics, bioinformatics and diagnostic services.

Spinoffs from research institutions form a significant proportion of all startups, averaging over 40% of the population over time. This is a higher rate than reported in many European and US studies of biotechnology or high tech startups (Haug 1995) (Smilor 1988) but the research spinoff rate in Australia has been maintained or is even rising, in comparison to overseas where companies now create more of the new biotech startups.

The role of the research sector in spawning such spinoffs varies between States (Figure 2). While universities have been sources of biotech companies across Australia, CSIRO has played a role in only four States, an issue linked to the location of CSIRO's biotechnology-related laboratories. Hospitals have also varied in their roles. They have been a significant source of companies in South Australia, but have played no role at all in WA.

CRCs have produced biotechnology spinoffs, to date, only in NSW and Queensland, despite almost half the existing CRCs using biotechnology within their research programs. (Calculated from 1996 CRC Compendium and Addendum listing 5th Round Centres (n=67).) Biotechnology programs were identified from the compendium's summary of research focus and areas of research expertise. There is no standardised list of terms used by the CRCs to describe their programs but those which indicated use of biotechnological techniques included "genetic engineering", "biological control", "gene technology", "gene transfer", "vaccine development", "genetics", "biotechnology" etc. These CRCs cover 4 of the 6 industry sectors listed in the compendium.The recent Mercer review of the CRC program noted that the propensity to use spinoffs as a mechanism of commercial output by CRCs varied with the role and focus of "users" (industry or other core participants) (Mercer 1998).

By taking a series of snapshots at different years the locations by State of extant (still existing) companies in each of four years can be analysed and the trends determined (Fig 3). These figures cannot be compared directly with analyses published in 1993 (Fayle and Playne 1993) because the latter drew data from a broader base of companies including laboratory suppliers, consultants and producer services, as well as large conglomerates only peripherally involved in biotechnology. Nevertheless, both surveys demonstrate the strength of Sydney and Melbourne as key locations and confirms the general geographic pattern of dispersion across the States. Over this period the number of extant companies has grown, from 25 in 1983 to 71 in 1988, 87 in 1993 and 132 in mid 1998.

While NSW and Victoria were on equal footing in 1983 with 28% of extant firms each, NSW has remained ahead since that time and now has 34% of current stock. Despite a recent flurry of startups Queensland has declined, in percentage terms, over the period from 20% of extant firms to 17%, on par with Victoria's current share. In Queensland's case, however, the main drop was from 1983 to 1988 and this State's percentage share has been rising since then. WA's share has declined slightly from 16% to 14% of extant firms, while SA has risen from 8% to 10% of total extant stock. ACT and Tasmania remain insignificant.

The pattern of DBCs correlates closely to major population centres, with only 17 of 164 DBCs located outside major capital cities (10%). Those in rural areas are usually working in agriculture-based biotechnology or biologicals and require large land areas for keeping animals or crop development. Those in major cities are generally within 30-45 minutes drive of the city centre.

This pattern is quite different to many US and European centres where biotech companies are located on the periphery of large urban centres, in secondary cities or in specialised biotechnology science parks eg the Ile de France (Scott 1988) and Maryland on the outskirts of Washington DC (Feigenbaum 1993). In the UK there are almost no biotech companies in London itself but secondary cities such as Oxford and Cambridge in England and the area between Edinburgh and Glasgow in Scotland are the main centres for biotechnology (Oakey 1985).

Table 1: Extant companies by Sector

Table 1 groups companies according to target industry sector. It shows that Australian biotech companies are heavily orientated towards human therapeutics, diagnostics and biologicals, defined as production of small molecules, peptides and monoclonal antibodies which are often sold into the research market. Many of these large companies operate in several markets and are listed as "multiple sector" on the accompanying table. These three areas have been identified as the strongest sectors in other studies of Australian biotechnology (Fayle and Playne 1993).

Plant agriculture includes plant breeding, crop protection, and production of bacteria for silage etc. Animal biotechnology is equally broad and includes animal breeding, animal therapeutics and animal vaccines. Australia's environmental biotech companies are also service-based eg bioprocessing of waste. Emerging areas, unlisted in other Australian studies but highlighted overseas (Lee 1997; Muller 1997; Morrison 1998), include diagnostic services based on new technologies (eg AMBRI Pty Ltd ), genomics, bioinformatics and combinatorial chemistry ("platform technologies").

The analysis now focuses on the sample of 60 companies interviewed in 1996. These companies employed 3,638 staff, an average of 60 per company. This figure is skewed by one very large company: the median staff per company was 17 staff (Fig 3). These figures indicate the Australian DBCs are much smaller than those in the US or Europe, which report average company sizes of 230 and 105 respectively in 1996 (Lucas 1996).

The survey examined the processes DBCs used to develop new products and services. It included, therefore, companies which were still in R&D phase. One fifth of the Australian sample was in R&D phase and had no trading products.

The numbers of R&D as a percentage of total staff was used as a proxy measure of innovation within the company. Levels of R&D are a useful indicator because they can be compared between sectors, are known to be high in high tech sectors, and correlate well with the numbers of high level technical staff employed in companies (Haug 1986).

The average R&D for 54 companies in the sample was 31.2% but this varied markedly according to the DBCs' target sectors (Table 2). Other studies have reported strong correlations between negative cash flow and high R&D budget(Mischlewski 1992), a situation which was confirmed in this study, at least in terms of percent of R&D staff.

Table 2: R&D Rates of DBCs in Sample, by Sector

There did not appear, however, to be any consistent relationship between age of company and percent of R&D, level of exports and percent of R&D, or turnover and percent of R&D.

These rates appear low when compared to biotech companies overseas during the same period eg in the US in 1995-1996 , biotech companies as a group spent 60% of revenue on R&D (Lee 1995), whereas European biotech companies allocated 52% of turnover on R&D (Lucas 1995). The difference could be due to the small size of most Australian companies and the general lack of finance for high tech sectors in Australia (NIC 1995; Thorburn 1998).

Forty of the 60 surveyed companies responded to a question regarding the amount of R&D performed by the company in-house, as a proportion of total innovative activity. On average, these companies performed 68% of R&D in-house, meaning that 32% of R&D activity was outsourced.

Respondents were asked to rate the value of all sources of technology on a Likert scale of 1 to 7, where 1 indicated that the source was relatively unimportant in relation to obtaining new technology, and 7 indicated that it was critically important as a source of new technology. This and subsequent questions sought to determine the type of input purchased with R&D dollars. Inputs included licensed intellectual property, contract or collaborative research, technology exchange agreements etc. Sources of new technology given a top ranking of 6 or 7 (a "high ranking") by respondents were then graphed against source to indicate relative importance of the latter (Figure 4). Internal company R&D was ranked the highest, with 32 of the 40 (80%) of companies giving this activity a high rating. This is almost twice the rate reported in the 1993 biotechnology survey (Fayle and Playne 1993) but this may be explained by the broader base of the latter.

Fifty seven companies then detailed the type of organisation providing this technology. Australian universities were nominated by 14 percent of respondents, followed by parent companies (12%) and CSIRO (9%). Overseas R&D institutions and companies ranked more highly than other Australian companies and CRCs.

These results reinforce the close alignment of biotechnology with the research system and its characterisation as a science-based industry (Pavitt 1984). It also shows the strength of Australian links: of all external links (excluding parental links which have not been classified by location) over two thirds are with Australian institutions.

The lack of links with CRCs deserves further examination and comparison with other industry sectors. It could arise because of the small number of industry partners in CRCs as a group and the dominance of large companies as these partners.

The Mercer Review lists only 50 industry partners across the whole program (Mercer 1998, Table B8). Alternatively, the links with overseas R&D institutions could be important because of the global and highly specialised technical nature of biotechnology.

Another question asked about location of sources of R&D. Of the 57 respondents to this question, 40 (70%) used sources in the same city. Twenty four (42%) used sources in other Australian cities, and 14 (25%) used R&D institutions overseas. Sixty six percent of respondents stated that they chose these R&D sources in order to access specialised skills, whereas 23% relied on parental expertise (wherever it was located) and only 24% stated that their choice was dominated by proximity of the source. These findings are in line with other research which points to the global nature of biotechnology's strategic alliances (Hagedoorn 1993) and explains the reasons for choosing overseas R&D institutions and companies as sources of innovation.

Finally, 763 formal linkages between the 60 DBCs and other organisations (an average of 12.7 links per respondent) were mapped. Formal linkages were defined as those involving a legal agreement. The numbers of linkages were much higher than those reported by other Australian companies. A 1994 study found that 30% of manufacturing firms had only one formal co-operative arrangement, 46% had 2-4 arrangements and 24% had 5-10 arrangements, excluding multiple customer-supplier relationships (BIE 1995)10. There is evidence that larger DBCs tend to have more external linkages, a finding that is in line with overseas research (Hagedoorn 1994).

These responses were then classified by type of link (Fig. 5). The most common type of linkage (33%) is collaborative R&D, followed by contract R&D which forms 25% of arrangements, and in-licensing (22%). The remaining categories were relatively minor, with joint ventures forming 7%, technology exchange agreements 6%, purchase of other companies (in order to acquire technology) 4%, and information or equipment access the remainder. These findings are broadly in line with international studies of strategic alliances, which find that collaborative and contractual technological alliances dominate in high tech industries and that joint ventures rate relatively lowly in comparison (Hagedoorn 1995).

This paper provides only a brief overview of DBCs in Australia, yet it reveals that there may be some significant differences between Australian developments and those overseas. Firstly, the DBC population is probably more concentrated in major cities than counterparts in the UK, Europe and the USA, with Sydney and Melbourne hosting the majority of companies. This is probably due to the overall geographic pattern of settlement in Australia but the stronger role, in relative terms, played by major research organisations in creating Australia's DBCs may also be significant. Areas of economic activity, however, reflect worldwide patterns.

Australia's DBCs appear to be up to ten times smaller than biotech companies in the USA and Europe, and their rates of R&D are lower. External innovation linkages, however, are high when compared to other Australian companies and rely heavily on other players in the Australian innovation system, particularly those in the same city. Further research is defining the exact nature of these linkages and whether there are any sectoral or geographic differences.

The findings thus far, however, raise questions about the best way to support these activities within government policy frameworks. Areas that could be examined in this context include the support for the continuing role of the research system in both spawning new companies and providing R&D support once they have been established; the role of proximity in the light of past experience with science parks and new interest in incubators; the role of the CRC program, given that it has developed such prominence in overall S&T policy; mechanisms for assisting the growth of these very small companies, bearing in mind they are competing with biotech companies ten times their size in an international market; and limitations of the R&D tax concession's "Australian content" requirement.

List of 75 DBCs approached to participate in industry survey in 1996 (in alphabetical order)

AGEN Biomedical Limited

AMBRI Pty Ltd

Amgen Australia

AMRAD Australia Limited

Animal Resources Centre

Applied Biotechnology Limited

Auspep Pty Ltd

Betatene Ltd

Bio-Care Technology Pty Limited

Bio Nova International Pty Ltd

Bioclone Australia Pty Ltd

Biomolecular Research Institute

Biopharm Australia

Bioquest

Biota Holdings Ltd

Biotech Australia

Biotech Corporation, The

Biotech International Ltd

Biowest Australia

Bloomfresh Pty Ltd

Bresatec Ltd

Burbank Biotechnology Pty Ltd

Cellabs Pty Ltd

Chiron Mimotopes Pty Ltd

Cortecs International

CSL Limited

DNALABS

Earth Pty Ltd

Environmental Biotech

Florigene Pty Ltd

ForBio Ltd

Forensic Science Centre (SA)

Fort Dodge Australia (then Cyanamid Webster)

FuCell Pty Ltd

Gene Link Ltd

Gene Shears Pty Ltd

GeneCo

Genesearch Pty Ltd

Genetic Consulting and Testing

Genetic Technologies Corporation Pty Ltd

GroPep Pty Ltd

Hyal Pharmaceutical Australia Pty Ltd

ICT Diagnostics

Ilexus Pty Ltd

Immuno Diagnostics

In Vitro Laboratory Pty Ltd

Insulin Mimetics Pty Ltd

JCU Tropical Biotechnology Pty Ltd

Johnson and Johnson Research Pty Ltd

Mason Enzymes Pty Ltd

Medical Innovations Ltd

Medical Resources Ltd

Medvet Science Pty Ltd

Megazyme Australia Pty Ltd

Microbial Products Pty Ltd

Microtech Laboratories Pty Ltd

Moregate Exports Pty Ltd

National Diagnostic Products Pty Ltd

Nerang Biotechnology Pty Ltd

Novogen Ltd (then Norvet)

Oncomed Pty Ltd

PanBio Pty Ltd

Peptide Delivery Systems Pty Ltd

Peptide Technology Limited

Progen Industries Ltd

Saramane Pty Ltd

Silbase Scientific Services

Silenus Laboratories

Southern Cross Biotech Pty Ltd

Southern Cross Laboratories (Maxwell Chemicals P/L)

Technico Pty Ltd

Trace Scientific Pty Ltd

Vaccine Technologies

Western Biotechnology Ltd

Virax Pty Ltd

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The author would like to acknowledge the assistance of Dr John Langdale, PhD supervisor, School of Earth Sciences, Macquarie University in planning this research. Thanks are also due to the biotech companies which responded to the survey and to Dr Martin Playne who provided many useful comments on an earlier draft of this paper.

Lyndal Thorburn is a PhD student at Macquarie University. She is researching innovation in Australian biotechnology companies and the effects of Government policies, finance sources and the role of research institutions. She is also Director of Advance Consulting & Evaluation Pty Ltd; ph 02 6297 2438; fax 02 6297 2203; email advance@cyberone.com.au

Copyright 1998 Australian Biotechnology Association Ltd.

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