submission on biomedical discussion paper 3aug16

JOHN HINE AND ASSOCIATES PTY LTDwww.developqld.net.au

SUBMISSION

QLD BIOMEDICAL AND LIFE SCIENCES 10 YEAR ROADMAP

3 August 2016

Summary

While Qld now has significant R&D expertise in biomedical science, and good commercial outcomes, it is hard to see a satisfactory return on the more than $1B investment in R&D compared to that which might be seen from investment in other growth areas, especially IT.

The good progress on commercialising research should continue but significant effort should be made to seek long term R&D contracts with large international companies. Trade and Investment Qld should actively support the development of such long term R&D contracts. R&D is now an internationally traded service.

A study should be undertaken into how the careers develop of the large number of young people doing PhDs in biomedical science. There are a number of stories about young people finding it very hard to obtain work back in Australia after doing post-doctoral work overseas. Encouraging our brightest young people to do study with limited job opportunities in Australia is of concern.

A fundamental question that needs to be considered is that, given the difficulties of commercialising biomedical research, why do we spend so much money in this area. A far better return on investment may be in spending money on other areas such as information technology. The IT company Atlassian had a market capitalisation of $8B after 10 years, the biomedical company CSL took nearly 100 years to achieve this. A key here is the considerable difference in the cost of proof of concept in IT as against biomedical science.

A linked approach to veterinary medicines should be considered in parallel with biomedical opportunities.

General Issues

The Minister’s Press Release of 26 June 2016 said that the Government was asking what was needed for Qld’s multi-billion dollar biomedical and life sciences sector to become a world leader in 10 years.

While this is a worthy goal, it is suggested that Qld can never be a world leader in the biomedical and life sciences sector.

Qld has far too small a research and a commercial sector for this to ever happen, despite the obvious quality of the research being done. The scale of the R&D facilities in other nations is far greater than in Qld.

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However, on a return on investment basis it would be hard to justify any new R&D facilities unless there are significant long term R&D contracts involved.

Developing sectors such as the pharmaceutical industry need to be done in the context of a long term national policy to develop knowledge based industries of all kinds. The lack of such a long term policy in Australia has been quite detrimental.

Australia’s long term balance of payments deficit needs to be addressed as a matter of urgency. Our annual balance of payments deficit is approx. $80B and our net foreign debt arising from our sustained balance of payments deficits is now over $1 trillion. Additional sources of exports are urgently needed and knowledge based exports must surely be part of the solution.

However, it is strongly suggested that knowledge based exports need not be based only on commercialising new technology and indeed will mostly NOT be based on commercialising new technology. We should not ignore the substantial exports of knowledge found in companies such as Domino’s Pizza, where a Brisbane company owns the master franchise for not only Australia but New Zealand, France, Belgium, the Netherlands, Germany, Japan and Monaco, and Genesis Care, which sells medical treatment skills internationally.

Specific Comments

Question One

A good way to understand how well each of the public sector R&D groups is going is to ask each to do an annual profit and loss statement and a balance sheet of assets and liabilities.

Question Two

The Vision is adequate but it is hard to see the biomedical sector generating high export returns, in both overseas R&D contracts and returns from commercialised research. Australia lacks the business skills required and does not have the venture capital markets for the high cost of proof of concept.

Question Three

Business skills and access to finance are certainly key issues but tight regulation will always be needed for the biomedical industries.

Probably the most significant thing that the Qld Government can do is to develop a wide ranging program of business skills, to cover all industries, to go from high school onwards and aiming wider than traditional qualifications.

The lack of capital for such industries is seen in the biomedical company Genesis Care, which is Brisbane based but has many cancer and cardiac care clinics internationally. This company currently has the US equity capital firm KKR as a major shareholder and KKR is about to sell its shareholding, probably to a Chinese company. If Australian capital markets will not invest in such a company, which has a lower risk that commercialising a new pharmaceutical or treatment system, then it will be very difficult to get capital for such higher risk and much longer term projects.



Question Four

While Qld has excellent research strengths, our relative lack of business skills and limited capital markets will be a problem for some time.

Page 10 0f the Discussion Paper notes that the University of Qld and QUT have good record in patenting research outcomes and that the QIMR has a good citation rate for its research papers. These are good indicators of research quality but in reality say little about commercialisation possibilities. Most patents are not exploited for a range of reasons.

It may even be that our complementary medicines sector has greater commercial prospects given the demand for such products in Asia, the lower cost to bring such products to market, our capacity to deliver consistent quality and the lower cost of manufacture.

Question Five.

No comment.

Question Six

No comment, other than to pose the question put above in why does Australia spend so much money on biomedical research when our return on investment is relatively low and it is so hard to commercialise such research here.

Question Seven

Given that business skills and capital availability are a limiting factor, it is hard to justify any new R&D facilities at this stage unless significant overseas R&D contracts are in hand. It is stressed that overseas R&D contracts are the key, not just Australian Government grants, as important as these are. The key is export income.

Question Eight

The experiences of past start-ups are that;

Business skills are critical. Capital availability is an on-going challenge. An investigation, with the Australian and other State Governments, into why Australian superannuation funds

are so reluctant to invest in venture capital would be useful.

Question Nine

The R&D tax incentive is critical for not only attracting and retaining companies within Australia but in encouraging and assisting in innovation generally within Australian companies.

The frequent changes to the R&D tax incentive upon changes of government do little to encourage a longer term commitment to innovation. Much innovation in Qld is based on exploiting an identified market gap, often using existing technologies in a new way, but this still takes time and capital to implement. Building the skills internally within companies to undertake innovation takes time and such skilled staff needs to be retained. Stop-start government innovation programs disrupt such company development.



Such stop-start approaches to innovation policy and programs also can lead to loss of skills within government as people find their career path blocked and they look for career opportunities elsewhere. It is suggested that this issue is important in the Australian and Qld Governments due to staff shedding policies of previous governments.

The periodic reduction in the value of R&D tax incentives also discouraged venture capital development.

Question Ten

The AIM patent box concept would seem to be relevant for Australia.

Two issues are also relevant for the development of any company seeking to develop complex products for the world market. These are;

The need for relevant industry support infrastructure. To a large extent this is missing in Australia for the pharmaceutical sector. This may be less so with biomedical devices, which draw on manufacturing support infrastructure in engineering and electronics, which presumably happens with companies such as Cook Medical and Cochlear, which have Brisbane facilities. In pharmaceutical manufacturing, two examples illustrate the importance of such infrastructure, namely;

o The Gardasil vaccine, which was developed in Brisbane but is manufactured by CSL in Melbourne. CSL has spent a century developing its support infrastructure in Melbourne.

o CSL is commercialising a new haemophilia treatment product in Switzerland. Australia’s relatively high corporate tax rate was cited as one reason but another may be the greater pharmaceutical industry support infrastructure available in Switzerland, which has several large pharmaceutical companies and even Nestle, which has sophisticated manufacturing facilities. This decision by CSL to commercialise this new product in Switzerland was made despite CSL having developed its production facilities in Melbourne for 100 years.

The difficulty of small companies developing the infrastructure needed for international sales and product support and in attracting the capital needed for substantial growth. A Qld illustration of the difficulty here is seen in the company Toft (orAusToft), which made sugar cane harvesters in Bundaberg. This established locally and was twice bought out by international companies and twice had a Qld management buyout. It is suggested that the difficulty was growing large enough and becoming diversified enough to support an international sales and support system. Finally the company was bought out by the FIAT group and its facilities are now in Brazil, where the sugar cane harvester market is much larger than in Qld.

Question Eleven

Given the difficulties for many sectors in Australia in attracting institutional investment, particularly from superannuation funds, it may be useful to look at the regulations surrounding such funds to see if these affect investment decisions.

Australian agriculture struggles to attract investment from within Australia but there are several pension funds from Europe and North America that have invested in agriculture in Australia. One pension fund for Quebec has invested some $30 M in an agricultural R&D facility in Melbourne, which is surely a long term, high risk investment. The international interest suggests that Australian agriculture is worthy of investment despite the lack of Australian institutional investment.

The Brisbane based company Genesis Care operates cancer, cardiac and sleep treatment clinics and has operations in 150 locations internationally. This is (presumably) offering state of the art medical treatment and not commercialising new products or services. It does undertake clinical trials. As reported in the Weekend Australian of July 23-24 2016, this company will soon be 50% owned by China Resources, as its current equity partner, the US equity investor KKR is selling its share. If a company offering established



services, and not commercialising new technology, struggles to find Australian capital, then companies with business proposals with much higher risk are likely to find it even harder to attract Australian capital.

It may also be that the relatively attractive tax concessions for lower risk property investment in Australia distort investment flows away from higher risk sectors. This is an Australian Government issue but the Qld Government could consider using the COAG process to raise the issue.

Question 12

In terms of barriers to success, issues that can reasonably be addressed by government are;

Creating a climate for change as part of building an entrepreneurial culture. Australia’s development as a resources base for Britain, and our high level of natural resources, has inhibited the development of knowledge based industries. Given the rate of technology change, and how markets are rapidly changing as people identify and use information technology to exploit new opportunities, developing such a culture is critical. The rapid acceptance of Airbnb and Uber in Australia shows that consumers will take up such new services. We need a commercial environment that encourages Australian companies to develop such new services. This is starting but needs to be further developed with urgency.

Business skills. This issue arises time and again and is one that can be addressed relatively easily. These programs need to be as broad as possible, start at high school, be available for people who may be displaced by technical and market change and also be targeted at university staff and students, especially those in engineering and science faculties. Programs need to be delivered by a range of mechanisms and service delivery groups and include entrepreneurial skills. Skills programs should not just focus on traditional qualifications eg diplomas, degrees and MBAs.

The regulations affecting superannuation funds in Australia. Issues here were outlined in the response to Question Eleven, above.

The range of issues affecting the commercialisation of biomedical research is outlined well on pages 21 and 22 in the Discussion Paper. Business skills, capital availability and supporting manufacturing infrastructure are important. This begs the question as to why Australia spends so much money on biomedical research as commercialisation is so difficult.

Question Thirteen

No comment.

Question Fourteen

I have no personal experiences in accessing capital.

Regarding raising capital;

Comments have been made above on reviewing the regulations affecting Australian superannuation funds.

A long term bi-partisan policy to support innovation may well lead to more venture capital being available. There are three aspects here;

o Lack of long term government policy support tends to discourage people and businesses from investing in an area. A current example is renewable energy.

o Start-ups may find it hard to attract capital if they lack the business skills required. A longer term policy on innovation should lead to improved business skills amongst entrepreneurs



o Australia’s long term focus on property and mining investment may have resulted in our institutional and personal investors, including banks, lacking the skills to assess and manage investment in businesses based on intellectual property rather than land or mineral deposits. A sustained government policy on innovation and knowledge based industries may lead to the development of relevant skills in our investing community.

Question Fifteen

Regarding university and industry links;

The current situation has arisen as Australia modelled its universities on those in the UK. Universities in the UK arose out of the Church and to attend Oxford or Cambridge University in the 19 th Century a person had to be an Anglican. University College London was founded in 1826 to allow non-Anglicans (ie Catholics, Baptists, Methodists etc) to go to University. This excessively traditional approach led our universities to be less involved with industry as might have been. For example, the leading nuclear physicist Rutherford at the Cavendish Laboratory at Cambridge in the 1920s and 1930s took the view that the best students should stay at university while the lesser skilled students should go to industry. A significant percentage of those winning Chairs in Physics in Australia in the past would have come from the Cavendish laboratory and these would likely have brought this attitude with them. The PhD research degree was developed in the USA and British universities only adopted the PhD when they found their best students were going to the USA.

University academic staff have traditionally been assessed based on papers published in refereed journals and numbers of postgraduate students, not industry links. It is understood that plans are in hand to develop industry links indicators to operate in parallel with the traditional indicators. These new industry-linked indicators need to be developed as a matter of priority. A whole cultural change is needed in our universities.

Question 16

It is very hard to see that Qld can build scale in the biomedical industries in the short to medium term.

Mechanisms include;

Working with the other States and the Australian Government on a long term policy on innovation.

Developing business skills in the wider population and especially in university staff and graduates and especially post-graduates.

Fostering venture capital availability, as discussed above.

Developing geographically broad urban precincts around our research hubs. A recent US study, Amazing Place: six cities using the new recipe for urban development, see http://www.smartgrowthamerica.org/. Smart Growth America advocates smart urban development, using concepts such as liveability, walkable urban space and good public transport linked with good skills development as a key investment attraction tool. Such smart urban development would foster knowledge based industries in general, not just biomedical industries. The report gives good evidence that policies used earlier such as tax breaks and subsidies are less effective. The proposed Herston Health Precinct could be developed within a broader urban development precinct concept to include the suburbs of Herston and Kelvin Grove and perhaps surrounding suburbs such as Paddington, Newstead, Fortitude Valley, New Farm etc. Areas surrounding other R&D facilities could be considered for further broader urban precincts

Questions 17 and 18

These characters of a successful health precinct are set out in the Amazing Place report cited above.



http://www.smartgrowthamerica.org/

Long term government bi-partisan support for innovation is likely to be a major issue. If such support is not evident, companies may not invest.

It is suspected that amenity is as relevant as land availability in such precincts.

Working with the other States and the Australian Government on reforming tax incentives for property investment, and so reducing upwards pressure on land prices in such precincts, is worth considering. Such tax reform may also spur investment in sectors other than property.

Question 19

The biomedical sector can be promoted by the same means by which it is being promoted currently, ie using conferences and direct marketing. Investment conferences as well as scientific conferences should be used.

At the same time, we need to make sure we have the right supporting policy environment, business skills, a culture for change, tax systems, urban development etc.

Question 20

There are a number of intermediate performance measures but the ultimate and only really meaningful measure is export income.

Export income can come from a range of sources;

Sale of biomedical products. Long term research contracts from overseas groups, either companies or government agencies. Overseas students. Sale of sophisticated healthcare services eg those provided by Genesis Care etc that have evolved linked to our

research efforts. This could extend to IVF services, pathology services, organ transplant technology, heart surgery, spinal and brain surgery and other sophisticated areas of medicine.

Wider consulting services relevant to the biomedical industries eg quality assurance consulting and third party auditing, staff training, intellectual property protection, design and management of clinical trials, design of laboratories etc. We need to think laterally here, and not only measure these areas but actively develop and promote them.

Australia could offer to cooperate with governments of other nations on the design and implementation of regulatory systems for the wider medical and pharmaceutical area. Australia and New Zealand cooperate in using joint food safety standards. At one stage, the Government of Singapore had approached Australia re a similar arrangement in, it is thought, pharmaceutical regulations. The key here is the level of complexity involved given the sophistication of the science involved and not duplicating effort. There is no suggestion that the Government of Singapore lacks the skills involved. This comment is based on sharing resources when governments are facing resource constraints.

Question 21

No further issues are suggested.

Question 22

The one thing that the Qld Government could do to assist the development of the biomedical sector is a wide ranging program of business skills development.

Such a program would have benefits well beyond the biomedical sector.



submission on biomedical discussion paper 3aug16

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