The 2009 Thredbo summit graphically illustrated why strategy is becoming increasingly more valuable to Australian Biotech’s than the technology upon which these firms were based.

This takeout from the weekend’s stimulating conversations and presentations gives us great heart that the sector has never been stronger or better positioned for a period of sustained growth.

Further, despite the growing weight of clinical evidence that continues to support the technology diligently developed over the last decade, shareholders should take great comfort that the management teams, more than the technology, more than the strength of the IP, more than the depth of the capital backing, can be the major reason for a growing sense of confidence in the Australian Biotech industry.

The Altitude with Attitude

So hold on, you say, strategy more valuable than technology? Did Thredbo’s altitude impair his thinking?

Ultimately, a technology is only really monetised when you place it in the hands of a customer. It’s only then that you work out whether or not it’s worth anything. Sure, you can do some wonderfully clever things by monetising your efforts in developing it to a certain stage. But it all hinges on the notion that someone, somewhere, will generate a massive return when it is placed in the customers hands. And that assumes a couple of things, that, a) you have customers, and b) you can put your technology in their hands.

Companies must actively engage with these potential customers, be they patients, physicians or even the big pharma you intend licensing to. By this we mean you must assess and validate whether or not these same customers want the product, will use it, will continue to use it and will pay for it. Only by doing so and providing cogent evidence to support this can you reasonably claim a value for your technology.

Often the market hears spurious claims about the potential market share a new technology will grab when it enters a market. Just because a market exists, does not mean you can access it. An existing market exists only for existing technology. An existing market is also owned by someone who has invested heavily to create and grow it, and will invest heavily to protect it. Claiming that your technology has a potential market share in someone else’s market without engaging with the end users is like claiming a clinical outcome without undertaking any clinical work.

The Exubera lesson

What became extremely clear in the clean mountain air of Thredbo is that Australia’s leading organisations are increasingly engaging with their end users and value chains to better understand the critical issues that drive acceptance and adoption of their technology. In other words, whether or not their technology has real value.

However just asking patients whether they want a new technology is never enough.

Gary Phillips of Pharmaxis took us through the well publicised Exubera case study. Exubera was Pfizer’s attempt to fill the blockbuster hole in their portfolio with an inhaled insulin product. As was pointed out, Pfizer more than likely undertook extensive research of the market to understand whether or not their technology would be accepted. However, as in any clinical setting, it is the question which is all important not necessarily the answer.

In hindsight Pfizer realised that the reason for the lack of acceptance had more to do with the way the product would be used and how this impacted the Physicians’ business rather than the technology itself. An issue highlight by Pfizer Vice President Ian Read in 2007 “The resistance from physicians and patients to going on to insulin any earlier than they might have done previously was seen as a particular hindrance to the uptake of Exubera, coupled with the burden the Exubera technology represented to the practice, in terms of lung function testing, training with the device as well as the size of the inhaler itself.”

This understanding of how your technology impacts the other ‘jobs’ both the physician and the patients are trying to get done is what Pharmaxis with their cystic fibrosis product Bronchitol™ and Acrux with their testosterone replacement device Axiron™ have sought to understand.

More importantly, it is how these two companies have responded to this that should provide investors with great confidence in the respective management teams and the strategies they are employing.

By ensuring a strong market orientation, both organisations have been able to add a powerful strategic element to their clinical development, product and device design and create compelling ‘Go-to-market’ strategies. In other words, market orientation has allowed both businesses to create powerful propositions to their markets and mitigate their market risk. By doing so they have gone some way to avoiding the problems Pfizer encountered.

The value is in the problem, not the solution.

Josh Hofheimer from Hexima and Jackie Fairley from Starpharma illustrated that market orientation does not only mean a focus on the end user, but includes strong appreciation of the needs of the marketing partner. This direction has the potential to be a huge boon for the Biotech sector.

StarPharma identified that SSL – one of the world’s largest manufacturers of condoms - would be able to create a long term competitive advantage by coating their condoms in the VivaGel® product. The job – of active product/brand portfolio management - is a critical issue facing all large consumer facing companies. Starpharma were able to provide a patented point of difference. In the world of Fast Moving Consumer Goods, that is as rare as hens teeth, and the subsequent value created has the potential to be significant for both partners.

Hexima , too, has focused on developing a deeper understanding of the challenges, or important jobs, their marketing partner, Dupont, faces. This focus on developing technologies that address some of Dupont’s high value important ‘jobs’ – dealing with margin control and yield - has not only resulted in some exciting revenue opportunities but also created a licensing outcome that many Biotech’s can only dream of. Not only have Hexima dropped the traditional ‘transactional’ licensing model of here’s my product, where’s my cheque, they have created a scenario where they are now an integral partner in Dupont’s Agribusiness offering.

Innovation in a time of crisis

Mark Morrison from Universal Biosensors, in a confronting and challenging session, raised the topic of the rising cost by the US health system, and indeed, health systems across the globe. The implications for the entire sector are immense. What happens when societies and economies can no longer afford to continue to subsidise the pharmaceutical sector? What then?

While this crisis will threaten the viability of many biotechs and pharmas globally, it is also opening the door for organisations with disruptive strategies. These are companies who not only develop breakthrough technology, but whose technology allow them to rip cost and time out of existing processes within the health system – from patients, right back through to the lab.

Labtech’s Lusia Guthrie illustrated just how compelling this opportunity can be. Labtech’s strategy of identifying processes with the pathology lab environment that are time consuming, costly and cumbersome and responding to this with an automated solution illustrated the power of market orientation. Not only is Labtech providing a compelling solution to a problem the lab technician experiences, more importantly, they provide a compelling solution to the Lab’s Chief Financial Officer (the buyer) who is seeking ways to improve productivity and protect margins in a sector under increasing price pressure.

As a result of this focus Labtech has now built a unique capability in solving problems within a defined market - a market that will continue to look to it for solutions to its key problems.

Welcome to the Renaissance

Thredbo 2009 illustrated that this sector has reached a fascinating inflection point. By building a capability in understanding the needs of their markets and bringing to bear the right technical and scientific expertise, Australian biotech’s are building a truly sustainable and compelling story; for investors, for customers, and for those who continue to sink their hearts and souls into this industry.

One of the more cogent comments we heard over the course of the weekend occurred right at the very end. A well respected and experienced delegate commented, “You know I used to think we were a bunch of very bright people who were so obsessed by how brilliant we were that we were all doomed to fail; but over this weekend I’ve heard some of the most amazing stories, not about how smart we are, but about how good we are at listening to what the problems are.”

If nothing else, market orientation ensures you listen. More importantly, it has the potential to then describe that problem with a common language; one that the customer defines, the investor understands and which can guide the strategies and activities of all those seeking to solve it.

Thredbo 2009 could signify a new chapter in the Aus Biotech sector. One where the emerging stars of this sector cogently demonstrate that the most effective way of commercialising a technology is to keep the problem it seeks to solve front of mind.

Michael Johnson.