Australia’s Biotech Problem: Great Science, Someone Else’s Profit

The gap in Australian biotech is not science, talent or early-stage capital — it is the several hundred million dollars required to run a phase three clinical trial. Almost no Australian investor base will fund that, so companies reaching the point where their asset becomes genuinely valuable must sell it or partner it away, and the majority of the value accrues to whoever funds the final stage. This article examines why, and what would change it.

Why is Australian research so strong?

Because of sustained public investment in a small number of high-quality institutions. Australian universities and independent medical research institutes have produced globally significant work in immunology, cancer biology, genomics and vaccine science, funded principally through competitive public grants rather than commercial sponsorship.

The clinical trial environment reinforces it. Australia offers experienced investigators, well-organised hospital networks, ethics approval processes that are efficient by international standards, and costs materially below the United States. Global pharmaceutical companies routinely conduct early-phase trials in Australia for those reasons alone.

The research and development tax incentive is the financial mechanism that converts this into company formation. Because the offset is refundable, a pre-revenue biotech receives cash back on eligible expenditure rather than a credit against tax it does not pay, which functions as substantial non-dilutive funding during exactly the period when equity is most expensive.

Why does the value leave?

Because late-stage development requires capital at a scale Australian markets do not supply. A phase three trial for a significant therapeutic indication costs hundreds of millions of dollars, runs for years, and carries binary risk — the drug works or it does not. Very few investors anywhere fund that, and almost none of them are Australian.

The rational response for a company holding a promising asset is therefore to partner or sell at the point where the risk-adjusted value is highest relative to the capital required, which is typically after phase two data. The acquiring company funds the expensive stage and captures the majority of the eventual value, which is a fair exchange for the risk it assumes.

The aggregate consequence is that Australia consistently converts public research investment into commercial value realised elsewhere. That is not a failure of the companies involved, who generally make the correct decision individually, and it is a structural feature of an ecosystem lacking the capital pool to fund the final stage.

What did CSL, Cochlear and ResMed do differently?

They built manufacturing and distribution rather than licensing technology away, and they took decades to do it. CSL acquired plasma fractionation capacity internationally and built a collection network; Cochlear and ResMed established regulatory approvals, clinical evidence and sales infrastructure across the United States, Europe and Asia themselves.

Each had a structural advantage that made this possible. CSL began with an existing government-built manufacturing base and a privatisation that provided scale from day one. Cochlear commercialised a device rather than a drug, which requires far less capital to reach market than a therapeutic. ResMed addressed a very large patient population with a consumable business model that funded its own expansion.

The common factor is that none of them needed to fund a phase three pharmaceutical trial from an Australian balance sheet. That is the specific barrier, and the Australian companies that became global did so by pursuing paths that avoided it — which suggests where the next generation is most likely to emerge.

What would actually change the outcome?

Late-stage capital, from the one pool large enough to supply it. Australian superannuation funds hold more than A$4 trillion and allocate very little to domestic life sciences, largely because the asset class requires specialist assessment capability and the individual investments are small relative to fund size. Closing that gap is the single change that would most alter the trajectory.

Sovereign co-investment vehicles are the mechanism most frequently proposed, pooling public and institutional capital to fund late-stage development in exchange for a share of returns. Several jurisdictions operate versions, and the design difficulty is avoiding a fund that either crowds out private capital or funds assets private capital correctly declined.

Manufacturing capability is the other lever. Australia has limited domestic capacity to manufacture advanced therapeutics at commercial scale, which means even a successful local company must manufacture offshore. Building that capacity is expensive, slow and strategically valuable — a lesson the pandemic taught expensively and which policy attention has followed. The broader ecosystem question is examined in our analysis of Australian startups and venture capital.

What about medical technology rather than drugs?

It is a considerably better fit for Australian conditions, and the track record supports that. A medical device reaches market for a fraction of the capital a therapeutic requires, the regulatory pathway is shorter, and the development risk is engineering rather than biological – meaning failures are usually fixable rather than terminal.

Cochlear and ResMed both demonstrate the point. Neither needed to fund a phase three pharmaceutical trial, both could iterate their products after launch, and both built businesses on recurring revenue from an installed base rather than on patent-protected exclusivity with a defined expiry.

Digital health and diagnostics sit in the same category. Software-based clinical tools, imaging analysis and diagnostic platforms require regulatory approval and clinical validation without the capital intensity of drug development, and Australia’s clinical research infrastructure supports generating the evidence. If a second generation of globally significant Australian health companies emerges, this is the most probable source.

One structural point that receives less attention than it deserves: the people. Australia trains excellent clinical and laboratory scientists and has historically had limited domestic career paths for them in industry, which means a substantial number build careers overseas. That outflow costs more than the intellectual property does, because a researcher who leaves takes not only their expertise but the companies they would have founded and the people they would have trained. Retaining that cohort requires industry jobs at scale, which requires companies large enough to employ them – which is the same circularity the capital gap produces.

How does Australia compare internationally?

Strong on research output per capita and weak on commercialisation, a combination shared with several comparable countries. The United Kingdom and Canada have faced almost identical criticism for decades – excellent publicly funded science, insufficient domestic late-stage capital, and value captured by American and increasingly Asian acquirers.

The United States is the outlier rather than the norm, and its advantage is a deep pool of specialist investors, an enormous domestic market that pays higher prices, and a concentration of pharmaceutical companies able to acquire assets at any stage. Trying to replicate that in a market of 27 million people is not a realistic policy objective.

The more useful comparison is with countries that built specific niches. Denmark, Switzerland and Israel each developed globally significant life sciences positions from small populations by concentrating on particular capabilities rather than attempting full-spectrum competition. That is the achievable version for Australia, and it argues for depth in medical technology, diagnostics and clinical trial services rather than breadth across all of biotechnology.

What would a realistic strategy look like?

Concentration rather than breadth. Australia cannot fund full-spectrum pharmaceutical development, and attempting to means spreading limited capital across many assets that each need more than is available. Selecting a small number of areas where the country has genuine advantage – clinical trial services, medical devices, diagnostics, particular therapeutic niches – produces better returns per dollar.

Late-stage capital is the other half, and it requires institutional participation rather than government grants. A co-investment structure that gives superannuation funds exposure to a diversified portfolio of late-stage assets, managed by specialists, addresses both the capability gap and the position-size problem that keeps large funds out of the sector.

Manufacturing capability is the third element and the one with strategic as well as commercial value. A country that can develop a therapeutic and not manufacture it depends on offshore capacity in exactly the circumstances – a pandemic, a supply disruption, a geopolitical dispute – when that capacity is least available. That argument became considerably harder to dismiss after 2020.

One encouraging development worth recording: the pattern of Australian founders returning after building companies overseas has become considerably more common than it was a decade ago. Operators who spent years in American or European biotech and then established companies in Melbourne, Sydney or Brisbane bring exactly the late-stage development experience the ecosystem lacks. That is the same mechanism that transformed Australian software after Atlassian, and it operates on a longer timescale in life sciences because the development cycles themselves are longer.

For founders specifically, the practical advice is to decide early which business you are building. A company designed to be acquired after phase two should optimise for the data package an acquirer will value and should not build commercial infrastructure it will never use. A company intending to commercialise independently must plan the capital pathway from the outset, which usually means a device, diagnostic or digital product rather than a therapeutic. Companies that leave this decision until the capital runs out find it has been made for them, on worse terms.

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