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Kangasmall

The “Long Tail” is premised on three main concepts:

1) That it’s a reasonable idea for Australian life sciences companies to tap the public markets early. In my opinion, this can be as early as a solid clinical proof-of-concept (biotech) or first revenues (medtech / services).  This is because the $s required and the horizon for a return-on-investment is challenging for individual private investors in Australia’s domestic investment climate. Public markets enable ownership to shift over time and, in Australia, the ASX has somewhat filled the “void” of venture capital.

2) That the ASX small-cap life sciences sector is a retail-driven ownership model that is intrinsically frothy and fickle – and therefore especially needs solid sources of digestible information. Not scientific gobbledygook, but benchmarks and analysis that doesn’t require a doctorate in biology. Without quality, objective coverage, public ownership of small cap stocks will never be a viable alternative to venture capital and the whole thing is doomed.

3) That the ASX continuous disclosure guidelines are largely abused by the life sciences sector, and particularly the small-cap segment. Punters need to know when information is perhaps not “misleading” (in the legal sense of  Listing Rules 3.1 and 3.1A and section 674 of the Corporations Act) but when it may or may not warrant a change in company valuation.


Australia could be a world leader in the commercialisation of life sciences, healthcare technologies/services and biopharma. Our universities are relatively good (a few are truly world-class), a number of research institutes “punch above their weight” in terms of international peer-reviewed publications and state/federal governments have spent $Bns not just on building fundamental infrastructure for health technologies, but ensuring that our clinical platforms are decent and capable of doing high quality translational research. To top it off, the Therapeutic Goods Administration (TGA) has taken some fairly pragmatic views on clinical proof-of-concept through the Clinical Trials Notification (CTN) scheme, and certain areas of clinical practice benefit from useful regulatory exceptions. A good example is physician-supervised cell therapies, except under the TGA’s 2011 Excluded Goods Order. Note that I have not focused on any specific government funding policies or incentive schemes here – they simply have too little consistency or commitment to warrant mention.

There are a lot of purported reasons why Australia’s “biotech economy” isn’t up to snuff. Market isolation and healthcare industry size is an often purported excuse. Yet this doesn’t really explain why early, high quality, clinical translation isn’t done here before perhaps heading overseas for the larger-scale clinical trials that are just not possible here. Many studies have been conducted that try to make comparators with places like California’s San Diego, but I am not sure that a city-based comparison (i.e. Melbourne) is all that useful except, perhaps, in understanding whether industry clustering has any meaningful impact. As an OECD country we are pretty much bottom of the pile in terms of a national science strategy, including driving STEM secondary education and higher-education reform.

All of these things impact our life sciences ecosystem but the biggest issue is, in my opinion, a lack of capital for early commercialisation. Australia’s venture capital (VC) landscape is virtually non-existent and is, on the whole (with few notable exceptions), poor quality. The lack of VC isn’t, in itself, necessarily a problem for “tech”. We have plenty of angels, high net-worth individuals and some reasonable early development grants. The challenge is that capital-intensive industries like biotechnology, clean tech and energy have financing needs that really go beyond even the deepest family office pockets. This is where the Australian Stock Exchange (ASX) becomes a little bit interesting.

The sector hasn't even performed that badly (Source: ASX Healthcare Sector Factsheet 2013)

The sector hasn’t even performed that badly, at least historically (Source: ASX Healthcare Sector Factsheet 2013)

The ASX is littered with small-cap tech companies, including over 100 firms classified as “healthcare equipment and services” or “Pharmaceuticals and Biotechnology” companies. A few of those companies, such as CSL, Cochlear, ResMed, Ansell and (possibly) Mesoblast are proper companies that have international traction and competitiveness. There are also some “up and coming” firms like Sirtex and pharma distribution leader Sigma that are reasonably investment worthy and kind of round-out the “mid cap” part of the sector. Once you get below the top 20 or so companies you are left in the “long tail” of the distribution with around 100 more companies that have an average market cap of ~$30m.

Hmmmm.

An illustration of the "long tail" of the ASX

An illustration of the “long tail” of the ASX

I used to think that this kind of an ultra micro-cap public market was kind of stupid. Many of these companies are “zombie” companies with weak corporate governance and stagnant boards, often with people who have no business sitting on the board of a public company. There is a lot of director incest.  Most of those small-cap life sciences and healthcare companies are poorly capitalised and struggle to meet valuation inflections that would enable them to raise further capital and lift their station. The worst part is that many of those companies are so dysfunctional that the management team has almost no incentive to perform except to collect a paycheck. They just sit there and slowly dissipate any value they may have. That’s not to say that these companies are all lousy or incapable of realising an ROI through the development of their product or service, but rather there is relatively little momentum in the sector to enable them to achieve it. I’ll get back to that in a minute.

However, if you take a 30,000 view of what the small-cap life sciences sector of the ASX really is, it’s about $5Bn worth of “public” venture capital alternative. Aussies love a bet – we spent $400m betting on the Melbourne Cup last year (not to mention the $1Bn we unintentionally “bet” by taking the time out to enjoy the fun). Annually, we spend about $20Bn on gambling and sports bets. There is plenty of money kicking around and we simply need to take a more flexible view of what VC really is – because we are not the US, we are Australia. According to AVCAL, the VC industry in Australia raised about $500m last year (though it should be noted that 2014 was an exceptional year), which is about $20 per capita. This is relatively low compared to the US (AUD $75/capita) and Israel (AUD $135/capita). But if you factor in that around another $Bn is either value traded or “new” money in the form of IPOs or secondary offerings for ASX-listed companies, it probably pushes the total “new venture” investment closer to $60/capita, actually not so far off the US. Of course, we simply don’t have the powerhouse large-cap segment of NASDAQ or NYSE, but that’s not the real consideration here. The real consideration is how to finance the most challenging early growth stages.

So actually, the ASX has great deal of potential, especially since a few hours on Hotcopper makes you appreciate that there are a lot of “punters” are there, completely clueless about the fundamentals of the stocks they are picking. This is especially true for healthcare and life sciences companies where a more content-rich and scientifically/clinically-grounded understanding is critical. Unlike other public markets, such as the US, the ASX really has no noteworthy coverage of life sciences equities. I would even go so far as to assert that the coverage that is available is rubbish at best. Generally coverage of ASX life sciences equities, particularly in biotech / pharma, utterly lack scientific merit, any useful comparators with international peers or a real understanding of what company disclosures actually mean. On the topic of disclosure the ASX continuous disclosure rules, in my opinion,  prejudice retail investors because management often utilise the breadth of the disclosure rules to publicise events that have, in fact, little commercial value but are interpreted as “commercially significant” by virtue of the use of the public disclosure mechanism.

In order for the ASX to really have momentum as a public alternative to venture capital, it needs to have objective and high-quality equity coverage in order to ensure that quality investments are more readily identifiable. We need to understand the “Long Tail” of the ASX and recognise what are the significant events, and what are not. That is the purpose of this website.

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