Evaluating R&D deals of Australian human health biotechnology companies.

<p><b>Background and Motivation</b></p> <p>The discovery of the human DNA structure in the 1950s and subsequent advances in biological sciences paved the way for modern biotechnology. It enabled the use of human and non-human biological systems to develop targeted biological therapeutics, such as insulin, monoclonal antibodies, gene therapies and many others.</p> <p>With government-backed world-class academic scientific research and a well-developed economic and regulatory environment, Australia presents favourable conditions for the biotechnology industry. However, the performance of the country’s human health biotechnology sector does not reflect this. Most biotechnology companies are small-tomedium-size enterprises (SMEs) that struggle constantly because they do not have any revenue-generating products in the market. The sector is also characterised by poor private capital investment, and the biotechnology SMEs often face product development failures that affect their performance.</p> <p>The complex and expensive process of therapeutics research and development (R&D) requires complementary skills, technologies and organisational abilities beyond the capabilities of most biotechnology SMEs. To navigate these challenges, they seek various strategic alliances or ‘R&D deals’, such as licensing, merger or acquisition, research collaborations, development partnerships or manufacturing agreements with various entities to access the necessary resources and capabilities, or to commercialise their R&D assets. This research examined the various R&D deals undertaken by selected publicly listed (public) development-stage biotechnology companies based in Australia, and evaluated how these deals affected their financial stock market performance (stock price movements). The aim was to identify optimal value-enhancing R&D deals.</p> <p><b>Research Question and Methodology</b></p> <p>The primary research question was:</p> <p><i>How do the R&D deals undertaken by Australia’s human health-focused development-stage biotechnology companies affect their financial performance?</i></p> <p>This research investigated 21 selected Australian human health-focused development-stage biotechnology companies that develop biological and non-biological human therapeutics and/or biotechnology platforms that are used in drug discovery research, as drug delivery tools or in diagnostic assays. It took a conventional quantitative approach of market model regression analysis and hypothesis testing to evaluate the effects of 184 R&D deals executed by the selected public biotechnology companies (between 1 July 2004 and 1 March 2016) on their financial (stock market) performance. The approach followed an event study methodology whereby the R&D deals were incorporated into the market models as dummy variables to estimate how they triggered stock price changes (measured as deal-day abnormal returns and seven-day cumulative abnormal returns). R&D deals were categorised in relation to four attributes: deal subjects, deal types, deal partners’ organisational types and deal partners’ international locations. There were 20 deal categories under these four attributes:</p> <p>• <i>Deal subjects</i>—therapeutics, platform and business • <i>Deal types</i>—licensing, merger and acquisition (M&A), research collaboration, codevelopment and manufacturing • <i>Deal partners’ organisational types</i>—biotechnology, pharmaceutical, university, research institute, scientific service and other • <i>Deal partners’ international locations</i>—Australia, the United States (US), Europe, Canada, Asia and other regions.</p> <p><b>Research Findings and Their Implications</b></p> <p>The research also examined the financial stock market performance of the selected companies. The majority displayed poor stock market performance over the study period, mainly due to product development failures. In addition, the 2008 Global Financial Crisis (GFC) significantly affected their stock prices, as half of the companies did not recover from stock price declines during the GFC.</p> <p>The research also analysed the distribution of the R&D deals in relation to the four deal attributes outlined above. The deals included research collaborations, licensing deals (inlicensing and out-licensing), co-development partnerships, acquisition or sale of therapeutics or technology platform assets, merger or acquisition of business entities and contract manufacturing deals. At around 40%, licensing was the predominant deal type executed for the development and commercialisation of R&D assets. Among the various partner locations, the US was the dominant region, as over one-third of all R&D deals were signed with various USbased partners. Among the various deal partners, the largest number of deals were executed with similar development-stage biotechnology companies, and nearly half of these were licensing deals. However, the low ratio of deals with large pharmaceutical companies (only 16%) implies low value proposition for the R&D assets developed by the Australian biotechnology companies studied.</p> <p>The research found that different categories of R&D deals had varying effects on the stock market performance of the companies investigated. Among the 20 deal categories, 15 produced statistically significant (all positive) deal-day abnormal returns and seven of these also produced statistically significant (all positive) seven-day cumulative abnormal returns. Abnormal returns were not significant for the remaining deal categories. Among the deal categories, business M&A deals, deals with (large) pharmaceutical companies and deals with partners of Asian origin produced strong 8–9% deal-day abnormal returns and 1–2% sevenday cumulative abnormal returns. Although more deals were performed with biotechnology partners or with US-based partners, the effects of these deal categories were not as strong.</p> <p>These research findings have important implications for Australian development-stage biotechnology companies when they select appropriate R&D deals and deal partners for the development and commercialisation of their R&D assets. Business M&A deals with local biotechnology partners and licensing and co-development deals with large international pharmaceutical partners command strong value signals for the deal-making biotechnology companies. While this research found varying value effects for the international locations of R&D deal partners, these effects were more influenced by the types of deals or the organisational types of the deal partners than by the partners’ international locations. The comparable value effects between deals involving therapeutic assets and those involving technology platform assets suggest that the biotechnology companies need to maintain their focus on the development and commercialisation of therapeutic R&D assets leveraging their proprietary platform technologies.</p> <p>The most important contribution of this thesis is the insights it provides into the financial performance challenges faced by Australian human health-focused development-stage biotechnology companies. Further, it presents evidence for how selecting appropriate R&D deals and deal partners can empower companies to overcome performance challenges by enhancing their value.</p>