Brandon Capital breaks even in biotech milestone
October 5, 2017
A milestone for Australia’s life sciences venture capital industry will be achieved this month when the dozen members of Brandon Capital’s investment team receive their first profit share cheque, a decade after the manager formed.
A staged payment from one of Brandon’s most successful seed investments – Spinifex Pharmaceuticals, maker of a chronic pain treatment and that was sold to Novartis for $US700 million in 2015 – was responsible for the manager’s second fund, the $40 million Brandon Biosciences Fund 1 of 2008, returning all investors’ money and surpassing the 10-year government bond rate on its returned capital, thus triggering the profit.
“I feel like we’ve built a business now, we’ve actually achieved the objective of a funds manager,” according to co-managing director Stephen Thompson, who founded Brandon alongside fellow scientist-turned-commercialiser Chris Nave in July 2007.
“It was a small cheque but a historic moment for our firm, to be able to ring all our staff and say ‘your share is on its way’.”
The distribution of surpluses to Brandon’s institutional investors was also important, Mr Thompson told The Australian Financial Review, as proof that the local life sciences industry was “coming of age” as an investible asset class.
There is a lot of money betting that Brandon and its fellow seed-stage investors in life sciences, like Uniseed and IP Group, can live up to their funds’ targeted returns, which in Brandon’s case is 20 per cent annualised after fees.
Of the $2 billion raised in the renaissance for Australian venture capital since March 2015, $700 million has gone to life sciences and $400 million to Brandon itself, as early backers like Australian Super, HESTA, Hostplus and SA’s Statewide Super doubled down.
These returning investors allowed Brandon to get the most matched funds from the federal government for its Biomedical Translation Fund, which is focused on drugs and medical devices at the clinical trial stage.
“After scratching around for a decade with $100 million at most, we can hardly complain about capital at the moment,” Mr Thompson said.
Of the 22 companies Brandon backed with that first $100 million between 2007 and 2013, only eight still survive. Mr Thompson expected some bigger write-offs than the $1-2 million average booked for each failure to date, as the four not either sold or with a product already in market were in the clinical trial stage.
“So we’re ready for a couple of bloody noses, but that’s the game. Clinical trials have a binary outcome and our investors understand that,” he said.
Mr Thompson was confident there were enough promising patents locally on which to deploy Brandon’s fourfold increase in funds under management.
The local life sciences industry had reached a scale where it was able to support more jobs than previously, he said.
For instance, one of the two companies in Brandon’s portfolio to have a product on the market in the US, Global Kinetics with its smartwatch for monitoring Parkinson’s disease, has 30 of its 45 total headcount based in Melbourne.
Meanwhile Vaxxas, which is in clinical trials for its “nanopatch” replacement for needle-and-syringe vaccinations, employs all 35 of its staff in Brisbane.
This contrasts with Brandon’s two earliest and most successful exits, Spinifex Pharmaceuticals and scar tissue therapy maker Fibrotech, which are now US and Irish companies respectively and never employed more than a handful of Australians full time.
“Given the funding available at the time, we had to build those up leanly and virtually, so lots of contracted research groups and the like, both here and offshore,” Mr Thompson said.
Despite the lack of permanent employment benefit, both deals represented significant capital inflows for Australia. For example, the sale of Fibrotech to Ireland’s Shire Group in 2014 reaped $US75 million up front for major direct investors including Brandon, Uniseed and Australian Super, with potentially $US400 million more of milestone payments to come.
Having done it for 10 years, Mr Thompson said Australia was capable of translating more of its university research into commercial ventures, but argued that government grants awarded by the National Health and Medical Research Council and Accelerating Commercialisation could be better targeted.
“Once you attract venture capital in Australia, your grant funding as an academic gets a lot tougher.
“There seems to be a view that ‘you’ve got this truckload of money, we don’t need to support you any more’, right at the point where we need them back in the lab working on the next thing.”
Brandon advised the academics it worked with to never give up a tenured position, Mr Thompson said, but rather apply for a leave of absence while they helped get their patent past the research-proving stage.
“Once it gets into the development stage, we tell them they’ll want to be back in the lab, because development is really boring.
“It’s really a lot of forms in triplicate and sticking by rigid rules set out by the regulators.”
The Australian Financial Review
5 October 2017