Uniseed: The First 20 Years (Part 3): Storming & Performing (2011-2015)

In June 2011, four further fund managers were invited by the Federal Government to establish IIF funds (Round 3, Tranche-3), with three of these closing $40M funds in 2012: MH Carnegie, MRCF and Southern Cross Venture Partners (SXVP). The MRCF and SXVP funds would later co-invest with Uniseed. 

In July 2011, a major boost was received with the introduction of the refundable R&D Tax Credit which provided a 45% cash rebate on eligible R&D for non-profitable companies with turnover below $20 million. This has proved to be the most beneficial scheme for Uniseed companies over the past 10 years, with nearly $60 million received in total.

Despite this, the limitations on ownership by tax exempt entities has meant that Uniseed’s seed stage investments are often ineligible for this funding. That is, in most seed investments the universities initially retain over 50% ownership of the start-up, which makes these companies ineligible for the tax credit. This is a little counter-intuitive considering it is these companies that need this type of incentive most given the higher risk and difficulty of raising funds.

Furthermore, Governments have continued to tweak the scheme – each time taking a little more away from the start-ups that need the funds. In July 2016, the rebate was arbitrarily cut to 43.5%. This small change was designed to give a major fiscal impact for the Government, but it also took away valuable funding from start-ups. The program is again under review with proposed legislation to cut it to 41%. There have been moves to pin this at 13.5% above the company tax rate. If the company tax rate continues to fall as planned, this will result in a rebate of just 38.5%. That’s a potential drop of 14.5% from the original rebate of 45%, which is a significant loss for start-ups.

Balancing the positive impact of the R&D Tax Credit in 2011 was a major change in the Uniseed fund membership that created some challenges. Uniseed’s superannuation fund partner Westscheme was taken over by the much larger super fund AustralianSuper (AusSuper). Westscheme had been a supportive and patient partner over the five years it had been in Uniseed and as a superannuation fund saw alternative assets such as venture capital as a strategic differentiator, taking a long-term view to this asset class. However, the GFC had ultimately created some issues for superannuation funds as publicly listed asset values (e.g. share prices of ASX-listed companies) dropped significantly after the GFC, while valuation of private companies based on the last round investment value remained static. This led to a significant over-weighting of alternate assets in Westscheme’s portfolio.

Australian Super took on Westscheme’s venture portfolio after the acquisition. It made sense for AusSuper to rationalise this portfolio as a number of their venture managers held shares in the same investments. There were also subsequent discussions, which didn’t eventuate, about merging Uniseed with another fund.

After the AusSuper acquisition of Westscheme, AusSuper’ Investment Manager Alistair McCredie replaced Paul Cheever as Observer at Uniseed Board and Investment Committee meetings, while Westscheme’s Board representative Winsome Hall stayed on as AusSuper’s Board representative. As Mr Cheever had put it, Westscheme had joined Uniseed based on “optionality”, but AustralianSuper declined to make any further direct follow-on investments into Uniseed companies. 

The period from 2011 to 2014 was probably the most difficult period in Uniseed’s history. Uniseed had been operating for 10 years without a "blockbuster" exit, though it was arguable that a seed fund may take longer than 10 years to reach this milestone. It had great companies in its portfolio, but some shareholders were beginning to question the long-term viability of the fund, and this had an impact on new investments during the period, as the focus shifted towards exits and returning funds to shareholders. Uniseed only made four investments from 2011-2015 (Smart Sparrow, Q-Sera, Nexgen Plants & OccuRx) relative to 15 investments made in the first five years of Fund-2’s operation over 2006-2010. As a consequence, over $6 million of the $40 million commitment to Fund-2 remained undrawn at the end of the Fund’s 10-year review period in 2015.

Over that period, two of Uniseed’s three Investment Managers left to join Uniseed investee companies and neither were replaced in an effort to keep management costs to a minimum. Richard Marshall became CEO of Tenasitech in November 2012, coinciding with a move to Boston, and David Rowe joined Smart Sparrow in March 2014. Both companies would go on to sell their IP to large multi-nationals in their respective industries.

In June 2012, a major disappointment was the U.S. F.D.A. issuing of a Complete Response Letter (CRL) to QRxPharma, rejecting the company’s New Drug Application. It was highly anticipated that the lower dose morphine-oxycodone combination product (MoxDuo), which had been shown to reduce side effects, would be approved, and that on approval the ASX share price would respond positively, allowing Uniseed to exit the investment in which it still held over 2,000,000 shares. In response to the CRL, the share price fell from around $2.00/share to 50 cents/share. QRxPharma resubmitted an amended NDA in 2013, but on 22 April 2014, the FDA’s Anesthetic and Analgesic Drug Products Advisory Committee voted 14-0 that MoxDuo should not be approved for the management of moderate to severe pain, with another CRL subsequently issued. This news drove the share price down to around five cents/share, and ultimately led to delisting of the company from the ASX in 2018, given that it did not make commercial sense to do more clinical trials due to the remaining patent life. There have been a number of contributing factors proposed, such as the combination product which was new territory for the FDA; the increasing political pressure on the FDA regarding opioid drugs; and the differences of opinion over what had been agreed between the FDA and the Company in terms of the trials and data needed. Ultimately, this failure led to a class action against the QRxPharma Board of Directors and certain advisors to the company, with a proposed settlement pending in the Federal Court of Australia this month. The QRx story demonstrates the inherent risk in investing in drug development and start-ups in general, as well as the importance of transparent reporting by publicly listed companies.

The QRxPharma news followed the disappointment in March 2014 that, after another change in Federal Government, the Commercialisation Australia program was suspended and corresponding grant applications in the system were cancelled. The CA program had provided $225 million in grant funding up to that time. Furthermore, it wasn’t until November the same year that the replacement program (Accelerating Commercialisation) was implemented, providing another large 7-month hole in the non-dilutive funding pool available to Australian start-ups.

The tide finally turned in May 2014, when Uniseed achieved its first blockbuster exit in the 9th year since the Commercialisation Fund (Fund-2) was started. Fibrotech Therapeutics, a company seeded by Uniseed and them supported throughout by Uniseed and Brandon Capital and led by Professor Darren Kelly from the University of Melbourne’s Department of Medicine at St. Vincent’s Hospital, was sold to Shire plc for US$75 million up-front and over US$480 million in contingent milestone payments. Fibrotech was developing a new class of drugs to prevent a massive health burden associated with fibrosis, and had completed a Phase 1 safety trial in healthy volunteers and patients with diabetic nephropathy (kidney disease). The up-front payment provided a significant capital return to Uniseed shareholders and on top of this, significant funds were returned to the University of Melbourne for its founder equity related to the intellectual property provided to start the company.

A year later, in June 2015, Uniseed achieved its second blockbuster exit, with Spinifex Pharmaceuticals sold to multinational pharmaceutical company Novartis for US$200 million up-front and US$500 million in contingent milestone payments (collectively an AU$1 billion deal). Significant cash was returned to Uniseed shareholders from the deal, with the University of Melbourne and University of Queensland also receiving a significant return from their direct investment (UQ/UoM) and founder equity (UQ).

Spinifex Pharmaceuticals was led by CEO Dr Tom McCarthy, while the technology was invented by Professor Maree Smith, who was Executive Director, Centre for Integrated Preclinical Drug Development (CIPDD) / TetraQ at the University of Queensland, with the assistance of Dr Bruce Wise from UQ, where they identified AT2 receptor antagonists as inhibitors of neuropathic pain in preclinical animal models. Phase 2 development of Spinifex’s lead drug candidate, EMA401, achieved a clinically meaningful and statistically significant reduction in pain caused by shingles (post herpetic neuralgia) with the results published in the prestigious journal The Lancet. Uniseed had supported the Company through every funding round.

Professor Smith was awarded the 2015 Johnson & Johnson AusBiotech Industry Leadership Award; the 2015 Australian Pain Society Distinguished Members Award; and was the inaugural inductee in the Life Sciences Queensland Hall of Fame. In 2019, Professor Smith was named a Companion of the Order of Australia.

Spinifex was followed by a third ‘blockbuster’ exit in September 2015, with Hatchtech’s human head lice technology sold to Dr Reddy’s Laboratories in a US$200 million deal which provided further cash returns to Uniseed shareholders and separately to the University of Melbourne through its founding equity and direct investment in the company. Particular credit needs to go to Founder, Inventor and Chief Scientific Officer, Associate Professor Vern Bowles at the University of Melbourne, and Hatchtech’s most recent CEO Hugh Alsop. For a detailed analysis of Hatchtech, see a previous LinkedIn article at https://www.dhirubhai.net/pulse/hatchtechs-20-year-journey-fda-approval-peter-devine/.

Also in September 2015, Uniseed investee ProGel Pty Ltd signed a license deal with Bega Bionutrients around the encapsulation of Beta Lactoferrin (Inferrin) which protects the protein from digestive enzymes. Lactoferrin facilitates a healthy immune and digestive system. At the time, ProGel received an up-front payment and would also receive royalties on future Inferrin sales. Earlier that year, ProGel had signed a license agreement relating to a novel probiotic drink, which was spun out as PERKii Pty Ltd, with initial funding secured in 2016. ProGel is based on technology developed by Professor Bhesh Bhandari, Dr Lai Tran and Dr Su Hung Ching at the University of Queensland, who developed a process for the encapsulation of high value additives small enough to remain undetectable by the consumer (improved stability, delivery and taste masking), whilst still being cost effective to the manufacturer of the ingredients. Cameron Turner is the CEO of ProGel.

Coinciding with the end of the Uniseed Fund-2, the mood in the innovation an investment sector changed for the better, with the Uniseed exits playing a major role in influencing this change. The Fibrotech, Spinifex and Hatchtech deals were awarded the “Best Early Stage Deal” of 2014, 2015 and 2016 respectively by the Australian Venture Capital Association Limited (AVCAL; now the Australian Investment Council AIC). These exits showed that university-generated start-ups could deliver significant returns, and validated Australian research in this regard. 

On top of the Uniseed exit deals, other Australian companies and research organisations reported large deals, such as ASX-listed Nanotech drug-delivery company Starpharma’s licensing deal with AstraZeneca worth more than $650 million in September 2015; Atlassian’s IPO on Nasdaq in December 2015 – the largest float from an Australian company on US markets; and UQ’s Protagonist Therapeutics raising $118 million in a Nasdaq listing in August 2016.

As a result, there was a groundswell of interest in university technology, innovation and entrepreneurship, and the mood of the Australian economy shifted positively in subsequent years. Entrepreneurship become fashionable, and some superannuation funds returned to support and make allocations to venture capital. Numerous large superannuation-backed venture funds were raised, with HostPlus Super being a major supporter. On top of this, new research organisation-focused funds were eventually set up in Australia, such as CSIRO’s Main Sequence Ventures backed initially by the Federal Government and the IP Group Australia backed by UK investors.

The Government also introduced specific programs to support the innovation and investment sector. In May 2014, the Medical Research Future Fund (MRFF) was established - AU$20 Billion Federal-Government fund to support medical research and innovation. The Biomedical Translation Bridge Program is an initiative of the MRFF established in 2019, providing up to $1 million in matching funding to nurture the translation of new therapies, technologies and medical devices through to the proof of concept stage, with management provided by a consortium including Uniseed partners UniQuest and BioCurate.

In December 2015, the National Innovation and Science Agenda (NISA) set a focus on science, research and innovation as long-term drivers of economic prosperity, jobs and growth, with $1.1 billion committed over four years to 24 measures. In December 2016, the Federal Government announced the $500 million Biomedical Translation Fund under NISA, with three fund managers subsequently appointed to support clinical stage medical drug and therapy development. The need for Uniseed investee Spinifex to relocate to the United States to raise US$45 million from U.S. venture funds to support clinical development of its neuropathic pain drug was a significant influence on the implementation of these programs.

Research organisations have also shown a greater focus on innovation, not only through support of their research staff but also by putting in place incubators, accelerators and other schemes to support students, alumni and staff, such as University of Sydney’s Incubate, University of Melbourne’s TRaM, CSIRO-ON, UNSW’s 10X and Founders Program, University of Queensland’s iLab and UQ Ventures, and Cicada Innovations supported by UNSW, USyd, UTS and ANU. The returns to UQ from Spinifex also helped justify the development of a fully integrated small molecule drug discovery capability based at that university - the Queensland Emory Drug Discovery Initiative (QEDDI).

Most importantly, Uniseed had survived the toughest period in its history, and on the back of the blockbuster exits, Uniseed would raise its third and largest fund, extending the membership to five of Australia’s leading research organisations.

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Cover Photo: Top Row: Prof Darren Kelly, Prof Maree Smith, Assoc.Prof Vern Bowles, Tom McCarthy, Hugh Alsop. Middle Row: Judy Halliday, Dean Moss, Rhiannon Black, David Rowe, Kastoori Hingorani, Terry Woodcroft, Andrew Davis, John Kurek, Richard Marshall, Jim Henderson, Peter Devine. Bottom Row: Ross Macdonald, Graham Morton, Emma Elliott, Christophe Demaison, Jason Connan, Aleta Knowles, Mike Jorgensen, Andrew Rudge, Sean Lumb, Alistair McCreadie, John Bates. Not shown: Board Members, John Green & Richard Symons.

Acknowledgements: Special thanks need to be given to those who assisted Uniseed through this period. The Uniseed Board members mentioned in Part 2 of this series; Uniseed’s Investment managers John Kurek, David Rowe and Richard Marshall, Investment Intern Kastoori Hingorani, and Susan Hamilton and Rhiannon Black for Administrative support. The support of the Uniseed Investment Committee’s TTO members was also vitally important – UniQuest’s Dean Moss, Andrew Davis, Judy Halliday and Terry Woodcroft; IMBcom’s Peter Isdale and Chris Price; UoM’s Christophe Demaison, John Bates, Michael Jorgensen, Sean Lumb, Jason Coonan and Andrew Rudge; UNSW’s Jim Henderson, Emma Elliott, Aleta Knowles and Graham Morton; and independent committee member Ross Macdonald.