Was Biotech Failed By The Cutler Report?




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Video title: Was Biotech Failed By The Cutler Report?
Released on: November 27, 2008. © PharmaVentures Ltd
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‘Innovation policy is economic policy’. Dr Terry Cutler, author of the controversial ‘Cutler Report’, is interviewed by Fintan Walton in this special edition of ‘PharmaVentures Business Review’ filmed in Melbourne at AusBiotech 2008. Following a discussion of the aims of the report Fintan focuses in on the effect the report will have on Australian biotech and gives voice to the many criticisms the industry has of the recommendations. Terry Cutler addresses these criticisms and talks about what the government can do to help such a unique sector within industrial innovation on a national and international level.
Driver behind cutler report.
Fintan Walton:
Welcome to PharmaVentures Business Review here in Melbourne, Australia. On this show I have Terry Cutler who is the Author and Chair of the Review on the innovation system for Australia, a review that was been initiated by the Australian government. Terry Cutler, the first question I would like to ask you is what was the driver behind this review, give us the circumstances why this review came about?
Terry Cutler:
During 2007 the lead up to the election the then opposition put a lot emphasis on the need for a new focus around innovation and industry policy and put out a number of statements including one in which they said if elected they would conduct a review, they were elected and they initiated a review.
Fintan Walton:
Right. Now that process obviously you took on the challenge, I am sure your
Terry Cutler:
Mission Impossible.
Fintan Walton:
And clearly could you just also describe to the audience what that process was, how did you actually get to the report itself?
Terry Cutler:
First of all we had an expert panel put together about 10 people and very good cross section from academia, government and from business most importantly. Then we had a panel of international advisors and they probably haven't received enough attention but were very important in giving us a global perspective international context and they came from Europe, the UK and the US. So that early in the process we sent out a call for submissions and I did a long national road show, we had a lot of public forums, then we started to receive this diluted submission some and in the end we received well over 750 submissions.
Fintan Walton:
Right.
Terry Cutler:
And that doesn't sound that many but the previous proactivity commission enquiry into the same area received a 100, so the level of engagement in this whole process was superb in parallel with our analysis of the submissions and then instigated a number of round table topic forums on issues that I thought were important that really haven't been highlighted enough in, perhaps in the submissions, we got experts round tables to pull together new perspectives. And then we had the task to try and pull it over together.
Fintan Walton:
Right.
Terry Cutler:
In an impossible time line.
Fintan Walton:
So how do you pull something like that together because obviously you have to eliminate certain ideas includes others and obviously you as Chair you were driving this through, how do you do that?
Terry Cutler:
Well firstly the panel even though they are of the illustrious [ph] structure met very regularly, so it was a very active panel and we were constantly thinking about the agenda and priorities and making sure that our frame work was comprehensive in that we had as few blind spots as possible. In parallel we had a huge team in the department supported by some external advisors looking at all the submissions going through them, analyzing them feeding that into us, so it is each was of process.
Fintan Walton:
In the end it's called a Cutler report, is the Cutler report Terry Cutler's views?
Terry Cutler:
It's the report of a panel which I lead.
Fintan Walton:
Right. So it's a collection of thoughts coming together?
Terry Cutler:
Very much and it is a consensus panel document that we pulled together.
Fintan Walton:
And then did the people vote on certain...
Terry Cutler:
No (indiscernable) over that seven month period we worked towards a consensus on priorities and directions that we felt as a group very important remembering, interacting massively with people as we went along.
Fintan Walton:
Your people should read the report because it's quite a term of information in there?
Terry Cutler:
Good bets I agree too.
Key Highlights of the report.
Fintan Walton:
But I suppose if I can be a cruel enough to ask you to summarize that report, I mean what would you say are the key components of that report that you'd like to highlight?
Terry Cutler:
Right. I think the first important point is that, is stressing that innovation policy is very much economic policy, it is about the competitiveness and productivity reforms in a country. And so it's not the same as science policy or technology policy they are important parts of it, but at the end of the day it is all about robust competitive firms and industries at the core of it. Then we said there were four key thrusts that we needed to promote. First how do you promote entrepreneurial firms and innovative workplaces is number one priority. Secondly how do you invest in the human capital and build the talent pools of the country, number two. Thirdly how to you maximize the information flows within the innovation system between the different parties to produce the best outcomes. And fourthly how do we internationalize Australia's innovation system, because we felt that one of the conclusions we drew that our most of our activity was not sufficiently globally oriented at all levels research, firm, government-to-government, so we need to internationalize. So there are the four main thrusts if you like if they report. Then under that we said there were key things that government needed to do. It needed to invest in the appropriate infrastructure, supply there infrastructure. It needed to think about the way it regulated and designed markets particularly the emerging markets when we look at areas like the whole area the environment its not just the climate change.
Fintan Walton:
Sure.
Terry Cutler:
The regulatory frame which you put in place critically influence the innovative potential. How does government set priorities and so a key focus was how do we establish national innovation priorities to be selective about where we put government investment, so that there is with the really the main thrusts.
Fintan Walton:
Right. So therefore that's basically shapes the frame work?
Terry Cutler:
Correct.
Fintan Walton:
But then you have to take that frame work and translate it into results and you've got several components in the report about how you think can get to those results. And I would say you've already mentioned infrastructure and when you talk about an infrastructure you are talking about the public bodies, the universities, the institutes obviously and other bodies that can be created by the Federal Government?
Terry Cutler:
And you know just core infrastructure like national broadband networks and so forth.
Fintan Walton:
Right, right. So when you talk about an innovation policy is an economic policy are you talking about it from a national level or a global level?
Terry Cutler:
Globally, globally.
Fintan Walton:
Right.
Terry Cutler:
And I think one of the key messages we often don't get enough [ph] is that innovation does center around the market activity of a firm, now pulls through the research environment and pushes through into the take up in the community because what the firm does is at the heart of it.
How does review fit with biotech sector?
Fintan Walton:
Right. So clearly we are here at AusBiotech here in Melbourne and the audience is made up of people who are in the biotech sector and obviously this is of great interest to them because we are talking about innovation taking intellectual property and commercializing that component. I suppose one of the things that I no from talking to people here is first of all can a policy or a review that spans innovation in such a broad way be applicable to all sectors, in another words what I am saying is can a review and the recommendation witness review fit perfectly within a biotech sector?
Terry Cutler:
Yes of course it can. But I think the point to make is that is it going to do all you need to do for a particular sector whether it's biotech or ICT or rural industries and the answer is no.
Fintan Walton:
Right.
Terry Cutler:
So what we trying to do with a national policy frame work you say, what are the overall frame work within which you might then very well look at sector specific issues which needed to be further elaborated or we need to tailor particular responses. Now of course good examples of that working currently and in parallel with my review, there were reviews of the auto industry, the textile industry and then the initiation of the pharmaceutical industry strategic review now that's good examples of saying within the broad frame work and consistent with it, how do you develop specific strategy road maps in particular areas.
Fintan Walton:
Right. I mean it's particular true for biotech and particularly in the pharmaceutical application because there is the risk profiles for getting a drug commercialization of a drug is different to one for an innovation in IT or an innovation in software and so forth. So how can the report be accommodate or the review accommodate those sorts of big challenges that we have specifically here in the biotech sector?
Terry Cutler:
Well I think it does it in several ways, first of all you are putting in place some generic initiatives that you test against the robustness across the whole agenda. And I like to think that we look to that so for example our recommendations around the tax frame works we thought those with the most appropriate and looked at how that impact across different areas. The other angle is to look at when we looked at areas like biotech and ICT and other areas where you are talking about all sort of fundamental capabilities that inform a whole lot of industries I mean biotech's are classic case of health and medical and it's also animal and planning.
Fintan Walton:
Yeah.
Terry Cutler:
Biotech hugely important for agricultural sector so also applications in mining so you are saying how do we ensure the capability building across all those sectors and look at the horizontal challenges as well as the market verticals.
Criticism of less focus on commercialization?
Fintan Walton:
Right, right. I suppose the other think that again talking to people here at the conference and asking their views on the report and on the review is that there is a feeling that was tended to be more biased towards you know the universities and institutes they were gonna get, still get a better deal than the and then was less focused on the commercialization do you think that's a fair criticism?
Terry Cutler:
No. I mean whenever you've handed over a report immediately we start thinking about areas that you might have done a little less justice to than others or that you might have wanted to put more of the spot light on. And I think certainly in the explicit text through the report we didn't put as much emphasis on public research agencies, medical research institutes, hospital based researches we as we might have, but that doesn't mean that that was necessarily not thought about in the review process. But I think that also highlights one of the challenges currently where a lot of areas are looked at on a solo like basis and for example when we talked about research funding and you know talking about the full funding of research is an absolutely fundamental priority we saw that you know applying lot across the board.
Fintan Walton:
Right. But I suppose when we go back to the issue of commercialization in biotech and particularly these risk hurdles, I mean clearly there are specifics again we can refer to within biotech, so things like proof of concept and there are a proof of concept ideas within the review, a proof of concept is much more costly exercise and so the level of grant that could be available for a proof of concept study in a different sector outside biotech is a different cost level to one in biotech, so there has to be doesn't there adjustments made specifically for the biotech sector if the government is gonna take this forward seriously?
Terry Cutler:
Undoubtedly and I think that's actually getting smarter about the overall funding models we use, because generally speaking one of the things I was very keen to see is move towards this more of a venture capital type funding model for government support very much following the sort of US model used by (indiscernable) the NIH and so forth of trenched funding which you can then say well you have initial proof of concept clear that hurdle you, if you clear that hurdle you might then automatically proceed to development funding.
Fintan Walton:
So this would be what this is government funding of projects within?
Terry Cutler:
Correct.
Fintan Walton:
Okay. And these would be in the form of grants, or loans or how would they work?
Terry Cutler:
Well we talked about repayable loans as part of that proof of concept scheme, because how that works in practice depends on the detail. But and the other principal that I think is important with funding model is to try and keep that co-investment model.
Fintan Walton:
So when you talk about the co-investment model you are saying that government should put in grants along side venture capital or loans alongside venture capital?
Terry Cutler:
That's the ideal model I believe.
Fintan Walton:
And one of the comments that people have made to me about loans going into biotech companies for an example is that - well you what the first thing you gonna do is weaken the balance sheet and that may not make the company as attractive from an investment point of view - so, but obviously that's going to be well and first of all what's your reaction to that?
Terry Cutler:
Well it relish you if I am in support of in terms of debt versus classic equities obviously key one. And it's depends a lot on your view about the maturity of the local capital markets and how much you want to introduce incentives there. So I think that's one that has to be looked at very, very carefully in implementation.
Fintan Walton:
Right. Well that I mean it's the key thing here, we know that biotech companies in the United States for an example do get debt financing, but the debt financing comes from the private sector not from the...
Terry Cutler:
Correct.
Fintan Walton:
From public funds, so it is going to be in the detail and how that the underwriting of that of those particular loans, because in the end it could actually be a poison pill for biotech?
Terry Cutler:
Correct and recognize that, that's also and why I see the our tax proposals has been particularly relevant to the biotech sector with the refundable tax credit for, you see it not yet in profit, because that immediately goes through to the bottom-line and effectively as saying that you know up to 50% of your expenditure on R&D is immediately returned as cash, so that I think highly relevant to a biotech start-up.
Publicly quoted companies and the market.
Fintan Walton:
Yes, yes. And I think that's recognized. I think one of the other things that when I looked at the report and what it seems to be very relevant here in Australia is you've got lot of publically quoted companies with people talk about them getting on to the market far to quickly, is it not one of the key areas that this report needs to focus on more, I think that probably wasn't if I can make this criticism covered enough?
Terry Cutler:
Probably unjustly criticized because we did - we did have a - I think an important discussion about the nature of capital markets in Australia and we have made some important points that firstly that there is systemic failure everywhere around the early stage venture capital and we said there needed to be certainty and predictability of government support for that going forward and we've recommended new expanded scheme. Then we highlighted the problems with the lack of sufficient integration with particularly US capital markets in these area and suggested that we really want to look at how we can attract more active off shore VC participation in Australia. Then thirdly talked about how we should continue to push changes to the overall tax and capital market regime is to make that much more attractive and global transfer for inward investment.
Terry Cutler:
Right. Well bringing money in from the US is obviously clearly a good one and encouraging at least I think one - at least one venture capital firm I think is mentioned in the report, but isn't there a need to have a mind change as well within the in the capital markets towards risk? And then you know how can you do that?
Terry Cutler:
With difficult yin a small country the thin capital market. So I mean part of the problem is we head for so long a domestically oriented service economy oriented with that is not - I mean if you look at our export orientation and trade performance very much around the commodity side we have very low trade intensity as a you know exports is a percentage of GDP. We had a massive cultural problem in terms of making all industry much more globally oriented.
Fintan Walton:
Right. But and that's in my view and that's those things change we never going to get the dream, the vision of getting innovation and getting a successful outcome from innovation here in Australia?
Terry Cutler:
Totally and that's why we put such a focus on global integration is being an overwriting theme in priority put across the board.
Fintan Walton:
But that's is it's a government driven risk the government has respond to this and what legislation can they introduce that has an impact on the global level so you know I can see them having making changes here on the national level, but how do they have an impact on a global level?
Terry Cutler:
Easy. So start with the research side and start saying well [ph] Australia would be much more active in writing the cheques to participate in major global research programs by the European frame work programs as an example.
Fintan Walton:
Right.
Terry Cutler:
It can remove barriers such as - we've started to say research grant and post graduate funding scheme should be open to any one local or international as long as they do it here and that also fund more people to go off shore. So that's easy with firms we said change the rules around all industry support programs that we don't care who owns the firm whether it's a local or a multinational or whatever as long as the activity takes place in Australia that's the important public policy goal.
Fintan Walton:
Right.
Terry Cutler:
And there is a government-to-government level huge spirit for governments to be much more proactive in saying how do we become part of global projects around population, health issues, global warming and so forth is major global collaborations, having said there are easy things to do.
Fintan Walton:
Right.
Terry Cutler:
If you got the mind set in the perspective.
Measurement of success.
Fintan Walton:
Right, right. I suppose the other thing is how do you measure success in innovation and if you where, so we can look back and those are the things were adopted from your review, how could you measure success is that because clearly one you know one way of I am looking at this would be retention of intellectual property rights here in the innovation stays in Australia would that be a measure of success, how would you measure success?
Terry Cutler:
Well first of all there is no ultimate measure of success because of course the goal post keeps changing so we got to keep on adapting, but it goes back to economic output metrics is the only true ultimate measure. So do we have globally competitive firms that can stand up against competition from any where are you know our firms winning global business and global customers, are we getting the sustained productivity in all areas in our economy I mean the what is our trade performance there the ultimate metrics of the success.
Fintan Walton:
So general economics, economic metrics?
Terry Cutler:
It's output metrics. And then we say well I think one of the right failures has been that the failures to link innovation input and metrics with the real outputs which is - what the game is all about.
Fintan Walton:
What would you change in your review based on the turmoil in the markets in the last two months?
Terry Cutler:
Probably have much more of lecture in the report about in times of challenge and uncertainty is exactly the time we need to invest in innovation. And that it would be I think disastrous for this country if we don't invest massively and even bring forward some of these measures, because I am particularly concerned if we don't that the flow through of the current global situation into the impacts on SME's could mainly come out if we are not careful at the end with nothing to go forward with.
Fintan Walton:
Is that a criticism with stopping the commercial ready grants for an example, a reaction by the government to pull that budget in?
Terry Cutler:
But remember that, we already pre-dated the full flowing of the crisis and was really part of what is typically around the (indiscernable) a first term governments first budget to demonstrate...
Fintan Walton:
What's you reaction to that? I mean that was done half way through your, your review itself, what was the reaction of you in the panel to that?
Terry Cutler:
Well we probably thought it was bit unhopeful on the middle of the review. And sort of we did focus as you can see from my recommendation on saying well, what is the problem we are trying to solve for with things like commercial grants program and we in fact did recommend introduction of the scheme that address that same market area.
Fintan Walton:
But what was wrong with the Commercial Ready Grants?
Terry Cutler:
You have to ask the Finance Minister that. I don't think when they introduced the budget they really spilt out what their thought was terribly wrong with it.
Fintan Walton:
Right. But from - but obviously you reviewed that type of grant and you haven't said in your report or your review that we should continue with that type of grants, so there must be something that...?
Terry Cutler:
Well it's not entirely true, I mean we said that grant was addressing that crucial early stage proof of concept development area and so we did recommend a sizable new program addressing the same area.
Fintan Walton:
So it's a modified version of it?
Terry Cutler:
Yes. And of course when you have a stock take on something it's your good chance to go back and say what is the real problem you are trying to solve for here and how do you best design a program.
Fintan Walton:
Okay. Well I think you've heard enough from me, I promise that we would open up the floor to questions and to ask to Terry directly. And I'd see Dr Susan Pond come to the floor. Go ahead Susan?
Susan Pond:
Thanks very much. We are in very interesting a period in early times which is the real scale and you talked about scale with respect to us as Australia interacting on the global seeing just really what we need to do, can you talk about some of those innovations that we need to achieve scale on domestic's scene where we are in model that we have only a small population and the (indiscernable) really important is internalization?
Terry Cutler:
Yeah. I mean initial scale goes right to the core of the lot of the thinking in the report as you mentioned. I mean certainly to me I think one of the key messages like you're trying to get across is we've got to be realistic about the fact that Australia really is a small country economy in terms of knowledge generation and innovation the best we've got 2% global market share that's the reality we've got to face up with. So then we got to say well, how do you best organize and focus that activity we can fund and best pursue here to maximize the benefit from it. And then the flip side question which is the internationalization question, which I think has been seriously neglected in the past is how do we best access and pull in the 98% of knowledge and innovation generated elsewhere until we have those two in balance, so within the 2% goes the heart of what we are saying about national innovation priorities first of all what from a government point of view do you focus finite resources on and then how best you would organize and coordinate that? On the organization side so first of all you need far stronger whole of government holistic frameworks so move away from the, that program solo[ph] as you see at the moment across the government between general research funding, medical and health funding, agricultural funding, environmental funding, defense and so forth, because that fragments you know particularly applies to areas like biotech really not getting the synergies across say as programs, so that's important. Then how do you get away from the federal disease we have there sprinkling money little doll ups everywhere and focus that in either hubs of activity and promoting greater collaboration models both in terms of research and firm collaboration, but also in terms of shared infrastructure. So quite a few thrust there addressing just those questions if how do you build scale critical mess, but you know the biggest challenge I see is that one of global integration and the 2% versus the 98%.
Role of AusBiotechin shaping the policy.
Fintan Walton:
One thing Terry, what's going to happen now the review is landed on the, on a Minister's desk, I am sure he stumbled his way through it many times, so what is the process and what things can bodies like AusBiotech do and other people here do to help and influence the shaping of this policy?
Terry Cutler:
Of course the horror for anyone who chairs a review is that is someone is just gonna put it in the bottom draw and nothing happens, because you don't go through all that pain to have nothing come up the other end. What the Governor said is the process is that of course that they invited initial responses to our report and we received a wide range of those. They've said they are going to respond with their own formal white paper policy statement early in 2009 and in parallel the government is working to finalize it's budget position for the 09-10 budget. And so what, which of these initiatives have picked up in the first trench of funding. The crucial issue to me is that to look at the things that have changed since we put the report down and of course particularly the alarms cause by the global financial melt down and the crucial importance I think of industry, every industry and every part of the industry maintaining the dialogue with the government about how important it is to implement this because end of the day all governments respond to constituencies you know they think and if they don't hear industry and people are saying this is crucial and important, they might believe it's not important.
Fintan Walton:
Right. So campaigning on this is still an important element of this?
Terry Cutler:
I think it's crucially important. As it is, I mean it's also a part of the continuing development of greater public general public awareness of the importance of investment within this area, which I think collectively we have not done nearly as good a job [ph] in that areas we might have in the past, because you need general public support to say that you know innovation around health, innovation about environment whatever is crucially important to us as voters and citizens and that's what government respond to.
Fintan Walton:
Right. But Is it in a sense your responsibility or responsibility has been thrust upon you to make sure that this is actually driven all the way through you've got you know different sectors having their own views on your report as you more than more aware than I am, but equally the important is that you still have that voice going back to the government to make sure that things actually do change?
Terry Cutler:
Absolutely I mean I've been driving and promoting the Idea of better innovation agenda in Australia for years I am not gonna give up now, because I just think this is vitally important.
Fintan Walton:
Which is indeed. Well thank you very much indeed Terry for coming on the show. Thank you very much indeed.
Terry Cutler:
Pleasure.
Susan Pond
DrTerry Cutler is an Industry Consultant and Strategy Advisor in the Information and comMunications Technology Sector. He has authored numerous influential reports and papers on the Digital Economy and innovation, including the recent National Innovation Review (The Cutler Report), which was released on 13 September 2008 by the Australian Minister for Innovation, Industry, Science and Research, Kim Carr. Terry Cutler has had a longstanding engagement with public policy. He has served on numerous Government Boards and advisory bodies. Apart from his present appointments, from 1996 to 1997 he was Chairman of Australia's Information Policy Advisory Council and Chairman of the Industry Research and Development Board from 1996 to 1998. Currently Dr Cutlerholds the following several appointments including Director of the Commonwealth Scientific and Industrial Research Organization (CSIRO), Member of International Advisory Panel, Multimedia Supercorridor (Malaysia), Director MSC Technology Centre Snd. Bhd., Malaysia, Director Multimedia University (Universiti Telekom Sdn. Bhd.), Malaysia and Chairman Advisory Board, Centre of Excellence for Creative Industries and Innovation. The Cutler Report, entitled 'Venturous Australia', examines the Australian innovation system and recommends some major, but not necessarily fundamental, changes to the way Australia does R&D. It was undertaken by the newly elected Australian Labor government to address a need for a new focus around innovation and industry policy.
Cutler & Company
Cutler & Company is a Melbourne-based firm that provides specialist consulting advice, counsel and practical support in several areas including market evaluation, strategic planning and business development, strategic management, issues audits and stakeholder relations, and government relations, policy development and regulatory support to a wide range of organizations, both in Australia and overseas, in the converging communications and media markets.