By Rachel Pannett 

MELBOURNE, Australia--Australia is taking a page from Silicon Valley's playbook as it seeks to reinvigorate its resource-dependent economy at the end of a long commodities boom, placing bets on biotechnology and digital health care.

For years, mineral-rich Australia has lagged behind the U.S. and other tech-centric economies in converting tech discoveries into business ventures. Australians produce twice as many citable research papers per capita as Americans but only half the number of patents, according to a 2014 report by consulting firm McKinsey & Co.

That is changing, partly because of tax incentives for research and development that have aided biotech companies facing years of costly research and drug trials. Australia ranked fourth globally for biotechnology innovation last year, up from seventh place in 2013, according to a survey by Scientific American based on categories including government policy, intellectual property protection and workforce education. The U.S. is No. 1, followed by Denmark and New Zealand. Switzerland, home to pharmaceuticals giants such as Novartis AG, slipped to seventh in 2015 from third in 2013.

The sector may get a further boost after Malcolm Turnbull, a successful software entrepreneur and venture capitalist before turning to politics in 2004, wrested the job of Prime Minister from Tony Abbott in a Liberal Party coup.

"Mr Turnbull's business acumen along with his knowledge of and well-known support for the Australian technology sector will provide him with unique insights into the barriers facing Australian startups, particularly in terms of accessing venture capital and talent," said Peter Bradd, chief executive of nonprofit organization StartupAUS.

In the semi-industrial Melbourne suburb of Abbotsford, Starpharma Holdings Ltd. recently moved into a building used for years by Carlton United Breweries to analyze beer. Walls and parquet floors that evoked beer hops and wheat fields have been whitewashed, but the whiff of brewing yeast lingers, billowing from the neighboring brewery's smoke stacks.

Starpharma is creating a unique product by replacing toxic detergents in off-patent cancer drugs with a synthetic polymer. Early trials have shown it can target tumors without hurting healthy tissue. The discovery could eventually allow doctors to administer around 30 to 40 times the normal dose of the drugs without side effects such as hair loss, nausea and bone-marrow damage, according to Starpharma's chief executive, Jackie Fairley.

The company this month signed a licensing agreement with U.K.-based drug maker AstraZeneca PLC to commercialize the drug delivery technology, a deal Ms. Fairley estimates could be worth around US$450 million to Starpharma for every successful product. Starpharma was founded on technology originally discovered at the Biomolecular Research Institute, a joint venture between the Commonwealth Scientific and Industrial Research Organisation and the Victorian State Government.

The 18 health-care companies among Australia's 200 largest stocks had a total market capitalization of roughly 86 billion Australian dollars (US$60.16 billion) as of Aug. 31, up from A$62 billion in December 2013. The value of the 33 resources companies included in the top-200 index fell to A$200 billion from A$269 billion over the same period.

Australia is looking to build on that growth through government investment funding and university programs designed to nurture entrepreneurs.

Canberra is looking to reduce its reliance on resource exports as the end nears for a commodities boom that led Australia to ride one of the longest economic expansions in modern history. Australia's economy expanded just 0.2% in the second quarter from the first, the slowest pace in four years. That is pushing the jobless rate higher even than in the depths of the global financial crisis.

Federal lawmakers last month approved the creation of a medical-research fund pledged to reach A$20 billion by 2020. Still, Australia faces an uphill struggle to catch up with the U.S., where the government contributes tens of billions toward medical research each year. The Australian fund will pay out just A$10 million in its first year and even at its peak will distribute only about A$1 billion a year.

Australian universities are also getting on board, upending what had been Australia's traditional college model of prioritizing published research above efforts to commercialize discoveries.

Three years ago, the University of Melbourne launched the Melbourne Accelerator Program, offering startup firms A$20,000 in seed funding, along with free office space and mentoring. Next year it will launch a master of entrepreneurship, modeled on similar programs at U.S. universities such as Stanford University and Massachusetts Institute of Technology, aiming to give budding young businesspeople the mentoring they need to survive the startup years. Among the most promising areas are medical technologies.

"I can see biotech and medical tech really transforming Australia," says Michelle Gallaher, who has spent the past two decades working with biotech startups and pharmaceutical companies. Australia's distance from the rest of the world is a potential asset to budding entrepreneurs, she says: "If we can survive in our own pond with very little money, we come out quite strong."

Still, the risks are high. Fewer than 5% of Australian startups succeed, compared with 8% in Silicon Valley, according to Rufus Black, a former partner at McKinsey & Co. and current master of the University of Melbourne's Ormond College, which is collaborating on the new entrepreneurship degree.

In a sign of the sector's promise, Fibrotech Therapeutics--a drug company developing scar-tissue therapy based on University of Melbourne research--was sold to Irish pharmaceutical company Shire PLC last year for US$75 million. The deal value will rise to about US$1 billion once the drug is approved and additional incentive payments are made, making it one of Australia's biggest-ever biotech transactions.

Darren Kelly, a Fibrotech founder, says when he launched the company nearly a decade ago his university colleagues told him he was committing "career suicide" by going into business. "We were trained to be in the lab every day, pipetting away," says the 45-year-old Mr. Kelly, wearing a dapper gray business suit at the board table of the office where OccuRx, a biotech company he spun out of Fibrotech before it was sold, is based.

Write to Rachel Pannett at rachel.pannett@wsj.com

 

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(END) Dow Jones Newswires

September 15, 2015 15:44 ET (19:44 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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