This article was originally published as a guest post on The Armchair Analyst newsletter.
Who actually gets paid
Most biotech companies, particularly at the ASX small-cap end, do not run experiments in-house. They operate as relatively small core teams directing a network of external providers to advance their programs. Like an orchestra. Outsourcing R&D to service providers is not a bug; it is a feature of an industry where capabilities are too specialised and capital-intensive for any single company to maintain in-house. A typical development program is therefore distributed across a set of specialised providers, each responsible for a distinct part of the process:
Each plays a distinct role, and none are interchangeable. Importantly, each engagement is sourced, negotiated, and managed separately, independently of what every other provider is doing.
The biotech company sits at the centre of all of it, coordinating across providers who share no common systems and have no visibility into each other’s work. That coordination is a substantial operational undertaking with real financial consequences, and it is why things can get expensive for early-stage biotech companies.
Why costs escalate
The cost of biotech R&D is high for structural reasons, not incidental ones, and they compound across the development lifecycle. The most fundamental driver is failure. Industry-wide clinical success rates are between 5% and 10%, meaning companies must fund all programs that do not work, not just those that do. There are no refunds if the placebo control works better than your drug. On top of that, clinical trials, manufacturing, and regulatory compliance are substantial costs in their own right. Phase III studies alone can run into the hundreds of millions, and the costs of GMP manufacturing and regulatory documentation accumulate across the entire development timeline regardless of whether the science ultimately succeeds. Less well recognised is the coordination overhead that comes with operating across a distributed provider network. Sourcing, engaging, and managing external providers is itself a time-intensive and often inefficient process, and the friction it creates has real financial consequences. While not the largest driver of biotech spend, it is among the most addressable. All of this operates in the background, and investors just get the call-up for the next capital raise.The role of the RDTI in cost behaviour
In Australia, these dynamics are further shaped by the R&D Tax Incentive (RDTI), which changes how costs are experienced. The RDTI provides eligible companies with a refundable tax offset of up to 43.5% on qualifying research and development expenditure. It is a genuine structural advantage for biotech companies, extending their runway and supporting early-stage development, making Australia a comparatively attractive location for R&D. It is deeply embedded in how the industry operates. Companies plan their budgets assuming the refund, structure their activities to maximise eligible spend, and investors and lenders factor it into funding decisions and capital planning. An entire industry of debt financing secured against the R&D tax incentive has emerged, but that is a story for another article. Overall, the RDTI is a net benefit for Australian innovation, serving as the largest government lever to encourage private-sector R&D and boost national competitiveness. But it also has second-order effects that investors should understand. It reduces price sensitivity. When a portion of spend is rebated, the effective cost of services falls, allowing providers to sustain pricing that might not hold in unsubsidised markets. It can encourage activity over discipline. Programs that might not clear a strict capital allocation review become easier to justify. RDTI claims are not always a signal of high-quality R&D deployment; they can reflect activity that was marginal without the subsidy. R&D financing can bring forward cash, masking underlying burn and making execution inefficiencies less visible in the short term. Grant overlap introduces clawback risk. Where RDTI claims intersect with grant-funded activity, the net benefit can be reduced or reversed, particularly where risk is not fully borne by the company. For investors, this creates uncertainty around the durability of claimed benefits and warrants scrutiny of any disclosed overlap. The clawback rule is under review in the Strategic Examination of R&D report, and changes here could materially shift outcomes. Classification can distort perception, with RDTI receipts occasionally presented in ways that make pre-revenue companies appear more advanced commercially. For investors reading ASX financials, it is worth confirming how RDTI receipts are categorised. The result is a system that supports spending, but can also obscure how efficiently that capital is deployed.Where capital leaks
Beyond the direct costs of engaging external providers lies a less visible layer of inefficiency: the structural barriers that prevent optimal vendor selection in the first place. Providers are difficult to compare. Services are bespoke, pricing is opaque, and capability descriptions are inconsistent. As a result, decisions default to known providers, not necessarily optimal ones. The full market is rarely visible. Regional specialists, emerging CDMOs with available capacity, and academic core facilities with relevant equipment often remain entirely invisible to teams sourcing through traditional channels. We felt this frustration first-hand. In our time inside biotech and research teams we had no structured way to know who offered what, at what scale, or whether they had relevant capacity, or an easy way to showcase our lab’s capabilities to external teams. We spent more time hunting for providers than evaluating them. Incumbent providers retain pricing power not because they are always the best option, but because they are the most discoverable one. Procurement is also relationship-driven. Personal networks dominate vendor selection across the industry, while reputation and prior experience routinely outweigh rigorous comparative evaluation. This is understandable in a sector where trust matters, but it means capital is not always deployed to the most capable or cost-effective provider. Just the most familiar one. For investors, this is not “inefficiency” in the abstract. It materially impacts the company’s burn rate, timelines, and dilution.A structural shift
This kind of fragmentation is not unique to biotech in Australia. Manufacturing, logistics, and professional services all faced similar challenges before infrastructure was built around supplier discovery and procurement. The pattern, when that infrastructure emerges, is consistent. More visibility brings more providers into competitive view. Standardisation makes evaluation faster. Centralisation removes duplication. The result is that more of the budget reaches the actual work. The investor implication is straightforward: when procurement improves, more capital reaches the science. Faster sourcing accelerates milestones. Better vendor selection reduces execution risk. Less duplication means each dollar raised goes further. Australia is early in this transition. The infrastructure that supports it is still being built.What this means for investors
Most financial models for ASX biotech companies capture the science, the pipeline, the trial timelines, and the probability of approval. Fewer capture the operational layer sitting underneath it. Here are five questions you can ask a company to evaluate whether it is managing its supplier networks and looking after your capital:- How do you identify new providers, and when did you last go to competitive tender?
- What criteria do you use, and can you walk through a recent decision?
- How long does it typically take from identifying a capability need to having a shortlist of providers ready to quote?
- What happens when your preferred provider is not available, or quotes too high?
- How much internal time goes into sourcing and managing providers, and is that captured in your cost base?
Related
Why Australia Needs a Platform
The fragmentation problem, and what centralised infrastructure changes.
Australia's R&D Tax Incentive
Refunds, reforms, and how outsourced research is treated.