By Fiona Rotherham
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Friday 1st March 2002 |
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Auckland chemical engineer Corran McLachlan had tried everybody. Back in 1999 nobody was interested in helping commercialise his research into links between milk containing the beta casein protein A1 and heart disease. He was beginning to despair when he met an ex-Treasury colleague, Leigh Davis, who was then with merchant banker Fay Richwhite. McLach-lan explained to Davis his theories for the commercialisation of a sort of milk that doesn't contain the A1-like casein variants; a milk now called A2 milk. Once Davis heard his research story he told McLachlan he knew the one person in New Zealand who would be fascinated by it - Howard Paterson. And he was. "He's an agricultural venture capitalist and no one else is," Davis says.
One of the first things Paterson said was, "Let's look at the risk factors." He had his people independently run through McLachlan's work. "They said there were risks but, on the other hand, the opportunities it presents were enormous. That's how [biotech company] A2 Corporation started," McLachlan says.
And that's how the Dunedin-based entrepreneur, New Zealand's largest dairy farmer and the South Island's richest man (though he hates the title) became involved in biotech. The conservative Paterson says he couldn't turn his back on what McLachlan was telling him for moral reasons, not just commercial ones. The 48-year-old businessman makes a truckload of money out of selling milk from cows, but no longer drinks it himself as he doesn't think it's good for him. And he's invested big-time in herds that produce pure A2 milk.
This little piggy
Paterson has brought four biotech companies to market so far, all in different fields. As well as A2 Corporation, there is Blis Technologies (developing a cure for strep throat along with other anti-bacterial health products), Botry Zen (researching a biological control for the fruit-destroying fungus botrytis cinerea) and animal remedies company Pharma Zen.
What's so amazing about Paterson's biotech foray is the amount of investor money he's brought with him. Investors subscribed a phenomenal $170 million in total for the latest two companies, Botry Zen and Pharma Zen, when only $13 million was sought. Botry Zen alone attracted $120 million.
And this is on the less-regulated secondary board where investor protection is weaker, and for the biotech sector where the risks are traditionally high. How come?
If you believe David Parker, the man who helps start up these biotech investments, investors respect Paterson's business track record. Throughout the years, he has used other people's money through syndications and the like to fund new investments. "His brand value, if you like, his ability to do this next time, relies on him not having sold a dog to people last time," Parker says.
For someone of Paterson's wealth (he's estimated to be worth around $100 million) the profit he takes from these biotech companies is not as important as protecting his reputation, Parker claims. But don't be misled. It is definitely about money. "In 28 years of business everyone who has entered into a venture with me has not only had their money returned, but has had a superior rate of return," says the media-shy Paterson. "The reason we get the money is because we have an unblemished track record of success."
There's sure to be some disgruntled shareholder out there who disagrees with that assertion. Nonetheless, investor interest in Paterson's biotech companies has snowballed as people saw money being made out of the first two. Some early investors in the first two companies have cashed up already.
"There's been more speculative interest in the later ones based on what has happened before them," says Graeme Wong, executive chairman of Southern Capital. "The market does work on greed, doesn't it?" Wong's company (in which Paterson holds a 10% stake) invested in all four biotech companies. It is already well in the money because it was able to buy in at favourable prices at the outset.
Paterson himself paid nothing or virtually nothing for any of his shares in the companies. It is what right-hand man Parker calls "carried interest" - an American venture-capital term. Paterson's stakes range from 21.5% in Botry Zen to around 15% in Blis and Pharma Zen and 13% in A2 Corporation. He gets the shares dirt cheap in return for bringing in other habitual and retail investors and for his nous in commercialising the products.
By Unlimited's back-of-the-envelope calculations, based on the latest share prices, Paterson has already made more than $30 million on paper from his biotech endeavours. Even for a multi--millionaire, that's a lot of money.
Of course, he can't realise any of that profit at this early stage without sending the start-ups into a mortal spin. After initially refusing to be interviewed, Paterson then waxed lyrical about his biotech investments. He professes to be in for the long haul, is obviously passionate about the technology and confident all four will be successful. But then you'd expect him to say that.
Money-maker
Paterson's business ventures began in rental property, when he was 19 and still at university (he later completed a degree at the University of Otago in the phenomenology of religion and philosophy). He cashed up his share market investments just before the 87 crash, went to Hawaii, and then moved into agriculture on his return in the late 1980s. Today he is a director of a staggering 140-or-so companies, with his business interests including property, agriculture, tourism, the health sector and now biotech.
Paterson and his team have considered and rejected hundreds of biotech proposals (they receive around two a week), and only taken up four. "We have to be very convinced what we're doing is right," Paterson says. The quality of the science and research is key, rather than picking up something from "some Mickey Mouse inventor" and hawking that to the market, he says. The criteria includes whether there is a product to be sold, whether it has international revenue potential and a competitive and sustainable advantage.
Only Blis Technologies has graduated to the main stock market, although Botry Zen is poised to move up from the unlisted market next month. Pharma Zen and A2 are expected to do so later this year. A2 is also looking at a secondary board listing in the UK this year.
But don't look for any more Paterson-associated biotech start-ups in New Zealand, at least not in the short term. Parker says they have a company in each of the biotech fields they wanted to be involved in.
"Our intention is to consolidate what we have and add more product ranges. We're actively seeking things for these companies now, rather than start-ups." For example, animal remedies company Pharma Zen did a deal late last year with Alliance Freezing Works to do "some smart things with its by-products", Parker says. The joint venture will initially produce some reasonably low technology products and also do research and development on some high-tech products.
Global promise
The common theme between all four biotech investments is the smart technology that differentiates each product, Paterson says. He reckons investors have put their money behind the story he's told in each case, rather than just the storyteller. Others say both are important.
"Howard [Paterson] follows a formula of going for products that he personally believes have strong global opportunities … All [four companies] have clearly identified revenue models," says Forsyth Barr analyst Rob Mercer.
Certainly the institutional investors who have bought into A2 and Blis say they were lured by technology with global applicability, rather than Paterson's name. The likes of Axa, the Accident Compensation Corporation, National Mutual and BT Funds Management have thrown their money in. While biotech is high risk, there is room for that sort of investment in a balanced portfolio, says Andrew South, BT Fund Management equities manager.
A drawcard for Alliance Capital, fund manager for Axa, was the open-door policy on speaking to the originators of the patents. Axa has made a substantial investment in A2 and Blis (around $4 million in total) and has spread the risk further by investing a similar amount in Southern Capital. Portfolio manager Andrew Bascand says he flew an independent biochemist with global expertise over from Sydney to independently analyse the companies.
"He came back with a strong conclusion, particularly in the case of Blis, that the technology had truly global applicability and was unique. With A2 his view was that the patents that were held had true global applicability, but it was unproven as to whether the consumer would agree with the patents."
Bascand thinks Paterson has reached the end of the road in terms of bringing new biotech start-ups to market. "We now need to prove what we have. We're well along the road with that with Blis and with A2 it requires consumer acceptance of what we produce. March or April, when the A2 milk comes out, will be the litmus test of that," Bascand says.
Other than Paterson there is no direct link between all four companies, but Blis chief executive Kelvin Moffat confesses to an internal competition between them on who is going to be first to market. Blis's strep throat tablets are due out next month ("before the winter season") while A2 milk, under licence in New Zealand to NZ Dairy Foods, is set to hit supermarket shelves around the same time, according to A2 chief executive Corran McLachlan.
Analyst Brian Gaynor suggested in a December Herald article that, "The success of one Paterson company has fed on the others but the experience of the 1980s indicates that if one company fails to deliver then it can adversely affect the others."
The snowball could roll backwards.
Not surprisingly, Paterson bristles at the notion. The companies were deliberately set up individually to reduce that risk, rather than as a conglomerate, he says. And Paterson's view is shared by at least one institutional investor. "If that happens, that's sentiment. And that presents opportunities for investors," says BT's Andrew South with a rapacious chuckle.
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