The bumpy road to riches

Tuesday 1st May 2001

Genesis' trial by analysts

Brokers and traders in the US breathed a collective sigh of relief at the end of last year, after witnessing the worst year for technology stocks since the Nasdaq was established in 1971. Tech stocks rallied early in January 2001, before the all-too-familiar plummet resumed. Fear of recession and inventory overbuild weighed heavy on the market, and down she went.

One of our local stocks felt this more than most: Genesis Research and Development. A stock price of over $7.50 quickly turned into a stock price of $3.80. So, what went on?

First, Genesis stocks follow the Nasdaq biotech sector closely, thus a rise in the US index is likely to see a similar rise in Genesis. The fall in Genesis' stock price has closely followed the fall of US biotech stocks. These stocks are the most risky group on any exchange. The rewards are usually huge, but the road to biotech riches can be very bumpy indeed.

Second, the results of the company's stage 2 trial for its psoriasis treatment drug were perceived to be negative by analysts in the US, which sent shareholders into a tail-spin here. It's a moot point whether the results were good or bad. Looking at the results from the point of view of safety, the trial was an outstanding success. However, from an efficacy point of view, the results were mixed. Despite this, the trial helped define the best candidates for the new psoriasis treatment.

Third, the fall in the share price and the confusion over the drug's trial results saw some journalists starting to question whether Genesis was all washed up. It isn't. It has $58 million in the bank. It will generate revenues of $29 million this year and spend $35 million, leading to a loss of $6 million. Simple maths shows that Genesis has at least 10 years of life left in it, if it continues operating at its current levels.

The psoriasis treatment is one of a number of projects Genesis is working on at the moment. It has also developed a promising treatment for asthma; it is looking seriously at a cancer treatment; and it has projects involving trees, grasses, milk processing and fruit. Not quite a plethora, but certainly a respectable portfolio of projects. By any measure Genesis is more than a one-product company.

Where will the share price go from here? Watch the Nasdaq biotech index.

Bruce McKay is head of research at DF Mainland

Bruce McKay
bruce.mckay@dfmainland.co.nz

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