Genesis CEO, Dr Jim Watson

Monday 3rd December 2001

Following is a ShareChat Investor Interview with Dr Jim Watson, the CEO of Genesis Research and Development (NZSE: GEN). This interview was conducted during November 2001 and posted on ShareChat on December 3, 2001.

SC Investor: Can you please give an update on how the trials are going for your psoriasis treatment, PVAC? When is the next result due and what do you expect?
Jim Watson: PVAC^TM, our treatment for Psoriasis, is currently under trial in Brazil and the Philippines. These trials are proceeding well although enrollment has been slower than expected. The trial clinicians follow the protocols that have been agreed with the FDA and we have to wait for the enrollment and assessment periods to be completed. At this stage results are likely in the second quarter next year.
Because the trials are double blinded i.e. the patients do not know what treatment they are receiving, Placebo or PVAC^TM, and the doctors do not know which treatment they are administering, we are unable to assess the results of the trial until it is completed and the blinded codes are broken. We then carry out the statistical calculations on the improvement achieved by the treatment group in comparison to the Placebo group. The important aspect of the trial results is the degree to which greater improvement has been achieved by the treatment group in comparison to the Placebo group
We have also been busy planning a further Phase II trial in the USA. The FDA have been involved in reviewing the planned protocol and we are happy with the progress that has been made in agreeing the terms of the trial with them. We will make a public announcement when the trial commences.
SC Investor: What are the possibilities of signing more licensing agreements for your PVAC treatment?
Jim Watson: We have had discussions with a number of companies regarding licenses for the sale of PVAC^TM in certain territories that are not yet licensed. We expect that it will be better to delay any further licenses until the results of current clinical trials results are available.
SC Investor: On 19th January 2001, Genesis had a total of 1,638 shareholders of whom 97% (1,584) had holding of less than 50,000 shares. What is the current number of shareholders, and what percentage of these are 'small holders' i.e. with less than 50,000 shares?
Jim Watson: Genesis currently has over 2,200 shareholders and we are pleased with this increase in the number of shareholders. 97% of them (2,158) hold less than 50,000 shares.
SC Investor: If institutional holders rather than private individuals are holding an increasing proportion of shares in Genesis, how do you think this will affect the GEN share price?
Jim Watson: We have not noticed any significant change in the balance of the Institutional or private shareholders. We certainly value both shareholding groups and aim to keep an informed market available for any shareholder.
SC Investor: What do you consider to be the biggest factor in the fall of your share price since it listed on the sharemarket?
Jim Watson: The Genesis share price declined after the release of the Phase II PVAC^TM Psoriasis trial results which were adversely affected by the inclusion of patients who had previously been treated by significant immunosuppressive drugs such as methotrexate and cyclosporin. These trial results did not change our belief that Psoriasis can be treated very effectively by PVAC^TM but there is an apparent message from the market that further trial results are needed to support this belief.
Genesis currently has approximately $50 million cash ($1.93 per share), which means that the market is only valuing the intellectual property and future cash flows at less than $30 million or $1.14 per share. We believe that this is unduly conservative if you consider the portfolio of products that Genesis is developing including PVAC^TM for Psoriasis AVAC^TM for atopic dermatitis and asthma, YB-1, Epigen and FGFR5 early stage molecules for cancer and other indications, BioStore storage solution, and AgBio programmes investigating key plant regulators, promoters and hormones, and supporting our forestry interests in ArborGen LLC.
SC Investor: Genesis strikes me as a complicated company and I don't really understand what you are doing. Do you think other investors feel this way and if so what are you doing to improve the market's understanding of your business?
Jim Watson: Genesis is not a complicated company; it has a portfolio of products in development for human therapeutics and a complementary pipeline of products in the AgBio field. While the Genesis products may appear diverse, the technology, which underpins development, is common to both areas. The genomics pipeline provides virtually identical technologies for gene discovery in Therapeutics and AgBio. The product diversity appears after initial targets are identified. The model we use is to partner our products with organizations who have the expertise in that product.
SC Investor: Which of your medical products has the potential to earn the most revenue, and how will that happen? Will it be through production, or licensing your knowledge?
Jim Watson: Many commentators have focused on PVAC^TM for Psoriasis, as that is our most advanced product for commercial release. However a number of other products have similar market potential including AVAC^TM for atopic dermatitis, BioStore storage solution and other earlier stage developments.
Our business model is to develop our discoveries to the stage where sublicensing can achieve significant milestone payments together with ongoing royalties from commercial sale of product. We do not intend to develop our own manufacturing or selling and distribution infrastructure.
SC Investor: In his ShareChat Interview of 29 June, Luke Moriarty of Rubicon said the following when asked if Rubicon would consider increasing its shareholding in Genesis: "We have not yet addressed our current position in Genesis, other than to say that we see more value than the $3.85 per share at which it is trading today." Given recent sub-$3 trading levels for GEN shares, is there any indication that Rubicon is about to increase its stake in Genesis?
Jim Watson: We have not had any indication from Rubicon as to whether they intend to increase their shareholding in Genesis. We work closely with them on our common shareholding in ArborGen LLC.
SC Investor: What are the three GEN business factors most crucial in determining EPS growth for the 2001/2002 financial year?
Jim Watson: In our last Annual Report we noted that staff numbers and Research & Development investment would increase in 2001, resulting in a Net Deficit for the 2001 financial year. Genesis will continue to fund a large proportion of its Research & Development through research contracts and collaboration revenue, but a significant ongoing net surplus is only likely after PVAC^TM receives approval for commercial sale. Earnings per share is not very relevant to a discovery company such as Genesis until products reach the market.
SC Investor: I understand that ArborGen has contracted your company to provide research services. How much are these contracts worth and how long have they been signed for?
Jim Watson: Genesis has a services agreement with ArborGen that provides for research to be undertaken over a period of 5 years at the level of approximately $6 million pa.
SC Investor: Wouldn't Genesis be better to get some income generated from some lesser, easier-to-market drugs than pursue the more grandiose world firsts etc, etc. Once some income is coming in then go for the bigger, harder to catch fish?
Jim Watson: Drugs with small market niches have the same regulatory requirements as drugs aimed for major market segments, so there is little to be gained by focusing on small targets.
The Genesis strategic plan does prioritise those products that have the earliest potential to achieve market success but we also need to ensure that our ongoing pipeline is identifying early stage molecules and targets for subsequent development.
Genesis has managed to develop substantial partnership revenues that significantly reduce our cash burn. By comparison with similar biotechnology companies we have a higher proportion of costs covered by revenue than many.
SC Investor: In your annual report it states that you have patents for "12 of the 13 biosynthetic steps in the production of Lignin in trees"? Can you explain the importance of lignin and how will these patents help make money?
Jim Watson: Lignin and cellulose are two key components of wood. Increasing the amount of lignin would result in timber with improved structural strength; reducing lignin content would result in lower cost of producing pulp for paper manufacture. It may also be possible to improve the reactivity of lignin and accessibility of it for pulp manufacture. Pulp is a huge market with significant waste disposal issues and any possibility of improving the manufacturing process with the use of a fewer chemicals has significant potential commercial value.
SC Investor: What's happening with your joint venture with Wrightson?
Jim Watson: Genesis and Wrightson are now pursuing particular targets that we have identified, focusing on the area of improving grass nutrition to increase livestock productivity. We have a number of areas where we are developing patent claims and it is difficult to talk publicly of these until they have been lodged.
SC Investor: When Genesis talks about sub-licensing its technology, what does this actually mean?
Jim Watson: Sublicensing is the process where contracts are agreed with another company, which wishes to be able to use and sell one of our products in a defined geographic area of the world. For instance we have licensed PVAC^TM to Medicis Corporation, a leading skin care company in the USA, which entitles them to sell PVAC^TM to patients in the USA, after we have received FDA approval. We will separately sell licenses for Europe, Asia and Australasia.
Licenses are typically negotiated to provide certain upfront payments on signing the license, subsequent milestone payments when certain activities are achieved and also royalty payments based on a percentage of the sales revenue when the product is finally sold to consumers.
SC Investor: If a company comes up with a successful product while utilising Genesis technology, will your company share proportionally in that product's success?
Jim Watson: Genesis has taken particular care to only license technology to other companies on the basis of Genesis receiving a share of revenue of any developments that are based on the Genesis technology.
SC Investor: There is a big backlash against genetic engineering in New Zealand. How is your company taking this into account in its business development plans?
Jim Watson: Genesis supports the position taken by the government and the Royal Commission on Genetic Modification, to proceed with caution in this area. Some parties are concerned about Genetic Engineering but many other groups of New Zealanders strongly support it. Indeed for some groups such as diabetics, the use of genetic engineering technology to produce human insulin has provided a significantly enhanced quality of life. While it is entirely appropriate to proceed with caution, as the Royal Commission report noted, it is important to allow research to be undertaken so that New Zealand builds on its strong base of Agricultural production.
SC Investor: Which of Genesis products has made the most money so far and which one has cost the most to produce?
Jim Watson: The licensing payments received in respect of PVAC^TM licences are the biggest single item of revenue for Genesis to date. This reflects the future commercial value of PVAC^TM as a Psoriasis therapy.
PVAC^TM is probably also the most expensive product so far, due to the cost of undertaking extensive clinical trials. In Biotech there is not necessarily a direct relationship between cost to produce a product and commercial value.
SC Investor: I like the sound of your preservation process. How well is the marketing going of your Biostore product/process going now that you have taken full ownership and what is the licensing agreement with Australian veterinary company Jurox worth each year?
Jim Watson: We are focusing on the commercial opportunities for BioStore that are most likely to be achievable in the short to medium term. One of these significant opportunities is the preservation of platelets, which currently are destroyed by the blood product laboratories after several days, as they cannot be stored for any long period.
The licensing agreement for a veterinary product in Australia is currently for a single product use but is expected to expand into further products in due course. We are only agreeing to non-exclusive licenses so we maintain the opportunity to develop multiple licenses.
SC Investor: Genesis seems to be to be a long-term investment simply because it can take such a long time to get medical approval for drugs and so on. Do you agree?
Jim Watson: Any Biotech investment should be considered a long-term proposal as it can take a number of years to get a product to market, even without the requirements for FDA approval.
The requirements for clinical trials to achieve the standards that FDA requires involve long time periods of planning and execution but as we have seen with Psoriasis, commercial opportunities for gaining licensing income can arise long before the product actually reaches market.
Genesis balances the long-term revenues from sale of products with the revenues from research contracts, partnership programmes and license payments, which provide continuity of cash flow.
SC Investor: Is it possible for you to give a breakdown on who is selling and who buying your shares?. Are institution's showing more interest?
Jim Watson: We do monitor share transactions each month although a large number are carried out in the name of nominee companies, which are hard to trace in the short term. The Institutional shareholders we talk to continue to be very supportive of Genesis.

ShareChat thanks Dr Jim Watson for taking part in this Investor Interview.

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