Biotech firms offer better bets

By Peter V O'Brien

Friday 30th July 2004

The buoyancy of the sharemarket's indices have disguised the mediocre earnings, dividend and share price performance of a significant number of stocks.

Some 41 ordinary shares on the NZSX market last Friday failed to carry a dividend, excluding recent listings that will make a payment during the current reporting round and also excluding mineral exploration companies. That is about 25% of all ordinary share listings. Losses were reported by 32 companies. Most lossmakers and dividend-passers were the same groups but there were cases where companies in profit decided against dividends.

It was no surprise to see low-priced shares heavily represented in the lists of companies returning losses and passing dividends, given the usual relationships between the three measures. The relationship was so strong that only one of the 22 stocks priced at less than 30¢ on Friday had paid a dividend in the past year. It was also the only one to show a profit in the same period.

Millions of dollars were invested in these struggling companies. Their depressed share prices meant substantial amounts of private investors' money were written off or are being maintained against the day the organisations produce solid operating earnings and pay dividends.

The lossmaking, low-priced and no- dividend companies are never mentioned in daily or weekly sharemarket rundowns. They get scant newspaper space to cover interim and annual announcements, "news" items of general interest and annual meetings.

Some will reward their shareholders' faith and patience with moves to profitability, dividend payments and consequent rises in the share price, the last possibly recouping earlier losses, including the opportunity cost of foregoing alternative investments.

Others will either struggle until they are liquidated or become vehicles for companies to list at much lover cost than starting from scratch.

The clutch of listed bio-technology companies could be useful bets among the potential "rewarders." Blis Technologies, Botry-Zen, Genesis Research & Development Corporation and Pacific Edge Biotechnology form the biotech group, with Genesis differing from the other three's market statistics in having a 77¢ share price last week, although reporting substantial operating losses and yet to pay a dividend.

Investors who think yesterday was history and tomorrow is the distant future will never understand that companies based on the results of basic scientific research take years to realise potential, assuming they have the capacity to develop marketable products.

Genesis' retiring chairman David Irving described a biotech company's image difficulties at the June annual meeting in June.

"Genesis is not viewed favourably by local sharemarkets: overseas exchanges have longer and deeper experience of biotech investment and a better understanding of the rate at which value is created. In this environment our approach has been to retain a clear focus on meeting milestones on the path to commercialisation and to communicate clearly and honestly with our shareholders and the wider market.

"... it takes considerable resilience for highly talented science staff to work productively in an environment where the outside world consistently discounts your value by 80%. It places a burden and a particular responsibility on the board to enable these staff when investor sentiment discounts their work."

Mr Irving said a headline that had described Genesis as a "failure" was glib and did not do justice to the company, its staff or prospects.

Biotech companies have understood the need to be well funded during the product development phase.

Genesis had share capital of $76.51 million at December 31 but carried an accumulated deficit of $49.29 million, which reduced shareholders' equity to $27.21 million and put total equity at 35.6% of share capital.

Further capital raising was under way in June. Few secondline companies with an accumulated deficit of $49.29 million in the New Zealand context would have escaped liquidation, indicating Genesis and similar companies were aware of the need for appropriate equity funding.

Pacific Edge Biotechnology was a more modest venture in size terms than Genesis but had the common element of a hefty accumulated deficit relative to share capital. The company's capital was $9.62 million at March 31, accumulated deficit was $7.09 million, leaving shareholders' equity of $2.52 million (26.2% of share capital).

Pacific Edge has been developing products for cancer treatment, an area of research where progress can be measured in years.

Such companies, and others currently among the lossmaking, dividend-passing and low share price investments, might eventually become market darlings.

Meanwhile, their existence as a significant percentage of NZSX companies showed there was more to listed equities than the latest price movement in Telecom, Carter Holt Harvey, The Warehouse and energy groups.

Biotech companies, and others among the lossmaking, dividend-passing and low share price investments, might eventually become market darlings

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