By Rod Oram
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Friday 1st March 2002 |
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Biotechnology was primitive in 1980 when Genentech of the US became the first biotech company to float, grabbing the glorious ticker symbol DNA. Back in those dark ages, the key process for manipulating strands of DNA was fermentation, a technique little changed since 2000BC when the Babylonians discovered how to brew beer.
In fact, beer had its attractions to Genentech, according to Cynthia Robbins-Roth, a researcher there at the time. Desperate for large volumes of human urine as a feed stock for some of their research, insiders joked they should spread sawdust on the floor of their Friday night beer bashes to harvest the golden liquid, she recounts in her book From Alchemy to IPO: The Business of Biotechnology.
Light years later in biotech time, last year in human time, Celera Genomics, a US stock market-listed company, completed mapping the human genome, opening the way for stunning science. Custom-growing new body bits or tailoring drugs and gene therapies to specific patients are just some of the highly touted fields that could open up.
Forget the industrial or information revolution. They were mere ripples on the tide of history compared to the profound changes biotechnology will bring. Even cautious scientists such as Jim Watson, the forefather of commercial biotechnology in New Zealand and founder of Genesis Research and Development, make such bold claims.
"There are two parts to biotechnology - health and agriculture. For the past 20 years, the focus has been on health. But the next round of value creation will be from a wave of science and technology that's plant- and land-based. That's not necessarily about GM plants but more about better gene tools for breeding, better manufacturing processes and less environmental damage."
One driver, Watson argues, is growing public rejection of today's intensive farming practices because of problems such as disease, the effects of abundant use of powerful chemicals and the salting-up of highly irrigated land.
New Zealand is ideally placed to capitalise on this trend. Growing and harvesting things is our natural advantage and the backbone of our economy. The bulk of the government's Public Good Science Fund - some $3 billion over the past 10 years - has gone into agriculture. As a result, we're very good at traditional technology. But unless we develop world-class, leading-edge, commercial biotechnology in the relevant fields, we'll wither on the vine.
By all accounts, Crown Research Institutes and universities are doing some decent research, some of it world beating in agriculture and medicine. But it's proving very hard to turn science into products, to set up companies to commercialise the products, and to float them or find alternative ways to fund their development. Compared with North America, Europe and, increasingly, Asian countries such as Taiwan and Singapore, New Zealand biotechnology is in danger of being stillborn.
Gene genie
Watson's doing his bit. After a distinguished career in US biotechnology, he returned home in 1983 to head the University of Auckland's department of molecular medicine. Determined to drag New Zealand into the age of commercial biotechnology, he and 24 colleagues left academia in 1994 to establish Genesis Research & Development. Floated on the New Zealand Stock Exchange in September 2000, Genesis is our one and only leading-edge biotech company open to public investment. And even Genesis is still at least two years away from large-scale product sales (see "Waiting on the science").
Meanwhile, South Island entrepreneur Howard Paterson lays claim to being the godfather of Mainland biotechnology through his four embryonic but already floated companies, Botry-Zen, Pharma Zen, Blis Technologies and A2 Corporation (see "The biotech guru").
Blis Technology will be first to market with a product - an over-the-counter remedy for strep throat due out this month. But with all due respect to the quartet's scientists, they are working far down the technology scale compared with Genesis' development of prescription vaccines for psoriasis, asthma and tuberculosis and the products it hopes to spin off from its databases of plant genomes.
Confusing signals
Watson's investment, science, international relationships and risks are far greater than Paterson's. And if Watson's plan works, his global payoff will dwarf Paterson's. In commercial and scientific terms, he will deliver blockbusters.
But the combined market capitalisation of Paterson's four companies at the beginning of February was twice Genesis's: $168 million versus $80 million. That vastly over-values the quartet and seriously under-values Genesis, says one of the country's leading commericalizers of biotechnology talent.
Two dangers arise, he says. First, there is the risk of grave disenchantment among local investors, turning them off more challenging biotech investments. "It would be a real nightmare for those of us using the conventional route of venture capital and mezzanine finance if we couldn't float companies in New Zealand," he says.
Second, an under-valued Genesis could be starved of capital, making it - and its technology - vulnerable to foreign take-over and perhaps the migration of its research efforts offshore.
The Paterson camp, though, is sure of where it's heading. "We're a long way from being gene jockeys," says Max Shepherd, co-partner in Zenith Technology, the Dunedin company that is the primary source of science for Blis, Botry-Zen, Pharma Zen and their key shareholders. "We believe the cost and complexity of bringing such novel molecules to market that way is beyond any New Zealand company. Instead, our science is very outcome-driven. We'll have commercial products long before Genesis."
Such rivalry goes right to the heart of the biotechnology investment dilemma worldwide. Promise runs much further ahead of science and products in biotechnology than in any other scientific field. Discovery is hard enough but commercialisation is a nightmare, taking vast amounts of time and money. It's a game of massive risk and reward. Moreover, the long-term science cycle is way out of sync with the short-term stock market cycle, leading to manic-depressive swings in investment performance.
Bull-bear whiplash is the main ailment of biotech investors. "There have been five or six cycles over 20 years in the US, two or three over 10 in the UK and one in continental Europe," says Daniel Green, director of life sciences at Dresdner Kleinwort Capital, a European investment bank which has been a star performer among biotech mutual funds.
Celera is a classic example. Its shares went up like a rocket (from $US7 to $US240 in the eight months ending February 2000, adjusted for a stock split) … and down like a stone (to $30 in late 2000 and $20 today), and this is no flaky company. It was launched with the biggest ever single slug of venture capital in US history ($US350 million) and floated in 1999, but is now searching desperately for a moneymaking strategy. Last year, it thought it could get rich by selling gene data and mapping technology to drug companies. This year, that looks like a dead-end so it's decided to develop drugs itself. Those are not the skills of Craig Venter, its distinguished gene scientist and founding president, so now he's free to go back to fundamental gene research and to savour the spoils from cashing in some Celera stock back when it was worth a bundle. Over Christmas he was sailing his New Zealand-built superyacht around the Caribbean.
Slim pickings
Long-term investors have far less to show for their faith in biotechnology. The sector's two key US benchmarks, the biotechnology indices of Nasdaq and the American Stock Exchange, underperformed the S&P 500 index from the early 1990s until early 2000. Since then the sector has pulled well ahead by hanging on to some net gains in the latest boom-bust biotech cycle.
That said, a few very savvy long-term investors who can evaluate the science have come out ahead. And their success has relied as much on market timing as on deep understanding. A handful of US mutual funds have generated annual returns of better than 15% over the past five years (see "Biotech investing, for real"). Of these, only one, from Fidelity Select Biotechnology, has a narrow biotechnology focus, while the rest invest in the wider healthcare sector, which has more real commercial activity in its business model.
Is biotech to investment what the Black Plague was to medieval Europe? Not quite - if you have the genes (and money) for risk and you're willing to invest a lot in learning about the sector (see "Wanna be a gene jockey?").
There is a scant selection of candidates, and it won't be easy for you and your money to do your bit for New Zealand biotechnology. Right now you can take a direct punt on only Watson or Paterson. There would be many more investment vehicles if New Zealand could unlock its biotechnology potential, but getting funding is the key to opening this treasure trove.
Don't be fooled by the $170 million investors offered Paterson for shares in the heavily over-subscribed floats of Botry-Zen and Pharma Zen. He took only $13 million of the money for the two companies, a fraction of the sum Genesis spends on science in a year. Moreover, getting US regulatory approval for a drug costs more than $500 million.
New Zealand's professional investment community - institutional shareholders and analysts - are simply incapable of evaluating sophisticated science and then coming up with big money to back it, says Garth Cooper. Like Watson, Cooper is a New Zealand biotechnologist with a foreign track record, now passionately focused on the home turf.
Bargain basement
Cooper was co-founder of Amylin Pharmaceuticals in 1987, a big early success in commercial biotechnology, first in the UK and later in the US. These days he's at the University of Auckland biological sciences department and driving Protemix, a start-up bio-pharmaceuticals company backed by his own money from his Amylin success and from investors such as Wellington venture capitalist Neville Jordan. With some 50 research staff, its initial focus is on diabetes treatment.
"From a scientific and technical point of view we're extremely successful. Abroad, we're repeatedly told our work's better than that of US and UK universities," Cooper says. "But here there's a huge discount on our work because of the lack of capital and expertise in the business community."
Over the next few months Cooper, Jordan and colleagues will be trying to resolve how to fund Protemix's development. Raising money in the US or Europe would be far easier than it is here, but those foreign venture capitalists or float underwriters typically want to move the company to their home ground rather than ship the money down here where they fear a lack of science/business skills. That distresses Cooper because he is deeply committed to building up New Zealand biotechnology.
"How to break free from the limitations of New Zealand is not a popular question to ask. But unless New Zealand can address it, then the 'Catching the knowledge wave' conference was no more than waving our hands in the air," he says.
UniServices, the commercialisation arm of the University of Auckland, makes no apology for going overseas with most of its start-ups. It has parlayed New Zealand science into start-up companies abroad in which it has retained a small slice of the action. One example is LifeFX, which floated on the Nasdaq in 2000.
"It's a state of mind," says John Kernohan, UniServices chief executive. "Either you want to build a large company with other people's money and help, or you want to keep control but stay small." Only by tapping those foreign sources can you pull off growth. Neuronz, for example, is a company in his university portfolio. It will need $100 million to $200 million over the next three years to further develop drugs to treat brain damage before it will be ready for a floatation.
US cures
What about the lure of the Nasdaq? You can float a nascent biotech company with only some nifty science and credible management, says Patrick Sutch, who was down here last December scouting for candidates to make an initial public offering (IPO) of shares on Nasdaq. "A strong enough story can raise at least $US30 million to $US40 million in an IPO," he says. And there's plenty of scope. "Your Crown Research Institutes are sitting on bucket loads of intellectual property. They could put together a management team in the US, keep the research here and get pre-IPO funding from an investment bank."
That's very optimistic, say local investment professionals. It might work for well-known US biotechnology entrepreneurs and for areas of science familiar to US market analysts. But New Zealanders and their research, particularly in plants and animals, are way off the US radar. Yes, Fisher & Paykel pulled off a Nasdaq float of its healthcare division last year with the help of the Auckland branch of Deutsche Bank, but its technology was already proven and well known in US hospitals.
Most likely, our biotech companies will have to be much closer to marketing a proven product before they can float abroad. ICPbio could be a test of this later this year. Owned and run by Maxine Simmons and Rosemary Sharpin, who founded the Auckland company in 1983, ICPbio produces a range of animal and environmental tests that sell well here and abroad. In science terms it is slightly ahead of the Paterson quartet but well behind Genesis. A New Zealand float is one route it is considering to attract capital to accelerate its growth.
"We think there's a huge appetite from investors for a company already making money," says chief executive Simmons. "But they'll need to see four or five biotech companies doing well before they'll be interested in start-ups."
Clearly, the start-ups will need serious slugs of early development capital. Our two best hopes lie in the series of seed funds the government is helping to get off the ground and in the catalytic effect should the likes of Genesis, Protemix, the Paterson quartet and ICPbio prove successful. Then the celebratory beer could really flow.
Yes, Einstein, it is complicated - but help is at hand. Get some background about biotechnology from:
Wait. Lie down, take a deep breath and maybe just fantasise about trading. Learn some more with the following:
1. No-brain: Buy an index fund tracking the Nasdaq or American Stock Exchange biotechnology index. You can ride the manic-depressive sentiment without having to think about individual companies.
2. Other brains: Buy a US or European mutual fund. Morningstar's website is a good place to shop. The number of biotech and healthcare funds it analyses has risen five-fold in five years, from 30 to 154. It might be a tad safer to go for one with age and track record, although science and investment personnel change so fast that's no guarantee. Two well-performing elder statesmen of funds are Dresdner RCM Biotechnology and Fidelity Select Biotechnology. Or you can dilute your biotech risk by buying into the broader healthcare sector fund.
3. Your brain: You could start with healthcare companies with some biotech leverage. Pfizer, Merck, Bristol-Myers, Astra-Zeneca, Glaxo SmithKlein are some examples. But if you want a pure biotech play, the risk curve starts with big and old companies, such as Amgen and Genentech, and rises.
Just like any other gold rush, those people who sell picks and shovels often make far more money than gold miners. For example, Clinical Research Organisations do the grunt work of getting FDA approval; supply companies such as Albany Molecular Research keep the biotechs in raw materials and equipment; and drug delivery systems like Inhale Theraputics and Aradigm will be the internet routers of their field.
Genesis Research & Development: Experienced management; well-established organisation; strong international connections; hefty intellectual property; high-risk/high-payoff profile. If it is successful, competitors will find it hard to match its products.
The Paterson Quartet: The reverse of Genesis in all respects, including being open to lots of competition. Given their lower risk/lower payoff profile, can they justify their high market caps?
Venture capital: Industry New Zealand (www.industrynz.govt.nz) lists venture capital firms by activity. You could check out the few that are into biotech, but the minimum investment will be very high. It will also be a long-term and illiquid investment. More opportunities should arise soon through the government's seed fund initiative.
Angel investing: Start networking.
Good luck!
Rod Oram
oram@clear.net.nz
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