Dialogue: Science that makes money

Crown Research Institutes have a bad name, but KEITH STEELE* argues it is not deserved.

In recent weeks, investors have had to wade through a swamp of corporate results - some good, some bad.

I know of one company that achieved a 42 per cent rise in profitability for the six months ended in December, compared with the previous corresponding period.

Net profit was $2.76 million, compared with $1.95 million for the same period the previous year. Revenue for the half-year was $59 million, a 24 per cent increase on the comparable period in 1999.

The worth of this company's net assets for the half-year was $87 million - 9 per cent up on the previous year.

With a capital base of around 47 million shares, the company's net tangible asset value for the half-year was $1.85 a share, an 8 per cent increase. Earnings per share soared by 42 per cent.

Impressive stuff, you may say. And you wouldn't even mind buying some shares in this company?

Well, I am proud to be working for this company, which is called AgResearch, and which is a Crown Research Institute (CRI).

In the past few weeks, I have had to endure reading a seemingly incessant plethora of misinformation about CRIs - their inability to get over their MAF and DSIR days, their lack of commercial acumen, their inability to turn a dollar into two, and the ultimate kneecapping - being a constant burden on the taxpayer.

AgResearch is a CRI, but the financial results speak for themselves. And it must be stressed that AgResearch is not totally dependent on Government handouts to make a profit.

In fact, funding from the Foundation of Research, Science and Technology (FRST) has been steadily dropping.

In 1993, AgResearch received 24 per cent of FRST's total allocation for science research. By last year, it had dropped to 18 per cent.



On net assets alone, the fair-value market capitalisation of our company would be about $90 million. But if the staff's collective intellectual capital could be quantified and aggregated as an asset on our balance sheet, the true cash value of AgResearch to New Zealand would be mind-blowing.

As for the inability of CRIs to commercialise their activities, our detractors must have been in slumberland when, last October, AgResearch launched its business arm, Celentis, which was charged with commercialising the company's science discoveries.

Incorporating a commercial philosophy across AgResearch's entire operation has transformed our approach to product development. We are effectively closing the gap between scientific discovery and taking the product to market.

In the past, scientists have done everything, from discovery to investigating the potential, to developing a product and then commercialising it.

We realised that we could not go on operating like this. We needed people with the right skills to carry out this task so we went out and found the best.

They are now have this responsibility, working under the Celentis banner, and our scientists can get on with what they do best, innovative, ground-breaking research.

In spearheading the commercial thrust of AgResearch, Celentis works closely with customers in identifying business opportunities to ensure that scientific research leads to the development of products of significant value.

It also manages all AgResearch's intellectual property, an approach that will assist us in attracting future investors for our technology.

And success has not been long in coming. Already Celentis has aligned AgResearch with some of the heavyweights in the global science research business. One such alliance is with Australian biotechnology heavyweight CSL,which will not only open up overseas markets for AgResearch's AgVax products but also allow further windows of opportunity on future joint research and development projects.

Another has been with PPL Therapeutics, of the United Kingdom, in the production of complex proteins for pharmaceutical and nutraceutical applications. AgResearch and PPL Therapeutics are world leaders in this field of research, which promises tremendous potential in the treatment of deadly diseases.

In the next few weeks, we expect to announce another important partnership agreement with a leading global player - so there is no doubting our business focus. We are bent on ensuring that science discoveries are transformed into commercial reality - and we will have many more in the future.

The proof of the pudding is in our projected product revenues. For the year ending in June we expect a 43 per cent increase in product revenues over the previous year. If revenues from Sastek (a joint venture company acquired this financial year) are included, projected product revenues will rise to $25.7 million, a twofold increase over the previous year.

Next year, AgResearch is expecting product revenues of $30.1 million, with $36.6 million the following year, and $43.4 million the year after that.

While the above figures will gladden any accountant's or investor's heart, a further pot of gold is in the "market revenues" realised by our partner companies (and considerably helping their balance sheets), which are estimated to be over $40 million a year.

The recent completion of the mapping of the human genome has highlighted the potential benefits that new gene technology can bring to human life. And as research companies worldwide strive to turn this newfound knowledge into worthwhile gains, AgResearch has been beavering away to ensure that New Zealand keeps pace.

A World Development report, issued last year, categorically states that today's most technologically advanced economies are truly knowledge-based. We in AgResearch are proud to know that our intellectual capital - our staff's knowledge, brainpower, know-how and processes, as well as our ability continuously to improve those processes - is a source of continual competitive advantage for New Zealand science.

In the past, we have been a powerhouse in global agricultural and pastoral research, and we will continue to be.

But we have gone ahead from there.

AgResearch has increased its research discovery programmes with greater investment in forage and bovine EST programmes - seen as important keys in our ability to provide superior animals and forages for New Zealand.

And in the past year, we have made major scientific breakthroughs such as the Inverdale gene discovery, which not only holds potential advantages and benefits for the agricultural industry but significant improvements for human health.

We are also doing research that could lead to new treatment for diseases such as multiple sclerosis.

* Dr Keith Steele is chief executive of AgResearch.