As expected, the pre-listing share offer by Genesis Research and Development was substantially oversubscribed.
Support for the issue was particularly strong from institutional investors.
The listing of the company next Friday will be a big test for the sharemarket. It will be the first biotechnology company to join the Stock Exchange and local investors will now have to work out how to value a company in this sector.
Genesis directors must be congratulated for the way they have managed the share issue and listing.
The more usual approach in this country would have been to split the shares 10 for one and issue new shares at 60c each instead of $6.
This would have attracted a large number of traders and speculators and the share price could have doubled on listing.
The 600c issue price, which is unusually high for New Zealand, will discourage traders and enable the market to put a more rational value on the stock.
Genesis' acceptance into the Stock Exchange also illustrates the value of a listing and full disclosure.
Before the latest $34.5 million share issue, Genesis shares traded on an unlisted market maintained by brokers.
Its last unlisted market price was 650c but investor interest has increased dramatically since the release of the detailed and informative prospectus.
Brokers are indicating that the stock will initially trade in the 800c to 850c price range next week.
Dr Jim Watson and a small number of former Auckland University Medical School scientists founded Genesis in 1994.
The company has evolved and grown, forming strong partnerships with two leading United States biotechnology companies, Immunex Corporation and Corixa Corporation, as well as Fletcher Challenge Forests.
Genesis' main area of focus is the study of genomics or genes.
It collects genes from human and plant cells and analyses and stores these in a sophisticated computer system.
The specialised cells of the body all use different sets of genes to manufacture their proteins.
Where a gene is associated with a disease, the protein produced by that gene is believed to cause the disease.
Genesis is building gene libraries from human and plant cells and hopes to identify protein products that offer commercial opportunities.
These prospects mainly lie in cures for human disease, many skin-related, and tree technology.
The discovery of a cure is only part of the equation. The development and commercialisation of the product is as important and is often the main difference between a successful and unsuccessful biotechnology company.
As Genesis is too small to bring a major product to the market, its choice of partners will be a key ingredient to the group's commercial success.
In this regard the company's most developed product, a potential cure for psoriasis called PVAC, is an excellent example how the commercialisation process works.
Psoriasis is a flaking skin disease that affects about 2 to 4 per cent of the global population.
In its advanced form it is disabling and unsightly.
What triggers psoriasis is unknown but it is a disease that may have genetic links as it often runs in families.
There are a number of cures for psoriasis but they are relatively ineffective and can have some bad side-effects.
In its original research Genesis used mutant mice that had skin disorders similar to those seen in human psoriasis.
The object of this approach was to identify genes that had defects which caused the disease.
In 1998, Genesis entered a joint-venture agreement with Seattle-based Corixa to share the costs and profits associated with developing PVAC.
Each potential cure must go through the stages of clinical trials established by the United States Food and Drug Administration (FDA). These are:
Phase I: These studies are carried out on 20 to 80 patients.
The early trials look for any harmful effects and help to identify appropriate dosages for the next stage of the trials.
Phase II: These trials establish the efficacy of the new drug and usually involve between 100 and 300 test subjects.
Phase III: The final trials confirm the curative properties of the drug and seek to determine if there are any side-effects in as many as 1000 to 3000 patients.
Monitoring for side-effects continues after these trials.
Genesis and Corixa began Phase I testing of PVAC in conjunction with the Leonard Wood Research Centre in the Philippines in 1997.
These trials, which involved 53 patients and were completed last year, showed that 65 per cent of patients got significantly better after treatment.
Last January, the FDA gave permission for Phase II trials to begin.
These are now taking place in the United States, Brazil and the Philippines and the joint-venture partners will be in a position to analyse data by the end of the year.
If Phase II is successful PVAC will proceed to Phase III trials, with final FDA approval targeted for 2002/03 and product sales a year later.
Genesis and Corixa bear the costs of the FDA trials and the future returns from sales of PVAC with a few exceptions. These are:
In August 1999, Genesis and Corixa gave Zenyaku Kogyo Co exclusive rights to PVAC in Japan.
In return the joint-venture partners will receive potential licensing fees, research and milestone payments of $US15.5 million ($37 million).
Genesis and Corixa will also receive a royalty payment on PVAC sales in Japan.
Last August 15, Genesis and Corixa gave Medicis Pharmaceutical Corporation exclusive rights to PVAC in the US and Canada.
When the agreement becomes unconditional Medicis will make a non-refundable payment of $US17 million.
Additional milestone payments could reach $US90 million, and there will be royalty fees on PVAC sales.
Corixa's share price rose strongly in response to the Medicis deal and the company now has a total market value of $US1.1 billion, even though it has never made a profit.
There are two main features of biotechnology stocks in the US: they have outperformed both the Dow Jones Industrial Average and the Nasdaq Composite Index but individual share prices have been extremely volatile.
Small research-based companies similar to Genesis have experienced big highs and lows.
Share prices respond to FDA decisions and joint-venture agreements that involve milestone payments similar to those with Zenyaku Kogyo and Medicis.
These deals give strong signals to investment markets because they show that knowledgeable industry sources are impressed by the potential of a product.
The PVAC arrangements for Japan and North America are important because they diversify Genesis' risk although it will mean having to share the rewards if a product is successful.
This is a similar strategy to oil exploration companies farming out their interests in a prospective licence area.
Although Genesis has many other products in the pipeline - including forestry-related developments - the psoriasis cure will have a big impact on its share price performance.
The market will react positively to a favourable result from the Phase II trials and an announcement that the Medicis deal has become unconditional.
Genesis has made good progress in a short time and it should be an exciting Stock Exchange listing.
But the risks are high.
Many North American biotechnology companies have cures in the pipeline and there is no guarantee that Genesis will beat them to the market with a successful commercial product.
*Disclosure of interest: none.
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