Brian Gaynor: Biotech needs a confidence boost

The resurgence of the biotechnology sector on the Australian Stock Exchange has bypassed the New Zealand Stock Exchange.

Our biotech companies are turning a cold shoulder to the NZX because Australian investors have a greater appetite for risk and biotech companies have outperformed the overall ASX in recent years.

In September, Living Cell Technologies, essentially a New Zealand company, listed on the ASX after the issue of shares at 20Ac and these are now trading at 50Ac.

Neuren Pharmaceuticals, which is trying to commercialise some of Professor Peter Gluckman's ground-breaking research at the University of Auckland, is raising A$15 million through an initial public offering (IPO).

The lack of investor confidence in New Zealand is mainly because of the poor performance of Genesis Research & Technology and, to a lesser extent, Blis Technologies and Botry-Zen.

Genesis was listed on the NZX and ASX in September 2000 after the issue of 5.75 million new shares at $6 each.

At $6, the company had a total value of $148 million with the new shares worth $34.5 million and the original $113.5 million.

At the time of the IPO, Genesis was entering the US Food and Drug Administration Phase II clinical trials for PVAC, a potential cure for the skin disease psoriasis.

(A drug has to successfully complete phase I, II and III clinical trials before it is authorised by the FDA, the world's most important drug regulator.)

Genesis was also preparing for a Phase I clinical trial for AVAC, a relief for asthma sufferers.

The PVAC development work has been abandoned and AVAC's prospects are not encouraging. The company's share price has slumped to less than 10 per cent of the IPO issue price. Blis Technologies listed on the NZX in July 2001 after raising $6 million through the placement of shares to institutional investors at 73c each.

The shares traded at a high of $1.20 soon after listing but they are now worth less than 10 per cent of that value.

The company's throat guard lozenges have failed to produce the expected financial returns.

Botry-Zen was listed on the NZX in November 2002 and traded at 20c shortly afterwards. The company is generating virtually no trading revenue and it continues to report large losses. Late last month, it reconfirmed that more capital was required.

There are huge risks associated with drug and other biotech developments and it is unfortunate that the shares issued by Genesis and Blis just prior to listing were too expensive.

New Zealand investors have been badly burned and now have a low appetite for biotech companies.

The situation across the Tasman is totally different. There are 118 biotech companies listed on the ASX, including Fisher & Paykel Healthcare and Genesis.

The sector has a market capitalisation of nearly A$15 billion and ASX-listed biotech companies have outperformed the ASX All Ordinaries Index by a reasonable margin during the past five years.

Of the last five IPOs, all listed in September, four have not done well:

* The one exception is Living Cell Technologies, whose share price has risen from 20Ac to 50Ac.

* Whereas Avexa has fallen from 30Ac to about 25Ac.

* Sunshine Heart has declined from 50Ac to around 43Ac.

* Acrux is around 88Ac compared with its issue price of A$1.20.

* Proteome Systems has gone from A$1.20 to about 65Ac.

The message from these figures is that the biotech sector has outperformed the market over a five-year period but there is no guarantee that new issues will trade above their issue price a few months after listing.

Living Cell Technologies, formerly known as Diatranz, was founded in Auckland in 1987 by David Collinson and Professor Robert Elliott after the Collinsons' son became diabetic at the age of two. Elliott was the founder professor, Department of Paediatrics, at the University of Auckland.

Living Cell is now based in Sydney but its research and development operations are in Auckland under the leadership of Dr Paul Tan, a former executive of Genesis Research & Development.

The company has developed a therapy whereby healthy human and animals cells are implanted in a patient.

Living Cell's product portfolio consists of: NeurotrophinCell, a potential cure for Huntington's disease and stroke; Fac8Cell, a product aimed at treating haemophilia; and DiabeCell, a treatment for insulin diabetes.

ALL products are in the pre-clinical trial phase and NeurotrophinCell should be the first to come to the market, the company says.

Living Cell has 92 million shares on issue and its largest shareholders are David Collinson and Stephen Tindall.

Neuren Pharmaceuticals is issuing 37.5 million shares at 40Ac or 44NZc. The IPO, which closes next week, is hoping to raise A$15 million.

Neuren was established by the merger of two companies, NeuronZ, which was originally formed to undertake research and development in the area of neuroprotection, and EndocineZ, which was formed with Pfizer, the international drug giant with a sharemarket value of US$206 billion, to undertake research and development in the area of growth and metabolism.

The science which is at the heart of all of Neuren's activities was originally discovered within the University of Auckland's School of Medicine.

The company's first priority lies in the area of neuroprotection where it has three prospective products: glypromate, NNZ-2566 acute and NNZ-2566 oral.

In simple terms, these compounds should prevent the death of brain cells in patients undergoing cardiac artery bypass graft, for those who suffer a stroke or serious brain injury or individuals with Alzheimer's, Parkinson's and multiple sclerosis.

Neuren is at the same stage as Genesis when the latter floated because glypromate has successfully passed Phase I clinical trials and PVAC had also passed Phase I.

But the pre-IPO valuations (the value of shares owned by the original shareholders) has been quite different. Genesis was valued at $113.5 million, Living Cell A$9.6 million and Neuren A$25 million.

 

Drug development is extremely risky but Neuren will be watched with considerable interest because of the involvement of Gluckman, Pfizer (an 8.1 per cent post offer shareholder) and University of Auckland (7.6 per cent). Tindall will also own 6.3 per cent post the IPO.

A breakthrough by either Neuren or Living Cell would be a huge boost to medical research in New Zealand and would encourage biotech listings on the NZX.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.