New Zealand feature: solid biotech is lacking investors

In terms of industry size, New Zealand and Australia have a similar number of biotech companies operating on their respective shores.

But while Australian firms habitually lament the low level of industry funding, at least one local biotech expert believes our trans-Tasman neighbour is some 10 years behind in that regard.

In recent efforts to remedy the situation, the Labour-led government has initiated the Venture Investment Fund (VIF) - a program seeded with $NZ100 million in government money and expected to leverage a further $NZ200 million through the six private fund managers selected in February to kick-start the initiative.

Chairman of the VIF, John Grant, likened the fund to Australia's Innovation Investment Fund, which invests in nine private sector venture capital funds that in turn assist small companies to commercialise their R&D.

Grant - who also chairs Biota Holdings and H-G Capital, is a non-executive director of Goodman Fielder, John Swire & Sons, Vision Systems, Mincom, and H-G Ventures, and has had 12 years' exposure to the Kiwi private equity scene - said New Zealand's biotech market was less developed than Australia's.

"In some aspects you could say it's about 10 years behind in terms of funding in as much as there are very few venture capital groups that are managing committed pools of funds for biotech, and the vast majority of those are in the late-stage area," Grant said.

"So basically deals in New Zealand in the biotech area have been done on a case-by-case basis, whereby entrepreneurs or institutes put together a transaction and then try to find investors. It's really where we were 10 years ago."

But he said the scales were somewhat off balance, as he believed there was more biotech activity happening in New Zealand than in Australia.

"There's been a big growth in the past five to six years in early-stage technology, particularly in biotech," Grant said.

"I think tapping the capital market through the VIF initiative at the early stage will lead through to helping companies to tap into follow-up funds in Australian and other public markets offshore.

"That is going to be an expectation of this fund."

But according to several industry analysts, while seed funding might be covered by such initiatives as the VIF, the next stage would remain difficult to finance because few venture capital funds specialised in biotech.

According to Investment New Zealand's biotechnology investment manager Dr Bret Morris start-up money was now quite readily available.

"The picture with respect to the venture capital industry here in the more mature phase is somewhat more difficult in that, of the various venture capital funds here, very few are specialising in biotech," Morris said.

"The dilemma then is that the companies with a product ready to go into phase II trials tend to go offshore for money."

Other companies, particularly those in the neutraceutical industry, which do not require FDA-approved clinical trials, opt for early public listings, he said.

But that too can be problematic, according to VIF's Grant, in that the New Zealand equity market - where five biotechs are currently listed - had relatively thin liquidity.

For some companies, such as Genesis Research and Development Corporation, this was overcome by also listing in Australia. The company, which deals in the discovery of molecules involved in cellular communication, went public on both the NZ and Australian exchanges in September, 2000.

CEO Dr James Watson said the decision to list on both exchanges after seven years of operation was primarily to raise money, give shareholders an exit strategy and increase the company's exposure to Australian financial institutions.

Watson said Genesis had developed several business relationships, built its product portfolio and had been running fairly cash neutral, but felt a listing would bring the money it needed to move forward.

"It's been a bit of a stormy ride in terms of share value and I think that's because the market expects there will be products out there fairly quickly," he said, adding that the company had felt a certain amount of pressure to list.

"The IPO has certainly given us the finance, which gives us stability in our own operations that is providing a buffer to pursue reasonable aggressive development."

A senior investment analyst with investment bankers Northington Partners, Dr Claire McGowan, said a clear gap existed at the $NZ1-5 million funding level.

McGowan, who earlier this year gave a presentation to United States investors on New Zealand biotechnology, said young US companies were moving away from early listings and tended to be more interested in partnering for development.

"The formation of strategic alliances and partnering with international players who can fund the company is quite a smart way to bring money into a company," McGowan said.

But she said some US investors were turned off by the attempts by New Zealand (and often Australian) universities and research institutes to hold strong equity positions in spin-off entities.

"In the US, a uni might hold a five to six per cent equity position then will negotiate money for the institute, jobs, royalty streams et cetera," McGowan said.

"Here, we want about 30 to 50 per cent of the new entity, which is much harder for investors to work with."

Another turn-off, according to Stuart McKenzie of venture capital group Otago Trust, was the high costs of drug development and strict regulatory path for genetically modified products.

McKenzie said his company, one of the six funds involved with VIF, avoided any company whose product would require FDA-style trials and approvals.

He said that of Otago's $NZ60 million funds pool, about $NZ35 million had been invested in biotechnology companies over the past two years.

"We focus on agribiotech because of the relatively low regulatory hurdles and we leave alone the FDA side of things because it is a very difficult business to run from a small capital base," McKenzie said.

He said companies involved in drug development needed international cash and were better off relocating to be closer to the best sources of finance.

In terms of GM products, an issue central to the current election campaign, McKenzie said the difficult regulatory environment combined with a perceived market acceptance risk made it another area Otago steered clear of.

And he said it was not the only one, with most of the venture funds now testing the biotech waters opting for the low regulatory neutraceutical and non-GM agribiotech businesses.

But according to Genesis CEO Watson, none of these initiatives or attitudes solves the problem of obtaining long-term biotech investment in the country -- a problem he says is also evident in Australia.

"I think the major issue is to somehow provide incentives so the private sector will invest long-term money in the development of these companies," he said.

"I don't think the investment industry, in general, views long-term investment favourably, but you can't get a billion dollar product on the market in a couple of years.

"The investment community has to realise that we are building value and governments on both side of the Tasman need to focus on incentives for that to happen."