The calling in before Christmas of receivers for pioneer Dunedin biotech company Botry-Zen shows the vulnerability of a sector which promised plenty but has so far largely failed to deliver. Business reporter Neal Wallace asks whether investors expected too much from the sector.
There was optimism Botry-Zen had finally turned a corner.
The biotechnology company had secured regulatory access to the United States for its biological control of the grape-wasting fungi Botrytis cinerea, production problems which in the middle of last year sent it spiralling perilously close to collapse appeared to be behind it, and it had a new chairman and chief executive.
Despite this, shareholders sent a signal on the eve of Christmas that they had run out of patience at continued deficits and requests for new capital by rejecting for the second time in 15 months a $1.5 million share purchase plan.
Directors had no choice but to call in receivers.
Shareholder frustration at what was perceived as slow progress by listed Dunedin biotechs to be profitable was not peculiar to Botry-Zen.
Go to any annual meeting and shareholder frustration has been palpable for many years, anger at an almost insatiable appetite for capital and a plethora of red ink on the accounts.
Share prices have hardly instilled investor confidence.
Botry-Zen stopped trading at 1.2c, Pacific Edge Biotechnology stock last traded at 29c, Blis Technologies ordinary shares at 11c, and Pharmazen trades on the Unlisted exchange at 3.5c.
There is a belief among observers that shareholder expectation of returns on their initial investment may have been unrealistic and that maybe some of the biotech companies went to market too early.
There is also a view that the role of the late Howard Paterson in launching many of these biotech companies and his wealth-making reputation could have heightened those expectations, evident by initial public offerings in companies he was associated with being heavily oversubscribed.
New Zealand Bio chairwoman Maxine Simmons said the biotech industry was generally poorly understood by investors, especially the time taken to take a biological product from development phase through the regulatory process and on to market.
Her organisation represented the wider biotech sector, which she said was a broad field of science and equally a broad spectrum of ownership and business models.
Ms Simmons said publicly listed companies drew attention and scrutiny to themselves and she said in hindsight they could now question whether raising capital through the sharemarket was the best option.
Biotech was growing and profitable, she said, pointing to a report profiling the sector from 2005 to 2007, which showed the number of biotech organisations grew 33%, the number of employees by 78%, core sector income by 23% and a doubling in net profit.
So what went wrong with Botry-Zen?On the surface, it appears to have successfully cleared all the hurdles: it had two proven environmentally friendly products, sales in New Zealand, access to the United States markets, and it was looking to Europe.
But it appeared to have become bogged down and shareholders frustrated at the time and growing cost of getting the necessary regulatory approval to those markets.
There was also no sign the company was going to finally return a profit.
Production problems last year at its Dunedin factory certainly hurt the company, but appeared to be behind it when two key investors stumped up with new capital and new processing systems were put in place.
Former chairman Stephen Higgs said in August last year that he had three goals for the company: stabilise production and finances, optimise what the company had, and expand markets with an international focus.
"The future is international. To make the company profitable, it has to be," he was reported as saying.
But that took money.
Pacific Edge Biotechnology chairman Chris Swann said having sufficient cash was a constant battle for biotech companies because there was no understanding of exactly how much money, time and effort was needed to reach milestones.
New Zealand companies tended to only have sufficient cash to tide them over for the next year before having to look for some more, by which time market sentiment or milestones may have changed, he said.
"You try to stumble to the next milestone so you can show you have generated value in the business and then go and get further cash."
Companies tended to be focused on one or two product lines, and that lack of range meant they have to look overseas for sales.
Mr Swann said the sector needed some high-profile winners.
"There needs to be a couple of winners, a couple of success stories to show it can be done and show there can be generous rewards for investors and shareholders."
Blis Technologies chairman Peter Fennessy said as with any industry, some early-stage companies succeeded and some failed.
The way to get "runs on the board" was from sales, and that had proven difficult while companies were working their way through the regulatory phase.
Taking a product from a laboratory to market was a long process during which the product needed an acceptable shelf life, intellectual property protection, to meet regulatory requirements, market understanding and finally sales.
"All these things take time and money, but for those that are successful, the rewards can be high," he said.
Going back to shareholders for more capital was a standard operating model for biotech companies, Mr Fennessy said.
"It is the operating model because of the need for ongoing inputs of cash to keep development going."
Reaching milestones was a sign of success, he said, but could also mean the need for more cash.
Mr Fennessy said biotech shareholders could have been overly optimistic about potential returns on their investments, given regulatory controls needed to get access to markets have tightened in recent years.
Craigs Investment Partners broker Chris Timms said investors need to view the sector as high risk and they need the stomach to stay in for the long haul.
"It is not a get-rich scheme."
Company launches attracted plenty of investor hype when in reality they came with a substantial risk of failure.
"A lot of people overlooked that initially."
Investor confidence was further eroded by repeated requests to inject further cash, in Botry Zen's case an extra $12 million since its launch up to the failed latest request.
Mr Timms said listed biotech companies in particular needed to get some runs on the board or have a cornerstone or philanthropic shareholder - "getting to the stage where they can set themselves some milestones, keep jumping hurdles until they get sufficient momentum, and become self-funding, then shareholders will see some positive news and gain confidence," he said.
Mr Timms said other biotech companies missed an opportunity to give their shareholders some confidence by not making market announcements about their situation when Botry-Zen called in the receivers.
"It would have given the market and shareholders some comfort things are OK going forward."
Botry-Zen is to be sold as a going concern and Mr Timms believed a buyer could do reasonably well, provided they had sufficient capital and realised that to be successful meant focusing on accessing markets in Europe and the US, because New Zealand was too small.
