Genesis is race between burnout rate and reserves

By David McEwen

Friday 21st March 2003

Genesis' origins date from 1994 when founder and CEO Jim Watson and a group of scientists left the University of Auckland medical school to establish a biotechnology company.

The company's focus is on research and development, and it is in the process of commercialising discoveries developed through partnerships with leading industry participants including the NZ Dairy Board and Agresearch.

It is also advanced in human therapeutics involving long-term storage of blood cells, organs and embryos, and development of products for the treatment of psoriasis, asthma, tuberculosis and leprosy.

Genesis' efforts culminated in the shares being listed on the Stock Exchange in September 2000, raising $34 million.

Since then, the world has changed. Biotechnology has gone completely out of favour with investors worldwide. This follows a series of disappointments from biotech companies that promised the world but were unable to convert their great inventions into hard cash.

The fallout is measured in the Nasdaq biotech index, which dropped 45% last year. Genesis was similarly affected, its share price halving last year to $1.45 and then falling further to the present level of $1.20.

In the 2002 annual report, the company reported a net deficit of $10.7 million (2001: $9.6 million) on operating revenues of $15.5 million ($19.9 million), of which $10.7 million was derived from research collaborations and grants. It derives income from three sources: research grants, licence fees on completed products and interest on cash in the bank. It invested $15.1 million ($20.5 million) in research expenditure, including clinical trial costs of $3.3 million. A cost-cutting programme resulted in expenditure falling from $29.5 million to $26.9 million. It has a staff of 154 (159), 135 of them scientists.

The net loss of $10.7 million is not at all unusual for a biotech company, which expects to burn cash for several years before its research and development produces sufficient commercial products to reverse the trend. The $10.7 million reported loss last year was, in fact, on budget.

In many areas, Genesis appears to be on the verge of commercially viable developments. With its partner Corixa, Genesis last year initiated a phase-two US clinical study designed to evaluate the potential effectiveness of its treatment for the skin ailment psoriasis. Several other clinical studies were initiated and 60 new patents were issued last year.

Genesis is also at the forefront of the development of plant-related discoveries involving, for example, improving the the nutritional value of pasture grasses. Last year, US patents for three forestry molecules were awarded. The report explains "two of these are used as cornerstone components in the ArborGen programme for the development of better wood quality and faster growth of forestry trees."

In the nature of its business, if only a few of its products take off, Genesis can make a lot of money quickly.

Chairman David Irving points out that Genesis is financially a lot healthier than many biotech competitors.

Nevertheless, behind the falling share price is that nagging feeling that Genesis constitutes a race between its burnout rate ($10.7 million) and its remaining cash reserves ($36.2 million). That still makes it a very risky proposition in anyone's language.

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