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The Shoeshine Column: The biotech heavyweights awake

Friday 15th September 2000

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Genesis Research will list next Friday on the NZSE - the first biotechnology stock on the main board. The considered opinion of experts is that it's on to a good thing but just as with the peaks and troughs of tech stocks investors should realise biotech is no quick fix for the pocket.

Genesis has been trialling its PVAC vaccine for the treatment of psoriasis, a debilitating skin-flaking disease, for the past few years and, in conjunction with American biotech partner Corixa, has a conditional agreement with US medical giant Medicis Corp for the commercialisation and licensing of the vaccine.

Genesis has also hooked up with Wrightson to develop better agricultural products on the strength of its genomic research.

The Genesis float was oversubscribed many times over - mightily impressive stuff, although Shoeshine wonders whether there is valid justification for the excitement.

Genesis' PVAC vaccine is only at the beginning of its phase 2 stage and the drug development approval process is lengthy and monotonous. Phase 2 involves determining preliminary efficacy - capacity to produce affects - and confirmation of safety tolerance and drug disposition from the phase 1 trial.

This takes at least two years and only 40 of every 100 such compounds reach the market.

Once through this stage, testing proceeds to phase 3 which determines long-term safety/efficacy and cost-effectiveness of the drug in a large number of patients. This normally takes three years with 65 of every 100 such products reaching the market.

The product then moves into the registration phase involving assessment by the regulatory approval body - and an 85% chance of success.

Finally there's phase 4 when the drug is monitored once approval has been received for safety and efficacy.

So results for Genesis' psoriasis vaccine won't be known for another six years - meaning investors are in for a long wait.

To Genesis' credit, it has spelt out in its float prospectus the risks involved in investing in the company, saying, "There can be no assurance that we will be able to successfully develop effective vaccines for such diseases in a reasonable time frame or that such vaccines will be capable of being commercialised."

Don't expect that to weigh on punters' minds when the market opens next Friday - they seldom read the detail in prospectuses. And put the "strategic alliance" with Wrightson in the same category. It also may not come to fruition and has strong competition.

Much of the biotech work in the agricultural and pastoral sector has long been carried out by Crown research institutes such as AgResearch which Shoeshine hears will embark on a significant commercial launch in late October.

AgResearch's work is world-renowned and its scientists are working on ground-breaking fertility drugs and possible treatments for ovarian cancer and multiple sclerosis.

If an organisation such as AgResearch was listed on the NZSE, its share price would most certainly be trading at a higher premium than companies like Genesis whose recent share offer was mainly based on the hope of successful future trials of the PVAC vaccine.

In the case of Tartan Mafia heavyweight Howard Paterson's Blis Technologies, the company has the rights to technology which it claims can prevent, among other things, streptococcal throat infections, rheumatic fever, rheumatic heart disease, dental decay, scarlet fever and acute glomerulonephritis, cars not starting in the morning, soggy weetbix and whatever else ails you.

But you can expect even longer than Genesis' six years before getting any tangible results from Blis or Mr Paterson's A2 Corporation.

Blis paid $2 million to the publicly funded University of Otago for 50% of the rights to the technology and has been granted a worldwide exclusive licence to the university's remaining 50% interest.

Paterson and co did that through spotting the potential cash machine of biotechnology and becoming one of the first groups to get dibs on its exploitation. Before that, valuable research was being done for theory's sake, leaving it vulnerable to theft, copy or free use by industrious foreigners.

Venture capital competition for the rights to research programmes is now thriving here.

A2 Corporation is hoping to produce milk that could slow the onset of diabetes and artery disease. And this is where things start getting murkier.

Investigations by the Otago Daily Times earlier this year revealed the company was using unproven research started in the 1990s by Auckland medical researcher Bob Elliott.

Professor Elliott had claimed a connection between two milk proteins: A1, which can trigger diabetes and artery disease in predisposed people, and A2, which can slow it.

But some scientists and the Dairy Board dispute this claim, saying the work is still largely unproven, contentious and not accepted by dairy industry science.

Faced by industry scepticism, Professor Elliott has since conceded more work is required before claims about the A2 protein's health benefits can be made.

But the saga does not end there.

It is also understood A2 Corporation is "negotiating" with the Dairy Board on the issue rights to the intellectual property over the milk findings.

The problem lies in the fact that Professor Elliott undertook research work for the Dairy Board and the Child Health Research Foundation in the early 1990s. In the course of that work, he stumbled on the A2 possibility - research he is now continuing through his company Diatranz.

Professor Elliott claims that the intellectual property and patents surrounding A2 belong to him.

But the Dairy Board also has its own A2 patents which are registered in several countries. The board is also understood to be continuing its own research in the same field.

In the end, the issue of who owns the intellectual property rights to Crown-funded research may well come down to a battle between patent lawyers. But the burning question for investors is one of whether they should be dipping into their pockets and buying into biotech stocks.

Biotech stocks are generally regarded as five- to 10-year investments at least. Over that period they should out-perform the general market but they will have their ups and downs.

The best investors know all booms bust and when no quick rewards are forthcoming the growing boom will do just that.

Those with patience and a good dose of luck will, as usual, be smiling.

An interesting question is how long before we see languishing dotcom or aquarium companies moving into the biotech area in search of a quick fix? Surely it's the ultimate genetic modification.

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