Investors to back innovation wanted

Genesis Research head Stephen Hall says failure is common in biotech but the payoff can be huge. File Picture

Backing the "knowledge economy" may be a worthy and patriotic idea, but betting your nest egg on local technology companies is hardly a conservative investment strategy.

Many a Kiwi start-up has destroyed investors' dreams when its bright idea for a world-beating product has withered under the pressure of breaking into export markets and competing against big international rivals.

On the flip side, some people have become rich backing clever ideas successfully taken to the world by local companies.

We are constantly reminded that this country's economic salvation lies in exporting innovation.

"As the knowledge economy we have to get out of the commodity trap," Geoff Henderson, chief executive of Windflow Technology, told an NZX investors seminar in Auckland this month.

Windflow is listed on the NZX's alternative AX board and has the immodest aim of being "a global leader in wind turbine innovation".

"Through the Windflow experience I've come in contact with a lot of different engineering companies," Henderson said.

"And while there is still a wealth of talent in New Zealand and a wealth of capability, I've also come to appreciate that it's a bit like a muscle that you've got to exercise. If people aren't doing what we're doing, then those companies will gradually atrophy."

Ensuring investors keep fuelling that technology muscle with healthy doses of cash was one reason the stock exchange organised the SciTech company presentations in Auckland and Christchurch.

"When you look at what's happening in New Zealand you see a lot of companies in these sectors [science and technology] that are growing and need access to capital," says Geoff Brown, the NZX's head of market products.

"That's something that the market can provide, and therefore we need to provide the opportunities for those companies to raise capital to grow."

To promote interest in the technology sector, NZX this year launched the SciTech index which tracks the combined share price performance of 23 listed IT, biotech and industrial technology stocks.

In the 12 months to the end of June, the index climbed 26 per cent, compared to a 10 per cent rise for the NZX top-50 index.

Brown says the predominance of smaller, fast-growing companies in the index helped push it along, but investors need to be cautious.

"You quickly realise when you start seeing some of these companies that, at an early stage in their development, they need to go overseas. As a consequence of that, the risk profile of some of these companies is different and higher than a lot of other sectors might be."

Seventeen of the 23 SciTech companies took the opportunity to appear at this month's seminars, a sign they are eager to "present their story", Brown says. He was also pleased with investor interest - about 200 registered to attend the Auckland event.

Brown says it is important for the exchange to highlight the share price success of companies like quartz crystal technology company Rakon, which listed this year.

"They create a degree of shareholder interest. They've performed well and they're now on a rating which must encourage others to look more broadly at the benefits of listing," he says.

"That's the critical part for Rakon for us - that on 40 times prospective earnings, all of a sudden people's aspirations in terms of the way that companies might be valued in New Zealand is raised."

SciTech index companies span the investment spectrum from well-established exporters like Fisher & Paykel Healthcare to more speculative plays like biotech company Genesis Research and Development.

Genesis chief executive Stephen Hall told the seminar failures were common in biotech and even the world's largest pharmaceutical companies could get hit with the huge costs of having to abandon a drug development at a late stage.

"The positive side is that the payoff is enormous if the product is successful," he said, citing the world's top selling drugs which can generate more than US$2 billion ($3.14 billion) a year.

"Biotech is about raising money and spending it, repeatedly for long periods, in the plan that eventually you will strike a success with an important product that returns substantial returns to shareholders.

"That is unlikely to happen in the first product. You'd be lucky if it does. But, hopefully, in the longer term, over a number of development projects, that is what will happen. So shareholders need to be prepared for ongoing periods of losses."

A different company strategy was presented by Earl Stevens, managing director of ICP Biotechnology.

Stevens described his company as being involved in "boring biotech" because rather than take the development risk itself, it merely supplied products to those that did.

"We're about making solid products that people need, typically in the biotech and pharmaceutical industries. So we're aiming to make money from day one. It's a different model than perhaps we've been used to in biotech but it's one that sits well with me," Stevens said.

Many speakers talked about the difficulty of cracking export markets, but agreed it was imperative given the tiny domestic market.

Brian Weatherly, chief executive of dental software company Software of Excellence, said his company won the top market share position in the British market by sending shareholding executives Clare and Errol Kent to work there for seven years.

"Certainly if I was speaking to someone who wanted to start an export software business, I would say this is a critical element to it - having people who care and love, and preferably have an ownership in the business, go to that market and start it," Weatherley said.

David Ritchie, chief executive of electronic payment technology company Provenco, said focusing on the company's business plan was vital when entering a new market.

"It's the blueprint for everything we're doing and we have to make sure we've articulated it before we start," he said.

"It's what we go back to, to make sure we're keeping on track as we continue pushing into any new market."

KNOWLEDGE ECONOMY

The 23 companies that make up the NZX's SciTech index:

Biotechnology
A2 Corp, Blis Technologies, Botry-Zen, Comvita, Fisher & Paykel Healthcare, Genesis R&D, ICP Biotechnology, Livestock Improvement, Pacific Edge Biotechnology, Wool Equities.

Information technology
Cadmus, Finzsoft Solutions, Plus SMS Holdings, Provenco, Rakon, Renaissance, Software of Excellence.

Industrial technology
Connexionz, Mooring Systems, Scott Technology, Sealegs, Wellington Drive Technologies, Windflow Technology.