Not yet ready to bet on ideas still in the lab

Some mar­kets are keen on biotech­nol­ogy, but in­vestors in SA don’t have much lo­cal choice, writes Rei­tumetse Pitso

Financial Mail - Investors Monthly - - Feature -

In­vest­ing in com­pa­nies in­volved in gene cloning, stem cell re­pro­duc­tion or even can­cer vac­cines is still a far-fetched idea for South African in­vestors look­ing for cut­ting-edge op­por­tu­ni­ties on the JSE.

This might seem strange, con­sid­er­ing how lo­cal in­vestors slav­ishly fol­low global in­vest­ment trends. In­ter­na­tion­ally these high-tech en­deav­ours — though en­dur­ing some stom­ach-churn­ing swings in in­vest­ment sen­ti­ment — con­tinue to at­tract frothy val­u­a­tions on the Nas­daq and the Lon­don Stock Ex­change.

On these large bourses a good num­ber of com­pa­nies with no profit history can com­mand heady rat­ings (and sub­stan­tial mar­ket cap­i­tal­i­sa­tions) that re­flect purely blue-sky po­ten­tial.

Con­sul­tancy EY’s latest Biotech­nol­ogy In­dus­try Re­port found that mar­ket val­u­a­tions for biotech­nol­ogy com­pa­nies reached new heights in the US and Europe in 2014, with cap­i­tal raised in­creas­ing by al­most $7bn over the pre­vi­ous year. Rev­enues across the four es­tab­lished biotech mar­kets — the US, Europe, Aus­tralia and Canada — grew a sprightly 24% in 2014.

Lo­cally, it seems in­vestors don’t have much choice in back­ing listed biotech con­tenders, un­less they are brave enough to traipse down the un­listed ven­ture cap­i­tal route.

CSIR Bio­science ex­ec­u­tive di­rec­tor Boi­tumelo Semete notes that in 2013 the gross do­mes­tic ex­pen­di­ture on re­search and de­vel­op­ment in SA of 0,76% was nearly on par with its emerg­ing mar­ket coun­ter­parts. But she notes that lack of pri­vate sec­tor fund­ing was much more pro­nounced.

“The sec­tor needs a cal­i­bre of in­no­va­tor that bring a strong en­tre­pre­neur­ial fo­cus. The sec­tor also needs an in­creased pool of seed fund­ing as well as in­no­va­tive fund­ing mod­els that cater for the ‘long-time high-risk’ na­ture of the in­vest­ments.”

Semete be­lieves the biotech sec­tor also needs to find a niche where lo­cal con­tenders can be mar­ket lead­ers.

The JSE is cer­tainly not host­ing a slew of biotech­nol­ogy list­ings — which is cu­ri­ous, con­sid­er­ing the thriv­ing biotech in­dus­tries in emerg­ing mar­kets like Brazil and In­dia.

There has been an ar­gu­ment that lo­cal in­vestors lack the risk ap­petite or the pa­tience re­quired to hold in­vest­ments in bud­ding biotech­nol­ogy com­pa­nies. Though there is not much ac­tiv­ity on the JSE, there were 55 biotech­nol­ogy com­pa­nies in SA in 2013. But Brazil had 263 and In­dia 200, with nine of these pub­licly listed.

The JSE hosts two biotech­nol­ogy op­por­tu­ni­ties. Both are small and both are tucked away in in­vest­ment com­pa­nies whose ex­ist­ing oper­a­tions dwarf the biotech­nol­ogy ex­po­sure. Both com­pa­nies are short on in­sti­tu­tional sup­port, and for that rea­son are not well re­searched by mar­ket mak­ers.

African Eq­uity Em­pow­er­ment In­vest­ment (AEE), the old Sekun­jalo In­vest­ments, and niche fi­nan­cial ser­vices com­pany Ec­spo­nent (the old John Daniel Hold­ings) are the only two list­ings that ap­pear to be ex­plor­ing the biotech niche.

AEE holds a 49,99% stake in Ge­nius Bio­ther­a­peu­tics, one of the old­est med­i­cal biotech­nol­ogy com­pa­nies in SA. Ge­nius has been in AEE’s port­fo­lio since 2006 and cur­rently has a car­ry­ing value of R128m, though AEE ex­ec­u­tives would hope to un­lock sub­stan­tially more value if the biotech sub­sidiary is listed.

Ge­nius has a rather in­ter­est­ing history. It was ini­tially nur­tured by beer gi­ant SABMiller and then sold to JCI, one of the com­po­nents of late min­ing mag­nate Brett Keb­ble’s con­vo­luted cor­po­rate em­pire. JCI sold its 49,9% stake in Ge­nius (then called Bio­clones) to

The biotech sec­tor also needs to find a niche where lo­cal con­tenders can be mar­ket lead­ers

Pic­ture: iS­TOCK

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