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 June 2003 Since its inception in the early '80s, biotechnology has been one of the most sought after sectors for venture investment. Long before the rise and fall of the telecom and dot-com sectors, the scientific promises in biotechnology offered bold and seemingly endless possibilities for products developed from the manipulation of genetic matter of plants or animals. Some reached the market; many did not. Now, in yet another expansionary phase, agricultural biotechnology is generating investor excitement. With a quarter century of research behind it, ag biotech offers the revolutionary opportunity to develop crops into factories for the manufacture of chemicals and pharmaceuticals. Agriculture could become for the 21st century the manageable, sustainable source of carbon for fuels, fiber and materials that petroleum was in the 20th century. Unfortunately, the expansion of pharmaceutical farming, as it is called in the United States, runs headlong into agriculture for food and fiber and its historic role. Companies in this sector now must wrestle with legitimate public concerns about biotech, food crop contamination, species diversity, genetic drift and environmental impact. Public policy debates are offset by the pressing need for development of new and less expensive chemicals, pharmaceuticals and food to economically serve a global community, the loss of nonrenewable resources and accelerating health costs. Despite these obstacles, the opportunities for above-average returns on capital are available in this sector. Sorting It Out The ag biotech industry and investors must understand that product commercialization costs associated with bringing new materials or medicine to market are extreme, ranking biotechnology capital requirements among the highest of any sector in the United States. The investor who is placing capital in this sector needs patience and sufficient knowledge of the core biotechnology to understand the regulatory and development hurdles unique to this industry. For companies meeting the basic criteria of a sound concept and proven science behind their product, capital is accessible at a price. To become successful, there are several nonnegotiable essentials to securing outside capital. First and foremost, the ag biotech company must demonstrate a reasonable valuation and create a solid capital structure with a realistic exit for investors. Furthermore, the valuation must be tied directly to reasonable cash flow projections and achievement milestones. Second, the company must demonstrate a businesslike and solution-oriented organization with an infrastructure capable of providing investors with a consistent stream of information regarding both successes and failures. In other words, the capital markets require that early-stage companies "grow up" quickly. Investor Expectations So what should investors expect? Early-stage biotechnology companies are highly technical in nature. Investors and founders must recognize that the science responsible for the discovery and first development of the concept and underlying research may not effectively translate good technology into real product demand. Risk capital now requires market presence. For a new technology to gain open market acceptance and generate significant revenue, it must satisfy a market need at a price greater than the cost of developing the product. Likewise, an honest and transparent dialogue among the company and its variousâstakeholders will create realistic expectations. When understanding replaces fear, biotechnology provides excellent returns to capital. This means that a company must know its product, who will buy it, at what price and when. Investors must understand this and be prepared to work for the company's success. Value-Building Potential As the industry matures, consolidation among smaller and early-stage participants is highly likely. Pooling of strengths may be the least expensive way to create synergies, generate greater valuation multiples and attract interested investors. Other advantages to consolidation include scientific and technical synergies, stronger intellectual property estates and the possibilities of accessing potential regulatory expertise with partner companies. When effectively in place, these are truly value-building mergers of equals. Smart Investment Equals Good Outcomes Many consumers and markets fully embrace plant-made pharmaceuticals and products and presume that they are as safe as their artificial counterparts. And yet, analysis and criticism of the underlying science will continue. In the end, the efficacy and economy of ag biotech is being proven in all sectors of ag biotech and will continue to provide new and safe products for the foreseeable future. The function of investors is to remain sensitive to the dilemmas facing the industry yet poised to provide the capital to fuel the growth of this important sector of the new agricultural economy. With the right partners, attractive returns to capital can be achieved, while creating opportunities for future generations of agriculture. Tom Steen is managing partner for Cybus Capital Markets, Des Moines, Iowa. Tweet |
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