By Stuart Roberts, Senior Analyst, stuart@ndfresearch.com, +61 447 247 909 (8 October 2016)
“New Zealand is already utopia.” -- Peter Thiel, founder of PayPal
I had just returned to Sydney from Queenstown in New Zealand attending this year's Bioshares - the pre-eminent Life Sciences investment conference in our region - and sent an email to the folks who were at the meeting saying thank you for a great three days. At the bottom of the email was a picture of me seated to the left of a map of Australia. One of the first replies I got was from Dr Andrew Kelly, who runs BioPacific Partners, a life sciences venture fund based in Auckland. ‘Typical!’, wrote the genial Dr Kelly, ‘Your smiling photograph completely obscures Australia's gifted little brother’. Sure enough, the two big islands that make up New Zealand were somewhere behind my collar and shoulder blade. That's funny because for a while now I have been telling anyone who'll listen that New Zealand is on the cusp of a biotech and medtech boom. As a matter of fact, I am so bullish about New Zealand as a Life Sciences investment destination that I have thought seriously about moving there for a while. In this essay I'd like to share what's great about New Zealand before explaining why investors stand to make a lot of money over the next few years backing New Zealand's bio-entrepreneurs.​ ​Note - the usual disclaimers apply - click here.

About New Zealand and New Zealanders

If you've never been Down Under, allow me to orient you towards one of the freer and more prosperous corners of the world. Boot up Google Earth and go to -34, 151, (i.e. 34 degrees South and 151 degrees East). That's my country, Australia, the sixth largest nation in the world by surface area. I spend a lot of time on this website telling folks what a great place Australia is, as a society of 24.2 million people, as an advanced and steadily growing economy and as a global Power in the Life Sciences (click here). However, if you really want to visit a land of wonders, plug in -37, 175 and Google Earth will jump you east around 2,000 km across the Tasman Sea to New Zealand. You will have officially arrived in God's Own Country, and not just because it has some of the most beautiful places on earth, as any viewing of Sir Peter Jackson's Hobbit and Lord of the Rings films will attest.

I will leave it to the tourist handbooks to tell you what's worth seeing in New Zealand in terms of natural wonders.  For the purposes of this essay I am more interested in the character of New Zealanders, or 'Kiwis' as they are called (after a native flightless bird, Apteryx australis). It's this character which has made New Zealand, a relatively small country of only 4.5 million people, God's Own Country in an economic and social sense and will, I believe, make it a Life Sciences wonder as well.

Consider just the Kiwi economy. It is currently expanding at a massive 3.6% p.a. (click here), making it the third fastest grower in the OECD. And no wonder, really. In New Zealand the top marginal rate of personal income tax is only 33%, which is one of the lowest in the developed world. The corporate tax rate is only 28%, and there is no capital gains or inheritance tax. With a centre-right government in charge since 2008 (and still popular with the voters), New Zealand's economy has for a long time been one of the freest on the planet and is currently No. 3 on the Heritage Foundation's rankings (click here). And the budget is in surplus. That's right, a surplus (click here). Unemployment at 5.1% is better than Australia's 5.7% (click here), and the business start-up rate is now around 1,300 new enterprises per 100,000 people p.a., whereas Australia's is more like 1,200 per 100,000 p.a. Consequently for the first time in decades more Australians are moving to New Zealand than the other way around (click here). For most Aussies that move would likely represent a step up in terms of their quality of life.  The Mercer Quality of Living rankings for 2016 had New Zealand's largest city, Auckland (population 1.4 million), as the 3rd most livable city in the world, while the nation's capital, Wellington (population only 200,000), came in at No. 12. On Mercer's rating Sydney is 10th, Melbourne is 15th and Perth 21st.

Now consider New Zealand’s social wonders. Transparency International rates New Zealand as the fourth least corrupt country on earth (click here), while the Global Peace Index has New Zealand as the world’s fourth safest place to live (click here). It would seem, moreover, that Kiwis don’t just keep their good fortune to themselves. The Good Country Index, which rates countries on their contribution to the greater good of humanity, has New Zealand as the 12th ‘goodest’ country in the world (click here). Alas, my beloved Australia only made it to the 13th , 15th and 18th spot respectively on these lists.

So my mate Andrew Kelly, who is a native of Australia but who has lived in New Zealand for many years, is spot on: New Zealand is Australia's gifted little brother. We’re brothers because we grew up in the same family, originating as British colonies - the Australian colonies first, followed by New Zealand - that became more or less self-governing in the mid-19th Century. We both retain close ties with our mother country in that Her Majesty Queen Elizabeth II is still Head of State in both Dominions; we both have the Westminster system of government; and even our flags are similar - the British Union Jack in the top left hand corner and the Southern Cross constellation in the right half. And let’s not forget that our two countries have a history of fighting wars side-by-side, most notably at Gallipoli in 1915, which is where the 'NZ' in Anzac comes from. This shared history is why an Aussie can arrive in New Zealand and feel at home pretty quickly.

Little brothers, however, while similar in many ways to their big brothers, can also be subtly different, as the above description of New Zealand as a wonder country will have suggested. The three things that stand out to me about Kiwis is that they are nicer people, they are tougher people and they are more modest people than us Aussies.

In the matter of niceness, don't get me wrong. It's not that most Australians today aren't fundamentally nice people as well, just that we started life as a prison colony where the country was taken away from the Aboriginals and we didn't even say please. That heritage gives us something of a rough edge. New Zealand, by contrast, was not only free-settled, but the settlers came in pretty much invited by the Maori via the Treaty of Waitangi, which was signed in 1840 and remains the law of the land in New Zealand.

The toughness of Kiwis I attribute to the high numbers of Scots immigrants to New Zealand over the years, the historic importance of farming to the economy, and country's 'Wild West' heritage from the Gold Rushes and the New Zealand Wars of the mid-19th Century. It's no surprise to me that the first man to get to the top of Everest was a Kiwi, the ex-beekeeper Sir Edmund Hillary (1919-2008), and while Australia has had its share of war heroes over the years we've had nothing like Charles Upham VC and Bar (1908-1994), a Canterbury sheep farmer whose 'Bar' signified that he had won the Victoria Cross twice.

The modesty thing, which Kiwis probably have because they are more in touch with their British cultural inheritance than are we Aussies, is amply and touchingly illustrated by Hillary and Upham. Hillary, who used to introduce himself to people as ‘Ed’, when asked how he and Tenzing managed to 'knock the bastard off', would only say that they 'did a pretty good job' and that he himself was merely a 'reasonably good climber' (click here). If you watch Upham on New Zealand's version of This Is Your Life in 1985 (click here) you'll see he looks a little uncomfortable the whole time he's being lionised for his truly remarkable life. And for evidence that great Kiwis are still modest, consider that the amazing Richie Macaw, captain of the All Blacks from 2006 to 2015 and a pleasure for even us Aussies to watch, has knocked back the chance to become Sir Richie Macaw.

I contend that all these qualities - the niceness, the modesty and the toughness  - help New Zealand to be a global success story. The first two make the country a great place to live, and, I think, make getting things done organisationally a whole lot easier - such people are without a doubt better team players. The toughness of Kiwis means that New Zealand, when it gets good at something, punches way above its weight. For recent proof of that you need only look at the medal tally from this year's Rio Olympics. At those Games, Kiwi athletes brought home four gold medals, nine silver and five bronze, for a total of 18 medals. That meant that of the 206 nation states and territories competing, only Grenada (population 111,000) and The Bahamas (327,000) earned more medals per head of population.
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There’s one other factor that I think has been very important in New Zealand's current success. It’s a shared experience from the 1980s and 1990s that I call The Road Back From Serfdom.

The house that Sir Roger built

In the early 1980s New Zealand was a high-inflation statist basket case sometimes described as the ‘Albania of the South Pacific’. It had earned that moniker through some really poor policy responses to Britain’s joining of the Common Market, which had ended preferential trading terms for New Zealand agricultural exports. New Zealand’s resulting lurch to the left, accelerated by the late 1970s oil shock, was so bad that eventually nylon carpets were banned (to protect the wool industry) and you needed a doctor’s certificate to purchase margarine (to protect the dairy industry). People started leaving the country en masse, many of them for Australia. Prime Minister Sir Robert Muldoon, who presided over the mess from 1975 to 1984, tried to laugh this off by averring that Kiwi emigration to Australia was raising the intelligence level of both countries.

Then an economic miracle happened, and unlike other such miracles it didn't involve tanks in front of Presidential palaces and the herding of regime opponents into football stadia. It happened through the ballot box. The ostensibly centre-left Labour Party under David Lange (1942-2005) won the July 1984 general election and started to radically free up the economy. I love the optimism expressed by the incoming finance minister, Roger Douglas, later Sir Roger Douglas, on election night 1984 when he commented that ‘I think that New Zealand has tremendous potential. It has to be remembered that in 1956 we were the richest country in the world. We’ve slipped down but we can get back there, I believe’. Left wing commentators have tended over the years to be down on Sir Roger and the free-market revolution he spearheaded under Prime Minister Lange, because real incomes in New Zealand tended to move sideways until the early 1990s during the transition, and they still sit below OECD averages. However, in my view that criticism misses the real issue, which is this: You don’t go from being the Albania of the South Pacific to the Switzerland of the South Pacific without taking the time to learn some new, market-oriented tricks. In New Zealand's case the re-tooling only took around 15 years or so, which in the history of economic development might just be a record. You could tell New Zealand was a transformed country early in the 2000s when advertisements started appearing on Australian television with a couple of good looking young Kiwis, one Maori and one Pakeha, encouraging skilled Aussies to come over and check out all the job opportunities.

My Kiwi friend John, whose family left Auckland in the 1980s for Sydney, has often complained to me, in reference to the years that preceded The Road Back, 'The thing about New Zealand, Stu, is that all the guys with get up and go, they got up and went.'  In other words, you may have one of the freest economies on earth, but if there's no entrepreneurial skill left to take advantage of it, you won't really prosper as a country. What John forgot, I think, was that a lot of talent stayed. As Thomas Jefferson and John Adams put it, in a slightly different context, '...all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed'. Frankly, New Zealand is such a nice place to live that a lot of businessmen chose to hunker down and wait for better times to come. Meanwhile, I contend that 'get up and go' was hard-wired into the DNA of all classes of Kiwi, not just the Auckland Grammar Old Boys like John. And by hard-wired, I mean almost literally - Kiwis like to say that their country has a 'number 8 wire mentality', which comes from the time when No. 8 (ie 0.16") was the gauge used in sheep fencing but was routinely used down on the farm for all sorts of mechanical tinkering. To be a 'No. 8' means to be ingenious and resourceful, which in my view is another manifestation of get up and go. One such No. 8 back in the day was the former All Black and farmer Terry McCashin, whose McCashin's Brewery at Nelson on the South Island pioneered craft beer in New Zealand. When that outfit opened in 1981 New Zealand was still a basket case, but the bleak economic situation at the time was no deterrent to Terry, who could sense that when Kiwis had a chance to drink a genuinely tasty brew, rather than the bland stuff the beer duopoly in New Zealand was foisting on the Serfs at the time, they'd take it. He was right. By the way, one proof that New Zealand is going to be a great biotech country is how they make the original biotech product these days. When you get there I strongly encourage you to drink a pint or two of the APA from Tuatara Brewing at Paraparaumu near Wellington. ABV 5.8% and an IBU almost off the scale at 50! Wow!

Before we leave this aside regarding stuff you can drink that comes from New Zealand, permit me to mention three examples of how this place has learned some clever 'new, market-oriented tricks' that it wouldn't have done without being firmly established on the Road Back From Serfdom. The first relates to wine. Last year I went with a group to visit a winery in the Central Otago district of the South Island. Central Otago has become renowned in recent years for making great Pinot Noir. I asked when it all started, thinking the answer would be in the Gold Rush days of the 1860s. Only around 25 years ago, was the reply. Before that it was just sheep country, and not very good sheep country at that. My second example relates to milk. Ever enjoyed A2 milk? That originated because the Kiwi chemical engineer Dr Corran McLachlan (1944-2003) figured out that the milk protein beta-casein A1 had a connection with ischaemic heart disease (click here) whereas milk with just beta-casein A2 was good for you. The result was the A2 Milk Company (NZX: ATM), now capitalised at around NZ$1.4bn, which shows you what smart Kiwi biology can achieve commercially. My third example isn't a drink but it is liquid - Manuka honey, that is, honey from the Manuka tree (Leptospermum scoparium) native to New Zealand. This honey is an acquired taste - once upon a time apiarists used to give it away while the government paid farmers to clear Manuka from their land. Then Professor Peter Molan (1943-2015) at the University of Waikato got to work in the 1980s elucidating the honey's medicinal properties. Now it earns New Zealand around NZ$200m a year in export earnings, selling in some cases at something like NZ$1,000 a kilo (click here) and proving a mainstay for companies like the NZ$400m market cap Comvita (NZX: CVT).

But to return to The Road Back From Serfdom. The thing about New Zealand since the late 1990s is that the nation's income growth has been steady. I believe, therefore, that Sir Roger’s 1984 prediction can ultimately come true. I hope that when that happens they at least put a plaque out front of the NZX in honour of Sir Roger, like the one for Ludwig Erhard at the Deutsche Börse building in Frankfurt (a statue is probably asking too much given what a controversial figure Sir Roger has been). You see, what the Road Back has done for New Zealand is, I think, to teach its business men and women to be innovative and global in their thinking. To harness the innate toughness of Kiwis in pursuit of business goals knowing that a small, remote nation like New Zealand has to try a whole lot harder. And even to moderate the number 8 wire mentality somewhat, recognising that just knocking something up in your shed won't cut it on the global stage - you also have to make and distribute it under best global practice.

In effect Sir Roger didn't just haul New Zealand out of bankruptcy in the 1980s. He set the country up to be ultra-competitive in the 21st Century.

Which brings me to why I think this wonder country can become a serious Life Sciences success story in the not-too-distant future.

New Zealand and the Life Sciences

I first started thinking about New Zealand as a Life Sciences investment destination around 2011 when I was a sell-side analyst in Sydney and met Simon Wilkinson from Christchurch, CEO of Innate Immunotherapeutics (ASX: IIL). After serving as an officer in the Royal New Zealand Navy, Simon had benefited from New Zealand’s free market reforms with a career in finance, banking and business management. About a decade before I met him Simon had, with no prior scientific background, invested in a vaccine adjuvant program where the product subsequently turned out to be a great immunomodulatory agent for the treatment of inflammatory disorders when administered systemically. With the kind of toughness characteristic of Kiwis, he had persisted with this program to the point where he had ample compassionate use data in secondary progressive Multiple Sclerosis patients living in Christchurch, and needed to get ready for a Phase II that would prove its utility in this setting. With impressive forethought, he had come to Australia to explore getting listed on ASX so as to raise the necessary capital he didn’t think was available with an NZX listing. Wow, I thought. So New Zealand isn't just sheep and dairy country like it once was.

My basic thesis on the Life Sciences and national development is this: In the 21st Century, any country with a free and growing economy, where the health and education systems are First World, and where there is an entrepreneurial spirit and access to risk capital, has the building blocks of a robust Life Sciences sector. About the only thing holding such a country back, if it doesn’t have a steady proliferation of successful biotech and medical device companies, is investor confidence, and that's more a matter of investor outreach and education than anything else.

We’ve seen that New Zealand’s economy is free and in rude health, and has a start-up ethic not unlike what we have here in Australia. When I look at the other success factors I see the building blocks already laid for a huge Life Sciences boom in New Zealand. Consider:
  • There is already at least one established, publicly traded Life Science company focused on medical treatments that has grown up in New Zealand - Fisher & Paykel Healthcare. By established I mean, 'blue chip', so that generalist institutional investors can buy its stock without getting heat from their asset consultants. Fisher & Paykel had been manufacturing refrigerators and other whitegoods in New Zealand since the 1930s, but when the company's researchers figured out how to properly humidify the air coming out of CPAP machines they had a whole new business on their hands as a competitor to ResMed and Respironics (now owned by Philips NV, the Dutch electronics major). In the year to March 2016 Fisher & Paykel Healthcare enjoyed operating revenue of NZ$816m and NPAT of NZ$143m.
  • There is a strong network of Kiwi Life Sciences professionals with OE. What the heck is OE? It took me a while to figure out what that abbreviation stood for when I first encountered it in the book on McCashin's Brewery. OE is 'Overseas Experience' and Kiwis talk about it a lot. When you come from a country as small as New Zealand you find yourself having to leave for a while, not just to get away from annoying aunts and cousins but also to tap greater career opportunities abroad and thereby put OE on your resume. Possibly 600,000 Kiwis live outside NZ, which is around 13% of the resident population (click here). Some Kiwis establish global reputations while overseas and never come back - a good example is Alan MacDiarmid (1927-2007) who, while he hailed from the Lower Hutt district, had been out of New Zealand for the best part of 50 years before he got the Nobel Prize for Chemistry in 2000 for his work on electrically conductive polymers. However a good deal of those 600,000 Kiwis in the diaspora will end up back in New Zealand because it's such a great place to raise a family. Their OE is what keeps New Zealand's economy up to date. The thing about Kiwis who are successful somewhere else is that even if they never come back they often have a strong regard for their native country. When Ernest Rutherford (1871-1937), the father of nuclear physics, was put into the House of Lords his title was '1st Baron Rutherford of Nelson', Nelson being the same town where McCashin founded his brewery. ​At Bioshares 2016 I had the privilege of meeting Dr Robert Peach, who serves on the board of Innate.  Robert Peach initially went to the University of Canterbury before obtaining his PhD in Biochemistry from the University of Otago. He later went to San Diego and worked at the antibody pioneer Idec before becoming a co-founder of Receptos. That's right, the revolutionary company that figured out how to crystallise GPCRs in order to drug them. That company was sold last year to Celgene for a cool US$7.2bn. Robert Peach still lives in southern California but retains strong family ties to New Zealand, hasn't lost his Kiwi accent, and is now looking to support the growth of the Life Sciences sector in New Zealand. 'This country gave me a free education', Robert told me. 'I would like to give something back'. 
  • There are Kiwis actually resident in New Zealand who have proved that it is possible to build significant Life Science companies without having to leave home. The Medicines Company (Nasdaq: MDCO), currently worth US$2.7bn and a specialist in drugs for acute and intensive care, was headquartered in Boston but Dr John Villiger, who hails from the Waikato and was a Medicines co-founder, ran the development effort for the company's first product, an anticlotting drug called Angiomax, out of an office in the Auckland suburb of Parnell. I once asked John how he managed it and he said 'I spent a lot of time on flights to and from the US'. On the other side of Waitemata Harbour from Parnell, in the suburb of Takapuna, Dr Hartley Atkinson, who used to work for John Villiger at Roche, started AFT Pharmaceuticals in 1997 in a spare room next to his garage. The company is still in that suburb. Like John Villiger did, Hartley has to travel a lot, but that's the price tough Kiwis are prepared to pay to stay anchored to God's Own Country.
  • There is a great University system, including one - the University of Auckland - in the Top 100 globally. It sits at No 81 on the 2016/17 QR list (click here). Following on behind Auckland is Otago (169), Canterbury (214), Victoria University of Wellington (228), Waikato (324), Massey (340) and Lincoln (343). I contend that all these universities support a research infrastructure with the capacity to create some future Life Science start-ups. After all, they educated most of the people mentioned in this article, and a whole lot of other world-beaters such as Dr Matt During, CEO of the New York-based Ovid Therapeutics, which may just have the Next Big Thing in rare diseases of the brain, and Dr John Bedbrook, the plant geneticist who helped clone the first cDNA containing a plant enzyme (click here). Speaking of plants, the New Zealand government operates AgResearch, a 'Crown Research Institute' whose mission is to develop new biotechnologies useful to the farming sector. Agriculture, after all, remains New Zealand's largest export earner.
  • There is a First World healthcare system in New Zealand. It may be under pressure, like it is everywhere else in the developed world, but it does deliver life expectancy at birth in New Zealand of 83.2 years for females and 79.5 years for males (click here). That's slightly behind Australia's 84.4 years for females and 80.3 years for males (click here) and the explanation lies in the fact that Maori are a big percentage of the current New Zealand population (around 14% vs 3% for Australia's Aboriginals), and, regrettably, Maori trail behind non-Maori in terms of  life expectancy by around 7 years. That said, you can tell the Kiwi healthcare system is First World because the gap is narrowing - it was 9 years in the mid-1990s. While we're on the subject of demographics, I was interested to learn that Kiwis are actually younger that Aussies in aggregate - the current median age of the New Zealand population is 37.8 years versus 38.6 years for Australia. So it looks like exodus of people from the years that preceded the Road Back won't be allowed to prematurely age the country and cut off its long-run growth potential.
  • There is the ability to do all Phases of clinical trials in New Zealand. New drugs, unfortunately, often take years to gain reimbursement in New Zealand due to stricter cost-effectiveness criteria than that which prevails elsewhere. One upside of this is that patient recruitment for trials can be easier to achieve in New Zealand than in, say, the UK or the US.
  • There is access to risk capital. New Zealand has a respectable stock exchange of long standing, the NZX, which rejoined the World Federation of Exchanges in 2013. For those companies for whom NZX is too small, the capital markets of Australia and New Zealand are integrated such that Kiwi companies can easily go public on ASX without excessive hassle.

All of which is great. However I can already hear my patent lawyer friends protesting: 'If New Zealand is so good, how come its Life Sciences sector only collected 12 US patents in the year to early October 2016, whereas Australia's got 124?' (click here). Yes, it's true, on this measure it looks like New Zealand's level of Life Sciences innovation is only half that of Australia on a per capita basis. Consider, however, PCT patent applications rather than US patent grants. PCT stands for the 'Patent Cooperation Treaty', under which inventors are able to file a single 'international' patent application before taking it to individual jurisdictions asking for a patent. When I look at the list of PCT patent applications published between the start of 2014 and 6 October 2016 (click here) I count 80 for New Zealand's Life Sciences sector and 402 for Australia's. This puts New Zealand slightly ahead of Australia on the Life Science innovation stakes, at around 6.4 patent Life Science patent applications per head of population per year, versus only 6.0 for Australia.  Basically both countries have about the same level of bio-inventiveness, but New Zealand as a country doesn't push anywhere near as hard as Australia does to capitalise on its bio-innovation. And that's because, at the moment, New Zealand lags in terms of creating successful Life Sciences companies, where I define success as 'funded, attracting investor interest, and making steady progress towards bringing its drug or medical device to the market'.

Let me illustrate New Zealand's current underperformance with this crude measure: I took the list of ASX-listed Life Sciences companies that I watch (click here) and excluded those companies with a current market capitalisation of more than A$1bn. Of the remaining 98 companies, 34 were based in Melbourne and had a collective market capitalisation of A$2.9bn. In effect the Life Science companies from Melbourne were capitalised at around A$640 per inhabitant of that city. The next most productive Life Sciences city was Perth with 18 companies valued at A$720m for a capitalisation of A$360 per inhabitant. My city of Sydney had A$1.3bn worth of Life Sciences corporate value, but that was worth only A$270 per inhabitant. And then there was New Zealand. It could only muster A$530m in market value, making for market capitalisation of only A$120 per inhabitant.

I argue that, if New Zealand were performing at the same level as Australia in terms of creating successful Life Sciences companies, there'd be around 15-20 Kiwi companies on my list. Instead, there's only five - the aforementioned Innate Immunotherapeutics as well as Adherium (Auckland, ASX: ADR), AFT Pharmaceuticals (Auckland, ASX: AFP), Living Cell Technologies (Auckland, ASX: LCT) and Volpara Health Technologies (Wellington, ASX: VHT). I don't count Neuren Pharmaceuticals (ASX: NEU) as a Kiwi company any more, although technically it is, because its headquarters are now in Melbourne.

There's a simple reason why New Zealand is the laggard here - capital. When it comes to Life Sciences, New Zealand has until recently been where Western Australia was five years ago - somewhat lacking in investors who really understand the sector or who are willing to make the effort to learn. So you could raise capital in New Zealand for early stage development from firms like BioPacific Partners, but there weren't many of those folks. Or you could tap a champion angel like Sir Stephen Tindall, founder of The Warehouse retail chain and a proud backer of technology-oriented companies that originate in his country. But there weren't enough Sir Stephens to go around either. It was like the Wellington businessman Geoff Ross trying to raise the money to produce the premium vodka brand 42 Below. When Ross wrote a book about his struggles to create that ultimately successful business he entitled it Every Bastard Says No. With just about every bastard in New Zealand saying no to biotech and medical devices (some because they lost money in one of the earlier NZ biotechs, a valiant effort that was merely a little ahead of its time called Genesis Research and Development), not enough companies started up, and those that did found it harder to progress.

So why, I hear you ask, are you bullish about New Zealand's Life Science sector now? For seven main reasons:
  • New Zealand Pharmaceuticals, a company from Palmerston North which is the world’s second-largest manufacturer of cholic acid, saw the Australian private equity firm Archer Capital take control of the company earlier this year in a transaction reportedly worth NZ$200m (click here). This deal has the potential to put New Zealand on the map as a place where you can create world-beating specialty pharma companies.
  • I think the Life Sciences success stories that did manage to startup and keep going in New Zealand over the last 15 years or so are about to create big investor interest on both sides of the Tasman, leading to a significant rush of new capital into the sector. Both Innate Immunotherapeutics and Living Cell Technologies will read out important Phase II data probably in the next 12-18 months. Meanwhile AFT Pharmaceuticals has big growth plans for the next two years. And Volpara is rapidly growing its user base. Meanwhile the somewhat-adverse capital climate didn't deter good companies that are still private like Aranz Medical (wound imaging), Aroa Biosurgery (soft tissue repair) Avalia Immunotherapies (natural killer-like T cells for cancer immunotherapy) and Kode Biotech (platform to modify surfaces with functional molecules) from starting up, so there will be more good news stories to follow once the listed companies start to excite.
  • I think that there will be plenty of capital available once the listed Kiwi Life Science stories get as good as I think they will. I checked the National Business Review's 2016 list of the wealthiest New Zealanders, ie, those with a personal or family wealth greater than NZ$50m. When you add up the 194 entries on that list, from Graham Hart (NZ$7bn) and Richard Chandler (NZ$4,2bn) down through Sir Stephen Tindall (NZ$270m) and Prime Minister John Key (NZ$60m, a fortune based on OE where he headed foreign exchange desks for Merrill Lynch), there's just under NZ$60bn in cumulative wealth. A tiny fraction of that can create the next 15 or 20 New Zealand Life Science success stories. Encouragingly, not all the wealth comes from the Old Economy.  Sam Morgan built his NZ$440m fortune initially by founding the Wellington-based TradeMe, New Zealand's largest online auction site. And in the list at NZ$260m is the Douglas family, whose Douglas Pharmaceuticals, under the late Sir Graeme Douglas (who died last month), grew into a major generic drug maker from the 1980s.
  • There's a lot more venture funding available in New Zealand as of this year. In February it was announced that New Zealand had joined Australia’s Medical Research Commercialisation Fund (MRCF), a A$200m collaboration run by Brandon Capital on behalf of major Australian superannuation funds. The Brandon/MRCF people can obviously see what I'm seeing, and they are no slouches, having made big money in the likes of Spinifex Pharmaceuticals and Fibrotech Therapeutics.
  • New Zealand is gaining a reputation for being a great place to do tech ventures with international appeal. Xero (ASX: XRO), the accounting software company, is from Wellington, and behind Xero a whole bunch of Kiwi startups are gaining global reputations. Most of them are in Auckland, most notably 90 Seconds (a cloud video production platform), Booktrack (developer of soundtracks for audiobooks), Equitise (a crowdfunding platform), Harmoney (peer-to-peer lending), Power by Proxi (wireless power solutions), Unleashed Software (software for inventory management) and Vend (point-of-sale software), but others such as 8i (volumetric virtual reality) are clustering around Xero and TradeMe in Wellington. In my experience, when investors get comfortable investing in technology, it isn't long before they start getting into biotech and medical devices as well. The established healthcare information technology company Orion Health (NZX: OHE) is from Auckland, while a recent Auckland start-up called Jupl, which does remote patient monitoring, has the pharmaceutical chemist and social entrepreneur Sir Ray Avery as a co-founder. Both Orion Health and Jupl could drive local interest in other digital health plays. The adventurousness of some of the New Zealand tech start-ups suggest that Kiwi investor risk appetite has gone up in recent years. The Auckland-based Rocket Lab is doing what its name suggests - developing rockets. Meanwhile down in Christchurch you can find Martin Jetpack, which makes jetpacks to let people fly. It was funded by No 8 Ventures, the same crowd that did the exoskeleton company Rex Bionics.
  • If the Kiwis aren't listening, Sydney is only a three hour flight away from Auckland, which isn't all that long (hey, my full length audio recording of Hamlet only takes 3 hours and 25 minutes to listen to) and there are plenty of investors in Australia are now paying significantly more attention to the Life Sciences than they were five years ago.
  • Pacific Edge (NZX: PEB) has proved that the Kiwis will actually listen. This company, from the delightful South Island city of Dunedin, is a world leader in the development of urine-based cancer diagnostics. Pacific Edge's Cxbladder test measures expression of messenger RNA for five biomarker genes that represent a signature for bladder cancer. There are more such tests coming in the future, but the data for this one looks pretty good (click here). Under the stewardship of CEO Dave Darling, Pacific Edge has consistently attracted local investor attention and currently has a market capitalisation on NZX of around NZ$170m.

When the New Zealand Life Sciences boom happens, I don't think it'll just be the uber-wealthy Kiwis who play. Back when I was working for ASX-listed listed immuno-oncology companies I made a habit of looking at my company's share register to learn who owned our stock. I was surprised to see there were literally hundreds of Kiwis on my registers from places I had barely heard of like Whangamata, Kerikeri and Te Puke. My ignorance of New Zealand geography annoyed me, so I started to spend time with a map of the country finding out where these intrepid investors lived (if you've read My Early Life you'll recall that Winston Churchill once did the same thing to pass the preliminary examination for the Army). They came from all 16 of New Zealand's regions, including the underpopulated West Coast of the South Island, and while about a third of them were from Auckland, there were big representations from Wellington, the Bay of Plenty and Canterbury. I realised that Kiwis could and would invest in a biotech company headquartered 2,000 km away and not even traded on their local exchange. Imagine how Kiwi investors will react should one of their own companies come up with the Next Big Thing in Parkinson's Disease or MS.

Adherium - Potentially a breathtaking opportunity, once the selling stops

Company: Adherium
ASX Code: ADR
Main business: Monitoring devices for respiratory disease
Location: Auckland
Market capitalisation*: A$46.8m
Liquidity**: A$53,000 per day
* 6 October 2016   ​** Twelve months prior to 6 October 2016
Comment, 6 October 2016: The chart for Adherium looks lousy but the company, based in downtown Auckland, may warrant another look by investors. Adherium has developed the 'Smartinhaler', a monitoring device with 510(k) and CE Mark approval for patients with respiratory disorders. As the name implies, Smartinhalers attach to a patient's inhaler, where they track medication adherence and send the data to the patient's doctor via the Cloud. Numerous studies have shown that Smartinhalers can markedly lower the number of severe episodes a patient suffers by improving compliance with therapy. Asthma, for one, is widely known for the poor overall quality of medication adherence, so given the large patient population the upside potential is huge. Adherium has long term partnership with AstraZeneca, which historically has had a formidable respiratory franchise. Through this relationship Adherium supplies devices and sensors that AstraZeneca incorporates into asthma and COPD patient support programs. Importantly, AstraZeneca is also a substantial shareholder in Adherium.

AFT Pharmaceuticals - From Takapuna to the world

Company: AFT Pharmaceuticals
ASX Code: AFP
Main business: OTC pain and allergy relief pharmaceuticals
Location: Auckland
Market capitalisation*: NZ$312m
Liquidity**: NZ$16,000 per day
* 6 October 2016   ​** Since 22 December 2015, on NZX. At the moment the stock has minimal liquidity on ASX
Comment, 6 October 2016: Have you seen that ad on television lately showing a man with longish grey hair and a soft Kiwi-accented voice pitching an OTC painkiller called Maxigesic? That's the guy from Takapuna I mentioned, Hartley Atkinson of AFT, who invented the product from the room off his garage - it was the first in the world to combine paracetamol and ibuprofen in one formulation. AFT, which specialises in pain and allergy relief products and which listed on the ASX and NZX last December, is in rapid expansion mode. CAGR for revenue has been 19% p.a. since 2005, reaching NZ$64m in the year to March 2016. The best may be yet to come given that in that year AFT sold 21 million tablets whereas next year it expects to sell 72 million. Not bad when the competition is giants like Reckitt Benckiser, owner of Neurofen, and GlaxoSmithKline, the company behind Panadol. How does Hartley do it? Strong R&D to come up with differentiated products, hard work on building distribution partners globally (I told you Hartley had to fly alot), and some clever marketing. That's made AFT a ~A$300m company, albeit virtually unknown to investors here in Australia.

​Innate Immunotherapeutics - An MS drug candidate where the patients are saying good things

Company: Innate Immunotherapeutics
ASX Code: IIL
Main business: Developing MIS416 for secondary progressive MS
Location: Auckland
Market capitalisation*: A$123.3m
Liquidity**: $30,000 per day
* 6 October 2016   ​** Twelve months prior to 6 October 2016
Comment, 6 October 2016: This company is based in the Auckland suburb of Penrose, down near Manukau Harbour, although Simon Wilkinson continues to live in Christchurch. As we noted above, Innate's MIS416 compound may help in 'Secondary Progressive' Multiple Sclerosis. In MS the Central Nervous System (i.e. the brain, spinal cord and optic nerves) comes under attack from the patient's immune system, and as the myelin insulating nerves gets destroyed the patient gradually becomes paralysed or blind. In the earlier stages MS is mostly 'relapsing remitting', meaning that it comes and goes. Later on it generally becomes 'secondary progressive', meaning there is no let-up. Innate may have one of the first drugs suitable for these patients. We'll have a better idea next year when the current Phase II study for MIS416 reads out data. What's interesting is that MIS416 already has a long history of compassionate use in NZ, where '70% of these patients have self-reported significant improvement in their MS-related disabilities and and/or health related quality of life'.

Living Cell Technologies - Exciting early stage data in Parkinson's

Company: Living Cell Technologies
ASX Code: LCT
Main business: Cellular therapy for Parkinson's Disease
Location: Auckland
Market capitalisation*: A$42.2m
Liquidity**: $47,000 per day
* 6 October 2016   ​** Twelve months prior to 6 October 2016
Comment, 6 October 2016: This company, located at Papatoetoe in South Auckland, is working on 'NT Cells', which potentially represent a breakthrough in the treatment of Parkinson's Disease. The therapy is based on the principle that the choroid plexus, a secretory tissue in our brains, helps maintain brain health by producing cerebrospinal fluid containing a range of neurotrophic and neuroprotective factors. Living Cell maintains a pathogen-free herd of Auckland Island pigs at Papatoetoe, and from the brains of neonates in the herd it harvests choroid plexus cells which are then wrapped in alginate micocapsules to protect them from attack by the human immune system. The cells seems to be effective in animal models of Parkinson's Disease, and in the first four Parkinson's patients to be administered the therapy in Phase I/IIa, the apparent result, as announced earlier this year, has been a halting of Parkinson's progression and significant improvement in neurological scores, as measured by the Total Unified Parkinson's Disease Rating Scale. Given that nothing really great for Parkinson's has happened since Levodopa first came on the market in the late 1960s (other than Deep Brain Stimulation for severe Parkinson's), NT Cells could be a really big deal. A confirmatory Phase IIb study is now underway. If this works, the therapy could gain its first approval, in New Zealand, in 2018.

Volpara Health Technologies - Radically improving breast cancer detection

Company: Volpara Health Technologies
ASX Code: VHT
Main business: Software for analysis of breast density
Location: Wellington
Market capitalisation*: A$35.2m
Liquidity**: $31,000 per day
* 6 October 2016   ​** Twelve months prior to 6 October 2016
Comment, 6 October 2016: This company is based in Wellington because founder Dr Ralph Highnam, a Brit, married a Kiwi girl. I always say that the best way for Australia and New Zealand to grow our economies is for our beautiful women to fan out around the world and persuade the best and the brightest to move Down Under. But seriously folks, Volpara is important because breast density is set to become a big issue in the detection of breast cancer, and Highnam and his colleagues, including Oxford's Professor Sir Mike Brady, an authority on medical imaging analysis, have developed potentially the best way to analyse breast density. Currently, when you take a mammogram, the part where the breast is dense shows up white on the image, which can potentially obscure a tumour. Volpara's software, by showing the probability of a missed tumour, can help oncologists decide if further scans are necessary. With 24 US states having legislated for coverage of breast density tests, there is a great growth opportunity for Volpara, which counts the abovementioned Sir Stephen Tindall as well as the Australian venture capital investor Roger Allen as backers. FY16 revenue was NZ$2.5m.

Further reading

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