Biotech Capital Continues with New Investment Approach
Bioshares, 23 November 2007

Several months ago Biotech Capital (BTC: 30 cents) made a decision to change its investment approach. The listed life science venture capital fund started out as an investment vehicle to give investors an exposure to a portfolio of early development stage biotech businesses. The fund is now realigning its investment focus on revenue generating businesses, where exit opportunities are better and investment horizons are shorter for its shareholders.

Generic Health
This week Biotech Capital announced it had made a $2.2 million investment in a generic pharmaceutical business, Generic Health. The generic pharmaceutical area can be highly successful if the business plan is smart and the execution is very solid, which it needs to be in this industry. Arrow Pharmaceuticals set the benchmark in performance and generated wealth of $800 million for its investors in just six years, after it sold its business to Sigma in 2005. Others such as PharmAust and Genepharm Australasia have found the going a lot more difficult.

Generic Health was formed in 2004 and is based in Melbourne. Its competitive advantage that underpins its business is the international low cost manufacturing contracts it has formed overseas to make generic pharmaceuticals for the Australian market. Low cost manufacturers entered the local market about one year ago with Ranbaxy from India gaining a presence in Australia with its own field force. Generic Health believes it can match any overseas low cost drug makers and is seeking to be competitive to gain a slice of the $550 million generic pharmaceutical business in Australia.

The market has been splintered from when Alphapharm had over 80% of the business in Australia in the 1990s and made the market difficult for new entrants to gain a significant presence. Hexal and Douglas Pharmaceuticals struggled to gain over 5% market share each and it was Arrow Pharmaceuticals that led the charge very successfully to break the Alphapharm dominance.

Genepharm Australasia, which listed on the ASX in June 2004, had a higher cost supply agreement with its Greek affiliate company that made it less competitive in the Australian market. It has since acquired Douglas Pharmaceuticals to beef up its business. Alphapharm and Sigma now have only an estimated 60% of the Australian generics market.

Generic Health’s approach is to sell the top 30 generic drugs on the Australian market (from a total of over 200) which represents around 75% of the market. It does not have complicated discount systems, but seeks to offer the lowest price on any of the pharmaceuticals it sells, which can be purchased as a single product line. The simplicity and clarity of its service together with what it believes will represent the most competitive prices underpins its current approach.

The company’s CEO, Gavin Upiter, has pharmaceutical manufacturing experience from working with Bristol Myers Squibb for 12 years in South Africa, Australia and Europe and this experience assists the company in selecting high quality and low cost manufacturers in India and China. According to Upiter, the generics market is in a state of flux in Australia and is ready to adopt the simplified low cost pricing model that Generic Health is offering.

Generic Health runs a low overhead structure with its distribution outsourced to Sigma and API. It has a modest sales team that services 1500 pharmacies at the present. It currently sells 12 pharmaceuticals which represents about 40%-50%. A further 12 are expected to be released in Australia over the coming year.

The company is close to approaching a breakeven position. Growth will come from adding to its product line and participating in a high growth market over the next five years from the raft of patent expiries occurring over this time.

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