Sent: 09-03-2010 10:10:15
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Rewarded for Success
Companies do get rewarded when they get the job done, according to recent research.
One of the laments often heard from executives of Australian small companies is that their efforts are not as well recognized as they would be if the companies were headquartered in other countries.
This cry for better treatment most often comes from biotechnology companies and early stage miners.
Biotechnology and mining companies are often thought of as coming from opposite ends of the technology spectrum and, therefore, likely to face substantially different commercial challenges. However, in some key respects, they are remarkably similar.
In both cases, executives are asking potential investors to accept their judgement that they are going to complete company transforming discoveries. In one instance, it might be a miracle drug. In another, it might be a previously unknown mineral resource.
In both cases, investment returns are very highly dependent on the presence of specific executive skills without which commercial success is unlikely.
Even after the science or the geology has been demonstrated, there is typically a long sequence of further steps required before a commercial outcome can be contemplated. The gestation from initial indication to revenue could be a decade or longer.
Both endeavors tend to be very capital hungry with investors facing a real risk of having their financial positions substantially diluted even if the intended discoveries go according to plan. There is a significant chance that, in both cases, early investors lose everything they have put into the companies.
Two recent pieces of analysis suggest that, contrary to some of the complaints, markets do reward companies that get the job done.
A paper by Bixia Xu entitled "Investment success and the value of investment opportunities: evidence from the biotech industry" and published in Applied Financial Economics (Volume 19:7) looks at how movements along the drug development pipeline are reflected in the market prices of listed biotechnology companies.
Another paper, "Gold - Valuation benchmarks are obsolete" published jointly by international accounting and advisory firm BDO and Edison Investment Research in January 2010, quantifies the revaluation of listed gold companies in Australia, Canada and the UK as they upgrade their resource bases.
The BDO/Edison research also highlights the extent to which the Australian market is more generous toward its local mining entrepreneurs than investors in overseas markets. Australian companies with inferred and measured resources are priced at a premium to comparable companies listed in Canada and London, according to the analysis.
There are some more detailed notes on the these two pieces of research and their implications for local market conditions in the next edition of the monthly ATC Digest, available on subscription from https://www.atcbiz.com.au/store.php.
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