The Investment Column: Back Utek Corporation as the technology transfer leader winner

It's now too pricey to join the Mears fan club
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After a flurry of floats this year, there is a cluster of about 10 of these companies, ranging from the quite old (BTG was formed from the Government's old National Enterprise Board and floated in 1995) to the brand new (Amphion, which listed last week, was formed in May 2003, although it is managed by two veteran venture capitalists).

And the cluster also encompasses a wide range of business models, not all of which - frankly - look long-term winners.

The theory is that academic institutions have a poor record of exploiting intellectual property, and there is a commercial opportunity in helping them do so by licensing their technology or by creating companies with them. The technology transfer company's investors - who would never be want to invest directly in such risky ventures - get access to a diverse range of new inventions. It's a numbers game, they say. Sooner or later, one of the technologies will turn out to be a blockbuster.

Except that there is little evidence that the numbers stack up. The longer a technology transfer company has been around, the worse its track record appears to be. BTG and Generics, who both employ dozens of scientists to turn patents into products, have had to shovel more cash than expected into their early-stage ventures. Generics needed a rescue rights issue last year. And BTG has the industry's most cautionary tale: a non-surgical varicose veins treatment, Varisolve, which it licensed from a pioneering doctor in Spain, is taking more than five years longer than expected to get into trials in the US.

There is a price for this sort of company, of course. Despair over Varisolve sent BTG shares to a level that gave it no credit for the massive cost cuts it had finally had to impose. It is now back up in "hold" territory.

XL TechGroup is subtly different because it creates companies not by finding an interesting technology but by deciding on a market need. Sourcing the technology is second. Its share price can be justified by the valuation and prospects of AgCert, its first spin-out, a company that creates tradeable pollution credits by reducing farmyard emissions.

A range of low-cost technology transfer companies have emerged, determined to cut out risk as well as expense by refusing to do any scientific work itself. Their value lies in the quality of their relationships with academia and the ease with which they can exit their investment.

IP2IPO is currently best on both counts, since it has wide-ranging deals with Oxford university and King's College, London, among several. It has floated four companies, three in the biotech sector and another which is a technology to map oilfields. The trouble is they have been floated before proving their business models, so it is not possible to say yet if IP2IPO has created anything of sustainable value. Three are below their float price, a fact which could dampen investor appetite for other IP2IPO spin-outs and spell disaster for the whole enterprise. Sell.

One model that does look appealing is that of Utek Corporation, floated here in April but on Nasdaq since 2000. It has taken most of the risk out by allying itself not with inventors but with corporate product developers. It works on contract to them to scan the universities of the UK, Europe, Israel and North America for technologies that they need for an urgent project, and typically makes a five-times mark-up on buying the technology and selling it to the client. Buy.

It's now too pricey to join the Mears fan club

Mears Group has been one of the Alternative Investment Market's great success stories. Investors in since the float have made their money 25 times over, thanks to the share price surge and a dividend that was hiked again yesterday, this time by 40 per cent.

The uninitiated might think Mears has found a cure for cancer, or invented a successful internet business, but no. It paints council houses, mends leaky taps, fixes broken windows or does a spot of rewiring.

The trouble is, there are few now who are uninitiated, and the share price, up 8p to 274p, reflects the size of the fan club.

Mears secured £220m of new work in the first half of the year, taking the order book to £960m, making future results highly predictable. It also has very strong cashflows, but Bob Holt, the chairman, was vocal yesterday about acquisitions: can't be bothered unless they're perfect.

There is about £5bn of work out there each year, but little more than half of UK councils have brought in the private sector and Mears has grown because more are doing so. Also helpfully, the Government is spending £3.5bn a year on upgrading social housing, a commitment that could well last until 2015. But don't forget that this is not high-margin work, and should not command a sky-high stock market rating.

The improved dividend and upgraded earnings forecasts of yesterday should help a little, but at 274p, on 20 times 2006 earnings and with a yield of less than 1 per cent, it is just too pricey.

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