How Iatia changed its fortunes by changing its business model

Ruth Beran talks with Iatia boss Charles Laycock about the importance of being smart and flexible in designing a good biotech business model.

When vision sciences company Iatia (ASX:IAT) floated on the Australian Stock Exchange in April 2002, its shares opened at AUD$0.25. Inexorably, over the next three years that price fell, finally reaching a low of $0.02 in March 2004.

At that time, Iatia's chairman approached Charles Laycock to see what could be done to improve the company's fortunes. He was employed as a consultant to review Iatia's operations and finances, and following the retirement of CEO Brian Powell in September 2004, he was employed as the company's chief operating officer and began implementing a new business model. In January this year he became Iatia's new CEO.

"They paid me in shares, at $0.04 a share," says Laycock. "I said that if I couldn't double [the figure], I'm not worth anything."

Fortunately for Laycock and the company, Iatia's shares are now trading between $0.07 and $0.08 a share, and the company's future looks healthier too. But how did it sink so low, and how was the slump turned around?

Wrong-footed

Laycock says that Iatia got off on the wrong foot, by listing too early and adopting the wrong business model. "Iatia decided that it wanted to make hardware using its technology for the microscopy industry," he says.

Iatia's quantitative phase imaging (or QPI) technology is based an algorithm co-developed by Prof Keith Nugent, a University of Melbourne physicist. Nugent was Iatia's founder and is currently a director and chairman of the company's scientific advisory board. Iaita's QPI technology is able to extract phase and wavefront information from light and other wavelike radiations using conventional imaging technology, such as standard digital cameras, without the need for special optical components.

By selling its product to consumers, whether research institutions or companies, Iatia was "up against entrenched interests" of big multinational microscope manufacturers like Zeiss and Olympus, who have a "lot of money invested in their market position," says Laycock. "They don't like new technology that upsets the apple cart."

Another problem with Iatia's business model was that selling software to consumers who can have various cameras associated with their microscopes creates "an infinite number of permutations," says Laycock.

At one stage the company had nearly 30 employees, offices overseas and a machinery shop. "It had only raised $5 million and it was going through it at a frantic rate of knots," he says. "One of the biggest problems we faced is that we were very short on cash. When you're very short on cash, your horizons contract, because you're worried about how you're going to survive, where your money is coming from."

So the company decided to change its business model. Iatia decided to sell its software to original manufacturers who could then incorporate it into their product lines and sell to their clients. "That way you sell to one organisation," says Laycock, "and they would deal with all the problems that may come in."

The company has downsized to four staff and Laycock says the company will never again have a large payroll. "We don't need them. Most things we do in the organisation we can do via the internet. When it comes to sending someone a product it's literally a computer disk in a box with a licence agreement. That has a 98 per cent profit margin," he says. "How good is that?"

GE deal

Laycock believes that the new business model has "totally changed everything, and is now beginning to pay dividends."

This year GE Healthcare, a division of General Electric, launched its IN Cell Analysis system, which incorporates Iatia's QPI technology. The system measures cellular growth and cell response to drugs without the need for staining as required by conventional optimal imaging, so live cell samples do not need to be altered or killed.

"If you're looking at cells under a normal conventional microscope, you can see very little because the cells are opaque. Once you add our technology you can see all the shapes. That makes a huge difference to cell analysis," says Laycock.

Laycock believes that Iatia's technology will have a huge impact on drug development by speeding up the drug process. "They can now see what happens when you apply drugs to cells," he says.

Laycock says the GE contract cost Iatia nothing, but the company makes a gross margin of $500,000 from the deal. And because GE Healthcare does not have an exclusive licence, Iatia can sell its technology to other companies. "What's really interesting is that they didn't even ask for [an exclusive licence], so we didn't have to agonise over what to do," says Laycock.

Winning GE Healthcare as a customer has had a major effect on the organisation, says Laycock. "They have validated our technology and given us credibility that we need," he says. "It's moving from the visionaries, who love your technology and like playing with it, to the pragmatists, who are the ones that use it in the market place and are major groups of customers. They're the ones that will make your profits."

A number of other companies are now testing Iatia's technology. "It is opening up the markets for us in a whole lot of ways, and into areas we hadn't really envisaged before," he says.

Japanese software developer HREM Research is now selling a new software product that incorporates Iatia's QPI technology in electron microscopes, allowing sharper images of atomic structures. Californian firm Xradia is also incorporating the technology in its products, including tools being developed for the manufacture of next-generation semiconductors as well as to examine very small tumours in breast cancer.

Iatia is currently in negotiations with original equipment manufactures in the optometry and ophthalmology markets, with potential applications in lens meters (for spectacles and contact lenses), wavefront analysers and refractrometers (used in prescribing eyewear and laser eye surgery), and an advanced fundus camera (used to monitor the back of the eye for conditions such as glaucoma and diabetic retinopathy).

"We're in a process of deciding who we actually want to deal with so that we get it right," says Laycock. "For example, if we're doing a fundus camera, then whoever agrees to develop it will want an exclusive licence. So we need to make sure we find the right partner."

And if Iatia needs to conduct major research and development then it will contract good physicists or medical technicians. "We don't need them on staff," says Laycock.

Unexpected application

In mid-June, Iatia signed a AUD$2.97 million contract with the Australian Defence Department's Defence Science and Technology Organisation (DSTO). Over the next three years, Iatia will research whether its technology can be used for passive (undetectable) surveillance and target ranging, particularly through obstacles such as fog, cloud or foliage.

Iatia had never thought of this application for its technology, says Laycock. The company had approached DSTO with the idea that its technology could detect stress fractures in metals, such as turbines in jet aircraft, that couldn't be seen otherwise. And Iatia has received $700,000 from DTSO in the last three months.

"It's the classic example of a market appearing for somewhere you least expect it," says Laycock. "Often the market that absolutely makes a company is one that you hadn't looked at when you originally did your plans."

Laycock stresses that the company is not a biotech company, but a supplier to the biotech industry. "The people who made the money out of the gold rush weren't the miners, they were the shop keepers and the suppliers of the technology, the equipment that was needed to mine the gold," he says. "We're one of those."

When approaching brokers, Laycock believes that "it's better to say we're a general technology company... if you say you're biotech, the brokers will say, 'Our books are full of biotech. We don't want to know you'."

In the last financial year, Iatia raised $500,000 from a placement agreement and a further $519,757 from the exercise of 10 million options. Laycock says there will be another capital raising this financial year for the company, with a further 22 million $0.05 options expiring on March 31.

"I think between 50 and 100 per cent of those will be converted," says Laycock. "So that raises us between $0.5 to $1 million, and $1 million is adequate for what we need."

The company had cash of $611,163 as at June 20, 2005 and a burn rate of about $100,000 over the last financial year. "It will go up to about $130,000 and that will be about it for the foreseeable future," says Laycock. "The big money will be spent on further R&D for applications."

While Iatia has increased its shareholder base from 600 to 850 shareholders in the last year, Laycock would prefer to have 2000. "I think at $0.08, we're still significantly undervalued," he says.