Market forces: do biotechs list too early?

What's the difference between a biotech and a dot com? The average age of the board or directors. Funny? Maybe, but not exactly accurate. While there may be a sense of déjà vu - small start-ups looking for cash stampeding to the market - the biotech industry, unlike dot coms, is anything but an overnight phenomenon.

There does seem to be a sense that the enthusiasm and excitement shown by investors towards these new and exciting companies was simply a passing phase. But was it really, or have many of these companies simply listed prematurely and now find themselves in over their heads?

According to The Australian Biotechnology Report 2001, which was produced in collaboration by Ernst & Young, Freehills and the Department of Industry, Science and Resources, there were about 190 core biotechnology companies operating in Australia in 2001. Of these, approximately 35 were publicly listed. And between 1999 and 2001 there were more than 20 initial public offerings (IPOs) of Australian biotechnology companies. There is no doubt that biotech was hot.

But the 20-plus IPOs between 1999 and 2001 raised on average only a mere $11 million - small by Australian Stock Exchange (ASX) standards; tiny compared with comparable European and US companies. And looking at other measures, such as market capitalisation, revenue and R&D expenditure, also illustrates just how small these companies are. The problem, it seems, is not with the biotech industry's recent popularity; rather, it is the size and stage of development of the companies when they decide to go public.

"What we've seen over the last two to three years is a big rush of biotech companies going to the market to raise very small amounts of money, certainly by the standards of other listed companies, and going to market very early in terms of the stage of the science as well," says David Black, client director at Deloittes. "At the time a lot of them listed, it was seen as an easy option for them. Biotech was flavour of the month."

What may have been a quick-fix funding solution for many at the time has met with logistical financial problems further down the track. According to Black, the extra requirements placed on a company listed on the stock exchange, such as accounting, share registers, disclosure, and the continuous announcements companies are required to make, place a great strain on the smaller companies.

Another problem that seems to plague the biotechnology industry is the lack of industry knowledge by investors. Many of the people who put their money into these companies during the "biotech boom" simply didn't understand that biotechs generally have a much longer path to market than other industries.

"Going back 18 months to two years, when there was a rush of small companies coming to the market, people thought they needed to jump on the bandwagon. There were a lot of mum and dads investing who probably didn't know what they were getting into," says Black.

"It's easy to bill a company as having a cure for cancer or for HIV, but whether the people who are investing know that, assuming everything goes well, you're still seven to 10 years from market."

He says that the companies that seem to be doing relatively well at the moment are the ones that have a product that's either out there on the market or very close to being out on the market, as this gives investors something more tangible that they can go back to and hang their hat on.

"Once a small biotech is listed it's difficult to keep the share price up there. It's not like you're coming out with regular sales announcements, regular profit announcements; you're really dependent upon announcing scientific advances to keep the market interested in you," Black explains. "Because most of the biotech companies that are listed are so small, most of them fall below the radar of the analysts.

"I think, in general, a lot of the biotech companies will just tend to drift along until there is some major announcement, either good or bad."

There are alternatives to listing, such as venture capital and private equity, but it seems biotechs are having a hard time getting their hands on it. According to Lisa Springer, director of the biotechnology group of corporate finance and investment banking at PricewaterhouseCoopers, there is plenty of money available in the market. But the investment propositions being put forward are simply not convincing enough.

"I think you have to look at why the venture capitalists aren't putting up the money. If it's because the companies are simply not investment-ready then, frankly, the companies should not logically get money from anywhere. They should go back and examine what the status of their company is: do they have an appropriate strategy, do they have a real commercial product, do they have the management in place to take the business forward?" says Springer.

This seems to be an opinion expressed by many in the market at the moment. Dr Craig Fowler, a principal with Ernst & Young, says that there is "no money for science which is ill-thought through in commercial impact or potential".

He says that there is increasing money in Australia available for investment, and not necessarily through the IPO market. "The options are to look around and see who and where the synergies are by way of collaboration. The other thing for companies is to perhaps look at their business models to see whether or not they have opportunities to 'earn while they learn', and to generate revenue faster than if they only went down, say, the track of very long-term, long-tail drug discovery. Quality ideas and quality management will find funding opportunities."

While the outlook for Australia's biotech industry is quite positive, it does seem inevitable that some of the smaller players may not last the distance. "I think there are a few companies whose share price is suffering so much and they're running out of cash," says Springer. "Their ability to get more cash is very, very difficult because of the market's condition and also because they haven't met milestones that they had intended to meet."

Perhaps many of the smaller, younger companies did list far too early, however, now that they're there, it's simply a matter of hanging on. And only time will tell who survives.

Premier's pitch

Premier Bionics (ASX: PBI) is one company that many might say went to market too early. The device and diagnostics developer listed on the ASX on May 29 this year, a mere six and a half months after the company was formed. On listing, the company raised approximately $3.5 million but has since seen its share price slide about 52 per cent. So why the rush to market?

According to CEO and executive director Dr Martin Soust, the company considered various options for raising capital but in the end decided the public route was the most appropriate. " We could have stayed with private equity, but in our particular case that wasn't an option that we or our seed investors particularly liked," Soust says.

He says the company also looked at pooled development funds but decided that the restrictions the company would have had to operate under were unattractive. Premier Bionics was established to invest in the research and development of the medical devices and diagnostics markets. The company's first and only investment to date has been in Pulmosonix Pty Ltd, a company developing a lung inflation monitoring device, providing up to $1.25 million in funding in return for a 72 per cent stake in the company. PBI, which aims to invest in companies which are near or at "proof of principle" stage and are approximately 12 months from clinical trials, is hoping to have another two to three investment projects under its umbrella within the next year.

Soust says that presently the company has "enough money in the bank to look at another opportunity immediately and fund it". However, taking on another two or three investment projects would mean going back to the market to raise more capital -- something, Soust says, that no company would be too keen on doing in current market conditions. At the time of listing, PBI had an issue price of 20 cents and a market capitalisation of $3 million. Six weeks down the track the company is trading closer to the 10 cents mark and has a market cap of about $1 million.

But Soust's optimism won't be soured. He attributes the fall in share price purely to poor market conditions and says that the company is more focused on looking at new projects rather than concentrating on its day-to-day share performance. He also says that the company currently has six potential projects that it is reviewing, and that he is confident there are enough opportunities available to enable the company to achieve its milestones.

"[Premier Bionics] is a company that is meeting its stated objectives and is delivering on what it said it would deliver. I think the market is always going to have a positive ear to that particular story, and consequently, I think there is always going to be money around for a good investment," says Soust. "Other people may have thought it was too early [to list], but from the company's point of view, it was the best way to move forward and raise capital."