How Chemeq hopes to save its bacon

To say that things have not been going particularly well recently for West Australian biotech Chemeq would seem a bit of an understatement. In early September, Chemeq announced it would lay off half of its workforce and move its whole operation to its factory in Rockingham, giving up its offices in the Perth suburb of Bentley.

In mid-August, Chemeq's founder Graham Melrose, who had also acted as CEO, chairman and non-executive director in descending order over the years, retired from the board after a transition period following the appointment of new chairman John Hopkins.

In July, it received a major rap over the knuckles to the tune of $500,000 from the Australian Securities and Investments Commission (ASIC) for breaches of continuous disclosure provisions in 2003 and 2004, before the new management team took over. In March it announced it had suffered setbacks in regulatory approval for its proprietary antimicrobial in Australia and two of its major target markets, Brazil and Thailand.

And last year it had to cede two non-executive board positions to Japanese bank Mizuho when sought $60 million to stay afloat. That followed a year in which Chemeq's stock performance could only be called horrendous. It lost 77 per cent of its market value and $450 million in market capitalisation in 2004.

Such a litany of disasters would make anyone think twice about whether to keep going at all, despite the product's proven success in pig and poultry applications. But the current board and its CEO, David Williams, are intent on turning the company's performance around, developing a new strategy for Chemeq that they hope will save its bacon.

Williams, a former lawyer who joined Chemeq in August last year after a career in the energy industry, admits that the company did not have a "sensible" cash burn and running the factory full-time was a mistake.

"The company was set up to produce 24/7 but that wasn't a good idea as we really didn't have a market yet," he says. "Part of our new strategy is to concentrate on developing those markets and reducing manufacturing to a sensible level."

That will mean producing far smaller quantities of its product - CHEMEQ 5% solution for pigs and poultry - rather than the 400,000 litres per annum it is capable of, investigating outsourcing production to a contract manufacturer, concentrating more on research and development of other applications for the antimicrobial and seeking out partners for commercialisation opportunities.

The major problem with the company, Williams says, was trying to do everything itself. Focusing on just one application of the polymer was also a mistake, he says.

"All of the investment went into one line of the product, and we built a plant before there was any demand. We are changing direction and will try to broaden the commercialisation potential."

Over the next year, the market can expect to see a different business, he says. "We have a new strategy and we are about reducing risk. In 12 months we will be in a different position."

Wide applications

Chemeq's polyaldehide-based product certainly seems to work. The polymer targets proteins on the cell wall of micro-organisms, acting as a biocide and not an inhibitor. It has a kill rate of 100 per cent of E.coli in as little as 10 minutes, it is not an antibiotic and therefore does not suffer the same problems of resistance, its molecular size is large enough that it is not absorbed into the body from the gastrointestinal tract and it is a broad spectrum antimicrobial. Gram-negative and gram-positive bacteria, bacterial spores, mycobacteria, protozoa, viruses, yeasts and fungi are all on its menu.

The company says it has been proven to have the same effectiveness against multiple antibiotic resistant bacteria as non-resistant bacteria, including pathogenic strains of E. coli. It also looks good against MRSA.

It is easy to administer - it is added to the animals' drinking water - and is steadily inactivated as it moves through the gastrointestinal tract. It is completely inactive upon excretion and therefore non-toxic.

The existing product line is aimed at broiler chickens and weaner pigs but Williams says there are many wider applications that the company is now concentrating on. "We are changing the focus from just pigs and poultry to other animal health applications. However, Chemeq has always had half an eye on the technology's potential application in the human health area."

Therapeutic applications in humans is some way down the road, but for the moment the company is intent on diversifying into wider animal health, industrial applications and the cosmetics industry.

"One is a topical use as an ear-wash for dogs, which we are pursuing now. There are also applications as a preservative in cosmetics, mainly due to wide concerns about the use of parabens - methyl paraben and propyl paraben - in products like mascara.

"We are also investigating its use as a floor wash in hospitals to combat MRSA, which looks promising, and there is potential as a sterilising agent in arthroscopic instruments."

Early work is also being done to test its effectiveness against Giardia, Salmonella and Heliobacter pylori, he says. "These are all potential applications that we are looking at closely. We will then need to develop markets so we will be looking for commercial partnerships."

Crunch time

Under the 2005 deal, Chemeq must repay $60 million in bonds if the holders - now Stark Trading, Shepherd Investments and Harmony investments - do not convert to shares before a deadline of March 30, 2008. Williams is confident the bond-holders will convert or that Chemeq will be able to refinance the bonds at maturity in 2008.

He is also confident that the reinvention of the company under new chairman John Hopkins and the new executive team will see it flourish in the future. Chemeq is in "advanced discussions" with potential distributors and hopes to see the regulatory issue that has set back its plans in the massive Brazilian market overcome in the new year, he says.

"This strategy is a big shift in the direction of the company," he says. "It is steering the company away from its old strategy of trying to do everything itself and removing a lot of the risks associated with doing it that way.