Can­cer firm has the tech­nol­ogy, but where’s the profit?

Pa­cific Edge needs to prove that the mar­ket’s good­will is jus­ti­fied

Weekend Herald - - BRIAN GAYNOR -

acific Edge’s share price tum­bled 27.7 per cent this week, from 47c to 34c, af­ter it an­nounced a fully un­der­writ­ten 1- for- 6 rights is­sue at 32c a share that will raise $ 21.3 mil­lion.

This could be a last- chance op­por­tu­nity for the blad­der can­cer di­ag­nos­tics com­pany be­cause it has al­ready raised $ 111.6m of eq­uity, has had to­tal com­mer­cial rev­enue of only $ 16.0m since in­cep­tion in 2001 and losses of $ 94.5m over this 15- year pe­riod. This in­cludes a mas­sive $ 21.0m loss for the March 2017 year.

There is huge good­will to­wards the com­pany but the board and se­nior man­age­ment must demon­strate that they can ex­e­cute on their am­bi­tious and costly US plans.

The Pa­cific Edge story be­gan in Fe­bru­ary 2001, when the com­pany was in­cor­po­rated as Pa­cific Ge­nomics Ltd in Dunedin. Three months later it changed its name to Pa­cific Edge Biotech­nol­ogy.

On Au­gust 22, 2001, the com­pany is­sued a prospec­tus for the is­sue of 20 mil­lion shares at 25c each, but there were no plans to list on the NZX af­ter this pro­posed $ 5m cap­i­tal rais­ing.

The of­fer doc­u­ment dis­closed that Pa­cific Edge’s mis­sion was to “ap­ply its unique com­bi­na­tion of ge­netic ex­per­tise and re­search tools to im­prove the di­ag­no­sis and man­age­ment of dis­ease, in par­tic­u­lar can­cer”.

The com­pany’s can­cer ge­net­ics ex­per­tise was mainly based on the peo­ple, in­tel­lec­tual prop­erty and skills de­vel­oped by the Univer­sity of Otago Ge­net­ics Lab­o­ra­tory. As part of the IPO, Pa­cific Edge had en­tered an agree­ment to ac­quire the in­tel­lec­tual prop­erty as­so­ci­ated with this ge­netic re­search by is­su­ing an ad­di­tional 10 mil­lion free shares to the Univer­sity of Otago.

One strange as­pect of the pub­lic is­sue was that the 20 mil­lion or­di­nary shares were sub­ject to an un­der­writ­ing agree­ment with Forsyth Barr, signed by Eion Edgar and An­drew McDouall on be­half of the un­der­writ­ers. How­ever, these 20 mil­lion or­di­nary shares were never is­sued, although the com­pany is­sued 5,294,875 Se­ries A con­vert­ible pref­er­ence shares at $ 1.00 each.

These se­cu­ri­ties con­verted into or­di­nary shares on the ba­sis of five or­di­nary shares for one note.

In Novem­ber 2002, the com­pany an­nounced a fur­ther cap­i­tal rais­ing, or­gan­ised, but not un­der­writ­ten, by Forsyth Barr. The of­fer, which was a pre­lude to an NZX list­ing, was for 12 mil­lion shares at 25c, with 15c payable im­me­di­ately and the re­main­ing 10c on or be­fore Septem­ber 30, 2003.

Only 8,036,000 of the 12 mil­lion shares were taken up. The com­pany listed on the NZX on Oc­to­ber 1, 2003 but there was lit­tle in­vestor in­ter­est as only 33,760 shares, with a to­tal value of just $ 4800, were traded in the first three months af­ter list­ing.

But the ma­jor event in the last quar­ter of 2003 was the ap­point­ment of David Dar­ling as Pa­cific Edge’s CEO.

Dar­ling joined Pa­cific Edge af­ter more than two decades with the Fletcher Chal­lenge group of com­pa­nies. He was in­volved in the de­vel­op­ment and start- up of Ar­borGen, a biotech­nol­ogy joint ven­ture be­tween Ru­bi­con, a Fletcher Chal­lenge spin- off, and two ma­jor North Amer­i­can forestry groups.

Be­fore join­ing Pa­cific Edge, Dar­ling was Ru­bi­con’s science man­ager in re­la­tion to the Ar­borGen joint ven­ture.

Dar­ling has been the dom­i­nant fig­ure at Pa­cific Edge as he has an amaz­ing abil­ity to con­vince eq­uity in­vestors and grant dis­trib­u­tors to com­mit more and more funds to the com­pany.

Dar­ling’s en­thu­si­asm and en­ergy never waned, even though the first 10 years, up to March 2012, were ex­tremely dif­fi­cult.

Dur­ing this decade, the com­pany gen­er­ated only $ 4.7m of rev­enue, of which 50 per cent came from grants, mainly from Tech­nol­ogy New Zealand and the Foun­da­tion for Re­search, Science and Tech­nol­ogy. A fur­ther 17 per cent of rev­enue was de­rived from in­ter­est re­ceived, 5 per cent from tax re­bates and 8 per cent from other sources. Only $ 926,000, or 20 per cent, of to­tal rev­enue over the 10- year pe­riod came from com­mer­cial sales or con­sul­tancy fees.

At the end of the decade, the com­pany had $ 28.5m of ac­cu­mu­lated losses and had un­der­taken at least 11 sig­nif­i­cant cap­i­tal rais­ings, in­clud­ing two in its 2011- 12 year. These were a place­ment of 23 mil­lion new shares at 22c each in July 2011, which raised $ 5.1m, and a 3- for- 7 rights is­sue later that year at 19c a share, which raised $ 20.1m.

The in­ter­est re­ceived on this new eq­uity rep­re­sented 53 per cent of Pa­cific Edge’s to­tal rev­enue for the March 2012 year.

At this stage Pa­cific Edge had de­cided to fo­cus on Cxblad­der, its blad­der can­cer de­tec­tion prod­uct, and the 2011 prospec­tus stated: “The pro­ceeds from both the pri­vate place­ment of shares im­me­di­ately prior to the of­fer and the rights of­fer are in­tended to fund the com­mer­cial­i­sa­tion and roll­out of Cxblad­der in the United States”.

These in­cluded: $ 4.5m to set up a

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