Acing the test
With its value now pushing $1b, diagnostics specialist Pacific Edge has had last laugh on critics who said it listed too soon, writes Jamie Gray
You have to have the resilience to keep getting up when you get knocked down.
David Darling, chief executive, Pacific Edge
‘Keep standing up when people keep knocking you down” — that’s the message Pacific Edge chief executive David Darling has for start-ups. He should know.
The company’s shares traded in the mid-teens to mid-20 cent range for the first decade of its life as a listed company.
But since then, the medical diagnostic company has gone from being a perennial penny dreadful to worth close to $1 billion.
Shares in Pacific Edge went on a tear when it announced last June that it had struck a deal with US health insurance giant Kaiser Permanente for the commercial use of its Cxbladder cancer diagnostic tests, quickly hoisting the share price from 13c to 77c. This week, the stock traded around $1.19, closing yesterday at $1.16.
Darling has advised that he will step down in April next year, from the Dunedin-headquartered company that has been his baby since the outset, listing on the NZX in 2003.
In the early days, some critics said the company had listed too early, without having enough runs on the board, but today Darling says there was no other way.
“It’s always been the challenge with these types of companies,” he says. “You have to invest a lot of personal energy and you have to have the resilience to keep getting up when you get knocked down.
“We have had a lot of business commentators who have been ‘green’ about young, growth companies.
“You get headlines like ‘Pacific Edge haemorrhages cash again’, or ‘Pacific Edge fails to make another profit’. The intention was never to make another profit; we are still in a growth mode.
“If business commentators don’t recognise that and don’t understand the environment, then all they do is poison the new companies coming through.”
Those new companies struggle enough as it is, he says, without facing unwarranted criticism.
“For us as a country, we need to build an environment that enables these companies to flourish.
“It’s about getting out of the starting blocks.”
In its latest result for the March year, Pacific Edge’s total revenue increased 101 per cent to $10.4m, with operating revenue from test sales up 76 per cent to $7.7m. The company’s net loss narrowed by 25 per cent to $14.2m. The result said commercial test use by Kaiser started late in 2020 — at a slower rate than initially expected due to Covid-19 challenges and demands on physicians — but demand was now starting to lift as restrictions eased.
Darling says medical technology — “med-tech” in the jargon — is a challenging field.
“It’s the burden of evidence that you need to deliver in order for the product to succeed through to the marketplace . . . without that burden of evidence, you can’t get there.
“When we entered the industry, the performance of diagnostic tests and tools for detecting and managing cancer were very poor. They were invasive and very expensive.”
Darling says Pacific Edge’s test is in the upper 90 per cent zone in terms of accuracy in dealing with urethral cancer. “And there have been no new tests [on the market] for years.
“The reason for that is that they are very difficult to do — to get the accuracy that we have been able to get.”
The Kaiser deal, he says, was a big turning point for the company.
Pacific Edge has been a controversial stock, mostly because of the time it has taken to reach critical mass.
“There are many investors who came in with different time lines, time horizons and different expectations.”
But while the stock has had its detractors, overly optimistic backers can also be a problem.
Darling tells the story of a friend hosting a barbecue for his 21-yeardaughter, with the guests deeply engaged in trading Pacific Edge shares on their online share trading platforms. “Not a single one of them knew what Pacific Edge was about, but they were trading in Pacific Edge shares because they were on the up.
“Of course, those people are going to trade out of them, but the reality is that in med-tech it will take you this long to succeed.
“For New Zealand, and for New Zealand investors, that’s something they need to be aware of, for when you do break through.”
Med-tech — just like the pharmaceuticals industry — has a very long investment cycle.
“You’ve got to be careful about how you tell the story and to be able to deliver correctly.
“If I had walked in and told the chairman that by 2021 we would be a global company, with operations in the US, Singapore, Australia and New Zealand, and that the company would be worth $900 million, he would have put me in a straitjacket and wheeled me home.
“You have to build that credibility and take your investors with you.
“We have had some outstanding investors who have been long in the pocket and deep in the vision.”
Among those investors are The Warehouse founder Sir Stephen Tindall and Sir Eion Edgar, a veteran businessman and former chairman of broker Forsyth Barr.
“There are the institutions who get in behind you and who are there for every capital raise, because they believe in the outcome.
“They know you are going to get there, and when it comes
through, it’s going to be big. That’s why the investment environment has to be nurtured.
“New Zealand was very green — green because there had not been many diagnostic companies that had taken that amount of time.
“People [can say] ‘they took a long time’, but that’s as long as it takes.”
Unsurprisingly, Darling has a word or two for the short-termists.
“Those kids sitting around the barbecue trading Pacific Edge shares on Sharesies — they are arbitrage agents — they are trading on the market and on the day.
“What you have to have for a company like this is the longer term investor.
“You don’t want arbitrage investors or hedge funds who want to get in one day and out tomorrow, or to short your share in the market because they see an opportunity to make a quick buck.”
Darling says institutional shareholders have been “outstanding” since the outset.
But what about the criticism that the business listed too early? “We listed publicly a year after we were born, whereas normally market debuts are when companies are close to gaining revenue.
“But the reality was that New Zealand at the time did not have angel investors. We did not have a venture capital community. And we were the backwoods boys.
“In New Zealand at that stage we did not have a Super Fund to underwrite the investment into the next generation of businesses.”
The company has two labs. One is in Dunedin, covering New Zealand, Australia, Singapore and southeast
Asia. The other is in the US, covering that market.
How it works
A urine sample is collected in a clinic, in a special cap that protects the sample, then transported to a lab and subjected to patented tests to ascertain whether or not the patient has bladder cancer.
To get an idea of scale, Darling says Kaiser has 12.8 million customers. It has 650 urologists — compared with just 300 between Australia and New Zealand.
“Everyone wants Kaiser to evaluate their products on the off-chance that Kaiser will adopt it.”
As evidence of how slow progress can be, Darling says the Kaiser deal took four years of due diligence.
“We will continue to grow our US business which will generate a lot of cash. It’s a wealthy market.”
And Southeast Asia has the potential to generate as much business as the US, he says.
While Pacific Edge may have been unloved in its early days, Darling urges other start-ups to stick with it. “The key to it is to believe in your product and to get some mentorship into your business.
“Never ever, ever lose sight of the end. Get out there, find some support. And keep going.”