Cash Is Catalyst Of Change In Lab

The Age

Tuesday March 25, 2008

Ari Sharp

Listed biotechs may be in for a taste of sharemarket natural selection, writes Ari Sharp.

IF THE alarm bells weren't ringing earlier for biotech minnow Apollo Life Sciences, they certainly were when its half-year report was lodged at the end of last month.

The dwindling cash balance caused by a net loss of near $1 million a month sparked a warning from the company, which was echoed by auditors Deloitte Touche Tohmatsu at the time.

"The directors acknowledge that there exists significant uncertainty as to the consolidated entity's ability to continue as a going concern," the report read.

Sure enough, last Tuesday, less than three weeks after those words were published, doubts about the company's ability to meet its obligations were such that trading was suspended and the company forced into a fire sale of its assets, mostly intellectual property relating to research in the field of proteins.

What ultimately sank Apollo was the inability to source capital to finance its losses, which, as is the case with many biotechs, showed few signs of slowing any time soon. The company was looking in Australia and overseas, but a finance deal in the US fell through thanks to a wave of sharemarket jitters.

So, less than three years after listing, Apollo is the first biotech casualty of a sharemarket collapse that has seen the S&P/ASX 200 Index drop 25% since November 1.

The first casualty, certainly, but it is unlikely to be the last.

Apollo was at the tail end of a biotech risk-assessment list compiled by respected industry newsletter Bioshares. The list rates companies on a "survival index" (SI), using cash reserves and the rate of spending to calculate how long before the cupboard is bare, absent further capital raising. The latest list, covering cash balance as at December 31, rated Apollo a 0.5 on the SI. Below it sat 17 other companies whose petrol gauges were also nearing empty.

Some of those companies have found cash to tide them over, for now at least, but many are on a watch list of 20 or so companies that several industry analysts don't expect to survive in their present form.

The nature of biotech companies, of which about 130 are listed on the Australian Stock Exchange, is that most burn through lots of money before their developments generate cash flow - if they ever do at all. This reliance on regular capital raising, or deep pockets, makes them particularly vulnerable when the market's appetite for risk drops and there is a flight away from stocks at the margins.

"Just about every listed biotech company would be reviewing its clinical program and deciding whether they should be spending the money in such a hurry or just let it sit in the bank for a while," says Harry Karelis, managing director of private equity fund Biotech Capital. He predicts that companies will think twice before launching important but expensive trials of new drugs, wary of running short of cash and struggling to find further finance.

But while the latest woes are a new experience for many in the sharemarket, which has enjoyed a long boom and supersonic price surges, Karelis says the biotech sector has been in a bear market for several years and is hardened to the reality of a tougher capital-raising environment.

Another company whose ambitions have been scuttled by the state of the market is skin-cancer researcher Peplin. Its plans to list on the Nasdaq have been on hold since Australian shareholders approved the move last October. The company is tight-lipped about the timing, but has previously said it would depend on favourable market conditions.

Peplin is one of the lucky ones, though, being of a size and scale to withstand the survival crisis the woes cause for others.

Companies short on cash and without significant intellectual property may have little choice but to do their best to die with dignity. Survivors may be able to extract something from the body on the deathbed.

Short of a major market rally, the industry looks set for a shake-up over the next 12 months. The fragmentation of the industry has long been a bugbear for biotech veterans frustrated at the number of companies with a small number of drug compounds in the development pipeline. It's now likely the number of companies in the sector will decrease - but for few of them it will be on terms of their own choosing.

© 2008 The Age

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