Pacific 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 $21m 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.

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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 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 Clinical Laboratories Improvement Act certified laboratory in the United States; $7.5m for laboratory staff recruitment, salaries, director fees and costs associated with the company's US subsidiary; and $8m for operational costs, mainly in relation to Cxbladder.

A company presentation released in conjunction with the rights issue said Cxbladder "provides general practitioners and urologists with a quick, cost effective and accurate measure of the presence of cancer".

Pacific Edge believed that the US was the best market for Cxbladder because 1 million patients had potential cancer bladder symptoms every year and 68,800 were diagnosed with the disease.

The company anticipated that if it could gain a 5 per cent market share, it would generate annual revenue of US$50.2m and a gross profit margin of US$41.1m.

Pacific Edge, which changed its name from Pacific Edge Biotechnologies in April 2010, has not achieved this market penetration objective as demonstrated by the following figures:

• It has generated commercial revenue of only NZ$15.1m in the five years since March 2012

• It has reported total losses of $66.0m in the past five years compared with losses of $28.5m for its first 10 years

• The company has raised $65.4m of new equity since March 2012, compared with $46.2m of new equity in the 2002 to 2012 period.

• It has received $4.5m in grants and research rebates in the past five years, compared with $2.6m in the decade ended March 2012.

In other words, Pacific Edge has been churning through the money since it expanded into the US, although there are recent signs that its US business is beginning to gain traction.

One of the issues with Pacific Edge is the reliability of its stock exchange announcements, as 11 of these have had to be amended over the past decade, including the company's 2017 annual report.

At the end of September, Darling revealed that the company's cashflow revenue from customers and grant providers was overstated by $3.2m in the latest annual report; the figure should have been $4.6m, not $7.9m.

A company presentation released this week partly explained this issue with the comment that there "is considerable delay between Pacific Edge completing the analysis of a patient's sample and payment by the relevant US payer (insurer)".

However, it went on to say that "time to cash receipt will improve significantly with the award of the Local Coverage Determination".

The presentation also disclosed:

• Only $3.2m of Cxbladder's accrued revenue of $8.1m in the March 2017 year was received during the year

• The company expects to receive just $4m of the $12.6m it expects to bill for Cxbladder in the current year

• Pacific Edge is expecting a huge improvement in the March 2019 year, with estimated Cxbladder revenue of $27.9m and cash receipts of $25.7m

Pacific Edge has developed a very important product but Darling and his management team have yet to prove that they can generate sufficient sales, and collect the cash from these sales, to justify the huge investment in the company by equity and grant providers.
Brian Gaynor is an executive director of Milford Asset Management.