Chemeq another to disappoint

The current problems facing biotech company Chemeq add to Western Australia’s poor track record in technology commercialisation. Mark Beyer reports.

THREE months ago, Chemeq founder, chairman and chief executive Graham Melrose was unflappable.

In an interview with WA Business News, Dr Melrose was 100 per cent sure the company was on the right track, despite criticism from many quarters.

“We get so much unknowledgeable scepticism,” he said.

This week, as Chemeq sought backing for a $50 million capital raising, the company announced Dr Melrose would step down from his role as chief executive and become non-executive chairman.

It’s a big climb down for Dr Melrose, who was adamant Chemeq was best served by having an executive chairman.

He was dismissive of corporate governance guidelines, stating the two roles should be split.

“Every statistic says it is more efficient to have the combined role,” he told WA Business News.

Efficient or not, the market has lost patience with Dr Melrose, whose company has failed repeatedly over the past year to meet its own commercial targets.

Looking back, Dr Melrose is certainly not the only Perth technology innovator to have hit the brick wall of reality.

Orbital Engine founder and one-time executive chairman Ralph Sarich was another who convinced hundreds of investors his technology would take the world by storm.

Former ERG chief executive Peter Fogarty provides a third example of a Perth entrepreneur who won plenty of backers but failed to deliver the expected commercial results.

Collectively, these companies have burned hundreds of millions of dollars of shareholders’ money over the past decade.

Chemeq, Orbital and ERG are all still in business, and the latter two have long-standing customers and substantial revenue.

But they have all fallen a long way short of the expectations they helped to build up in the first place.

In the early 1980s, Mr Sarich had governments in Australia and the US scrambling to host Orbital’s engine components factory.

Orbital built its factory near Detroit but never won the big orders for its direct injection fuel systems.

It came tantalisingly close on several occasions, with companies such as Ford and General Motors testing its fuel efficient technology, but Detroit was ultimately more interested in making gas guzzling sport utility vehicles.

Under current chief executive Peter Cook, Orbital makes a modest living by selling its technology to companies such as Mercury Marine, Italian scooter maker Piaggio and Indian auto-rickshaw maker Bajaj.

It has trimmed its costs and is now trading profitably but with little of the ‘blue sky’ potential that once lured so many punters.

Automated ticketing company ERG also lured many punters with high hopes, but between 2000 and early 2003 it raised $350 million and then proceeded to lose it all, much of it on an ill-fated foray into smart cards.

ERG has recently completed a mammoth restructuring, including a debt-for-equity swap that delivered control to holders of convertible notes.

The final leg in the restructuring was a $67 million rights issue, completed earlier this month, and the company says it is now “on the cusp of returning to profitable growth”.

“We are looking to the future with confidence, better project management capabilities and a significant pipeline of work,” new chief executive Alan Sullivan said.

ERG’s recovery will be helped by the fact it always had a substantial underlying business with real customers paying real income, expected to total about $200 million in a normal financial year.

Chemeq has not yet reached that point.

It did have one sales order for its animal health drug but famously told the market on July 30 that the order had lapsed on June 30, one month earlier.

It is now going cap in hand to investors, reportedly seeking up to $50 million through a placement and rights issue at $2.40 – well below both its June high of $5.98 and its latest close of $3.42.

If it succeeds, Chemeq will have raised $130 million from investors over the past two years.

It has spent a big chunk of that money on its brand new drug manufacturing plant at Rockingham, which cost $52 million, double the original estimate.

It needs additional funds to complete a $20 million upgrade of the factory and to provide working capital for the commercial roll-out of its unique animal health drug.

A significant problem for Chemeq was that the valuation of its stock ran far ahead of any fundamental assessment, based on likely sales and likely revenue. Now that the blue sky has blown out the laboratory window, potential investors are taking a much harder look at its likely earnings.

They also want new blood at the top level of the company.

Chemeq will shortly begin a search for a new chief executive and will also seek two new independent directors. This would be additional to the recent appointment of former CSL executive Paul Grujic to the board as a non-executive director.

For the eternal optimist, the stories of Orbital, ERG and Chemeq have a silver lining. They highlight the contribution of the Australian Stock Exchange as a true provider of venture capital.

An interesting footnote to the Chemeq saga is that most of the money raised in the past year was from brokers in Melbourne.

Were Perth brokers prescient or just too busy chasing the next mining float?