Chemeq sticks to the plan

The past year has been a tough stretch for Chemeq shareholders, but executive chairman Graham Melrose is adamant the company is on the right track. Mark Beyer reports.

ON the outskirts of Rockingham, Chemeq’s $35 million pharmaceutical drug plant is nearing completion.

When the plant is up and running, it will provide a rare example of a Western Australian company successfully commercialising a local invention and taking it to the world market.

Many investors have backed Chemeq, pumping $73 million into the company in the past two years and sending its shares to dizzying heights last June.

Unfortunately, the company has suffered repeated delays in the construction and commissioning of the manufacturing plant, and its share price has been sagging.

As the delays have continued, some have questioned Chemeq’s fundamental strategy.

One industry executive told WA Business News Chemeq was just a ‘oneproduct’ company that should have outsourced production to a contract manufacturer.

Other sceptics point to the slow progress in gaining regulatory approvals and question whether the global market for Chemeq’s polymeric antimicrobials is really worth $9 billion a year.

The company’s executive chairman, Graham Melrose, challenges these criticisms, having heard them all before.

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

On the most topical issue – the delayed completion of its manufacturing plant – he maintains the company has done the right thing.

Dr Melrose says the first sample of its veterinary drug should be produced in about two weeks.

That will be followed by a ‘ramp-up’ phase lasting three to six months before the plant reaches full production.

The doubters can be forgiven for taking Chemeq’s predictions with a grain of salt, given its track record.

In June 2002, it predicted “full-scale commercial production … to begin in early 2003”.

In April 2003, the company announced an upgrade and expansion of the manufacturing plant, pushing back the commissioning period to “August to October 2003”.

In September 2003 it said “commercial scale production is targeted for February 2004”.

In May 2004, Dr Melrose is adamant the strategy was right all along.

He said the board was keen to get product to market as soon as possible and therefore chose to proceed with construction before its research and development was complete.

That meant the task facing the construction contractor has changed over time.

“We chop and change, and being an entirely new technology, he [the contractor] has difficulty in estimating [the construction’s timing],” Dr Melrose said.

“Between the two, you have a difficulty with two good partners in accurately estimating when you are going to finish.

“We are not sorry we have done that.

“If we had waited until all of our technology was developed, we’d only just be getting planning and environmental approval to build.

“We’d be three years further back, so it’s been a good decision to go down that road.”

Dr Melrose insists the company has done the right thing by shareholders, many who bought stock last year at $5.35 per share, only to watch the share price slide below $5.00.

“We have always endeavoured to keep the market fully informed. We’ve done our best,” Dr Melrose said.

“Our objective is to get the best return, in terms of the share price, for our shareholders, and if we are three years earlier [to production] than we would have been otherwise, then our shareholders are enormously better off.

“Having said that, we do not have any empathy for day traders.

“We have always emphasised that our industry is a long-term process.

“It’s not a certain process, it’s an avenue for patient capital, for true investors and not gamblers.”

Dr Melrose said the company had no choice but to build its own manufacturing facility, for three reasons.

First, its raw material cannot be transported safely and therefore the raw material and the end product will be made on the same site.

Second, its production process is a blend of petroleum technology and pharmaceutical technology.

“You don’t have sub-contractors having that dual capability, and certainly not working at FDA standards,” Dr Melrose said.

“Another reason, that some people will debate, is that if you have a very highly secretive technology. A lot of people, including us, would say you’d be mad to give it to a contract manufacturer.”

More generally, Dr Melrose believes Chemeq needs to be a manufacturer so that it can afford to invest in ongoing research and development.

“If you don’t manufacture, you are not assured of your long-term viability,” he said.

“You need to churn about 15 per cent [of sales] back into R&D.”

Dr Melrose said an important R&D focus was the development of new products.

“It’s wrong to say we are a one-product company, that is totally wrong. We are a technology company choosing to focus in the animal healthcare area,” he told WA Business News.

Another major focus for Chemeq is gaining regulatory approvals.

Its polymeric antimicrobial is approved for use in pigs in South Africa and New Zealand.

It is close to obtaining approvals in Thailand and South Korea and is pursuing approvals in Australia and the US.

The company emphasises that the US Food & Drug Administration is fast-tracking the approval process, but after two years the task is still not complete.

Dr Melrose blames personnel changes in the US bureaucracy and is hoping for more progress once Chemeq can supply samples from its new manufacturing plant.

The regulatory approval process for poultry is less advanced.

The main targets are New Zealand, South Africa, Thailand and Brazil.

As well as seeking regulatory approvals, the company is conducting large-scale commercial trials to win approval from industry.

Its largest trials have used 1,535 pigs and 2,160 chickens respectively.