Phosphagenics CEO raises some questions about the management of the humilated biotech
Published 25 July 2013 12:20, Updated 25 July 2013 12:48
Phosphagenics CEO raises some questions about the management of the humilated biotech
Former Phosphagenics chief executive Esra Ogru
The dismissal of listed biotechnology company Phosphagenics chief executive Esra Ogru over the alleged misappropriation of company funds totalling almost $6 million will not be welcomed by Australia’s biotechnology industry which still struggles with its “penny dreadful” image.
A notable few exceptions aside, Australian biotechs have never been distinguished by their management smarts. They are often top heavy with scientists and academics who are more adept at research and development than commercialising their intellectual property or structuring their businesses to overcome the long lead times that must elapse before their breakthrough drugs or pharmaceuticals are ready to hit the market. Exhaustive clinical trials and regulatory hurdles can burn lots of cash, with very little revenue coming in, which is why biotechs generally appeal to patient investors. Biotechs make risk-averse investors very nervous.
Which is why Phosphagenics is stepping into the unknown with this full-scale imbroglio. Fraud happens, but it’s never a good look when the chief executive is the alleged culprit and it’s arguably doubly so when it’s the chief executive of a biotech. For investors who have no way of assessing the science of a new drug or its sales potential, the quality of management can be the only factor that gives investors confidence.
ASX investor guidelines for valuing biotech stocks makes this point: “Look at whether the management of the company has a good track record in delivering successful research milestones. It is also important to consider the commercialisation strategy of the company … Strong financial management is vital given the early cash burning nature of biotech companies.”
That would raise some red flags for Phosphahenics investors.
Phosphagenics acted swiftly when it became aware, according to its July 1 ASX market announcement, of “irregular transactions in relation to it invoicing and accounting records”. It didn’t beat about the bush, announcing that the company’s board had suspended Esra Ogru. Company founder and “joint CEO” Harry Rosen had returned from the company’s New York office to assume the role of “sole CEO”. The company had earlier, on June 28, sought a trading halt in relation to the irregularities which it considered “material”.
Ogru was a popular and respected chief executive both within the company and throughout the biotechnology industry; now she found herself dismissed as an employee of Phosphagenics. “The company alleges that she is implicated in and has benefited from the misappropriated funds,” the company said in its ASX statement of July 24. Five other people, one a recently dismissed employee, were also involved in the alleged fraud.
Phosphagenics, which has commercialised a drug delivery system used to increase the absorption of drugs into the skin, and has retail skin and personal care products on the market, stressed that it remains on track with its clinical programs and, crucially, has current funds of $14.1 million. An acne treatment is currently under trial.
Phosphagenics played by book and acted responsibly as a listed company.
But events at the Melbourne-based company do raise some questions about the company’s flawed leadership.
As the company has informed the market, the $5.7 million misappropriated from the company occurred over a period eight years from 2005 to 2013, involving the payment of false invoices. The irregularities in invoicing and accounting records were discovered by the company’s new chief financial officer, Anna Legg, the company’s fourth CFO since 2005.
The previous CFO departed the company in January. There is no question, according to sources close to the company, that he was a capable CFO, but it is striking that he only worked one day a week. This would appear a weak link in the company’s management structure: a CFO who only works one day a week hardly seemly appropriate for a publicly listed company.
A “full review of all internal systems and authorisations” is now under way.
Ogru, who was appointed chief executive in 2010, was in charge of setting strategic direction and management of operations and financing activities. She joined the company in 2001 as a molecular biologist. She was appointed to the board in 2005 and in 2009 was appointed chief operating officer.
An observer close to the company speaks of the shock at hearing about events at Phosphanegenics: “There was a massive shockwave through the entire biotech sector.”
A search for Ogru’s replacement is under way; until then Rosen will be the interim chief executive. He will no doubt be reflecting on the merits of appointing Ogru in the first place, and whether the “joint CEO” role, with him based in New York, was best for the company.
Phosphanegenics is a small company. It had 2012 revenue of $2.7 million – down 16 per cent from the previous year – and a net loss of $11.1 million. It employs 37 people. Shareholders have not deserted the company, its share price only falling around 5 per cent to 11 cents.
But some questions will be asked both within the company and in the investment community. Depending on what the answers are it may or may not remain a small company. Not quite a penny dreadful, but not far from it.
POH Price at posting:
11.2¢ Sentiment: LT Buy Disclosure: Held
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