Biotech Ventracor is on life support
December 15, 2008
Article from: The Australian
VENTRACOR'S chairman John Ward blamed the collapse of Lehman Brothers for scuttling a much-needed financing deal.
Under fire over the company's tenuous financial position at the company's annual meeting last month, he he went into great detail about a planned share placement and convertible note issue that fell apart when one of the cornerstone investors withdrew, citing exposure to the failed US investment bank.
Mr Ward, a former head of Qantas, also pointed to a later fundraising proposal that was proceeding well until the market hit new lows in November.
The frank report aimed to assure nervous investors that the company had been doing its utmost to raise money.
But what he did not reveal was that even before Lehman filed for bankruptcy, Ventracor had rejected multi-million-dollar financing offers because it believed its share price at the time did not reflect the company's true value.
"They continually refused cash when it was offered because they believed the share price was too cheap," an insider familiar with the deals said.
Now the company, whose product has helped hundreds of people suffering from heart failure, is on life support itself.
With just three months until the money runs out, Ventracor's high-profile board, which counts trouble-plagued Babcock & Brown and Commander Communications chairman Elizabeth Nosworthy as a director, has put itself up for sale.
Investors are rightly wondering what went wrong.
"They made the mistake of thinking that their baby was beautiful and couldn't understand why the rest of the world didn't agree," one observer said.
At its much-hyped peak, Ventracor was billed as the next Cochlear or ResMed of Australia's medical-device industry: a local company with a life-preserving device that was kicking goals internationally.
Its implantable heart pump, VentrAssist, won awards for innovation and attracted millions of dollars in government grants, and with the support of ABN AMRO Morgans, the company was able to raise more than $200 million to fund clinical trials of the device, which was well on its way to receiving marketing approval by the US Food and Drug Administration.
At their highest, Ventracor shares traded at more than $3. But like most life-sciences companies, Ventracor had yet to make a profit. When the auditor signed off on the accounts mid-year, it warned that the company would need to raise $18 to $22 million to survive another year.
It is understood that about a year ago a syndicate of investment funds offered Ventracor a cash injection of up to $70 million, enough to fund all the remaining trials needed to get VentrAssist on the market.
It was potentially the last capital raising Ventracor would need to do.
According to an industry source, the syndicate was willing to buy in at a price of 60c a share, but the offer was rejected because Ventracor's managing director Peter Crosby felt the price, which was at a discount to shares at the time, undervalued the company.
But instead of the share price recovering, it continued to fall. With cash fast disappearing, the company tried another fundraising earlier this year.
This time, investors were offering to take part in a substantial equity and debt raising pitched about 40c a share, but negotiations fell over on the issue of price.
With US advisers Cowen Group, Ventracor went in search of a better deal, but as global equity markets crashed, it became increasingly desperate and by mid-year plans were under way to raise $9 million by issuing controversial exploding convertible notes.
The deal would have required Ventracor to achieve certain milestones -- if it didn't, it could lose the entire company to the new investors.
That, too, failed to get off the ground.
By the time Ventracor decided to tap existing investors to take part in a Share Purchase Plan (SPP), its share price had dipped below 10c, a 90 per cent fall in 12 months.
Last week's news that the SPP had failed to reach its $10 million target sent shares crashing to just 3.3c.
Industry analyst David Blake, who is also the publisher of Bioshares, says Ventracor serves as an example to more than 100 companies in Australia's life-science sector.
He said the company failed to recognise the changes in the market quickly enough.
Incidently, rival heart pump maker Heartware, whose product lags at least two years behind Ventracor's, raised more than $30 million in May.
Mr Blake said he was concerned that Ventracor, which has a cash burn of more than $45 million a year, had not considered cutting staff.
With more than 100 employees, Ventracor spent $20 million on wages last year, including Mr Crosby's $1.4 million salary.
Some critics believe Ventracor's demise can be tracked back to the departure of a previous chief executive Michael Spooner in late 2003.
Under his guidance, the company's market capitalisation grew from $15 million to almost $440 million.
They point also to the company's subsequent decision to build its own manufacturing plant, rather than pursue the cheaper outsourcing option.
Some claim Ventracor's one-product strategy was never going to endure after the biotechnology boom of earlier this decade petered out.
Mr Spooner, now a non-executive director at Mesoblast and Peplin, lamented the company's predicament.
"Here was a great opportunity in terms of the technology and the science and a genuine product that was cutting-edge. Is it salvageable? I don't know."
He is no longer a shareholder, having sold out shortly after his departure.
In contrast, former chairman John Massey opted to hang on to his shares after his resignation in April. Although saddened by what has transpired, he defended the board's actions.
"If you look at the chairman's speech at the AGM, it's not like they weren't trying to raise money," he said.
"These are incredibly tough times for companies like Ventracor."
Mr Crosby, who is overseas trying to find a buyer or a strategic investor, did not return telephone calls.
Mr Ward also declined to comment, claiming he had said everything he needed to say at the AGM and in last week's announcement to the securities exchange.
Ventracor might not be his problem for much longer, because a group led by investor Vijay Kakani is attempting to rally support to seize control of the company.
Mr Kakani is pushing for a meeting. He proposes that the current directors be removed and that executive bonuses approved in 2006 be scrapped.
He said the company could be transformed into a profitable venture within nine months under the right management.
Mr Blake believes Ventracor could struggle to find a buyer willing to take on the ongoing obligation of maintaining the 400 patients who have been implanted with the company's product. "If they get $US10 million, that would be a good outcome," he said. "One could argue that they could get zero."
http://www.theaustralian.news.com.au/business/story/0,,24798807-36418,00.html
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