Blip for Blis

By Fiona Rotherham

Monday 16th September 2002

Setting up exports the US didn't start well for Blis, the publicly listed New Zealand biotech firm backed by venture capitalist Howard Paterson. Three consignments of its first product, K12 Throat Guard, were seized and returned by the all-powerful American Food and Drug Administration (FDA) because the drug was not registered in the US.

It sounds heavy but the packages were, in fact, just product samples sent to potential American distributors for marketing purposes.

"Those were only the ones [the FDA] caught," laughs Blis chief executive Kelvin Moffat. The other half got through, and those distributors whose samples were seized still got the product thanks to someone travelling to the US who dropped them off. Don't tell the FDA.

For Blis, success in the US is important - international sales are the only likely remedy for the start-up's poor share price. Blis debuted in July 2001 at $1.05 a share. In recent months it has fallen to a low of 48 cents and has climbed back slightly to around 55 cents.

Initial investors, such as Paterson, that bought into the stock at 10 cents are still well in the money. Those out of pocket include institutions that paid 73 cents per share in a private placement in May 2001 and those that paid up to $2.20 on the secondary board towards the end of 2000.

The weak share price doesn't mean Blis has done anything wrong. All right, it made an operating loss of $1.87 million in the last financial year and an overall deficit of $14.33 million after writing off the value of its intellectual property through a change of accounting policy. The move brings it in line with industry practice for biotech companies, though investors may well ask why there was no provision for this in last year's listing profile.

Punters always knew Blis wouldn't be making money this soon, and the company says its cash position is more than $1 million better than forecast in the listing profile due to product development savings. What's more, Blis has met all the milestones to commercialisation that it said it would. But even news at the recent annual general meeting that New Zealand sales of Throat Guard were some 30% above forecast and international distributor deals were close to being signed sparked barely a flicker in the share price.

Blame it on the markets. The global trend is to mark down technology and biotech companies and investment in risk is at an all-time low. Here in New Zealand, Forsyth Barr research head Rob Mercer says the market is not paying for promises. "It is not just Blis, it is everything. The key things in the next 12 months, in my view, are that the company proves it has some traction in one other global market, proves it has had another good season in New Zealand, and we start to see some visibility in the next product." In other words, the share price won't lift until the company delivers on all its promises.

The stock is tightly held. Otago University has 20% after selling the intellectual property rights to Professor John Tagg's research into bacteriacin-like inhibitory substances (BLIS). Southern Capital holds 15% and Paterson is reported to have around 11%.

The surprising thing about this year's AGM, Blis's Moffat says, was no one asked about the share price. At least one investor is not too unhappy with the current situation.

Kevin Bennett, spokesman for shareholder Alliance Capital, says the big test for Blis will be whether it can match its local success and convince distributors to take it offshore. In Bennett's view, the product that will make or break the biotech company is the next one - a treatment to prevent tooth decay, currently undergoing an efficacy trial at the Otago Dental School. "From a simple perception, a preventative to tooth decay is a given already with consumers and the product just enhances that. It should be a lot easier to sell than the strep throat product."

In the 11 weeks following Throat Guard's launch, total sales were above forecast at over $200,000. If you extrapolate the New Zealand sales, something manufacturers love to do, on a straight per-head-of-population basis, this would give potential sales for the first three months of $3 million in the UK, $4 million in Germany and $14 million in the US.

Yes, that's a big "if", but it is enough to have attracted the attention of overseas distributors. Blis claims to be close to signing a deal with a distributor to sell exclusively into the big German market by February next year. The as-yet-unnamed distributor has experience with (and German consumers are well familiar with) this type of product. Germany also has low regulatory barriers. Part of the deal will see Blis securing a cross-licensing agreement to sell the European company's complementary antibiotic product here.

Negotiations in the UK are less advanced but the biotech company hopes to have distributors signed up there and in the more problematic US market within a year. It is also screening potential distributors in France, Japan and China.

Like all good innovators, Blis is working on several other products - for bovine mastistis, middle-ear infections, a combined oral and intestinal beneficial bacteria for use after antibiotics and a remedy product companion to Throat Guard due for release next winter. The most advanced is the preventative dental treatment due out around April next year, all going well.

After all, Blis has to keep rolling out the products to meet investors' expectations that it won't be a one-hit wonder.

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