Pacific Edge in business

Following a stellar year hitting targets and milestones, listed Dunedin bio-tech company Pacific Edge has been named Otago Daily Times Business of The Year 2013. Business reporter Simon Hartley profiles Pacific Edge's decade of persistence.

On task are (from left) Pacific Edge chief executive David Darling, senior scientist Justin Harvey and chairman Chris Swann, in the company's Dunedin laboratory at the University of Otago's Centre for Innovation. Photo by Peter McIntosh.
On task are (from left) Pacific Edge chief executive David Darling, senior scientist Justin Harvey and chairman Chris Swann, in the company's Dunedin laboratory at the University of Otago's Centre for Innovation. Photo by Peter McIntosh.
Pacific Edge this year has established a presence in the lucrative United States health market, where it is spending millions of dollars marketing its non-invasive bladder cancer diagnostic tool Cxbladder.

During the past year, the company has notched up massive share price gains, signed up large US health organisations and most recently completed an oversubscribed capital-raising of almost $29 million, its second during the past two years.

For Pacific Edge's long-suffering shareholders, 2014 could be the year of redemption, as research and development spending to the year ended March 2014 is estimated at $46 million.

Dunedin businessman and accountant Chris Swann has been with Pacific Edge since its inception, as a financial adviser from the early 2000s, then as a director from 2005 before becoming chairman in 2007.

He credits Pacific Edge's success back to its inception led by Parry Guilford, the large skill-base within the University of Otago and in its commercialising of ''raw'' intellectual property rights.

Prof Guilford is principal investigator at the university's Cancer Genetics Laboratory in Dunedin and Pacific Edge's chief scientific officer.

''We've used New Zealand, as the home market, to develop and prove the research and the standard operating procedures for lab work. It is the knowledge base,'' Mr Swann said.

Pacific Edge's Cxbladder, developed over the past decade, uses a non-invasive urine sample for testing. Its certified laboratories in Pennsylvania and Dunedin can process up to 260,000 and 35,000 tests respectively annually.

He estimated that while Pacific Edge spent $46 million on research and development, had it been developed in the US it would have cost $US400 million-$US500 million to achieve similar breakthroughs and results.

''We've [also] been fortunate to have a very loyal and large shareholder base, which has helped immensely in the longer term,'' Mr Swann said. Shareholders are staying loyal, even if the company has not yet posted a profit.

He reiterated earlier estimates, of achieving an annual $US100 million turnover within five years, noting that was a mid-range estimate.

While Pacific Edge holds numerous patents in the US, Asia, China, Singapore, Europe and Japan, ''the United States is the sole focus for 2014, with all our energies going into that'', Mr Swann said.

''Trying to commercialise in a lot of countries all at once would be a recipe for disaster.''

The new Cxbladder diagnostic test costs around $NZ320, while the conventional full, invasive clinical test in New Zealand can cost $1750-$2200.

Cxbladder is being trialled and looked at by health boards around New Zealand, and in Europe and Asia, but it is the large US market which holds the most short- to medium-term promise.

Mr Swann said the non-invasive urine Cxbladder test in the US was about 80% cheaper for an initial test compared with conventional and invasive tests, but if patients went on to require ongoing cancer treatment, further Cxbladder tests offered more than 80% in savings.

Bladder cancer treatment in the US for a patient's lifetime is estimated to cost around $US200,000.

Pacific Edge has about 18 employees in Dunedin, including management, administration and lab technicians, a further 10 in Pennsylvania, and an expanding US marketing team of six, which is expected to grow to 25.

The Pennsylvania lab has the capacity to process 260,000 tests a year and Mr Swann is confident the company will processing ''several tens of thousands of tests'' next year. While the molecular science developed in Dunedin is closely guarded, and a large number of patents are held and regularly updated in countries around the world, price is a key selling point for healthcare providers.

Mr Swann estimated that intellectual property rights, or patents applications, and constant updating, had cost Pacific Edge between $5 million and $6 million, but pointed out patents were crucial for maintaining its competitive edge.

He was less concerned about the molecular science being ''copied'' by competitors in the future - because Pacific Edge is always developing and updating it, which acted as ''buffer'' - than by the potential for a breakthrough elsewhere in technology.

''This is why we are developing and want to have a broader range of tests [eventually],'' Mr Swann said, referring to expanding Cxbladder uses, and also applying more research into other cancers, such as melanoma, bowel and colorectal.

Breaking into the US market, giving it access to customers numbered in the tens of millions, meant a tough fight to gain strict regulatory approvals.

However, that process is now complete and next year product sales will not only provide much needed cashflow but will probably see large pharmaceutical companies sitting up and taking notice.

Following regulatory approvals to open its $4.5 million Pennsylvania lab, which allowed its growing marketing team to actually sell the product, Pacific Edge's shares began to spike, followed by more news of US contracts with health network suppliers.

From a trading range within 40c-70c during most of the year, its shares skyrocketed about 250% in early October to hit $1.50 in following weeks, and have since eased to trade around $1.30. As at December 24, Pacific Edge had a market capitalisation of $413 million.

A recent agreement with the FedMed network encompasses 4000 hospitals, 550,000 physicians and 60,000 ancillary care providers - to which about 40 million Americans have access. The politically divisive ''Obamacare'' health plan in the US also offers Pacific Edge the tantalising prospect of health customers numbering in the tens of millions.

However, the next crucial step is Pacific Edge gaining clearance from the Centre for Medicaid and Medicare Services (CMS), which oversees and reimburses payments for the US public health system.

Mr Swann welcomed Obamacare as ''an opportunity'', but the legislative changes meant Pacific Edge had to wait longer and make changes to gain CMS accreditation, but he hopes it will be through early in 2014.

''Because Obamacare is orientated around health benefits, it wants to see value gains through [our] tests,'' he said.

Pacific Edge's shareholders have poured more than $40 million into product development since its listing in 2003, including $20 million capital raising in 2012 and most recently a $29 million in a renounceable rights issue, while yet to come close to booking a profit.

The latest capital raising leaves Pacific Edge about $30 million in the black, to underpin marketing, distribution and testing costs of its mainstay Cxbladder product.

At its annual shareholder meeting in Dunedin in August, chief executive David Darling, winner of the Otago Daily Times Business Leader of the Year - 2012 award, had initially batted away suggestions of a company sale to the large pharmaceuticals, but conceded an offer could be expected.

Craigs Investment Partners broker Peter McIntyre said Pacific Edge became the ''share market darling of the year'' with a series of positive announcements which eventually saw its market capitalisation rise from $100 million to more than $400 million.

''Pacific Edge really created a buzz in the sector ... it showed a global business really can be run from Dunedin,'' he said.

Investors had been impressed the company had come through with results from being focused with a ''regimented approach'' to planning, targeting markets, opening its laboratory and setting goals in marketing Cxbladder to organisations and urologists, Mr McIntyre said.

He said while the company operated in a fast-growing sector with a lot of competition, it had protected its intellectual property well and ''was likely several years ahead'' of competitors catching up.

''A buy-out from a big pharmaceutical company could be an option. There's every chance of that happening in the future,'' he said.

Mr McIntyre said development of new products, some linked to Cxbladder research and other cancer types, will likely be a focus for Pacific Edge.

Forsyth Barr broker Haley Van Leeuwen noted Pacific Edge's success during the year could see it included in the New Zealand stock exchange's top 50 companies index early next year, possibly displacing main street retailer Hallenstein Glasson.

''Pacific Edge is lucky to have many supportive investors who love the story behind their product and the `feel good' factor behind what they do, especially those that have in some way been affected by bladder cancer,'' she said.

Setting up in the US was done in a period of low interest rates and the market was now looking for revenue from the new contracts and a continuation of more urology practices being signed up, she said.

''The new Obama-care healthcare reforms in United States pose an opportunity with a greater number of people having access to healthcare,'' Ms Van Leeuwen said.

- simon.hartley@odt.co.nz

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