ProStrakan rejects merger offers as hungry biotechs hunt out cash

Published on Sunday 24 February 2008 20:52

PROSTRAKAN has been approached for mergers from cash-strapped biotech companies from both sides of the Atlantic as the industry suffers from a major low in investor confidence.

But the Galashiels-based pharmaceutical company, which is funded through to its expected profitability date after securing a 50 million debt facility last year, has rejected all approaches. Chief executive Wilson Totten said they would "add nothing to the value of the business".

Turbulence in the financial markets has led to biotech companies struggling to raise capital, with a number in the UK announcing distress sales in recent weeks.

This month, Dundee-based dental technology company Idmos announced it could run out of cash in early March, while Ardana, the Edinburgh-based, early-stage pharmaceutical firm has also said it is seeking a merger with a larger, cash-rich group, to develop its portfolio.

But ProStrakan, not expected to make its first profit until at least the end of 2009, elected to raise debt last year, which according to Totten has made it "independent of the stock market" fluctuations and immune to the current difficulties raising funds.

"That wasn't because we were able to predict what was going to happen in the equity or the credit markets, but we took the view that we shouldn't have to rely on equity-based fundraising," he said.

"Some people criticised us, saying, 'you shouldn't be taking on debt as a loss- making company but, with hindsight, I think it was exactly the right thing to do."

Totten said that even last year the company – which makes products such as testosterone gel and an anti-nausea patch for people undergoing chemotherapy – explored the possibility of raising cash through a share placement instead of taking on debt, but "we weren't confident we were going to find it straightforward".

The debt facility has put the company in an almost unique position of being some way from profitability but well funded, prompting approaches.

Totten said "one or two (companies] have approached us about merging on the basis that we are well funded and we would solve their problems; the problem is they don't add anything to the business".

He also said that taking on additional early-stage assets – such as Ardana – would mean it may have to raise money through equity placements, and he did not believe the market would be any more favourable to it doing so than earlier-stage companies.

ProStrakan was able to raise the money as it already has significant revenue in Europe and is soon to launch in the US, while earlier-stage companies must rely on direct shareholder investment.

Totten said that while he believed the debt market would allow it to do a similar deal if it was to try to do it now, he speculated that bankers "would probably be more cautious than a year ago".

While appetite for the sector has always fluctuated, Totten said the current environment was the worst he had seen as investors everywhere flee to safety.

"It is as bad as I have ever seen it. It was certainly a lot easier to raise money in the 90s and even easier in the 80s," he said. "The banks are wobbling, the equity markets are wobbling and people are looking for low-risk, and if necessary low-return, homes for their money. Biotech isn't that; traditionally it's a boom or bust sector."