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Pacific's Edge's $100m American dream

In the parlance of the young, Pacific Edge is so hot right now.

And it is thanks to a little scientific magic from Dunedin.

Urologists curently use a cystoscope, threaded into the urethra or vagina, to inspect your bladder to see if the blood in your urine means you have cancer.

Dunedin biomedical company Pacific Edge has created a urine-based test, called Cxbladder, to do the same thing and – one already commercially available in New Zealand and Australia which is about to be rolled out in the populous north-eastern United States.

It detects certain genetic markers in the urine which are processed by a mathematical gizmo located in the throbbing heart of Dunedin's central city university precinct.

That produces a single score – a yes or no.

Given bladder cancer requires repeated urological consultations, tests can be expensive, time-consuming and physically invasive. Cxbladder might be revolutionary.

The idea has captured the imagination, and the investment money, of NBR Rich Listers Peter Masfen and Sir Stephen Tindall, who have 9.14% and 7.3% stakes, respectively.

Unsurprisingly, the University of Otago is another big shareholder, as the company was founded in 2001 on the university's exclusive licences.

Stock surges

Pacific Edge raised $19 million last year on the promise that amount would fund Cxbladder's commercial rollout in the US for two years.

A recent surge in small-cap stock's share price (NZX: PEB) – which has more than doubled since the start of August – suggest others are starting to believe in the company's potential.

Milford Asset Management senior analyst Will Curtayne says Pacific Edge's potential is huge if the company's push into the United States is successful.

However, meaningful sales data won't land until 2014 – which should sound a note of caution to potential investors.

"It's high risk," Mr Curtayne says. "This company is by no means going to make a fortune if this product doesn't work as well in the US as it hopes."

The face of Pacific Edge and the person doing the rounds of fund managers is ceo David Darling – himself a scientist, who has worked for Rubicon and Fletcher Challenge, and who joined the company in 2003.

He has just returned from the United States where he oversaw the fit-out of a $US3.7 million laboratory in Hershey, Pennsylvania.

Hershey, the so-called "town built on chocolate", is the launch pad for Pacific Edge's assault on the world's biggest healthcare market – an attempt to convince the country's 17,000 urologists its product must be added to their practice.

Compare that to Australia and New Zealand's 300 urologists and Australasia becomes a proving ground for the serious money to be made in the US.

The American dream

With the US laboratory now complete and registration under the Clinical Laboratory Improvement Amendments expected in March, Pacific Edge's American dream is within reach.

Mr Darling says there are an estimated 1.8 million bladder cancer tests in the US each year and its laboratory has the capacity to carry out 260,000 tests, annually – about an eighth of the market.

"But at that level gross revenue would be about $100 million."

Pacific Edge hopes to hit that mark in its fifth year.

"We can replicate that very quickly in another laboratory, on the same site we can go to the other side of the building that we're in, and relatively quickly, within six to eight months, we could scale up the entire volume again.

"If we had a $100 million business we'd be happy to pay for the next expansion out of cash."

That will be music to the ears of investors, as the last annual report's loss was $4.1 million, making accumulated losses $28.5 million – although it still had $18 million sitting in the bank.

Mr Darling says the US margins for Cxbladder tests are so large he is not worried about the effect of a strong New Zealand dollar.

One-stop shop

Pacific Edge is not just about one geography or one product.

It has partner companies in Australia and Spain and it has other products in development, which have been slowed or halted because of Cxbladder's US push.

Cxbladder's follow-up, Mr Darling says, is a prognostic product to tell if the cancer is superficial or invasive.

"Being able to provide a urologist with more than one piece of information – this one-stop shop concept – is very important, and it's also your quickest way to scale your business because now you'll have two products going down the same route to market, to the same customers.

"And we have a third one that we're currently working on that is at an earlier stage. We'd like to be close to bringing the second one to market within 12 months of the start of the US lab."

Pacific Edge is also developing "colorectal" cancer tests to detect tumours found in the anus, rectum and colon.

That makes interesting science, and sounds important for cancer sufferers, but when will investors see a return and will they be asked for more money?

Mr Darling says Pacific Edge is expected to be "cashflow positive" in the US within two years. And it isn't expecting to go back to shareholders unless there is a pressing need to set up a lab in another country.

Might there be a dividend, then, by the third year of US operations?

"I couldn't possibly comment," he says, before immediately contradicting himself. 

"But I would hope so."

More by David Williams

Comments and questions
3

I would suggest to Mr Curtayne that most share investing is "risky" in NZ ... unless of course you wait until all the action is over. The share market is NOT for nervous nellies who can't afford to lose their capital. I don't see PEB as high risk - it has a great launching product with a suite of like products to follow and is on the brink of something big. It has done all the hard work and is methodically working its way through the corporate compliance maze. It is a great NZ company that I think is undervalued and it deserves to be where it is heading. Messers Masfen and Tindall are not fools .... My best wishes go to David and the PEB team. (I can't see the same value in Xero however ... its share price so far is based on fresh air ... there is nothing tangible backing it ... certainly not for newby investor, but judging by the volumes, it is only them who are pushing things up...)

My advice to any budding investor is to get in while you can. If you wait until there is "no risk", you will either be too late or it will cost you a bomb. BTW, dividends are not the be all and end all ... retained earnings is the key for value. There's a lot to be said for capital gain....

Fair comments but allow me to make two observations :

1. PEB is very high risk and suited to those who have a portfolio spread - i.e.. no more than 5% of their total share portfolio. Messers Masfen and Tindall are no fools and that's why they only have a fraction of their considerable wealth in PEB. I remember Tindal writing off his $5m investment in Provenco.

2. Paying dividends is a discipline for NZ companies. Too many squander the cash generated from their operations into disastrous forays overseas or into other investments. Fletcher Challenge was a good example.

If the company wants cash for expansion, come to shareholders and have a rights issue. That's how it should be done.

All the best to PEB, the management and the team. You are doing University of Otago proud.

Good call by Will Curtayne

David Darling and the company have been promising "next year" results for the past 5 years. The roll out of products is the same product range ready to commercialise 4 to 5 years ago.

Messrs Masfen and Tindall are very smart people who made their money from one main enetrprise - not all of their speculative investments have been successful - in fact quite a few haven't been successful.

These guys can afford for over half of their speculative investments to go bad - as the other half cover them.

Small time investors don't have the luxury of a 50% strike rate.

So well done Will Curtayne of Milford Asset Managemeny for an honest and accurate aassesment that this is a risky investment.

Small investors shouldnt put their houses on Paciifc Edge - David Darling hasnt