Clioquinol

COMPANIES ON THE MOVE

FINANCIAL STRATEGIES

Perhaps more than any others, investors in new biotech ventures have to be willing and able to play the waiting game: Twenty years or more are often required to develop and test new drugs, get them approved, and bring them to market. Mostly, early-stage biotech companies subsist on government grants until-if their science works-big pharmaceutical companies snap them up and carry the ball.

But there are exceptions. Australia's Melbourne-- based Prana Biotechnology has been able to combine enough "angel" start-up funding with an early-stage IPO to take a company with a potentially huge product close to commercial takeoff. Furthermore, the founding partners are still solidly in control of the venture. Their expectation is nothing less than to be the first company to introduce an effective treatment for Alzheimer's disease and a host of other devastating neurological ailments such as Parkinson's disease, Creutzfeldt-Jakob disease (Mad Cow),Tardive Dyskinesia, Motor Neuron disease ("Lou Gehrig's disease"), and cataracts. Combined, treatment of these presently incurable conditions is estimated to be a $9-10 billion market.

If Prana's well-advanced research arising out of Harvard Medical School and Melbourne University pans out, the company is in a position to "own" this field and bring hope to millions of victims of what are today essentially hopeless afflictions. Along the way, Prana is likely to explode from its present status as a virtually unknown Australian-listed company with a market cap of more than A$ 100 million into the front ranks of global medical biotech players.

This, at least, is the game plan of Prana's executive chairman and initial backer, Australian entrepreneur Geoffrey P. Kempler, and the head of the company's research team, Dr Ashley Ian Bush-who in 1992 extended his pioneering work at Melbourne University's Department of Pathology to a second base at Harvard Medical School's Massachusetts General Hospital. Like other researchers, Bush has focused on disturbances of the amyloid protein in the brains of victims of Alzheimer's.

These abnormalities-- recognized by Prana research as being caused by oxidation damage to brain cells of older people-- were first observed in 1904 by a German scientist, Dr Alois Alzheimer. He found deposits, or plaque, in the brains of patients who had died of the degenerative disease later given his name. The deposits were called amyloids, or "starch-- like," because they look like small grains of starch.

Solving a Mystery

The true compositions of these deposits remained a mystery until 1984, when professor Colin L. Masters, head of pathology at Melbourne University, and others working with him sequenced the Alzheimer's precursor protein (APP) that produces the amyloid protein and its chain of 44 amino acids. (Normal protein chains have only 42 amino acids.) The follow-up work at Harvard uncovered the process that produces this oxidation in 1987, and Bush-who had studied with Masters in Australia-- made the crucial discovery in 1994 that the "beta" form of amyloid reacts with common mineral elements such as iron, zinc, and copper in the brains of Alzheimer's victims.The plaque is the excessive build-up of these deposits. Bush conducted this work in 1992-1994 at Massachusetts General Hospital with Dr Rudolph E. Tanzi

Most of the scientists involved in these discoveries, including Masters, Bush, and Tanzi, have been directors or advisory board members of Prana since the company was founded in 1997. "We have a huge scientific head start in this field," says Kempler, who has begun traveling regularly to the United States since early 2001 to introduce the company to institutional investors. "We have the scientists who have made and patented these discoveries."

Other, much larger companies such as Novartis and Parke Davis also are working on drugs to treat Alzheimer's, but Prana's approach is unique. "Nobody else is seriously investigating the role of biometallic binding compounds in the treatment of Alzheimer's and these other neurodegenerative diseases," Kempler says. "Other researchers are spending hundred of millions of dollars to find ways to eliminate the beta-amyloid protein from the larger host proteins in the brain cells of victims. We think that might not be such a good idea. No one knows what the repercussions would be if beta-amyloid were eliminated from the body."

Old Drug, New Use

Bush has published more than 80 papers on his work over the past 18 months, culminating with a report in the scientific journal Neuron in late June that began to create a stir in the medical and investment communities. The initial agent of treatment is an antibiotic called clioquinol that was withdrawn from use in the 1970s because it was linked to vitamin B12 depletion in some patients. Bush's research has found this drug can prevent-and even reverse-the damaging buildup of metals in the brains of mice that are genetically bred to overproduce beta-amyloid. Human tests are under way in Australia and will be expanded early next year if clinical trials continue to be positive. (A Greek company has a competing patent on this drug. But Prana execs are taking legal action to protest their use of clioquinol and say this is not a deterrent to their business plan.)

Bush, who also is associate professor of psychiatry at Harvard Medical School, says the current nine-- month program of tests on 36 patients in Australia is three-fourths finished. "The results should be decoded by the end of next February," he says. "After analysis, we will scale up to the next phase, which will involve hundreds of patients in Australia, the United States, and perhaps other countries. If the results are favorable, we then will apply to the Food and Drug Administration in the United States for approval of the treatment. A reasonable guess is that this treatment could be on the market about three years from now."

This brings Prana to its needs for another round of funding during the second quarter of 2002. Kempler, an industrial psychologist and entrepreneur in the retailing field in Australia, and another "angel" funded Prana from its start-up in November 1997 until its IPO in March 2000 on the Australian Stock Exchange with A$2.5 million of their own money. "To get to the next stage of development, we looked at the venture capital market last year and didn't like what we saw," he says. "The valuations from VC investors were way too low, but we saw that we could raise A$8 million by going public in Australia-- without giving up control of the company. We sold 16 million shares, or 31.7% of Prana, with the IPO." Today the two original financial backers still own about 26% each of Prana.

"I estimate that we would have given up at least 50% of the company on round one if we had gone to venture capitalists instead of the public market," Kempler says. Prana already has a level 1 American depositary receipt program in place, sponSored by the Bank of New York, and may use that to tap the US market for up to $40 million next year with a possible Nasdaq listing. "Another option is to make an alliance with a US or European pharmaceutical company that would fund the next phase of human clinical trial," Kempler says. A major alliance in the future would be needed to manufacture, market, and distribute the drug.

Priming Investor Interest

So far, Kempler and Bush have been introducing the company only to institutional investors, mainly in the United States. "A couple of institutions have bought shares already, but for most of them we are too small to be in their portfolio," Kempler says. Significantly, however, some fund managers contacted in New York are buying the company for their personal accounts on the Australian market. "I love this company," says one such New York-based institutional investor who specializes in biotech and medical stocks. "Their science looks good. If it all works, the results will be unbelievable with the treatment of Alzheimer's alone-and they are developing molecules for the treatment of all these other neurological diseases like Parkinson's."

Investor enthusiasm is nice. But getting to this point has not been easy. Prana's experience, Kempler says, illustrates the absence of a viable venture capital model for biotech start-ups. "Probably, we had to go public at a stage that was too early, but at least it allows us to raise more capital easily as we succeed," he says.

"Other industries, such as housing, have developed risk models that both suppliers and takers on credit understand-so you have 20- or 30-year funding for real estate loans. There are no 20-year loans for a biotech or scientific research venture, so you do what you can with angel money, VC funds, research grants-- and going public."

Copyright Global Finance Media Inc. Sep 2001
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