SMALL CAPITAL BUSINESS IDEA: Destiny Pharma joins the growing list of small companies going private

Last week, another life sciences company announced its intention to exit the junior market, saying that private equity offers better opportunities than AIM.

Destination PharmaceuticalsIf shareholders vote in favour of the IPO, the company will join companies including Redx Pharma, C4X Discovery, e-therapeutic and antimicrobial specialist Byotrol in withdrawing from the market.

The clinical-stage biotechnology company is currently seeking a partner to advance the Phase III development of its anti-infective XF-73 Nasal.

Nigel Rudd, chairman of Destiny and former Boots boss, painted a bleak scenario if the company did not delist: “If we do not go down this route, we believe that liquidation of the company is the most likely alternative,” he added.

But how did it get to this point?

The simple answer is access to capital. Since the start of the Ukraine war more than two years ago, the market has entered an ice age phase, with little or no money available to those who need it most.

Drug developers that have received significant new capital injections have relied on perhaps one or two key investors with ready access to cash.

Faron Pharma, for example, has managed to raise around £26 million in new funding, but this success is the exception rather than the rule.

Furthermore, the costs associated with listing on AIM, which was originally intended as a ‘light-touch’ exchange for early-stage companies, have become quite burdensome.

A smaller company must pay for a business broker and a designated advisor, or NOMAD, who acts as a supervisor.

Light touch, high cost

Add to that the costs of legal, accounting, accountants and financial public relations and the costs can quickly add up.

A frugal finance director might be able to manage this expenditure for £500,000, but once a business is up and running the bill can easily double or triple.

A company that raises £2 million can spend that amount in less than two years on just the costs of supervision and professional guidance, leaving little to invest in drug development.

With interest rates well above their 20-year average, capital that would otherwise be invested in UK small caps is instead flowing into safer, higher-yielding investments such as government bonds.

This trend is easing somewhat as hopes for rate cuts increase, but a risk-averse attitude remains.

Amid uncertain economic and political conditions, investors are favoring safe havens such as US Treasuries and gold over growth stocks.

Fund managers exacerbate this problem by investing funds abroad, particularly in the US, rather than domestically.

In addition, many fund managers are structurally not allowed to invest in AIM shares.

The proposed market reforms may encourage UK institutions to invest more domestically, but it remains to be seen whether this will be the case at AIM.

Sectoral decline

Life sciences companies have been hit particularly hard. In 2021, during the height of the Covid-19 pandemic, drug developers found it easy to access capital markets due to increased interest in the sector.

However, interest in this area has steadily declined and the life sciences sector is now at levels not seen eight years ago.

British companies are choosing to list in the US, where valuations are higher (as with Zura Bio), or to remain private, where financing is still accessible (as with Myricx Bio).

The AIM All-Share Healthcare index has almost halved since hitting a record high in April 2021, reflecting strong interest in small-cap drug developers.

If the sector is indeed cyclical, previous rebounds from lows to highs in 2016 (71 percent) and 2020 (66 percent) may offer hope. However, companies are unwilling to stick around to test this theory.

After going public, companies turn to organizations that can match buyers with sellers, such as JP Jenkins or Asset Match, which organizes periodic stock auctions.

Some companies, such as e-therapeutics (ETX), appear to be taking their time to go public on the US stock exchange, where the investment community has a better understanding of the life sciences, leading to competitive valuations.

Disappointing

ETX’s Ali Mortazavi, who raised almost £30m from two major investors before being delisted, has expressed his frustrations with AIM.

He said he was ‘extremely disappointed by the lack of institutional interest in the UK for our innovative, technology-driven value propositions.’

According to Mortazavi, ETX struggled to engage with most of the institutions it approached, reflecting the risk-averse nature of the UK market.

This trend has been a consistent theme over the past four years and the company has primarily raised funds through its current two main shareholders, who continue to support the company regardless of its listing.

“We believe there is a limited audience in the AIM market for companies like ETX,” he concluded.

For all your small cap news, visit www.proactiveinvestors.nl