Welcome to my first Blog! - Step 3

KAZIA THERAPEUTICS

1. Company Overview

The firm I have been given to analyse is ‘KAZIA THERAPEUTICS’ founded some 23 years ago.

History

The company started as an oncology biotechnology research and development business based in Sydney, Australia. Just last year, the company changed its name from ‘Novogen’ to ‘Kazia’. The company has changed its focus to become an oncology drug development company recently. Its business model now includes partnering and licensing its research and development with other pharmaceutical companies for revenue and sales royalties, and to bring undervalued drugs to market more efficiently. Impressive. Sounds like an interesting company to analyse.

Having said that, Kazia has had a shaky start in the beginnings. Its share price, which was trading at about A$30 in 2004 dropped dramatically to A$3.00 by 2008 and is trading at A$1.04 today. This definitely should raise some eyebrows.

Figure 1: Kazia share performance

Eager to find the reason for this radical drop, I did some research on the internet. The news was not good. In 2005, the company’s founder and executive director, Dr Graham Kelly, his family members, and a group of family companies were investigated for tax fraud, money laundering and dealing with proceeds of crime. There was a big scandal involving links to many other unrelated multi-national companies. Dr Kelly resigned shortly after this.

This would have sent shockwaves in the share market. I believe shareholders pulled out their funding in droves. It was a downward spiral for the company from then on. Lack of funding from equity investors would have led to reduced research and product development contributing to negative profitability. Despite this, the firm somehow managed to survive continued to show resilience.

The company successfully commercialised some of its products, like ‘Promensil’, but seemed to face huge stumbling blocks from getting its other products, like nutritional supplements, approved by TGA and other authorities. It was consistently reporting losses since it started. In 2000, the company was reprimanded for false advertising on ‘Promensil’. The firm made many attempts to reinvigorate public interest in its shares. It continuously reported that despite its massive losses, the company is in good shape and its cash balance is healthy. However, the public were sceptical. The share price kept plunging. Yet, surprisingly, the firm managed to process tens of millions of dollars each year to fund its R & D operations every year. It seems to be successful in keeping its cash balances up by issuing more shares each year.

Firms Strategies

The firm’s strategy is to research and develop drugs for cancer, aging and supplements for the health industry. Once the products are approved by the relevant authorities it intends to draw income by commercialising these products. However this income is insufficient to fund its on-going R&D. Therefore the firm has been managing to raise millions of dollars each year through issues of new shares for its research and development. In year 2000, it raised some revenue by licensing out its drug development and manufacturing with partnering companies. It intends to receive further revenue income through its milestone payment agreements and royalties on commercial sales. The firm intends to expedite its research by continuously employing highly innovative drug approach to drug development. In 2021, its main focus and plan for revenue were 3 significant drugs: Cantrixil, Paxalisib and a cancer drug called EVT 801.

The company’s business model now includes partnering with pharmaceutical companies to bring undervalued drugs to the market more efficiently.

2. Financial Statements

The presentation of the annual report for the last four years looked impressive. As expected, the firm’s chairman and the CEO painted a rosy future for the company. At initial browse, the annual statements looked clear enough to understand the elements. The notes provided were pretty comprehensive and clear. The statements looked to follow the AASB standards. The firm’s accounts looked simple. There were not many undecipherable items.

The following were obvious patterns noticeable at first glance:

- The firm has been consistently losing tens of millions of dollars each year for the financial years 2018-2021.

- It has been raising large amounts of equity, in the millions of dollars by issuing new shares to investors each year.

- Almost all this equity raised is spent on research and development.

- The firm made almost nothing as revenue for the three years until year 2021.

- The key challenge the company has is turning its Research and Development into cash generation. Time, money, expertise and obtaining relevant pharmaceutical approvals have been some of its major hurdles in the past and still is.

I compared the format of the statements with other firms like ‘Medical Development International’ and ‘Mayne Pharmaceuticals’. The basic format of the statements seem to follow the standard AASB that I have seen in many other firm’s financial reports. ‘Mayne Pharmaceuticals’ had a lot more items on their balance sheets like ‘royalties etc’. It also provided a much more comprehensive section of notes.

3. My thoughts

The obstacles this company faces are by no means simple. I was astounded on how the firm managed to raise tens of millions of dollars each of the last four years by constantly issuing more shares into the market; the public support for this firm indeed baffles me. The principal challenge this firm seems to face is earning any form of respectable income for the last 23 years it has been in the market. Jokes aside, I am wondering how does one find the key drivers of a business that seems to be going next to nowhere?

I found the following statement in the annual reports thought provoking:

“Shareholder wealth in a company engaged in drug development is generally driven by successful commercialisation, out-licence or sale of a drug candidate, and is a long term proposition, rather than being linked to annual financial performance.”

I do agree that it is true that Research and development of pharmaceutical drugs and health takes many years. The obstacles they face are enormous. The drugs after the time and cost consuming research phase, have to be tested over time to be effective and have no side effects. This costs millions of dollars. Once they have passed testing the drugs have to pass FDA and other approvals. Passing this red tape will be a huge hurdle. The struggles do not end there. After spending millions of dollars up to the stage of being ready to release the products into the market, the drugs have to be made cheap enough for the public to afford. It may take years to recoup the money spent up till this stage before any profits can be realised. See A dynamic perspective on pharmaceutical competition, drug development and cost effectiveness.

I do agree that pharmaceutical companies have the potential to earn billions of dollars if they get to that stage. See Pharma 50 for a list of top performing drug development companies organised by rankings and their annual revenues. There are some healthy pharmaceutical companies like ‘Bayer’, share price $67.30 and ‘AbbVie’, share price USD$162, that have shown good income growth over the last 10 years. Unfortunately, there are many that struggle and fail.

In their 2021 annual report opening statement, they openly admit to stating that the future income is not in the research and development but rather in the commercialisation of the drugs they get approved. I like the fact that the company does not assume that the audience, who are reading its annual reports, are gullible enough to keep investing in a loss making investment. Given their track record of negative net income for a substantial number of years, I would be cautious about investing in this firm. Yet, I am puzzled how this firm managed to attract so many investors for so many years. Clearly, I am missing something here.

The first thing I look at in a firm’s financial statement is how healthy its balance sheet and cash flow is; its income, debt, total assets vs liabilities, growth, investments, and dividend payouts. Next, I look at the firms directions for the future by reading through the director’s reports, how it manages its risks and competition. My first impression of this firm’s financial state was not good. Yet, I was intrigued that this firm managed to stay afloat for 23 years reporting millions in losses.

I am happy that I was given a research and development company to analyse. Better still that it is in the health industry, which I try to avoid because I find it difficult to understand their business path and directions. In the past I have always shrugged away from analysing R & D companies and budding businesses because I felt there was so sense is wasting my time looking at ‘the losers’ and ‘the uncertain’ when the ‘ocean was full of better fish to catch’. Perhaps, I might discover something valuable here.

4. Here are links to some interesting Articles to read on Novogen and Kazia, Videos and Blogs:

· Novogen becomes Kazia Therapeutics

· Kazia Therapeutics (ASX:KZA) has lost AU$28m market cap in last 7 days

· Did You Manage to Avoid Kazia Therapeutics?

· Novogen insists sales are on the up

· Novogen chief named

· Novogen cash reserves support clinical development of drug program

· Novogen insists sales are on the up

· Novogen misrepresented claims for pill

· The Drug Development Process - FDA

· A dynamic perspective on pharmaceutical competition, drug development and cost effectiveness

· Pharma 50: The 50 largest pharmaceutical companies in the world

Videos

· Kazia Therapeutics – introducing novel asset EVT 801

· Kazia Therapeutics marks big step forward as first patient enrols in EVT801 cancer therapy trial

· Kazia Therapeutics AGM 2021

Blogs

· Community View on Kazia and its share price