Faruk Khan, page-2

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    This might help from todays Australian Financial Review Pierpont Article

    Biota catches a cold it can't cure
    Oct 25

    Back in the days of the tech boom (which Pierpont enjoyed greatly), the share prices of dot com and biotech stocks were propelled to stratospheric heights. The undiscriminating investors of those days did not realise that a dot com and a biotech are fundamentally different animals.

    A dot com can be set up in a garage by a teenager and translated into millions before he's out of acne. Back in 1999, the simplest little computer program could start a paper empire which enriched brokers and expert advisers and usually left the boy-wonder's reputation back in the garage before his shares got out of escrow.

    A biotech, by comparison, is the slowest-growing animal on the board. Typically, some good, grey Professor Algae has spent decades trying to separate molecules on the scungy back benches of some university laboratory. Then, by great good fortune, Professor Algae manages to float his discovery into a public company.

    But the company has to have a lot of money because it takes 10 years to get its discovery through the US FDA, which carries out the most exhaustive tests on the drug before it is deemed safe to release to the public.

    If the FDA did not exist, the US drug companies would have invented it, because the FDA is the world's greatest non-tariff barrier.

    Pharmaceutical companies all around the world are discovering drugs that will cure cancer, ease pain, prolong life or whatever. The FDA's real purpose in life is to stop any of these foreign companies from exploiting those cures for humanity until some US drug company has either (a) run the foreigner out of money, (b) stolen their patent, or (c) worn the foreigners down to the point where they will accept a derisory royalty in return for handing over their discovery.

    Biota Ltd is a case study in how Australian pharmaceutical research is going to go down the tubes unless some form of regulatory protection is introduced.

    Biota kicked off with a drug called Relenza, which cured influenza. This drove Biota's share price to a high of $9.40 in early 1999. Relenza fixed the 'flu, but there was a flaw. It had to be taken in the first few days when influenza was incubatory. This, of course, is the time when most people don't realise they have the virus.

    Broadly, Relenza was useful when you didn't know you had 'flu, but once you knew, it was too late. Biota did a deal with GlaxoSmithKline which made a lot of money in year one, but - judging by the falling revenue stream since - a few customers must have worked out the product's inherent limitation.

    Undeterred, Biota's chemists are now working on more practical drugs which they call multivalent coupling, which in Pierpont's lexicon are drugs that grab viruses and hug them to death. This might not only kill off influenza but even the common cold (human rhinovirus).

    Great stuff, but Biota is first going to have to actually find a molecule that will hug rhinovirus, and after that it's going to take another decade while the FDA decides which US drug company should steal the patent. Unlike most biotechs, Biota might be able to survive the FDA's vilest efforts because it has a bankroll of $30million, which, properly husbanded, should see it through.

    However, that won't protect it from the good old free market which Graeme Samuel loves so dearly. Because Biota is now under threat from Farooq Khan's Bigshop.com, which has bought 9 per cent of Biota and wants two board seats and control of the $30 million.

    Here is a crux, which Graeme and all the other unabashed free-marketers might think about for a second. Biota is sitting on a pile of cash which it intends to spend researching to discover drugs for the good of humanity - and the Australian economy. Meanwhile, it has about the most open share register on the market, and its $30 million can easily be controlled by Farooq and directed for other purposes.

    Whether Biota shareholders would fare any better under Farooq is a moot point. One way or another, Farooq currently exercises control over five listed Australian companies, all of which are wallowing.

    Queste Communications hit 90¢ at its peak and is now down to 5¢. Fast Scout shares are down from 40¢ to 2.5¢. Bigshop.com, which is more or less Farooq's flagship, hit 20¢ early in its life and is now around 2.5¢.

    Farooq moved onto the board of Software Communications last July, in which time its shares have actually risen from 6¢ to 7¢, but it's still no great triumph. Central Exchange is currently 1.5¢ and has been pretty much a flatliner for the past two years. If you showed its share graph to a heart surgeon he'd advise you to turn off the life support.

    A second point several of these companies have in common is that they've been operational failures. Queste tried to develop VoiceNet technology, which has been a failure. Fast Scout wanted to develop an internet search engine. So far it hasn't, and even if it did it would almost certainly find that Google has too big a headstart.

    Central Exchange wanted to roll out a national telephone system and hasn't. Bigshop has abandoned its original purpose of online retailing and become a takeover merchant.

    A third similarity is that they are all, for most practical purposes, cashboxes. Farooq has gone shopping among busted dot coms that have open share registers and some residual cash, in each case buying enough shares to ensure a couple of board seats and effective minority control.

    A fourth similarity is that companies that come under Farooq's control think it's a great idea to do deals with other companies associated with Farooq and his extensive family. Fast Scout's internet indexing system was being put together under contract by a Pakistani company called Database Systems, of which more than half the capital seems to be held by interests associated with the Farooq family. Queste sold VoiceNet to Central Exchange, which is now proposing to take over Juniper Resources, of which Farooq is a director.

    Almost the only person deriving much benefit from these stocks is Farooq. He is chairman and managing director of Queste (remuneration $135,000), Fast Scout ($108,000) and Bigshop ($69,000) and chairman of Central Exchange ($130,000).

    Pierpont's spies on the Biota board say Farooq has told them he wanted to take control of the companies, merge them and use their combined cash of maybe $50 million to make a large acquisition.

    Gazing into the rather cloudy Pierpont crystal ball, your correspondent was prepared to make a wild guess that it might be some outfit in which the Khan family had an investment already.

    Until Pierpont checked by ringing Farooq, who said no, he didn't have any acquisition in mind at all, and especially not one with which he was associated. Farooq said he'd bought into Biota because he thought the company's biotech assets had value that hadn't been recognised by the markets and he wanted to make sure they were recognised. "We don't have any great plans to sell a you-beaut biotech company into Biota or to take the cash out," he said.

    Pierpont should point out that Farooq is just doing what entrepreneurs do. By buying into cashboxes, he's marshalling capital and maybe redirecting it. And in a free market, shareholders have a right to decide whether to (1) back Farooq to run Biota, (2) sell their shares on market and head for the sidelines or (3) hang in nobly as suppliers of patient capital while Professor Algae grapples with little rhinoviruses.

    If Pierpont were a noble investor who put the national interest first, he'd go for (3). If he were selfish and concerned only with saving his investment, he'd go for (2), because the share price of Biota is 50¢, which is 10¢ above its cash backing and the cash mightn't be there for much longer.

    The point is if Australia is ever going to get anywhere in biotech, then having it done by companies such as Biota is a very uncertain way of achieving the result. Unless firms like Biota hit the jackpot straight away (and the FDA is purpose-designed so they can't), they are always liable to fall into long periods where they're working on research and testing, and their bank of (highly necessary) capital makes them an easy target.

    Maybe biotechs should be set up as pooled development funds or in some special structure, because plain listed companies will always be difficult to defend unless the biotech has a big brother on the share register. The alternative will be to wait for the Farooqs of the market to save us from the common cold, in which case we'd better all go long Kleenex.
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