Tuesday 23 October 2018

Malin struggles to find a winning formula

State is losing out on its €50m punt on the life-sciences investment firm, writes Gavin McLoughlin

"It’s a far cry from the happy day when the company’s bosses smiled alongside Enda Kenny in the Irish Stock Exchange on the day it floated." Photo: Stock Image
Gavin McLoughlin

Gavin McLoughlin

The Ireland Strategic Investment Fund ploughed €50m into Malin PLC when the company floated in early 2015. Almost three years later the taxpayer is down over 10pc on that investment, the company's chief executive has left his position and then come back again, and Malin is on its third chairman.

It's a far cry from the happy day when the company's bosses smiled alongside Enda Kenny in the Irish Stock Exchange on the day it floated. It was one of the biggest biotech flotations in European history - generating €330m for the company - creating a well-capitalised entity designed to invest in businesses operating in fast-growing areas of the life sciences industry.

That was March 2015 and before long the company's shares were trading at €12 a pop (compared to an IPO price of €10). Thereafter it rolled along in the €11-€15 range, with some further investments and smaller fundraisings along the way.

But since October the stock has turned for the worse, and the initial investors are sitting on a loss. A big part of the problem is the performance of one of Malin's key investments - Nasdaq-listed Novan.

This was the biggest of the company's initial investments - a €28.5m chunk of change. When Novan went public in 2016, Malin subscribed for more than 800,000 shares at $11 each - almost $9m of further investment. This company has been a disaster for Malin. Post-IPO the share price went as high as $29 but today it's at less than $3.50. The reason? Bad results last year from clinical trials of its lead product - designed for the treatment of severe acne.

Malin did not respond to a request for comment on whether it participated in Novan's most recent fundraising efforts. Earlier this month that company raised net funds of around $35m in a share sale as it seeks to move on from the failure.

Malin had around €50m in cash at the end of June 2017, and may have decided to preserve this money for other follow-on investments. If it wants to follow its money in a meaningful way across its portfolio, however, it may well elect to return to the market for funds at some stage.

For an early-stage life sciences companies like Novan to encounter problems is not that surprising as investments like this are high-risk. If their product is proven to work and gets regulatory approval, they boom. Otherwise, things can get very difficult.

That's something that will have been well known by the company's leadership, who have many years' experience in the pharmaceutical industry.

Malin was born out of a company called Brandon Point Industries (BPI) - set up by Elan veterans Kelly Martin and John Given. This duo was a key part of the sale of Elan to Perrigo - Martin was Elan's chief executive and Given its general counsel.

Later, Adrian Howd, Malin's current CEO, joined as a shareholder.

Although the State's investment has taken a plunge in value - alongside the value of BPI members' shareholdings - BPI has had decent revenue from Malin's flotation.

Malin's IPO prospectus disclosed that BPI had made investments in a number of companies that became part of Malin's portfolio - these investments made by BPI were transferred into Malin for €7.6m in shares.

As part of the IPO process, KPMG took a look at this transaction and determined that the assets that Malin received were "not less" than what the founders got in shares.

This was deemed to be part of the founders' investment in Malin, alongside a €500,000 cash contribution. Later in the document, it was disclosed that BPI was due to receive €3.1m for "a range of corporate, administrative and operational 'back office' services", and for "legal, tax and due diligence services" that had taken place pre-IPO.

There was also a three-year "operating services agreement" put in place with BPI subsidiary BPMS. This deal would see BPMS receive as much as €1.7m a year for various corporate services. That agreement was terminated halfway through 2016.

BPI members have also received large pay packages in their capacity as Malin executives. In 2016, Kelly Martin's remuneration package was valued at over €3m and Given's was valued at over €3.5m, though for both the bulk was share-based.

The State's holding in Malin - which is just under 12pc of the company - means this is a PLC that is perhaps deserving of more scrutiny than it gets. ISIF, the State strategic investment fund that made the deal, is the successor to the National Pensions Reserve Fund and this transaction was the first investment it made under its new identity.

ISIF's mandate states that it is not supposed to invest in companies when the resulting economic benefits would have been achieved anyway - in other words, a private investor would have invested instead of ISIF and had the same impact.

That sounds like a good yardstick in theory, but in practice it can be difficult to measure. How is it possible to know if the same benefits would have come about?

However, in this case it seems fair to question whether the €50m put in by ISIF could have come from somewhere else. If the company could raise €280m from investors other than ISIF at IPO, surely it could have got another €50m on top of that? After all, one of the other investors was Woodford Investment Management - run by high-profile hedge fund manager Neil Woodford, pictured. His company did not respond to a request for comment.

ISIF's explanation of this investment was that its decision achieved significant commitments from the company to invest in Ireland.

"These commitments would not have been achieved by private-sector investors and are an example of ISIF's ability to act as a catalyst for attracting investment into Ireland that would not otherwise have taken place.

"ISIF's role as a cornerstone investor was critical in boosting support for the IPO from private sector investors outside Ireland and introducing new international capital into Ireland."

Be that as it may, the State is losing money on the investment and it remains to be seen if this €50m punt will pay off.

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