Transcript Alan Kohler: Well, now we’re going to talk to John...

Transcript
Alan Kohler: Well, now we’re going to talk to John Melki who’s the CEO of Genetic Signatures, which joined the lists in March at 40c a share. G’day, John. Welcome to Eureka Report. Thanks for coming.
John Melki: Hello, Alan. Thank you very much.
AK: Now, we are talking on Thursday and the share price is almost back to the 40c that it was floated at, but it’s been a bit rocky… it went up a bit, down a bit, come back up, so it’s a long way to go if you’ve only just begun on the lists, but the company is actually – what is it – 14 years old?
JM: Yeah. Fourteen years old. Founded in 2001.
AK: Let’s talk about the founding of it, just to get the context. Founded by Geoff Grigg from the CSIRO.
JM: Yes. That’s right.
AK: And he was a pioneer in DNA methylation which you need to explain.
JM: He was. Geoff founded the company in 2001 and Geoff had founded other biotech companies. He founded Pep Tech (Peptide Technology) and Cambridge Antibody Technology amongst others and he understand very early on that for us to succeed he needed to bridge that gap between good science and commercialisation.
So, he founded the company and brought on some cofounders, Mr Christopher Abbott of Maple Brown Abbot who’s been our supporter for the last 14 years and also brought on Mr Rob Birrell who’d founded Austar amongst other things. So he understood very early on that to get this right we need to do it at the ground level. And we were founded on a technology called DNA methylation which is a modification of DNA that happens naturally. It’s a very important part of our development and it’s something that goes wrong in oncogenesis. It’s in cancer.
AK: So what is it, methylation?
JM: It’s actually a chemical modification of one of the bases of DNA and so that can become methylated and it can become demethylated. And so understanding where and when it’s methylated is very important in development and in diseased states.
AK: Right. And in, presumably – because we’ll get on to this in a minute – presumably in the detection of diseases.
JM: That’s exactly right. So there are now diagnostics coming out that are based on detecting that methylation pattern and in fact the tool that is used, what was conceived by Geoff when he was doing some work in Cambridge in the UK, so that tool is something that the company was founded on. I have 20 years’ experience in that tool. Our chief scientific officer, Dr Doug Miller, has 25 years’ experience in that tool. Our company was founded on that tool, but our ‘Eureka moment’, if you like, was applying that tool.
AK: We have Eureka moments.
JM: I know. Our Eureka moment, really, was his invention of applying that tool in to a platform technology that allows better detection of infectious diseases.
AK: Right. So tell us what happened between 2001 and 2015 while you were sort of a private company. How much money was raised and what was it spent on?
JM: So to date, including the IPO, we’ve raised about $32 million. For a 14 year history we’d been running fairly leanly, to be honest, with this type of scientific development that goes on. And we spent a good portion, the first half of our existence, actually getting all of our tools right, developing the technologies, applying for the patents, giving us a position, so we can now compete on the world stage with infectious diseases. So we developed the tools. We got the patents away. We have now applied that tool into a better way to detect microorganisms.
AK: So not only doing the patents but you were developing the science? Is that what it was, developing the screens?
JM: We were developing this Australian science and getting the patents away and we applied that platform technology initially into the detection of infectious diseases.
AK: Tell us about the patents. How many have you got and how secure are they? Do they cover the whole world or what?
JM: They do. All the major jurisdictions in the world. So we have a number of patent families, but the main technology, what we call our 3Base technology is patented over a number of individual patents and that gives us coverage out to 2031 and that covers all of our existing products and also all of our future products.
AK: But how different is your technology to others in the field because I presume there’s not… you’re not the only one doing this kind of screening?
JM: This technology is unique to us. It’s an Australian invention that’s been developed now into a product and we’re getting sales now locally and also internationally. So the technique is very unique to us and what it does is it opens the door for us to be able to create these assays which allow for screening of a wide array of pathogens.
AK: Right. Because at the moment you’re only doing gastroenteritis, right?
JM: Gastroenteritis was our lead product and that allows hospitals to buy our products and it allows them to screen for up to 22 targets of the causes of gastroenteritis and they could be bacterial in nature, Salmonella, Campylobacter. They can be protozoan in nature, parasites, so Giardia, Cryptosporidium. Or they can be viral in nature, like Norovirus. So what our technology allows us to do is screen for all of them across all of those micro-organism classes at the same time.
AK: And you do it more quickly than previous screens, is that right?
JM: That’s right. So our platform technology that we’ve developed is characterised as being quick, so we get results in four to five hours, compared to four to five days with traditional methods. It’s also described as being accurate and I’ve got some clinical studies that I’ll tell you about which are also described as being what we call open platform and that means we work on equipment that’s already in our customers’ laboratories.
AK: So do you get any false positives at all?
JM: The clinical trials that we have to date and we’ve published and our customers have published have shown that we pick up more infections than the traditional methods. And to give you an example, the first study that we did looked at 279 patient specimens and they compared that using their traditional methods and just so you and your viewers understand that is a very fragmented approach in the pathology lab of a hospital. A specimen comes in. If they suspect bacterial, it has to be put on an Agar plate and put in the oven and checked up to four or five days. If it’s suspected to be protozoan, a specialist scientist has to have a look down a microscope at these prepared slides; it’s very insensitive. Or if it’s viral, they have to use these indirect antibody-based methods to do that. And what we’re able to do is come and with that one patient specimen put it through equipment that they already own – no additional capital expenditure is required – and they can get results in four or five hours across all of those groups.
AK: And how much does that cost? What are you selling it for?
JM: The cost of our assays varies depending on the number of targets. We are cost effective. And what that means is that labs can use us every day on every sample that comes in.
AK: But what are you yielding per test?
JM: Our margins are north of 75 per cent and the test that we bring in to hospitals in Australia is covered by existing Medicare rebates, so that’s what I mean by cost effective.
AK: No. But what’s the dollars? How much do you get per test?
JM: The dollars range between $12 and $50 depending on the number of targets that we detect.
AK: Right. And your margin is 75 per cent?
JM: That’s right.
AK: Blimey.
JM: So we’ve mentioned gastroenteritis and you said that’s our only product. In fact, we just announced two weeks ago that we’ve released the next product and that’s a screen for 15 viral targets in a respiratory context.
Respiratory disease is one of the top five killers worldwide and what our test can bring to these labs is the ability to screen for these top 15 targets, again with that four to five-hour window. Because what our team has worked so hard on is developing a workflow. It’s great to have a technology that’s going to change the world, but unless you can implement it, it doesn’t mean very much. Now, we’re really proud of that workflow that we can walk in to a lab and say try our test and they can do that in a way that has very little hands on time, so it frees up technicians’ time.
AK: What do you mean? Explain what you mean by that.
JM: So the traditional methods that I described to you are very labour intensive; someone looking down a microscope, somebody checking plates. We’ve automated our approach, so really somebody in the lab literally takes the specimen, they put it in to a test tube – that we supply as part of the test – they literally incubate that for 15 minutes and they put it in to equipment they already own and four or five hours later…
AK: What equipment is it?
JM: So there’s equipment that purifies the nucleic acid. So what we do is we’re a molecular test. It’s important to know we’re a molecular diagnostic company.
AK: So what do you supply them though to do the test? What do you actually sell?
JM: We provide the hospital with everything they need to go from the specimen to the result, so everything is included. It’s molecular, so it’s buffers, it’s solutions and they put the specimen in there and they put it in their equipment. It’s a real time PCR test. It’s an amplification of the genetic information and that allows them to get results very quickly.
AK: So gastroenteritis. Now, it’s respiratory diseases… viruses.
JM: Yes.
AK: What else can it do?
JM: We’re only now exploring what our technology can do, but we have many products in advanced stages of development. So the other assay that we have coming out in the next two months is one for MRSA.
AK: What’s that?
JM: MRSA is Golden Staph. You may have heard of it. It makes front page of the papers. It’s the flesh eating bacteria. In the US alone, it costs them $US2.5 billion dollars to manage it. It’s an avoidable cost. It results in 17,500 deaths. And so we have a product for that coming out in the next two months which will be cost effective and allow hospitals to screen all their patient populations.
AK: Are you selling the tests to both labs and hospitals?
JM: Yes. We sell at pathology labs and many hospitals have a pathology lab within, so they get the patient specimens in to their pathology lab.
AK: So are you selling to both independent pathology firms and operators or just in hospitals? Both.
JM: We are selling to both and it comes back to that workflow that I was talking about. What it allows us to do – a low through put as in tens of patients a day, but we’ve also designed the workflow so you could do hundreds of patients a day, so it actually applies to multiple laboratories around the world.
AK: And I note that in the 2014-15 year so far you’ve sold 40,800 tests.
JM: We have. It’s up 28 per cent on the corresponding period last year. So we’re in a growth phase and everything we’re doing now is just focussing on getting these tests in to as many labs as possible.
AK: So tell us those 40,000 you sold, give us an idea of who bought them. How many per hospital were you selling and what’s the rate of sale per day?
JM: We are selling in to primarily hospitals who are using their network. Some of them are private labs, so they actually have a GP network of GPs who send specimens in to the centralised lab. And what we’ve found is that these labs are so delighted with the results that they’re generating and they’re now advertising our tests on their websites, so actually educating their doctor networks that there’s a new test available and where before we couldn’t get your results for four to five days, we can now have the same day turnaround. So we’re seeing that translate in to increased numbers. One of our hospital sites began at 25 a day; they’re now telling us we’re doing 50 a day. So that’s just for gastroenteritis.
AK: Right. And that’s the kind of volume that you can expect from a hospital or can it be greater than that?
JM: That’s an average Australian hospital. There are 17 million-odd cases of gastroenteritis in Australia each year. There are 250,000 of those that end up in the emergency room and 17,000 of those end up being admitted because of their disease. Unfortunately, that can result in 80 or more deaths every year from this simple gastroenteritis which people think will pass.
It is a significant disease. Treatment is very important. It’s inappropriate to give antibiotics if they don’t have a bacterial infection, but if they do have a bacterial infection, it will stem the disease. What our products do is they allow the hospitals to stem their infection rate and that is key. It’s a global problem is controlling infection, so by detecting it early, it improves patient outcomes, it allows the right treatment to be administered very early and stems that infection rate.
AK: And it’s pretty cheap.
JM: And it’s covered by existing Medicare rebates and it’s able to be used…
AK: Entirely? What? It’s entirely covered, is it?
JM: That’s correct. And it’s able to be used every day on every specimen.
AK: Right. So is there any theoretical limit to the number of diseases and things that it can screen?
JM: Our chief scientist, Dr Douglas Miller, has designed assays for over 100 targets. So we have gastroenteritis of 22, we have respiratory for 15. Our products that are in the advanced stage of development cover meningitis, they cover sexually transmitted infections, they cover tuberculosis. At the end of the day our technology is unique to us, but it’s still detecting just DNA of the organism.
AK: Well, that’s the thing, so whether it’s a bacteria or a virus, what you’re doing is identifying the DNA of it.
JM: That’s correct. And really, that genetic signature is very unique to each organism.
AK: Yeah. So what’s the potential for selling overseas? Tell us where you’re at in particular with regard to Europe.
JM: So with Europe we’re going through a distributor model. We have distributors already in Italy; we signed them up last year. We have a distributor in Israel.
We’ve appointed a senior executive there, Susan Keese, who’s done it before. She actually took a molecular assay, the digene HPV assay in to Europe from the States and set that up through a distributor network.
We have regulatory approvals. We’re CEIVD marked. And so we are now actively looking for new territories. I’ve just come back from two weeks in Europe and we’re in discussions with a number of territories.
The biggest market for us is the US. That’s 30 per cent of the world market and we’ve appointed a senior executive there in Mike Aicher and Mike established a company called National Genetics Institute back in the early 1990s and he sold that to Laboratories Corporations of America which is an $8 billion company, so Mike was in charge of $1 billion worth of annual revenue for Laboratories Corporations of America, LabCorp, and he’s now leading our charge in to the US. He’s done it before and he’s keen to do it again with our product.
AK: Well, paint us a picture of the competitive environment both in the US, most importantly the US, and in Europe. Presumably there are other businesses doing DNA diagnostics in this way.
JM: So we’re a molecular business and molecular diagnostic. Worldwide sales were $5 billion just a few years ago, so it’s a very big market. There are other molecular players, but what’s unique to us is this core technology, this technology we’ve developed over so many years which gives us the advantage of being able to make assays that can screen for these wide array of targets in a very streamlined, cost effective way.
AK: Why can’t others do that, the other molecular diagnostic firms? Why can’t they do the same thing as you do?
JM: Well, it speaks a little to our technology and what our technology does is it actually takes the DNA and it changes the alphabet and what we do is we actually change the DNA alphabet to make organisms more similar to each other.
For example, for HPV there are over 200 subtypes, so for other players to detect 200 subtypes, there’s an inherent design problem, a bioinformatics problem of being able to target all of those unique sequences, but because of our technology we make those 200 sequences more similar to each other, so it’s easier for us to detect all of those 200 sequences in the one assay.
AK: So you can more easily say this is HPV?
JM: We can more easily say this is HPV or we can more easily say this is influenza because all of these organisms have subtype. Influenza is a good one. You’ve heard of Bird Flu. You’ve heard of Swine Flu. They’re all influenza, but they’re all different at the genetic level. They all have a different…
AK: But don’t you need to be able to say what type of influenza it is?
JM: It really comes down to what the treatment is and for influenza there’s no need to. Some people would like to and we can do that and we certainly do distinguish certain species where appropriate, but our technology is designed for screening, you know, this large array, so being able to screen 22 causes of gastroenteritis it doesn’t really matter at the end of the day whether they have Norovirus group I or group II because at the end of the day it doesn’t affect the patient outcome.
AK: So you say you can say this is a bacterial gastro or viral gastro or parasitic gastro and that’s it?
JM: That’s correct.
AK: And the treatment then flows from that.
JM: And the treatment flows from that.
AK: So the 40,800 treatments you’ve sold last year, how much did you make from that?
JM: Well, I think it was in our quarterly results.
AK: It was. I can’t remember what it was. Tell our viewers how much you made.
JM: Well, that translates to about $700,000-odd worth of revenue year to date.
AK: Right. And how much short of your costs is that? How much money are you burning?
JM: Well, our burn rate has now increased since listing because we’ve started implementing the business plan that we said we would and we’re six weeks in to that now, so our burn rate has gone up, but given current…
AK: To what? What is it?
JM: It’s about $400,000 a month, but with our current burn rate we expect our current revenues that will… that gives us about an 18 month runway. But the investment that we’re making is to accelerate sales, so as those sales start coming in, we will extend our runway quite significantly.
So this is all about growth. It’s all about bringing out new products in to the market, domestically. It’s about taking those products to Europe and to the US. We’re very, very conscious that Australia is 1 per cent to 2 per cent of the world market. We’ve had local success. We’ve had market acceptance. We’ve had our customers say this is fantastic, I’m going to publish this. They’re advertising it in on their websites.
As an example… I said I’d mention some clinical studies, but one of the studies looked at 279 patient samples with their traditional methods and they used our methods and found 79 infections that they would have missed. And this is standard of care. And they covered all of those classes. They covered viral infections.
And I’m sure you’ve heard of cruise ships where everybody comes down with gastroenteritis; that’s a viral infection, highly contagious, high cost to the healthcare system. Another study looked at 224 patients and we found 44 infections that they missed, but in context they found about 50, we found about 94. We had almost a double of their detecting the causes of this infection. So that’s what’s driving this; it’s the results that the labs are getting by putting it in a form that they can use this on every specimen that comes in.
AK: Give us a bit of a picture of your share register. Geoff Grigg unfortunately died, but is his family still a big shareholder and what about the other original shareholders?
JM: Yes. Geoff was our founder and his family is still involved in the register. His son was there on listing day.
AK: How much do they own?
JM: The percentage is…
AK: You can’t remember.
JM: I can’t recall. But look, what I do know is that we still have a major shareholder which is in Mr Christopher Abbott of Maple Brown Abbott. He is still our special adviser. He is our chairman Emeritus. He’s very involved with me personally. We speak once a week at least and we’ve come to market now with a whole host of new investors, but my focus isn’t necessarily on the register, it’s about actually taking the trust that these new investors put in me and in the company and turning this in to new products in to new territories.
AK: It’s been great talking to you, John. Thanks very much for coming in.
JM: Thank you. Thanks, Alan.