Spare a thought for Cortical Dynamics . In a float market where even resource companies are struggling to raise funds, Cortical wants investors to back its brain-monitoring device.
The Perth company seeks up to $4 million to commercialise its brain anaesthesia resource (BAR) monitor, which measures patient brain activity during surgery to help maintain optimal drug dosage.
It is potentially an important technology. One or two patients in every 1000 operations involving general anaesthesia are aware during surgery, the British Journal of Anaesthesia reported in 2006.
A patient not sufficiently anaesthetised to prevent consciousness may feel pain or pressure from the surgery, hear surgical instructions or panic. They may be too sedated to attract medical staff and experience a longer recovery or suffer post-traumatic stress disorder.
If approved, Cortical’s technology could help anaesthetists determine optimal dosage of anaesthetic agents, reduce litigation risk from patients and free up hospital beds by reducing post-surgery recovery times. The technology has particular benefit for older patients and children.
Several devices already interpret brain activity during surgery by recording electrical activity from the scalp; such tests are known as electroencephalograms (EEG).
Cortical’s technology differs by using an algorithm that produces an EEG index directly related to the patient’s state. Other devices produce EEG indices based on statistical approaches that depend on trial-and-error identification of EEG regularities during surgery.
Simply put, Cortical’s device is more personalised.
Cortical also believes its BAR system can monitor a wider range of anaesthetic agents, some of which are not as well detected by competing technology. The technology appears to have received favourable peer reviews in medical journals and has a decent body of academic research behind it.
An August 2010 paper in the Anaesthesiology journal from the American Society of Anaesthesiologists explained the technology’s potential and challenges. The paper said: “A clear scientific understanding of the causal mechanistic links among drug effect and (brain) function must be superior to existing heuristically derived blackbox (EEG) monitors.
“There is clearly much work that needs to be done before these observations could be translated into clinical practice."
The investment translation is that Cortical is a higher-risk, early-stage company that could be several years away from making money.
Market history is another factor. Cortical was set up in 2004 to commercialise intellectual property developed by associate professor David Liley of Melbourne’s Swinburne University. A year later, ASX-listed BPH Energy invested in Cortical and assumed control.
Cortical is the first of two likely biotech floats from BPH Energy this year. The other, Molecular Discovery Systems, has technology that detects and quantifies cellular properties.
BPH Energy has investments in other biotechnology, but has changed its focus to the energy sector. Its main asset is an investment in Advent Energy, an unlisted explorer.
BPH shares fell from 14¢ to 3.2¢ after it reported a dry gas well off NSW in January. Its average annual total shareholder return over five years is minus 32.4 per cent.
BPH chairman David Breeze chairs Cortical Dynamics and Grandbridge Securities, which provides corporate advisory services to several BPH investments.
He has a 35.5 per cent interest in Grandbridge, which is underwriting Cortical’s minimum subscription. BPH is sub-underwriting 6 million of those shares. Grandbridge could receive up to $20,000 each month over three years from Cortical for management services, depending on the capital raising. Grandbridge’s average annual return over five years is 5.3 per cent.
Cortical also has a $500,000 convertible loan agreement with BPH that could be repaid by issuing 10¢ shares to BPH.
The IPO issue price is 20¢.
Investors in Cortical must be comfortable with these related-party transactions; that BPH, capitalised at $6.6 million, was unable to create significant value from its biotech investments over several years; and that it has become an energy company with an early exploration failure.
Cortical doesn’t have a chief executive and the prospectus has limited detail on the business model. To be fair, several companies with novel technology have struggled with the Australian Securities and Investments Commission’s request to outline their business model in the prospectus, and have not provided anything remotely resembling forward-looking statements.
Cortical’s board has financial and commercialisation skills, yet no scientist or medical expert. Breeze and Cortical executive director Deborah Ambrosini are on the BPH Energy and Grandbridge boards. Two of four directors have executive roles and no board member could be considered independent.
Another challenge is capital. The $2 million minimum subscription leaves $1.65 million to fund research trials, develop the BAR monitor and achieve regulatory approval. Cortical has $42,000 in working capital over two years, after expenses – a small margin of safety given the technical and manufacturing risks – although the convertible loan agreement with BPH provides back-up.
Investors must also consider the commercialisation strategy, of which the prospectus gives only an overview. Cortical believes its product could be sold within a few years. Its prospectus doesn’t include details of substantial recent commercial market research to see if anaesthetists would demand the product and when, and what hospitals would pay for it. It may be too early for that.
Cortical will most likely sell a licensing agreement with a third-party equipment manufacturer.
The capital structure shows 113.7 million shares at the minimum subscription, for a $22.6 million market capitalisation. Less than 10 per cent of Cortical is offered through the float; most remaining shares were distributed several years ago to BPH Energy shareholders.
The majority are unlikely to be escrowed, meaning BPH Energy shareholders could sell Cortical shares upon listing.
A valuation yardstick is the sale of US company Physiometrix in 2005 for $US23 million. Its products included an EEG device with US Food and Drug Administration approval.
Cortical is among the more challenging floats this year. The poor investment performance of BPH Energy could spook investors. So could Cortical’s board composition, lack of CEO, low working capital, related-party transactions, emerging commercialisation strategy, need for regulatory approvals and requirement for more patient and clinical studies to confirm the technology’s benefits.Beneath these investment challenges appears to be a technology with considerable merit and potential application in other big markets, such as emergency medicine.
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