Aquasearch Aquasearch Inc. is small in size but has big aspirations.
banks on a
breakthrough
The Big Isle biotech firm holds
high hopes for its nutritional
product and its drug
discovery programBy Dave Segal
Star-BulletinIts recently launched nutritional product is in the process of branching out and its drug discovery program is still in its early stages.
But such is the world of biotechnology companies. A lot of money spent. A lot of money lost. And sometimes, if the testing and research pay off, there's a breakthrough to make it all worthwhile.
"My strong feeling about the biotech industry is that we are beginning to unravel some significant facts about human health," said Mark Huntley, Aquasearch's chairman, president and chief executive officer. "We're understanding disease pathways instead of just understanding and treating symptoms. These are fundamental advances going on. That's why you see value being accorded to the whole industry. People see where it's going to be in 10 years."
Where Aquasearch will be a decade from now is anyone's guess. But Huntley said the company, despite its perennial financial shortcomings, has turned the corner with The AstaFactor, an astaxanthin microalgae capsule. The company said the nutritional supplement has shown in tests to be effective in reducing symptoms for muscle soreness, osteoarthritis, high cholesterol, back pain, asthma and enlarged prostate.
AstaFactor, which was launched in March 2000, made up a significant portion of the company's $128,000 in revenues in the first quarter that ended Jan. 31. Huntley hinted that the second quarter, which ended April 30, would show even better sales.
"We expect to see revenues up and continuing," said Huntley, whose company's earnings report is due out in mid-June. "We are seeing a significant word-of-mouth component in the sales growth, and that's the prime reason that we're continuing to see sales increase not just in Hawaii but across a lot of zip codes."
Aquasearch, which dropped $1.2 million in the first quarter, has lost $17.6 million from its inception in 1988 through Jan. 31. The 42-employee company finished the first quarter with just $26,000 in cash but has since obtained a $30,000 one-year bank loan, $165,000 of debt financing from individuals and $560,000 by tapping its equity line with Cook Islands-based Alpha Venture Capital Inc. in exchange for 3.5 million shares of Aquasearch stock. Andrew Haag, Aquasearch's director of investor relations, said the biotech company has developed other sources to raise income and no longer plans to draw down money from that venture group."This is an early stage company," said Huntley, whose company has survived through the years by exchanging shares of debt and equity securities for investment capital. "Aquasearch has always had little money in the bank compared to what we burn, but that's been true for years, and if you look back at the situation, we've been successful in raising capital of about $16.7 million.
"In companies where you don't have a P-E (price-earnings ratio), investors are looking at how revenues are growing. I think Aquasearch is at a stage where we're seeing some significant growth. I can't promise when the company is going to become profitable, but if we keep hitting our targets, it's not going to be that long."
Aquasearch also produces the animal-feed product Aquaxan that imparts a pinkish hue to farm-raised fish such as salmon. But its principal product is AstaFactor, whose sales have grown at more than 100 percent every quarter since its launch. As a result, Aquasearch's overall first-quarter revenue was a 220 percent increase over the previous quarter and a 137 percent increase from the year-earlier period.
"I personally don't have any doubt (that the company will survive) because we've been here before," said Huntley, whose company will need $4 million in operating capital over the next 12 months, according to its first-quarter Securities and Exchange Commission filing. "I think what investors are looking at and what they'll see in our company is revenue growth of 150 to 200 percent per quarter."
Aquasearch's stock, which is up 6.5 percent this year after closing yesterday at 241/2 cents, actually climbed as high as $2.25 on March 3, 2000. That level marked the culmination of a 552-percent, two-month rise for the stock following a favorable ruling in a now-settled 21/2-year patent infringement suit against Big Island neighbor Cyanotech Corp. The stock, which is traded over the counter, remained at $1 or higher for about seven weeks before dropping below that level on April 19, 2000. It hit its 52-week low of 20 cents Dec. 26.
"I believe the market will reward rapidly growing companies, and as long as we continue our trend of revenue growth, I think the market cap (worth of the company) and the stock price will go up," Huntley said. "We focus on the fundamental business. We don't focus on trying to boost the stock price. And if the business is a good business and can grow, the market will treat you accordingly."
Randy Havre, a local analyst and CEO of Hawaii Venture Group, said Aquasearch may be facing a big payoff down the road.
"I think there's a lot of potential for them and Cyanotech," Havre said. "The algae area could be huge. Getting into drug discovery is an area where you can get a very high potential return.
"I've been involved with a couple biotech deals since 1994 and drug discovery is huge. In some cases, chances are slim to find the right one. But it's just like being in venture capital. You've got some losers and some winners. But winners are such that they can far exceed the losers. Aquasearch is like any other biotech situation. It's typically long to market but the potential is very high."
Huntley said that Aquasearch's focus right now is on trying to expand the market for AstaFactor, which is presently available in Longs Drug Stores in Hawaii and online at www.astafactor.com. He said the company plans to announce the availability soon of AstaFactor in some other Hawaii outlets.
"We believe the market in AstaFactor is probably a $500 million market overall," Huntley said. "There are only four companies that produce that type of product and three are here in Hawaii (Kona competitor Cyanotech and Micro Gaia Inc. on Maui). Our product is the only one that's been subjected to a human clinical safety trial. That's not required by the Food and Drug Administration but what the FDA does require is that you demonstrate that it's not toxic, and that's usually done in an animal study. Our feeling was that we weren't going to put our product on the market until we had tested it for human safety."
First Honolulu Securities Inc. Chairman Gregory Kowal, whose 11.3 percent stake of the company is the largest individual holding behind Aquasearch Chief Financial Officer's Earl Fusato's 17.1 percent holding, was on vacation and unable to comment about his position.
But Jeanette Daly, an analyst at the brokerage, said Aquasearch's potential seems promising.
"I think their prospects are pretty good both short term and long term," she said. "Short term, the most promising thing is their sales of AstaFactor.... What I like about the product is that it's helped people in terms of inflammation and the health of their eyes. A lot of drugs that are used to treat inflammation have been found to have negative side effects. So if AstaFactor turns out to be helpful in the treatment of inflammation or arthritis and is without negative side effects, there might be a substantial market for this particular product.
"I think longer term, the most exciting thing is their drug discovery program. In January, they made an agreement with University of Hawaii to develop new pharmaceuticals that gives them access to more than 2,400 microalgae species that are known to produce unique bioactive compounds. In this collection there are 170 unique compounds of microalgae that (albeit used to target cancer) have not been explored as a force for other new drugs. The microalgae (developed under funding from the National Cancer Institute) could have a potential number of new compounds that could be useful in drugs. I think their drug discovery potential is not only interesting in the revenue it could bring to the company, but Aquasearch may become a potential takeover candidate because they have the means to grow sufficient quantities of algae necessary for drug discovery.
"The National Cancer Institute going forward with its trials is also strong evidence that there is good potential with Aquasearch. They (the NCI) have confirmed in a second series of tests that some of the compounds derived from astaxanthin are effective anticancer compounds."
Huntley said the company's 6,579-gallon Aquasearch Growth Module holds the key to unlocking the commercial and medicinal potential of microalgae.
"The most successful sources of new drugs by far have been plants," he said. "Almost 60 percent of prescription drugs available today are derived originally from plants. Aquasearch's technology is directed at the cultivation of single-cell plants.
"There are an estimated 30,000 to 40,000 species of these microalgae that remain virtually unexplored as a source of new drugs. The reason for that is there has not been to date a technology to cultivate sufficient quantities of the microbial (single-cell) plants under controlled conditions to provide the bioactive substances necessary for drug development.
"Our technology opens that door. It allows us to grow these microbial plants. If plants are the most successful source of new drugs and if there are 30,000 species that haven't been explored, you have to ask yourself what's the probability of getting some new drugs out of these kinds of plants. ... We believe Aquasearch offers to the pharmaceutical industry something they desperately need, which is new compounds with a high potential for becoming drugs."