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How does a loss-making company raise $20m?

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Investors would be forgiven for thinking that Plant Health Care's latest shake-up has been ordered to tart up the alternative agrichemicals group for sale.

The biological sprays group - whose products work by provoking a response in plants to, say, fight off a nematode worm attack, rather than killing the pest themselves – has hired a new chief executive, Paul Schmidt, who sold the last company he led, Merck/EMD Crop BioScience, for $275m.

And the group in background literature for a £13.4m ($20.3m) cash call flagged a "wave of interest and activity" in biological agrichemicals groups "not seen since the surge of investment in seeds companies by the majors in the mid-1992".

"Over the last year, major agrichemical companies have made very substantial investments in the biological sector, to acquire science platforms, intellectual property, and products," Plant Health Care said, quoting deals including Syngenta's E403m purchase of Devgen, and BASF's $1bn acquisition of Becker Underwood.

'No lipstick involved'

But there is "no lipstick involved" in Plant Health Care's fund raise and boardroom changes, which have seen current chief executive John Brady step down to being non-executive director, while former interim chairman Sam Wauchope is leaving altogether.

"We are not going for the easy route," Christopher Richards, the group's chairman, said.

The group sees huge potential for licencing its products, including the Harpin line which boosts immune response, to a "whole series" of companies, perhaps seed groups wishing to get plants off to a better start, or agrichemical companies desiring extra efficacy for sprays.

"And that's what we intend to do," he said.

Next generation

In part, that will be helped by Dr Richards' own ability to "open doors" at potential customers.

As a chairman, and former chief executive, at Arysta LifeScience, the agrichemicals giant owned by private equity fund Permira, his name carries a certain cachet.

But the extra cash is not to fund a charm offensive.

It is to invest in the drive to further improve Harpin, and create a third generation, made of smaller molecules which are more easily applied to plants, or combined with customers' existing products.

That will involve further research, and expansion of the group's research centre in Seattle, US.

"The second generation is 10 times more effective than the first," Dr Richards told Agrimoney.com.

"But it is still a big molecule. That does have some drawbacks in terms of formulation and getting into plant cells."

Loss-making company

Will customers be convinced?

After all, it has not as if the second generation of products has brought riches, with Plant Health Care also this week announcing a widening in after-tax losses for 2012, to $6.4m, on sales slightly down at $7.8m.

And most of these sales were from, profitable, distribution businesses in Mexico and Europe which the company has now put up for sale.

Still, the results conceal efforts to erode a huge inventory of Harpin that Monsanto bought in 2008 as a seed treatment, but which Plant Health Care says "was not as successful as anticipated".

Factor in sales of that stockpile, through an Agrium subsidiary, into the mix, as there is a some $5.5m-6m in annual sales of Harpin, and Myconate, a root promotion product, Dr Richards says.

"That's a good base on which to build."

'Slightly oversubscribed'

Indeed, he says he will be "very disappointed" if sales have not reached $75m in four years' time, with breakeven anticipated "by the end of 2015".

"I anticipate 2016 being a very strong year for us."

The prospects have certainly impressed investors, with the group already seeing its placement of some 17m new shares "slightly oversubscribed", although the investment still requires the approval of a shareholder meeting on April 15.

The issue has received the backing of its top three investors, who control more than half the company, and which have "slightly increased" their overall exposure.

"We have bought in some additional institutional investors too," Dr Richards said, adding that it was "important for us to have a broader shareholder base".

They may have to be patient investors too, of course, with the idea of a takeover windfall not writ between the lines of Mr Schmidt's appointment.

By Agrimoney.com

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