New Issues Examined by Nick Britton

A quiet month for IPOs on AIM throws the spotlight onto the sole newcomer

In April, new issues on AIM appeared to be picking up, with six companies raising £74.5 million on the market. The following month, however, put paid to expectations of a torrent of fresh fundraisings, offering investors a solitary IPO for their consideration.

Ilika emerged from the University of Southampton, which several years ago received a grant of £6 million to ‘establish a centre of excellence in combinatorial sciences’. The company’s role is to speedily produce prototype materials whose properties can then be tested.

‘We can make hundreds of materials, which gives us the edge over Chinese manufacturers,’ explains Ilika’s CEO, Graeme Purdy, who joined the company in 2004 to help spin it out of the university. But he quickly adds that Ilika only develops new materials where there is clear demand and an expected market worth at least $1 billion.

Ilika has attracted some £9 million in private financing since the spin-out, from big names such as Artemis, Invesco and Nomura International.

The net proceeds of the £5.2 million placing, some £4.4 million, will help Ilika build on the two separate arms of its business. The company’s main raison d’être is the development of materials in partnership with big corporates (such as Shell and Toyota), which offer Ilika upfront payments in return for, effectively, outsourcing some of their R&D.
For example, the company is working with Toyota to develop new materials for lithium-ion car batteries. As part of the deal, Ilika gets to keep the rights to the intellectual property and licenses the exploitation of it to its global partner, aiming to generate ‘a sustainable flow of revenue’.

Expanding capacity
The other part of the business is the sale of woundcare products, such as ‘pre-grown skin’ made from polymers for burns victims. Ilika currently sells these products in the UK through a specialist distributor, but wants to expand its capacity and ramp up sales and marketing.

Sales across the entire business were £916,000 for the year to April 2009, and are expected to be significantly higher than that when this year’s results are announced. But the sting in the tail is the company’s failure, so far, to make a profit, with losses of £1.9 million declared last year, up from £1.6 million in 2008. Purdy says there will be no dividends paid in this financial year, with the company focusing squarely on growth.

Jam tomorrow?
The pertinent question, then, is when will the promise become reality? The first product that Ilika expects to commercialise (not counting the woundcare treatments) is one that will enable stem cells to be filtered from blood. This material, which is being developed in partnership with a supplier of blood filters whose identity is undisclosed, is expected to hit the market next year. Others are anticipated between 2012 and 2014.

There was £2.6 million of cash on the balance sheet in Ilika’s 2009 results, which, boosted by the placing proceeds, gives the company plenty of firepower to get to those early milestones and, in theory, start collecting some licensing fees. Maintaining momentum and ‘keeping the markets excited’ will be one of the biggest challenges in the next 12 months, concedes Purdy.

The calibre of Ilika’s blue-chip partners is impressive, and as speculative buys go, this is less speculative than most. It’s encouraging that it has a few irons in the fire, so that disappointment in a particular area will not necessarily be catastrophic. However, it’s still not clear to what extent the company’s innovations will translate into financial rewards, and balancing the need to keep innovating with delivering some decent returns for shareholders could be a challenge.

Six new floats are expected next month, so perhaps next month’s column will be broader in scope. Until then, fans of AIM can take consolation from the fact that there were only nine delistings from the market in May, the lowest figure for more than two years.