A US$38 million ($57 million) rescue package for rapid COVID-19 test company Ellume's Australian business has toppled over after the buyer Hough Consolidated failed to meet an extended deadline for payment, leading administrators from FTI Consulting to place the group in liquidation.
Ellume founder Dr Sean Parsons tells Business News Australia he's had a "torrid" seven months dealing with the ordeal, and a terrible week with the latest setback.
Parsons is currently in the United States where he emphasises the group's US subsidiary is not in liquidation. The founder is overseeing that operation where production is ongoing as part of the final phases of a government contract.
"I'm in the US supporting the team over here and preparing the US business for a sale," he says.
Ellume was the product of years of research spearheaded by Dr Parsons into fluorescent immunoassay technology that enables fast and accurate diagnoses for diseases, securing partnerships with major global players such as GlaxoSmithKline and Qiagen before the pandemic prompted a rapid pivot to test for COVID-19.
Dr Parsons was awarded Brisbane Young Entrepreneur of the Year 2020 and was described by this publication as an "entrepreneur for the times" as his company opened a 4,400sqm manufacturing facility in Brisbane that was pumping out around 100,000 rapid COVID-19 tests a day.
The technology caught the attention of influential public departments in the US including the National Institutes of Health (NIH) which awarded the company US$30 million (AUD$41 million) to scale up production. This was followed by the US Food and Drug Administration (FDA), issuing an emergency use authorisation for Ellume's over-the-counter at-home diagnostic test, a product that still hasn't been approved for sale in Australia.
In early 2021, the company secured a US$231.8 million (AUD$304 million) contract with two US government agencies to set up a new facility in the USA, which opened in April 2022 in Frederick, Maryland.
By that time however, the cracks had started to show for a business that had perhaps scaled too quickly for its own good, and was left exposed.
In its report to creditors published in December last year, FTI Consulting reported several reasons for failure, including a product recall in the US in 2021, a "material change in demand" for Ellume's home COVID-19 test in December 2021 after the US Government released free rapid antigen tests (RATs) to the public, and "substantial upfront capital expenditure in readiness for long-term future expansion of operations".
Other issues cited included unfavourable capital market conditions and issues in sourcing further funding for the US subsidiary. Ellume accumulated losses of more than $146.48 million between April 2020 and the appointment of administrators on 31 August 2022.
Parsons puts it down to a "hyper-unstable market" that has also negatively affected global companies with similar business models, such as NASDAQ-listed Cue Health, LumiraDx, and Lucira which was acquired by multinational giant Pfizer out of bankruptcy.
"All of those companies that were in that same place of massive scale-up through the heat of the pandemic have found themselves falling off a demand cliff on the other side, and in essence that’s a challenge that Ellume’s had," Parsons explains.
"If we had a stable market and stable sales, Ellume would certainly not have ever gone into a voluntary administration. There was insatiable demand for our products in the most extraordinary business circumstances for a long time.
"In the middle of the lockdown, lives were turned completely upside down."
He said the FDA has set quite a high bar for products and Ellume was the first company of its kind to pass through the regulator's hurdles.
"In response response to that we were scaling up enormously, and we accepted an enormous grant from the US government and we invested heavily beside that ourselves. We invested very heavily in the supply chain to build that out and to order components, many of which have months and months of lead time.
"Over the subsequent six or eight months, the FDA allowed through substantially inferior products – the cheap products, some made in America and some made in Asia – and then subsequently the US government gave away a billion of those tests for free.
"It is very difficult to compete with free products, and as a result the demand for our products through that second half of the pandemic weren’t anywhere near as strong as we expected it was going to be, and therefore we weren’t able to build a war chest which would enable us to expand the product lines through the non-pandemic period."
He clarifies that the product recall didn't help the situation and it was a hindrance, but "the biggest problem was market instability".
The administrators believe the company likely insolvent from at least May 2022, but obtained around $5 million in loans to keep the company going after the appointment as they worked towards a sale.
By 7 November of last year they had received four non-binding indicative offers, and a month later Hough was confirmed as the preferred bidder with creditors later voting in favour of this sale option.
Hough, which also makes rapid antigen tests that are sold at major retailers such as Officeworks and Woolworths, had asked for an extension from 9 June to 14 July, and this was granted on the condition of a non-refundable payment of $1.25 million to the deed of company arrangement (DOCA) administrators by 13 June.
"Unfortunately, as of 4.00pm on 13 June 2023, Hough failed to satisfy the condition for the variation of the DOCA and the DOCA was automatically terminated. At this time, the company has been placed in liquidation and a wind-down of the operations has begun," Joanne Dunn, one of the administrators, wrote in a circular to creditors this week.
"As a consequence of the company being placed into liquidation, we are now ceasing operations of the company.
"We have issued communications to certain suppliers for the closure of the accounts set up during the administration and DOCA periods. There are some suppliers who have been separately advised to continue supply or services during the liquidation."
In addition to the upfront purchase price, Hough would have also assumed Ellume's debts and employee entitlements. As of August 2022, Ellume had total liabilities of $297.97 million and negative net assets of $138.84 million, while employee entitlements were much smaller at $1.7 million for 217 staff.
For the sake of humankind Parsons wishes the pandemic had never happened although he had been anticipating something like it ever since he founded Ellume, but he is still undecided on a philosophical level about what the pandemic meant for the business itself and whether anything could have been done differently.
"I am proud that we chose to respond as best we could, and throw everything at responding to the pandemic when it happened," he says.
"We believe that products can do good for humans, and we believe it’s incumbent upon us to try and do everything possible to respond.
"I'm young enough to have other opportunities to explore and other businesses to be a part of and other things to do, so I’m pretty focused on getting this finished and honourably completing this piece of the puzzle, this transaction for Ellume and then consider what comes afterwards once that’s done."
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