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Oban biotech firm that went bust was given £3m by enterprise agency

Aquapharm ­Biodiscovery, one of the brightest hopes of Scottish biotech, was in receipt of more than £3 million in investment from Highlands and Islands Enterprise (HIE) when it went bust after massive losses last year, it has emerged.

The Oban-based firm was founded in 2000 by young microbiologist Andrew Mearns Spragg, with a strategy of building up a chemical "library" of marine micro-organisms whose special properties could be adapted into pharmaceutical products.

Located at the European Centre for Marine Biotechnology at Dunstaffnage, with offices in Edinburgh, the firm was bought out of administration in December by the Canadian multinational animal feed technicians Lallemand for an undisclosed sum.

Lallemand, a private company with a presence in more than 50 countries and 2500 employees worldwide, is a biotechnology company specialising in fermentation processes, including providing feed for fish farms globally.

Following a request from the Sunday Herald, HIE revealed ­Aquapharm had received more than £2m in equity funding over its lifetime, plus £346,000 in loans and grants amounting to £637, 000 from the development agency over 10 years. The investment of public funds amounted to nearly one-third of the £10.5m total investment the company absorbed.

Other investors included ­Co-operative Aescap Venture 1 USA Fund, Tate and Lyle Ventures, Sustainable Technology Partnership, Nesta, Scottish Enterprise and founder Mearns Spragg.

Despite amassing a collection of more than 10,000 marine micro-organisms, accounts show ABL was turning over only £309,776 in 2011-12 and £214,070 in 2012-13, while making operating losses of £2.6m and £1.8m in those years respectively and a loss of £2.3m in 2010-11.

HIE said Aquapharm's research and development "led to a number of chemical compounds being identified and the library being screened frequently", but it was not able to identify any products that used these compounds being brought to market.

The spokesman said: "It appeared likely the company would achieve a sale at some point and the shareholders continued to invest in several funding rounds to keep the business operating.

"A deal appeared close in 2012, but unfortunately this fell through. Subsequently, reflecting changes in the marketplace and in spite of cost management measures and significant efforts to market the business, the shareholders formed the view that sale had become unlikely. They therefore decided late in 2013 to invest no further funds, which led to the company's administration in December 2013."

The "changes in the market" that decreased the attractiveness of Aquapharm's discoveries refer to an increasing preference by larger companies and investors to source more market-ready products, putting pressure on smaller R&D companies like Aquapharm to undertake expensive clinical testing.

In 2010, shortly after the completion of a £4.2m new investment of funds, the already-troubled company replaced Mearns Spragg as chief executive with Professor Simon Best, former chief executive of Roslin BioMed and later chairman of the high-flying Edinburgh reproductive medicine company Ardana, once valued at £80m which went into receivership in 2008.

One life sciences industry source told the Sunday Herald: "Biotech R&D is extremely expensive, and the problem really is that developing novel compounds for, say, cancer treatment is a very long timescale. I suppose with the benefit of hindsight, Aquapharm might have needed to raise more capital to fund those products.

"It's not unusual in the R&D field to find something novel and then have to abandon it to another organisation when you can't fund all the in vitro and in vivo trials before a product can be launched."

Lallemand said it was still engaged in screening the library of products, and was not yet ready to discuss the potential application of Aquapharm's "uniquely diverse" library of marine species to its own operations.

Mearns Spragg, who founded a new jellyfish collagen company called Jellagen in 2013, and is an honorary professor at Stirling University, could not be reached for comment.

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