CANADIAN HEALTHCARE TECHNOLOGIES: WHAT’S HOT & WHAT’S NOT

CANADA’S HEALTHCARE TECHNOLOGY

SECTOR What’s Hot & What’s Not

There has been a surge in activity and investor interest in the Canadian healthcare sector in 2014. The following factors, all originating outside Canada, substantially influenced this surge:

• Rationalization of the pharmaceutical and medical technology industries will probably be a continuous process. Large companies are disposing of non-core and underperforming assets which are being acquired by global and regional players, including some Canadian companies.

However, the larger companies are also licensing or acquiring the assets which they need now and over the next ten years to fill their pipelines. • IPO windows for U.S. biotechnology companies have occurred in an unpredictable manner over the last two decades. The

IPO window during the last two years has allowed senior private companies to complete IPOs, including those by two

Vancouver companies, Aquinox Pharmaceuticals and Xenon Pharmaceuticals. The

IPOs and other major financings completed during this window gave companies three to four years of cash to reach major clinical or commercial milestones. • Moving head offices to lower tax jurisdictions triggered many headlines, action by

U.S. regulators and substantial share price volatility for potential targets. Montréalbased Paladin Labs was acquired by Endo, following which Endo moved its global headquarters from the U.S. to Ireland for its lower tax rates. Auxilium planned to acquire Vancouver-based QLT for a similar reason but Endo will now acquire

Auxilium, using its tax advantage to make the superior bid. • The Ebola outbreak in several African countries became a factor when it was carried back to the U.S. and Spain, and the developed nations realized they needed therapeutics. Whereas the African countries and WHO could never pay market prices for a vaccine or therapeutic, U.S. biodefence programs, especially BARDA, would fund both development and stockpiling of Ebola therapeutics. While biotechnology was very hot in U.S. markets during 2013 with an open IPO window, numerous follow on financings and rapidly climbing valuations, the activity in Canada was strong but not hot. There were no institutionally-backed IPOs – the last one in Canada was IMRIS in late 2007. Investors profited when several senior Canadian companies were acquired or taken private, among them: Atrium Innovations, Cangene, CML HealthCare, Medicago, OPMEDIC Group, Paladin Labs and Patheon. While the NASDAQ Biotechnology Index doubled in 2013, a group of 19 Canadian therapeutics companies had an average share price increase of 41 per cent (see quarterly blogs at http://www.bloomburton.com/blog/).

A single event in 2013 may have triggered the surge and defined the focus of Canadian investor interest for 2014. Endo Health Solutions announced on November 5 that it would acquire Paladin Labs in a stock and cash transaction which valued Paladin Labs shares at C$77 and the transaction at about US$1.6 billion. Under the terms of the transaction, Paladin Labs shareholders received for each Paladin share: C$1.16 in cash, 1 share of Knight Therapeutics and 1.6331 shares of Endo, the latter valued at US$104.05 based on the closing price on February 28, 2014 when the acquisition was completed.

For public companies, share price increases determine which companies and sectors are hot. The hottest Canadian healthcare group throughout 2014 has been the Therapeutics – Commercial group, where companies have revenues from approved drugs, many of which were acquired. Canadian investors are still generally risk averse, preferring to accept the commercial risk of this sector rather than the scientific and clinical risk of early stage companies.

Some investors were looking for the next Paladin Labs, where the patient accumulation of late-stage and commercial products and the subsequent acquisition by Endo was an enormous success for Paladin shareholders. Some investors may have picked companies which had the best potential to be tax-inversion targets. However, the share prices in this group have not dropped after recent U.S. regulatory action to discourage tax-inversion transactions.

For seven of the larger companies in this group (excludes Nordion, which was acquired, and Valeant), the average share price change for the first nine-months of 2014 was +115 per cent, with the best performers being Concordia Healthcare (+362 per cent), BioSyent (+154 per cent) and Nuvo Research (+123 per cent).

Former Paladin CEO Jonathan Goodman also liked his business model, started Knight Therapeutics as Paladin 2.0 and raised over $250 million to start executing that business strategy. Knight Therapeutics recently sold its U.S. FDA Priority Review Voucher to Gilead Sciences, for which it will receive US$125 million in cash upon closing the transaction. While BELLUS Health (+238 per cent) is not part of this group, it probably benefited from the commercial focus of investors. Although its lead product is still in a Phase 3 trial, BELLUS Health and its partner in KIACTA are looking to monetize their investment. The Microbix Biosystems (+264 per cent) share price rose twice based on patent litigation against Novartis, initially in the U.S. and then in the E.U., alleging infringement of its VIRUSMAX patent.

Ebola-based share price volatility impacted many companies with antiviral or vaccine products or technologies. One of the few companies with an Ebola product in a human trial before the outbreak was Tekmira Pharmaceuticals (+181 per cent). The share price volatility was probably due to both Ebola and news on other RNAi products in both its own and its partners pipelines. ImmunoVaccine (+105 per cent) announced positive results for an Ebola vaccine using its DepoVax technology which was tested in a primate study performed by the U.S. NIAID.

More than 30 other Canadian healthcare companies had nine-month share price changes of more than 40 per cent, both positive and negative. Some share price movements were not clearly related to a significant event but may have been bounces from share price lows or relief bounces on completion of a survival financing. Typical of early stage companies, share price movements of several companies were related to clinical and regulatory progress, delays or disappointments.

Looking deeper at these 30 other companies: • ProMetic Life Sciences (+85 per cent) has a revenue-generating bioseparations business and announced progress in developing both a plasma-derived product (plasminogen) and a small molecule (PBI-4050). • TSO3 (+76 per cent) announced progress in the U.S. FDA review of its STERIZONE

VP4 sterilizer. • Neovasc (+55 per cent) announced the first human implants of its Tiara mitral valve. • Spectral Diagnostics (-45 per cent) expanded the number of patients in its pivotal trial of the PMX device for treating sepsis, which will result in a delay in final clinical data. • Oncolytics Biotech (-61 per cent) announced Phase 2 clinical trial data using

REOLYSIN to treat pancreatic cancer which was positive for the KRAS mutated group

but did not meet market expectations. • iCo Therapeutics (-86 per cent) announced data from a Phase 2 clinical trial treating diabetic macular edema patients which did not show a clear benefit from the use of iCo-007. For private companies, the indicator for hot areas is the completion of major financings, such as the following two completed in Canada in 2014. Antibodies remain a hot area, especially antibody-drug conjugates. Vancouverbased Zymeworks is developing bi-specific antibodies and antibody drug conjugates for the treatment of oncology, autoimmunity and inflammatory diseases. They

MORE THAN 30 OTHER CANADIAN HEALTHCARE COMPANIES HAD NINE-MONTH SHARE PRICE CHANGES OF MORE THAN 40 PER CENT, BOTH POSITIVE AND NEGATIVE. SOME SHARE PRICE MOVEMENTS WERE NOT CLEARLY RELATED TO A SIGNIFICANT EVENT BUT MAY HAVE BEEN BOUNCES FROM SHARE PRICE LOWS OR RELIEF BOUNCES ON COMPLETION OF A SURVIVAL FINANCING.

A FIVE PER CENT OR MORE DISTRIBUTION AND A SLOWLY GROWING SHARE PRICE BY A HEALTH SERVICES COMPANY MAY BE A HOT INVESTMENT FOR AN INCOME INVESTOR WHEREAS THE INVESTOR IN EARLY STAGE COMPANIES IS LOOKING FOR THE HOT COMPANIES FOR WHICH ANNOUNCEMENTS CAN DOUBLE THEIR SHARE PRICE.

GOOD CLINICAL DATA CAN TURN INVESTOR ATTENTION TO A PREVIOUSLY IGNORED CLASS OF DRUGS.

recently completed a $17.3 million financing and an expanded licensing and collaboration agreement with Eli Lilly. Certain drug targets continue to attract investments. Amgen’s cholesterol-lowering drug evolocumab targeting PCSK9 is under review at the U.S. FDA. Montreal-based

Liphorus Pharmaceuticals has just raised $6.4 million from Sanderling Ventures to develop small molecules that address

PCSK9 at the intracellular level. One of the common stock market disclaimers ‘past share price performance may not be an indicator of future share price performance’ is applicable and can also be morphed into ‘hot areas in 2014 may not be hot in 2015 or subsequent years.’ Below I’ve compiled a list of what factors should be considered and what questions should be asked when determining what will be hot in the next few months or years: • Commercial progress is not always immediately reflected in the share price. The long-term share price chart for Paladin

Labs shows periods where the share price was stagnant. • Hot can turn into cold for an entire class of drugs if one drug shows an unacceptable side effect profile. • Good clinical data can turn investor attention to a previously ignored class of drugs. • Just as the acquisition of Paladin Labs may have defined the investor focus for 2014, a single event could define the investor focus for 2015. It might be the IPO announced for Profound Medical, which is developing a treatment for prostate cancer which combines MRI guidance and ultrasound energy to deliver thermal ablative therapy. The IPO is structured as a $30 million private placement and an RTO of a capital pool company. • A five per cent or more distribution and a slowly growing share price by a health services company may be a hot investment for an income investor whereas the investor in early stage companies is looking for the hot companies for which announcements can double their share price. • An investor could take a top-down approach to this analysis – look at what the large companies need to license or acquire and invest in those areas. • Should short-term trading be a focus since more than 1/3 of the companies in the

Canadian healthcare sector had share price changes of +/- 40 per centor more in the first nine months of 2014?

Wayne Schnarr is a mostly-retired healthcare consultant with over 30 years of experience in the biotech and financial industries. He is currently an advisor to Bloom Burton & Co. and TMX Equicom. The opinions expressed in this article are strictly personal and do not reflect the opinions of any current or past employers or consulting clients. Past share price performance may not be an indicator of future share price performance. The author and his immediate family members may have long or short positions in the shares of some companies mentioned in or assessed during the preparation of this article. Investors should obtain professional advice based on their own individual circumstances before making an investment decision.

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