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canadian healthcaRe in 2009: suRvival, success, suRRendeR
Canadian HealtHCare in 2009:
HOT BUTTON ISSUESsurvival, success, surrender
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Public Canadian healthcare companies operate in a complex, challenging and constantly changing global environment. In 2009, some companies celebrated success, while most focused on survival; unfortunately, a few of them did not make it. Considering the combination of increased financing, partnerships, share price increases and several positive clinical and regulatory events, 2009 was a good year for the sector. However, this positive performance was overshadowed by a few clinical failures that landed in the headlines, coupled with the lack of a defining positive event in the sector. There are a number of clinical and regulatory events expected in 2010 and a series of positive results could provide some upward momentum and renew investor interest in this sector.
Sector Performance in 2009
Money is the asset in greatest demand and shortest supply in the healthcare sector. The demand has consistently grown as new companies were formed and existing companies moved on to more expensive later-stage clinical trials. Supply constraints were worsened even more by the 2008/2009 financial crisis.
In 2009, the sector raised a total of about $1.28 billion from equity and convertible debt financings (see Figure 1). Excluding large financings by Biovail and SXC Health Solutions, the rest of the sector raised $654 million, which is substantially better than the 2008 total but is still far below the annual average of almost $1.05 billion for 2005 through 2007. Excluding Biovail and SXC, 18 companies each raised more than $10 million dollars, which would be sufficient to fund small clinical programs. However, many of the 2009 financings were only large enough to allow companies to survive, which means additional funding will be required soon.
Partnerships are the second major source of financing for smaller healthcare companies. A series of material licensing agreements were announced in 2009 (see Figure 2) that totaled U.S.$212 million in up front payments and U.S.$1,868 million in other potential milestones.
Partnerships are essentially exclusive option agreements. When clinical or market data do not support continued product development, the partners typically terminate the agreement. As an example, the cetrorelix partnership between Aeterna Zentaris and Sanofi-Aventis was signed in 2009 but, after two failed Phase 3 clinical trials, it was terminated.
The average share price return in 2009 for a group of 32 larger Canadian healthcare companies was +100 per cent (see Figure 3), compared to +31 per cent for the TSX Composite Index. Advancers outnumbered decliners by 26 to six, with five of the six decliners in the Therapeutics group. Nine companies had share price returns of 200 per cent or higher.
Specific events are often critical to the investment strategies of many investors in the healthcare sector. For profitable healthcare companies, the critical events are no different than those found in other sectors: the release of quarterly results; acquisitions of new products and revenue-generating assets; or new service contracts. But for companies still developing products, share price movement is triggered most often by three other types of events: clinical data, regulatory decisions and partnerships. There were a significant number of positive events of these types in 2009 (see Figure 4) for Canadian healthcare companies.
Investors’ Perception of the Sector
While the average share price return for the sector in 2009 was certainly positive for investors, their overall perception of the sector can be swayed by negative events. For example, when a Phase 3 clinical trial fails, the market cap of the company can drop below its cash value. BioMS certainly experienced that in 2009. The impact of other negative clinical results is also dramatic, such as the 55 per cent drop in Transition Therapeutics’ share price when it had to modify a Phase 2 trial of ELND005 due to safety concerns. These negative events and resulting large share price declines can become headlines that paint the sector in a negative light, whereas positive clinical results, regulatory approvals and solid quarterly results sometimes get little attention.
Most Canadian healthcare companies must have institutional investors in order to raise sufficient capital to develop their products. However, Canadian institutional investors in healthcare are generally small-cap funds that typically do not allocate a specific portion of their portfolio to healthcare stocks and often prefer to look at natural resource companies. Therefore, Canadian companies must look to the U.S., Europe and Asia for additional funding. But attracting the attention of these investors is challenging. When a small-cap Canadian healthcare company goes to New York, it is competing with not only its Canadian peers but with more than 1,000 other public and private healthcare companies. Retail investors are equally challenging and important to small-cap Canadian healthcare companies. Many retail investors have less investment experience and access to less sector information than their institutional counterparts. Their response to both bad and good news can lead to increased share price volatility. However, they are the only source of liquidity for some stocks where institutional and venture capital ownership is too high. They are also the shareholders who stepped up and provided survival funding to some of the smaller companies during 2009.
Investment strategies in the sector can vary widely. Value investors focus on dividends, distributions and business fundamentals, and are more likely to be ‘buy and hold’ investors. Another group of investors has a substantially higher risk tolerance and is focused on extraordinary capital gains. Like many investors in junior natural resource companies, they focus on data, be it clinical or drilling results, which can dramatically impact share prices. Many of these investors will have shorter investment horizons and may actually own a stock several times during the longer product development cycles in this sector.
WHat can inFluence an investor to consider buying a HealtHcare stocK?
acquisitions: Companies can acquire products, new service contracts and revenue-generating assets in order to grow revenue and earnings. Financings: For many Canadian companies, institutional funds only buy when there is a fi nancing because there is insuffi cient liquidity to accumulate a position in the market. low valuations: Many Canadian healthcare companies were trading at historic low share prices between October 2008 and March 2009, creating an opportunity for ‘bottomfi shing’. There were a number of companies whose share prices doubled or more from these lows, such as Angiotech rising from below $0.20 in December 2008 to a 2009 high of $3.10. impending clinical and regulatory events: Companies inform the market about the approximate timing of data releases, giving investors an opportunity to invest prior to the events.
positive events: Some investors are unwilling to risk investing prior to an event but are willing to accept the reduced risk after a positive event. Hot technology or target: Biological products are hot, partially because generic competition will likely be more diffi cult. The hottest type of biologic is still monoclonal antibodies, which has led to the acquisition of many companies, including Arius Research by Roche in 2008. Vaccines were hot in 2009 as a result of the H1N1 fl u pandemic but the interest has diminished since the pandemic severity was much lower than expected.
Two important types of events are missing from the 2009 list which might have changed the perception of the Canadian sector: positive Phase 3 clinical data or regulatory approval of a blockbuster drug, and a major acquisition, such as the 2008 acquisitions of Arius Research by Roche and CryoCath by Medtronic.
Events like these are not on the Canadian list every year. In fact, Canadian healthcare companies have only produced one drug for which sales exceeded U.S.$1 billion annually – BioChem Pharma’s 3TC. Previous high profi le acquisitions of Canadian healthcare companies involved BioChem Pharma (2001), ALI Technologies (2002), ID Biomedical (2005) and AnorMED (2006). The only major acquisition in Canada in 2009 was the private company ViroChem Pharma by Vertex Pharmaceuticals for U.S.$100 million cash and about 10.7 million Vertex common shares (U.S.$42.85 closing share price on December 31). The absence of these ‘home runs’ from the Canadian list is exacerbated by the seemingly continuous fl ow of these major events from U.S. companies.
WHat are some oF tHe reasons For an investor to consider selling a HealtHcare investment?
milestone events: Investors can take several different approaches to selling around events. Some investors do not want to own shares through an event and will sell prior to the event. Other investors make the decision to sell after the event, regardless of the outcome. lack of events: HOT BUTTON Investors may sell if there are no preISSUES dictable events in a given time period which are likely to signifi cantly impact the share price. low cash levels: If a company does not have enough cash to reach its next important milestone, investors may prefer to wait until a fi nancing is completed which would allow them to reach that milestone.
Outlook for 2010
Although public Canadian healthcare companies have no control over many factors in the broader fi nancial and healthcare environments, they do have control over their technology and product development strategies. Each clinical program should be planned and executed to
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industry group equity convertible debt total
Therapeutics
Services
Devices & Diagnostics
Others
HOT Total
BUTTON
ISSUES*Excludes Biovail and SXC Health Solutions
amount ($ million)
licensor/licensee product upfront / other market milestones (u.s.$ m)
251.2 6.3 257.5
180.9 80.4 77.7 590.2 22.0 10.4 25.1 63.8 202.9 90.8 102.8 654.0
Source: Company releases, compiled by Equicom
OncoGenex g Teva OGX-011 $60 / $370 Global
Cardiome g Merck Vernakalant $60 / $640
Acadia g Biovail
(oral and iv) Pimavanserin $30 / $365 Aeterna Zentaris gsanofi-aventis Cetrorelix $30 / $135 Oral (global) and iv (ex-North America) U.S., Canada U.S.
Bioniche g Endo Nuvo Research g Covidien Urocidin Pennsaid $20 / $110 $10 / $115 U.S., option on global U.S.
Thallion g LFB Tekmira g Roche
TSO3 g 3M Shigamabs C$2 / C$148 SNALP -- / $40 EU, S. America Two products, global
Technology STERIZONE No disclosure of financial terms
Toray g Spectral Toraymyxin No disclosure of financial terms
Source: Company releases
Figure 3. sHare price perFormance in 2009
Therapeutics (15 companies) Nuvo Research YM Biosciences Devices & Diagnostics (5 companies) Angiotech IMRIS Services (7 companies) SXC Health Solutions Centric Health Others (5 companies) Neptune Afexa Sector (32 companies) TSX Composite Index TSX Venture Composite Index NASDAQ Biotech Index 53% 220% 215% 149% 264% 253% 140% 481% 236% 139% 248% 208% 100% 31% 93% 12% deliver data that, if positive, will allow companies to do several things. First, the clinical information will allow the company to properly plan the next stage of clinical development. Second, the positive information may allow the company to obtain additional funding. Third, positive information will allow the company to start or progress discussions with potential partners.
A number of companies have indicated that they are in partnering discussions but it is impossible to predict when, or even if, partnerships will be signed. A couple partnerships with major pharmaceutical companies, including large upfront payments, might help change perceptions. Partnering discussions that turned into acquisitions would also be viewed positively by the financial markets.
While the sector could certainly use a little luck to catch the attention of potential investors, there are a number of clinical and regulatory events in 2010 that could also provide some positive momentum.
There are three PDUFA dates in the first quarter: February 6 for IntelGenx’ CPI-300, February 11 for Labopharm’s trazodone and March 29 for Theratechnologies’ tesamorelin. Other companies expecting regulatory decisions on their products in 2010 include Cangene,
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Figure 4. selected positive clinical, regulatory and partnering events in 2009
therapeutics
allon: positive data from Phase 2 trial in schizophrenia-related cognitive impairment
Bioms & spectral: partner for development of toraymyxin (spectral licensed us rights from toray)
Bioniche: partnership with endo for urocidin; enrolment complete in first Phase 3 trial
Biovail: licensed pimavanserin and acquired worldwide rights to tetrabenazine HOT cangene: acquires commercialization rights to certain biotech drugs from apotex and positive ema opinion on hepaGam BBUTTON ISSUES cardiome Pharma: more positive Phase 3 data on vernakalant (iv) and partnership with merck labopharm: Fda approval of ryZOlt (actually 31/12/2008) nuvo research: u.s. partnership with covidien and Fda approval for Pennsaid
Oncolytics Biotech: reaches sPa with Fda for Phase 3 trial of reOlysin
Paladin labs & isotechnika: partnership for voclosporin tekmira: agreement with roche to advance two rnai products to the clinic thallion: partners shigamabs with lFB theratechnologies: nda for tesamorelin filed and accepted for review by Fda ym Biosciences: u.s. treasury clearance to conduct nimotuzumab trials; proposal to acquire cytopia (now completed)
devices & diagnostics
novadaq: Fda clearance of sPy endoscopic imaging system sQi diagnostics: Fda cleared their sQidworks™ diagnostics Platform and its igXPleX ra assay tsO3: steriZOne supply and distribution agreement with 3m
services
centric health: acquisition of active health and alliance with interxvent canada chartwell: acquisition of additional retirement home interests cml healthcare: acquisition of u.s. medical imaging centers extendicare: 3 u.s. class action lawsuits thrown out by courts sXc: several significant new u.s. PBm contracts
others
afexa: new product launches to complement coldFX franchise atrium: acquires additional u.s. nutritional brand products
GlG life tech: expands stevia leaf harvest and manufacturing capacity noveko: signs new distribution and marketing agreements, including microban
Source: Company releases
Cardiome Pharma, Isotechnika (for Lux Biosciences’ LUVENIQ) and SQI Diagnostics.
Phase 3 clinical data can also prove to be a catalyst to attract investor attention. Pivotal data is expected from Aeterna Zentaris, Bioniche, Cardiome Pharma, Wex Pharmaceuticals and YM Biosciences and new Phase 3 clinical trials are expected to be started by Bioniche, Biovail, Cardiome Pharma, Oncolytics Biotech and Spectral Diagnostics.
Two companies have already reported statistically significant results in 2010 from controlled Phase 2 clinical trials. Primary clinical endpoints were achieved by Protox Therapeutics’ PRX302 as a treatment for benign prostatic hyperplasia and Transition Therapeutics’ TT-223 in type 2 diabetes. Further positive results from the series of clinical and regulatory events expected in 2010 could build on this solid base to create some upward momentum and renew investor interest in this sector. This article is based on the Equicom report “Survival, Success, Surrender: Review of the Canadian Healthcare Sector in 2009” (see Legal Notes, Disclosures and Disclaimers in this report). A copy of the report can be obtained by contacting the authors or at http://www.equicomgroup.com.
James Smith, M.Sc. (Eng.), is a Vice President and co-manages the Healthcare team at Equicom, providing strategic insight to biotechnology, healthcare services and pharmaceutical companies. He can be reached at 416.815-0700 ext 229 or jsmith@equicomgroup.com. Wayne Schnarr, Ph.D, MBA, is a Healthcare Consultant with more than thirty years of experience in the pharmaceutical and financial industries. He can be reached at 416.815.0700 ext 249 or wschnarr@equicomgroup.com. Equicom, a TMX Group company, is Canada’s leading provider of investor relations and strategic corporate communications services.
