By Tony Pullen
ACROSS CANADA
IS CANADIAN BIOTECH
COMING TO LIFE?
A
fter a long, lonely vigil beginning in mid-2007, not long after I joined Paradigm Capital to be its healthcare banker, I am finally seeing some stirrings in the Canadian “biotech” space. The Paradigm assignment provided me with a ringside seat as well over half of the roughly 150 public entities that populated the Canadian health care space in 2007 were either taken over, marginalized to the point of extinction by clinical failures, repurposed into mining companies, or just disappeared. Only 60 of those companies survived. Given that approximately one quarter of the 2007 population were already of marginal value (market capitalizations well below $10 million), my estimates of the damage are approximate but still revelatory. The number of public healthcare entities in Canada today is actually closer to half the original total, as roughly 20 new companies have emerged in spite of the blight. Nature abhors a vacuum. I don’t want to get too carried away by what I’ve detected in recent weeks, but there does seem to be a trend developing beyond just company or news specific reactions. Even Lorus Therapeutics, which for many years seemed to serve as a leading indicator for biotech cycles in Canada (back when we used to have them), caught fire in the past few weeks due to a long overdue change in management and direction. Street technicians have been pointing to the charts of many surviving Canadian health care companies as “starting to look interesting.” However, one has only to turn to their longer-term charts to see the extent of the aforementioned problem. So much wealth destruction! Again, using Lorus as an example, while it more than tripled to almost $1 in the two weeks after the management change, it is still down 98% from its 10 year high.
22 BIOTECHNOLOGY FOCUS February/March 2014
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I have been wondering for months and months if (and maybe even when) the strong advances that have occurred since last fall in the U.S. biotech market might trigger a rally in their Canadian brethren. I had pretty much abandoned hope—until these recent stirrings. The case for a Canadian bull market in the space is that valuations reappearing down south will make for heady comparisons to similar science north of the border. And yet, even if money does start pouring into the sector, there’s a danger that it may flow back indiscriminately. The few remaining Canadian analysts will be challenged to ensure that new money doesn’t get wasted on the wrong names. It may even be somewhat unnerving for them to find that investors want to speak to them again! For those interested in revisiting the sector, it’s important to know that a great deal has changed in the health care world in the past six years. First, as it always does, science has continued to leap forward dramatically. The entities that were financed in the last boom wouldn’t even be worthy of mention in the context of today’s knowledge. Sadly, most of the “class of 1995 to 2000” went on to fail anyway, while the survivors are, for the most part, still pushing failed agendas. The exciting progress in understanding the role of stem cells was barely a glimmer then. As for oncology, while it’s difficult to keep pace with an epidemic that has become a fact of everyday life, significant therapeutic advances have been made in many cancers. Cures for Alzheimer’s or Parkinson’s remain as elusive as ever, while treatments for the other emerging modern epidemic, diabetes (in all its forms), are advancing—but slowly. Our understanding of diseases and their causes—and sadly, their complexities—has improved while the Internet has created masses of wellorganized and informed victims’ groups. Orphan drugs, once the poor cousins of the pharmaceutical industry, are now its fastest growing category, as searching for the “next big blockbuster” has given way to the realization that personalized medicine is now not only possible, but probably the only path to true efficacy. Theranostics, pharmacoeconomics and pharmacokinetics are rapidly gaining in importance as “Obamacare,” a.k.a. affordable healthcare, 24 BIOTECHNOLOGY FOCUS February/March 2014
Name
Mkt Cap 2006
Biovail Corporation........................................................ $ 2,970.9 MDS Inc.......................................................................... $ 2,507.1 CML Healthcare Income Fund.................................... $ 1,333.8 Axcan Pharma Inc......................................................... $ 1,117.8 Aspreva Pharmaceuticals Corp................................... $ 703.9 Cardiome Pharma Corp................................................ $ 627.6 Cangene Corporation.................................................... $ 524.6 Angiotech Pharmaceuticals, Inc................................. $ 518.6 QLT Inc........................................................................... $ 466.4 Theratechnologies Inc.................................................. $ 466.7 SXC Health Solutions, Corp......................................... $ 384.4 Noveko International Inc.............................................. $ 366.7 Patheon, Inc.................................................................... $ 324.4 Transition Therapeutics Inc......................................... $ 316.6 Resverlogix Corp............................................................ $ 267.9 TS03 Inc.......................................................................... $ 206.8 DRAXIS Health Inc........................................................ $ 206.1 Table 1.................................................................... $ 13,310
is sending the U.S. system to either health or bankruptcy depending on whom you listen to. Companion diagnostics are fast becoming a necessary component of any potential therapeutic agent. The irony here, for those old enough to remember the early days of the biotech space, is that the idea of developing a diagnostic as a precursor to a potential therapeutic was the standard way in which the early companies developed. From a capital market perspective, the main change that has occurred in the biotech sector is that the old ’90s model started to die, particularly in Canada, with the financial collapse that followed the “human genome” rush of 2000. This original model presumed that investors would have the patience to match money with milestones in a virtuous circle of value creation over timelines measured in years. In Canada, that model went out for good in the 2008-’09 financial meltdown, aided and abetted by way too many clinical failures. Meanwhile, in the intervening period, the theoretical estimates of the total cost of bringing a new drug to market has climbed from $300-$400 million to well over $1 billion. I say “theoretical” because the reality is all over the map. Today’s demands for driving value
are “show me the money.” Reconciling this massive cost with the need for companies to still somehow succeed requires clear potential for financial milestones driven by third-party validation (from either partnering or outright acquisition). The milestones need to be just as clear, in fact, as potential revenue is for any operating business. Another significant change in the global biotech environment over the last five to ten years is the status and needs of “Big Pharma.” Rather than being the mother ships of health care delivery, these multinationals have been under enormous pressure to reinvent themselves. The good news is that these pressures, particularly due to the “patent cliff,” have shifted the playing field such that any new and exciting compound with a well-validated pathway or receptor can be snapped up at a much earlier stage than previously possible. The recent scramble for position in the rapidly growing hepatitis market is a clear example of this. Not since the heady early days of biotech, when Amgen made it all look easy by discovering two gamechanging biotech drugs in a row, has such fever existed. Now technology is allowing companies to revisit and repurpose previ-
ACROSS CANADA A perfect storm of adverse events culminated in a long litigation with its former partner, the result of which was the share price being cut by 75%. However, the company still possesses its leading-edge technology in the RNA interference space, which is all but impossible to explain to Canadian investors.
ously failed compounds (or trials) to find new efficacies or sub-populations for them. With encouragement from the National Institute of Health, some big pharmas are opening up their libraries of compounds to academia in the hope that new methodologies will find mechanisms that couldn’t have been seen ten years ago. Additionally, new companies are being built around repurposed drugs first discovered in the ’90s and then abandoned in the race to find the next blockbuster. So, what really happened to health care stocks in Canada during this period? While the vast majority of biotech stocks were shedding their value, two homegrown
Name
companies went on to create enormous wealth for investors. The biggest success by far was the conversion of the shell of Biovail, one of Canada’s earliest success stories, from a “dead in the water” yield dinosaur to the massive $35-billion consolidator of niche drugs now known as Valeant Pharmaceuticals. The other was the overnight success (years in the making) of Systems Xcellence/SXC Health Solutions, which morphed from a $400 million market cap into a $10-billion behemoth now rebranded as Catamaran Corp. Meanwhile, at the other end of the spectrum, the erstwhile poster child for the Canadian health care sector, MDS Inc., was carved up for
Mkt Cap 2013
Valeant Pharmaceuticals Int........................................ $ 38,193 Catamaran Corp............................................................ $ 9,964 Paladin Labs Inc............................................................ $ 2,436 Patheon Inc..................................................................... $ 1,373 Novadaq Technologies Inc........................................... $ 999 Nordion Inc..................................................................... $ 540 Medical Facilities Corp................................................. $ 537 Prometic Life Sciences Inc........................................... $ 444 TearLab Corp.................................................................. $ 329 QLT Inc........................................................................... $ 294 Cipher Pharmaceuticals Inc........................................ $ 215 Neovasc Inc................................................................... $ 202 Table 2.................................................................... $ 55,527
scrap by its militant hedge fund shareholders. (Ironically, SXC was helped to survive by the team at MDS Capital at a critical juncture.) Also, honourable mention to Novadaq Technologies for achieving a $1 billion market value, without much fanfare, thanks in large part to the support of the team at Fairfax Financial. Its recent U.S.-led $100 million financing is a significant milestone by any measure. In aggregate, seven years ago there were seventeen companies (Table 1) with market capitalizations over $200 million, for a total value of $13.3 billion. Today, there remain twelve companies over this threshold (Table 2), and thanks to the aforementioned success stories their combined market cap has reached over $50 billion. At face value, this is a spectacular success. If you had owned a basket of those seventeen names you would have been a very happy investor. However, remove Valeant and Catamaran from the picture and you lose $7 billion from the market value of the remaining fifteen companies to +/- $3 billion. In the next tier, companies valued between $50 and $200 million (where “institutional interest” in Canada really starts), it’s a very different story. Back in 2007, there were forty companies in this bracket, while today there are only nineteen. Surprisingly, eight of these are new entities, so on an “apples to apples” basis there are only eleven “survivors.” Between $20 and $50 million, fourteen companies remain where there used to be forty back in 2007. The rest of the population, comprised of thirty-six wannabes ranging from $1 to $19 million in market cap (for a total of $333 million), sits well below most investor’s risk tolerance. Hopefully there will be some great surprises from this list. February/March 2014 BIOTECHNOLOGY FOCUS 25
ACROSS CANADA
My purpose here is to provide some hard earned perspective on where I think opportunities lie in this vastly reduced landscape, having watched it evolve with some intimacy for twenty-five years (admittedly as an accidental tourist—by which I mean no background in science). In 1987-88, I led the financing effort to create MDS Health Ventures, the predecessor to MDS Capital Corp., now known as Lumira Capital. At that time the sector barely existed. I acknowledge that I don’t and can’t possibly know everything there is to know about all the companies comprising the Canadian biotech scene. What follows is an attempt to highlight the companies I do know well enough to say that the potentialities of their assets or operations are relevant to the health care environment of today. First, in the dwindled list of companies above the $200 threshold, I only have two favourites: Prometic Life Sciences and Oncolytics Biotech (at least the latter was at time of writing). Prometic because its massive platform of long awaited but transformative technologies is finally producing consistent revenues, and its therapeutic portfolio is gaining market recognition. It is now the most likely Canadian health science company to benefit from U.S. investor attention and valuation parameters. In the case of Oncolytics, evidence continues to grow that its lead compound, Reolysin, is on the verge of major validation as a leading therapeutic agent in oncology.
Even though the company has persevered against all odds by virtue of the old model mentioned earlier, it has continued to successfully finance its clinical programs. I would have liked to have included both Medicago and Trimel in this list, but the former’s management sold the company to its long-standing Japanese partner, while Trimel has had to deal with the negative headwinds involving its founding investor Eugene Melnyk and his personal finance issues which came to light in February. This culminated in May in an unfortunate valuation implosion when it became more obvious to the market that both the company and Mr. Melnyk needed to sell shares at the same time as the company was attempting to raise the capital necessary to bring its innovative lead drug, Compleo TRT, to the goal line. Fortunately the combination of the publicity and the share price resulted in the first “over subscribed” issue the sector has seen in years. In the interest of full disclosure, I worked with the company without success on a more constructive solution to this dilemma for six months prior to the dilutive financing. After the dust settled, Melnyk remained the largest shareholder but with a vastly reduced percentage. In the next tier of companies above the $50 million cut-off, my picks, now including Trimel, would be Tekmira and Spectral Diagnostics. Tekmira suffered a severe devaluation in its stock price almost immediately after it successfully executed a
I am continuing the effort as the company fully meets my core criteria for any healthcare opportunity: it is addressing a huge unmet need in brain health by way of a high-margin product (in this case software) with almost zero regulatory risk; and it is conducting one of the largest trials in psychiatric history with the full cooperation of the U.S. military. 26 BIOTECHNOLOGY FOCUS February/March 2014
share consolidation and NASDAQ listing in 2010. A perfect storm of adverse events culminated in a long litigation with its former partner, the result of which was the share price being cut by 75%. However, the company still possesses its leading-edge technology in the RNA interference space, which is all but impossible to explain to Canadian investors. The hard-won cash it received from successfully defending its IP leaves its technology value at a ridiculously low level. As interest in RNA interference grows, Tekmira will be a direct beneficiary. For comparative purposes, the major players in this space sport valuations from the $100s of millions to the $4 billion now enjoyed by its former partner, Alnylam. October’s $35 million, entirely U.S.-led financing clearly underlines this fact. It is worth noting from an historical perspective that Tekmira is the successor company, by way of a few iterations, to Inex Pharmaceuticals, part of the original class of ’90s Canadian biotechs. Its original drug candidate, now branded as Marqibo, was finally approved in August 2012 for treatment of a subset of ALL (acute lymphoblastic leukemia). The drug passed through many hands of ownership over the years, too numerous to mention here, and appears to have $50 million in potential sales for its now owner, Spectrum Pharma, in this approved indication. As mentioned earlier, the old model did not serve investors well, but the drug may still finally reach Inex’s originally tar-
ACROSS CANADA
geted market in non-Hodgkin’s lymphoma (NHL) back in the ’90s. As for Spectral, one of the early stock market successes in Canada, its potential stems as much from years of capital market neglect as from the promise of its technology. Its stock price rose spectacularly in the early 1980s, almost reaching $1 billion in market value, on the strength of early excitement about its “point of care” cardiac diagnostic panel invention. Nothing of much value resulted from this early technology. A management change over ten years ago set the company on a new long and painfully dilutive path (again, based on the old model) to what may finally become a huge win for its long suffering shareholders. Ironically, its current technology marries a well-established Japanese filtering device to—you guessed it—a point-of-care diagnostic, albeit in the vastly more challenging area of septic shock. Sepsis remains one of health care’s most profound problems. If its current phase 3 Euprates trial on which management has “bet the company” succeeds in 2014, the share price win will be in multiples. One other outlier company in this valuation range would be Titan Medical. Based on the work of one of Canada’s leadingedge experts in robotic surgery, Dr. Reiza Raymand, Titan is in a unique position, assuming it can continue to procure patient capital to achieve full value for developing the “next gen” solution for this growing field of surgery. It is beyond a “David and Goliath” story. With a market cap of only $75 million vis-à-vis its only real comparator/ competitor, Intuitive Surgical (valued at $15 billion), it is not for the faint of heart—but is world class in potential. As for where I think potential exists below these previous categories of value, I would highlight three long-term survivors: Cynapsus, Lorus and Microbix. While they’ve all had to endure enormous dilutions to stay alive, they’ve been able to maintain or develop new potentialities. Cynapsus has a high probability of improving the deliverability of a small existing Parkinson’s drug, creating the potential for a substantial win and take out. Lorus’s new American-based management team has already demonstrated its ability to add significant value to the small molecule portfolio that previous management struggled to sustain during
the blight. Microbix has been searching for market recognition for years on numerous fronts and still remains a “dark horse,” but it is finally becoming cash flow positive and still retains three assets that are each potentially worth some multiples of its market cap. Not to say that it will be a six bagger, but it is certainly worth a lot more than its current $10-million valuation. Among the newer crop of companies, I would cite Medifocus, Delmar Pharma, Sernova and VentriPoint as companies with new strategies or technologies with gamechanging potential in their respective fields. Some or all of them will be certain to achieve a following if the renewed interest in the space finds them. Medifocus has recently reacquired its management team’s original invention from Boston Scientific and is in the process of reestablishing that product’s $30-million revenue potential. This brings a welcome revenue stream to its multi-faceted oncology platform. Delmar is repurposing a therapeutic agent from the 1990s as a potential treatment for glioblastoma, one of cancer’s worst, most aggressive forms. Sernova is developing a new, cutting-edge approach to diabetes management. VentriPoint has a major, cost effective, cloud-based software solution for heart diagnosis that is currently in front of the FDA. Approval would bring a major value inflection. Also, I would be remiss if I did not mention CNS Response. I was introduced to CNS by the TMX in late 2010 and have been helping to finance it ever since. It came to Canada to try and avail itself of our more “user friendly” small cap market just as it was ceasing to be so. I was immediately attracted to its mission of providing a diagnostic solution (where none exists today) to the increasingly tragic area of severe mental disorders and depression. I am continuing the effort as the company fully meets my core criteria for any healthcare opportunity: it is addressing a huge unmet need in brain health by way of a high-margin product (in this case software) with almost zero regulatory risk; and it is conducting one of the largest trials in psychiatric history with the full cooperation of the U.S. military. Among the remaining health care entities in the Canadian market, I would cite IntelliPharmaCeutics, Critical Outcome Technologies, Immunovaccine and Nuvo Research as having enough merit relative to their current valuations to be worthy of investigation.
Among the newer crop of companies, I would cite Medifocus, Delmar Pharma, Sernova and VentriPoint as companies with new strategies or technologies with game-changing potential in their respective fields.
The problem for all the companies below the $50-million threshold will be finding adequate liquidity to sustain them until the market interest I am sensing really blossoms. However, remember that Prometic was under this threshold eight short months ago and it is now valued at $450 million. Cipher spent years hovering around $1 and now trades at $9 while making steady progress developing “me too” niche therapeutics. TearLab, the old, repurposed OccuLogix, has marched from $2 to $14—a plus $400-million valuation against an apparent revenue run rate of $15 million from its Osmolarity system. This occurred without much fanfare, at least from what I have seen, save for a successful $40-million financing this summer. Another way to summarize the magnitude of the opportunity represented by Canadian health care companies is by removing today’s 10 largest from the aggregate $58.8 billion value of the 81 entities in Appendix A. I base this on a presumption that these, at least, may be efficiently valued. The resulting 71 are worth slightly more than $3 billion, or an average of $44 million each. There have to be more Prometics out there to be discovered.
To see the full appendix of Canadian companies visit http://biotechnologyfocus.ca/ is-canadian-biotech-comingto-life/
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