Part One of a series by Tony Pullen, a veteran of the Canadian capital markets. In this in-depth article series, Pullen reviews the past seven years of Canadian biotech, and takes a look at where we are today.
After 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 ten year high.
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 1995-2000” 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 well-organized 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, 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.
To read Part Two, which highlights some of the top Canadian life science companies and investments in biotech over the past seven years, click here.
Tony Pullen is a 46 year veteran of the Canadian capital markets. His career has included trading, retail and institutional sales, research management, market strategy and investment banking. He first encountered the Canadian biotech sector in the mid-1980s by way of advisory work for Cangene in its early days, raising the initial capital for MDS Health Ventures and leading the refinancing of Allelix Biopharm.
Beginning in 1991, he was instrumental in the formation of the biotechnology team at Yorkton Securities that dominated the wave of financing for the sector over the following 10 years. This article resulted from insights gained during the effort to save Lorus Therapeutics during last summer.
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