There have been many success stories in Canadian healthcare. When asking somebody to identify specific companies, the answer may start with ‘it depends’ because their perspective will affect which stories they deem to be successes.
Consider the following perspectives:
• New research institutes or revenue from IP licenses would be success stories for academic researchers, universities and hospitals.
• Governments are focused on job creation. Long term success stories would include the generic companies, Apotex and Novopharm (acquired by Teva), and the original Canadian biotech company, Connaught Laboratories, now part of Sanofi.
• Product approvals are success stories for the Canadian companies which have reached that milestone, including Photofrin and Visudyne by QLT, 3TC by BioChem Pharma (acquired by Shire), Arctic Front by Cryo-Cath (acquired by Medtronic) and Mozobil by AnorMED (acquired by Genzyme; now part of Sanofi).
• Success for companies marketing products is sales reaching or exceeding expectations. Some companies with disappointing initial sales programs have bounced back, including Theratechnologies and Cardiome Pharma. Solaraze for treating actinic keratoses was developed by Hyal Pharmaceuticals (acquired by SkyePharma in 1999) and then forgotten by most Canadians. Prior to the approval of generic versions, U.S. sales peaked at US$92 million in 2012, very respectable for a dermatology product. Finally, in a few cases, the recovery time expires, an example being the current voluntary liquidation and dissolution of DiagnoCure.
• Several acquisitions of Canadian companies are mentioned in this article. Acquisitions are success stories if:
-R&D or manufacturing facilities are left in Canada;
-a new generation of entrepreneurial executives has been trained; or
-investors recycle at least part of their profits into new healthcare investments.
The remainder of this article will focus on the perspective of Canadian investors. In this low interest rate environment, some investors are looking for dividends and distributions from investments with a lower risk profile. There are seven public companies (Six services, One medical device) which I monitor for a blog (https://www.bloomburton.com/author/wschnarr/), that have annual yields of between 2.9 per cent and eight per cent (based on July 11 share prices).
Success for most investors is capital gains from increases in share prices. Success for investors in private companies occurs at the exit point, usually either via an acquisition or an Initial Public Offering (IPO).
Acquisition was the preferred exit for several years, both for private companies such as Gemin X Pharmaceuticals (Cephalon; 2011) and Enobia Pharma (Alexion Pharmaceuticals; 2012), and for public companies including ARIUS Research (Roche; 2008),YM BioSciences (Gilead Sciences; 2013) and Medicago (Mitsubishi Tanabe Pharma; 2013).
There have been a few recent IPOs and listings through Reverse Takeovers (RTOs) on a Canadian stock exchange, including Concordia Healthcare and Profound Medical. Some Canadian firms backed by U.S. VCs took advantage of an active U.S. IPO market and went directly to NASDAQ, including Aquinox Pharmaceuticals, Xenon Pharmaceuticals and ProNAi Therapeutics. These companies have all been successful at reaching intermediate milestones and completing major financings. Some private companies, including Zymeworks and Clementia Pharmaceuticals, have attracted major U.S. VC investors and are on similar pathways to potential success.
‘Historical performance may not be indicative of future performance’ is a common phrase in the financial industry. However, before looking forward, look back at the five best annual share price performances in the last three years and also in the first six months of 2016 for companies starting each year with share prices of $1.00 or more.
What might be learned from looking at these success stories?
• Is there a sector which is more likely to have success stories? These top performers can be categorized as Therapeutics –Development (7), Therapeutics – Commercial (6, with 2 repeats), Services (3), Medical Devices (1) and Information Technology (1). There are more successes in the two therapeutics sectors partially because there are more companies in these sectors. There are also more therapeutics companies among the worst performers every year.
• Is there a common factor among the success stories? There are companies which have matured after years of product and market development, including Cipher Pharmaceuticals, Nuvo Research and QHR Technologies. Other companies benefited from the rise of Valeant Pharmaceuticals and the acquisition of Paladin Labs, including Concordia Healthcare and BioSyent. Many companies experienced event-based share price movements, including Patheon (privatized but now doing an IPO), Paladin Labs (acquired), NeoVasc (preclinical data), Transition Therapeutics (clinical progress) and Prometic Life Sciences (clinical data).
• Have the successes been sustainable? Many companies have not been able to sustain their success stories, including Transition Therapeutics (clinical failure), Neovasc (slow commercialization and now a lost IP lawsuit), Cipher Pharmaceuticals (slow revenue growth) and Concordia International (impacted by the Valeant share price collapse). Nuvo Research’s share price history has been extremely volatile. The current share prices are far below the $500+ level during 2000 (accounting for share consolidations) and the bounces over $25 in 2009. However, the share price has climbed, with some volatility, for the last three years and shareholders also received a share of Crescita in March 2016.
Based on this assessment, there is no simple solution to selecting future success stories. Investors must pick individual sectors, companies and technologies.
Most investors looking for large capital gains choose a Therapeutics sector. Investors willing to accept more risk choose the companies with products still in preclinical or early clinical development. Potential investors, even those with no industry, scientific or medical background, can at least have a checklist of factors, including the following:
• Unmet medical need;
• Large market potential;
• Known mechanism of action;
• Experienced management;
• Clinical strategy; and
• Funding from biotech specialist funds.
Most investors will not stay with one company through an entire product development program which can stretch over 10 years. Success might be a share price double over a shorter period, which can be triggered by the expectation or announcement of later stage clinical and regulatory events. For example, Spectral Medical has announced that it expects to release primary outcome results in September from its pivotal Phase 3 EUPHRATES clinical trial of Toraymyxin™ in the treatment of septic shock, and Cynapsus Therapeutics should soon release data from its CTH-300 Phase 3 efficacy study. Potential success for earlier stage companies might be based on a core technology in a hot field – Trillium Therapeutics in immuno-oncology, or superior preclinical efficacy against an established drug target – Essa Pharma in prostate cancer (early clinical results expected in 2016).
For investors who are not comfortable with scientific or clinical risk, they may choose the market or commercial risk in the specialty pharma sector. There is less clarity on the checklist of factors for this sector after its rise and fall over the last two years. If your checklist includes prior management success, not overpaying for assets and controlled use of debt, then Knight Therapeutics has delivered a return of over 100 per cent since listing on the TSX in Q1 2014 and has not deviated from that checklist.
Celebrate the recent successes in Canadian healthcare and get ready to cheer the successes which will be coming.
(The author would like to thank David Martin, Head of Equity Research at Bloom Burton & Co, for contributing to this article.)
ABOUT THE AUTHOR
Wayne Schnarr is attempting to be a mostly-retired healthcare consultant after over 30 years in the biotech and financial industries. He is currently Chief Business Officer at Translatum Medicus inc. and is a member of the Industry Advisory Board at Bloom Burton & Co. The opinions expressed in this article are strictly personal and do not reflect the opinions of any current or past employers or consulting clients. This article does not consider the investment objectives, financial situation or particular needs of any particular person. Investors should obtain professional advice based on their own individual circumstances before making an investment decision.