The Fire Marshall’s Report: A search through the embers
In memory of my dear friend and colleague Dr. Ezra Lwowski, my biotech mentor and muse for thirty years.
Since 2014 I have written two commentaries on the state of the Canadian public life science companies. By way of introduction to new readers, I have been involved in the investment business my entire career and back in the mid-80s I became intrigued by the life science space, which was nascent at the time in Canada, for all the right reasons. I was compelled by the idea that we were at the dawn of a new age of discovery and, as an investment banker, the likely demand for capital to support this emerging sector. That was back in 1985. My last commentary for Biotechnology Focus was two years ago. It was a sequel to a piece I had written the previous year about the hope that the post-2009 resurgence in U.S. biotechnology stocks could spill over into Canada. My conclusion then was that expectation was “much ado about nothing”.
That hope had been driven by the dramatic 150 per cent surge in the Nasdaq Biotech Index (NBI) between late 2011 to year-end 2013. For most of the previous decade, the index had been largely range bound in the aftermath of the great, human genome inspired, rush into the sector after 2000. At that time, investors, both retail and institutional, piled in to anything resembling a biotech stock determined not to miss this next great industry of the future. From year end 2013 to its peak in July 2015, the index almost doubled again as conviction and capital poured into the space. That NBI peak of 4162 was four times the level it launched from in 2012, and 10 times its level after the “tech wreck”. During that same period, even the S&P Healthcare Index, dominated by the big pharmaceutical companies, advanced 75 per cent from year-end 2012 to 2014. That index has been unchanged since.
Unfortunately, an index to measure the sector in Canada doesn’t exist. The majority of healthcare companies in Canada are individually too small. The closest comparable, the S&P/TSX Healthcare Index merely mimicked the rise and near demise of now beleaguered Valeant Pharma which, in spite of its collapse, still remains its largest constituent. The other life science participants in the index are Prometic Life Sciences and Knight Therapeutics, along with two, hardly relevant, retirement home companies, Chartwell and Extendicare. The former are the only other two billion dollar plus survivors of the conflagration. Presumably, they will soon be joined by Canopy Growth with its two billion market cap, courtesy of its recent merger with its next largest competitor, and it’s new, cheeky stock symbol WEED. Unfortunately, the S&P/TSX designates marijuana producers as “Life Science” companies, but more on this later.
Last year I chose not to report on developments in the sector in 2015 because frankly, I felt I had answered the original question–namely the potential for a “biotech boom” in Canada. Unlike 2014, when the Valeant inspired interest in specialty pharma, the short-lived inversion mania, the Ebola crisis and the excitement about CAR-T technology caused a resurgence of prospects for Canadian life science companies, 2015 became a year of extreme crosswinds. Certainly, the U.S. biotech sector raced into 2015 with the tailwind of a record year of fund raising, share price performance, partnering and M&A activity. During each of the intervening years, despite persistent volatility, the U.S. capital markets managed to raise approximately $5 billion for the sector, twice the amount of 2014, despite the frequent opening and closing of the financing “window”. Merger and acquisition activity, both attempted and consummated, reached into the hundreds of billions and the FDA played its part by approving a record breaking 45 new drugs in 2015. This surpassed the previous record of 41 during 2014, which, in turn, was 52 per cent higher than 2013.
All this exuberance began to subside after the July peak in the Nasdaq Biotech Index at 4162, but not before some eye-popping IPOs which proved once again that in U.S. capital markets, nothing succeeds like excess! One example was the IPO of Nantkwest in August whereby the famous biotech entrepreneur Patrick Soon-Shiong (one of Prometic’s largest shareholders) launched the company with a $200 million raise and a post-money market cap of $2 billion. This valued his estimated $77 million earlier investment in the company at $1.1 billion. Today, it trades at $300 million, not much above its remaining cash.
One of the wildest rides was experienced by Canada’s Aquinox Pharmaceuticals. The company had gone public in a “straight to Nasdaq” offering in March 2014 successfully raising $52 million against a valuation of $65 million at $11. The share price had experienced a fairly bumpy ride until the company released disappointing trial results for its lead product, AQX-1125. The stock price immediately plunged 72 per cent to $1.50, at which point its market cap reached $16 million versus its remaining cash position of $29 million. This was an experience all too familiar for Canadian biotech companies. However, in a matter of weeks, the Company disclosed positive secondary end points from the same trial that unleashed a spectacular 2000 per cent advance peaking at $22 per share before settling back in the high teens. The company quickly raised $98 million and by year-end was selected for inclusion in the Nasdaq Biotechnology Index. Later in 2016, it came back to the market for another $75 million and finished 2016 with a $520 million market cap, 32x above the 2015 low. Now that’s volatility! However, the cracks were beginning to show as the bizarre Martin Shkreli scandal burst upon the scene and pharma price gouging leapt into the discourse of the Presidential campaign. Almost immediately the markets froze and activity ground to a halt. Shkreli quickly became the media villain for all that was wrong with drug pricing.
The capital markets opened 2016 with another dramatic set back reminiscent of the “China slowdown” meltdown of late August 2015. This time the catalyst was a collapse in oil prices which shut down the IPO market completely on both sides of the border. Against this backdrop, the Nasdaq Biotech Index extended its retracement from the July 2015 peak to 1400 points or 36per cent. In the subsequent market turmoil, the Index was left behind managing only a meager 3 per cent recovery by year-end and registering a 23 per cent decline for 2016 as a whole, the first decline since 2008. From the heady pace of the previous two years, the IPO market dried up with only $450 million raised in Q4. As if in sympathy, even FDA approvals dropped in half to 22.
Late in 2016, the shocking election of Donald Trump added to the long list of global uncertainties plaguing the global capital markets. Ironically, the almost immediate benefit of his election has been a dramatic surge in equity values. For the past five years, I have been both wondering and despairing for what possible catalyst could shake stocks from their range bound lethargy and bring capital gains back into the investing discussion. The persistent sluggish growth of global economies, which lies at the root of the political disquiet that drove Britain out of the EU and elected Trump, has also stalled corporate earnings. It instantly appeared as if the malaise of global uncertainties, that has pushed interest rates to unsustainably low levels and backed up a mountain of investable cash, suddenly lifted. Corporate earnings, as measured by those underlying the S&P 500 index, have been stalled around the level of 100 to which they had recovered following the financial crisis of 2008/09. Ever since last summer’s rapid market recovery from the unexpected Brexit decision, the harbinger of Trump’s win, I have felt that the market was finally beginning to look ahead from a valuation point of view. Therefore, I believe the real message from this price surge is the expansion in the underlying price/earnings ratio shown in Chart 1 attached. Clearly the market has “priced in” the added earnings anticipated from the Trump agenda whatever it may be. For equity markets, periods during which earnings and share price multiples expand together, while rare, are a perfect recipe not often seen. Even before the election, forward estimates of S&P earnings had reached 130 for this year vs. 108 for the 2016 results now being reported. The Q/4 9 per cent year-over-year increase, in turn, has been ahead of earlier expectations. Sustaining the market’s newly gained price earnings ratio of 21 times on expanding earnings estimates, once these expected policies are clarified, would provide 20 to 30 per cent of immediate headroom. Unfortunately, and ironically, the main risk to this positive equation is the completely unpredictable and unprecedented antics of “the Donald” himself. The comedy act, that has been the theme of his Presidency to date, makes me wonder if all the global collateral damage of this “gang that can’t shoot straight” will create an even more profound national backlash than the one that put him in charge. He has certainly already debased both his credibility and the prestige of his high office with his constant tweeting distractions and insults of his fellow foreign leaders.
At year-end 2016, I decided to fully revisit the life science space in Canada. As a base, I reviewed the 96 companies I listed in my year-end 2014 commentary. As shown in Table 4 attached, they had an aggregate market capitalization of $78.4 billion. In spite of the gradual erosion of the extended biotech boom south of the border, their aggregate valuation ended 2015 at $76.8 billion. This total comparison is positively distorted by the $16.6 billion United Health purchase of Catamaran midyear. After deducting Catamaran from both years ending totals, the remaining aggregate value declined 10per cent from $66 billion to $60.2 billion. While this is more reflective of the second half decline in the Nasdaq Biotech index of 15 per cent, the main contributor was the initial roll off from Valeant. By year-end 2016, the real story became a jaw-dropping 71per cent collapse to $17.5 billion with 27 per cent of the decline attributed to the plunge in Valeant.
As previous readers may remember, Valeant and Catamaran were valued at $3 billion and $400 million respectively back in 2006, then known as Biovail and SXC Health Solutions. From that point, both companies went on to achieve combined worth of $140 billion by mid 2015. It is hard to imagine such profound sector success not spreading out through the remaining companies in the same space as would be the case in our resource sectors. Part of the answer is that the Canadian capital markets can no longer support such heady valuations for companies outside the core resource or financial sectors. The gains for Valeant came from its acquisition binge fuelled by massive capital from Wall Street. Fortunately, that meant that the bulk of the capital market fallout was also in the U.S. That said, Valeant, became yet another example of a Canadian company’s market capitalization briefly exceeding that of the largest bank of the day, only to collapse into ignominy, as with RIM 10 years ago and Nortel before that. I even remember the fate of an earlier Canadian success story, Dome Petroleum. At that time it rose to eclipse the value of all five Canadian banks, as did Nortel at its peak, only to suffer a similar fate.
As for Catamaran, its acquisition closed the book on the biggest success story in the history of the Canadian medical technology sector and Canada’s biggest technology win by acquisition ever. Founded in Milton, ON as Systems Xcellence, it survived a turbulent early capital market history with numerous near death experiences as well as management and name changes. Subsequent reversals marginalized the share price during the late 90s. From its protracted survival lows of $1 per share, adjusted for offsetting consolidations and splits during its history, its acquisition at US$61.50 is a remarkable success story by any measure. It is unfortunate that this success has not garnered the attention it deserves. Catamaran, like Valeant, successfully followed the path, hoped for by all Canadian non-resource or financial companies, of migrating over the border to the sunny slopes of Nasdaq. By the time of its acquisition, it had largely lost its Canadian identity.
In my previous commentaries, I have focussed particular attention on the companies with market capitalizations of $200 million because it is an important valuation threshold. At least this used to be the case when there was broader investor interest for smaller cap companies in Canada. Tables 1, 2 and 3 track the evolution and decline of the companies meeting this benchmark over the past two years.
Table 1 shows the population at year-end 2014 with their corresponding values in 2016. Table 2 shows the list at year-end 2015. The population expanded to 16 with the inclusion of Aquinox, CRH Medical, Cynapsus, Merus, Patient Home Monitoring and Cardiome. Cipher, Transition and Xenon dropped below the benchmark. Table 3 shows the few companies remaining above $200 million following the 2016 bonfire. All three tables necessarily include Medical Facilities and Nobilis Health by market cap although they are operators of healthcare facilities and not science-based companies. (Nobilis delisted as of year-end from the TSX.) The list also includes Cynapsus and QHR Technologies because both companies were acquired during the year for a combined $1.15 billion versus their 2015 and 2014 year-end valuations of $329 million and $150 respectively. Now for the bad news, Concordia, Neovasc, Arbutus(formerly Tekmira), Merus, Patient Home and Cardiome all fell from the 2015 list with a combined 81 per cent ($3.5 billion) meltdown, 78 per cent of which attributable to Concordia. As mentioned earlier, Aquinox and Aralez (formerly Tribute), only made the list by virtue of financing and merger efforts. Bottom line, very little remained of the 2015 list.
The Concordia saga is a story in itself. Back in 2015 I commented as follows;
“This launch of Concordia in late 2013 couldn’t have been better timed to capitalize on the disappearance of Paladin and three other of Canada’s larger healthcare players early in 2014. The acquisitions of Patheon, Cangene, and Nordion, along with Paladin, freed up an aggregate of $5.5 billion of liquidity, almost 10% of the value of the total sector at year-end 2013, to be reinvested. In other words, this elegant combination of the right business plan, the right market cap and just the right amount of available liquidity was a perfect recipe to harvest the potential institutional interest to play the next version of either predecessor company.”
The two predecessor companies I reference in the quote are Paladin and Valeant.
What a “harvest” it was! Concordia, in two short years became the quintessential fiasco for the pharmaceutical roll-up model. From its initial $35 million equity raise and public listing in late 2013, the company went on an acquisition tear and quickly reached $1 billion market cap status. It then proceeded to raise another $1 billion in equity and debt for additional, larger acquisitions all while its share price raced to $110 and a peak valuation of $4 billion. It then bet this entire value on a massive acquisition of an entire privately-held UK company called Amdipharm Mercury. The resulting effort to raise another billion to finance the acquisition collided with the unfolding anti-pharma drama with such mutual velocity the whole effort imploded as soon as the acquisition closed. The attempt to complete this colossal financing became an exercise of catching a falling knife. The share price plunged 70 per cent in a matter of days, eventually wiping out most of its market value.
In spite of the fire, over the past two years, only three companies actually failed: Imris, Diagnocure and Biosign. On the other hand, besides Catamaran, Cynapsus and QHR, an additional five were acquired. Another medical technology company, Medworxx, was acquired in 2015 followed in 2016 by the acquisitions of Transition Therapeutics, Prism Medical, Telesta Therapeutics and Response Biomedical. The latter four acquired companies have been around for years and were quietly subsumed. Reciting their names is reminiscent of the list of recently departed Academy members honoured on Oscar night. There were also a number of name changes and mergers: QLT became Novelion Therapeutics, Trimel became Acerus (mainly to shed its Eugene Melnyk history), Tribute merged into Aralez Pharmaceuticals, Amorfix became Promis Neurosciences, Miraculins became Luminor and Nightingale Informatix became Nexia Health Technologies.
For Acerus, everything that could go wrong has. I had high expectations for its innovative testosterone delivery technology addressing human sexual health, ever since its lead product, Natesto, was approved by the FDA and because its female equivalent, Tefina, was making clinical progress (now stalled). The testosterone replacement category, which had been growing and gaining for a number of years, completely reversed due to ischemic concerns in the target population. Despite its novelty, the resulting head winds were insurmountable and the initial product launch failed. The company continues to pivot toward a more specialty pharma profile but traction is slow.
Poking through the embers further, by eliminating all the large market cap companies listed in Table 1 at year-end 2014, leaves the remaining 82 with a total of only $3.5 billion which was the basis for my “much ado about nothing” conclusion; not enough market value to attract attention. These companies ended 2015 at $4.2 billion collectively, up 20 per cent. The “flares” from the acquisitions of Cynapsus and QHR, added a further 30 per cent of value to $5.5 billion in 2016 despite all the volatility overhead. Without those, the remaining 74 companies finished the year worth $4.2 billion. The problem is the resulting average of $56 million still leaves the endemic problem for Canadian biotech, lack of critical mass. There are simply too many companies scrounging for too few dollars. In each of the past two years, the 96 Canadian companies—apart from the $3 billion raised and blown by Valeant and Concordia— were drip fed $1 billion. Moreover, $400 million of last year’s total was raised by Knight Therapeutics, but more on that shortly.
In my last report, I described the earlier history of Cynapsus, as Cannasat Therapeutics, and its effort to capitalize on the potential of medicinal marijuana. I feared the early rush into the area was nothing more than “a promotional binge for which there cannot be a happy outcome”, and would draw money away from the cash-starved Canadian biotech sector. What a binge it has turned out to be! Since then the current rush into this space is rapidly creating all the classic characteristics of a bubble and drawing capital away from more productive needs in the life sciences. I have found over 20 public companies now worth over $5 billion collectively and growing which is now more than the collective market cap of the remaining 74 “life science” companies remaining from my 2014 list. Since then, 33 true life science companies have been listed or gone public over the past two years. Their combined market capitalization is slightly under $1 billion, only a fraction of the rush into the marijuana space. Five of these new additions, Helius Medical, VBI Vaccines, Biosyent, CohBar and Essa Pharma account for two-thirds of this total which means the average capitalization for the remaining 28 is only $12 million, barely enough to justify being public.
One wonders how many more people with enclosable farming space are out there chasing the magical licences that are being dispensed by a Government, which now has its hands full of other crises, still trying to develop a regulatory framework for this controversial business. I have no idea what the ultimate market opportunity is but I have to believe medicinal consumers are already being well served. I can only imagine how easy it must be to get a prescription. Reviewing the list of entities on the Canadian Securities Exchange, I could almost smell the aroma. Every second “news blast” from Stockhouse seems to be for another indispensable factoid from the space, now rivalling the frequency from junior miners. In the recent release of the TSX Venture 50, half of the “Cleantech and Life Science” performers–not sure why they are lumped together– were marijuana producers. Only Ceapro, which ironically is a company based on turning natural ingredients into medicinal products, managed to represent the conventional life sciences. From what I am hearing about the growing IPO calendar for anything remotely resembling an marijuana company, this number will probably double again before some reality check for the industry creates an unwinding similar to that of the spec pharma space last year. It has all the makings of a future bonfire!
When I was introduced to Cannasat, a full ten years ago, it was struggling to sustain its mission to create a sublingual method of delivering the pain mitigating elements of cannabis. Sound familiar? In order to move the project forward it was constantly raising “friends and family” rounds in and around .10 per share and sub $10 million of market cap, as so many life science companies are still doing today. I was instrumental in convincing Cannasat’s then CEO that his capital requirements would be unsustainable in the aftermath of the 2008/09 market crash. In late 2009, I introduced him to a veteran biotech CEO who had just completed the sale of his previous biotech company. The new CEO, Anthony Giovinazzo, began the process of repurposing and renaming the company. He soldiered on with a new drug candidate, APL-130277, using a similar, sublingual, approach to delivering an existing Parkinson’s drug more effectively with the aim of massively expanding the market. The struggle for capital continued for the next three years and the experience prompted Anthony to share these comments with me about the hope for a recovery in the sector in late 2013;
“Of course I believe that Cynapsus has an exit value potential of $300 to $500 million in three years’ time, when we have eliminated the clinical and regulatory risk. What we suffer is a Canadian listing and lack of support within Canada. Like many others our only choice is to become much more American focussed………I do not think what you are seeing is a ray of hope for a new dawning. But the last deep breath before a death bell rings.”
It turns out that $300 to $500 million was a profound prophecy! He did become “American focussed” and crossed the border after cobbling together $10 million to initiate his product development. As clinical credibility for APL-130277 grew, he executed a rapid series of financings totaling $100 million during 2014 and 2015. That capital plus further clinical success and fast track designation by the FDA, triggered an $840 million takeover offer from Sunovion Pharma last fall. The headline number gained a lot of attention, but between the share consolidations and the late stage dilution, the actual return was more muted for the longer term Cannasat shareholders. I estimate the US$40.50 takeout price was equivalent to only 3 to 4x for the investors of ten years ago. Not a great time value of money, but a win all the same. I also suspect that those later-stage US investors proved to be a mixed blessing for the Company by promoting this liquidity event too early for ultimate shareholder benefit.
The takeover of QHR was an amazing outcome for a quirky, little software company from Kamloops BC, both in terms of the price and the purchaser. I first met its tenacious CEO, Al Hildebrandt, ten years ago during his many trips east to find money to support his electronic medical record dreams. An ex-police and fireman, he was about as far away from your archetypical software CEO as you could find. He kept showing up with regularity, each time with more revenues for his tiny company. I decided that if he had been so successful in growing the company from nothing, what might he achieve with some growth capital? A subsequent financing of $10 million at .65 per share and Mr. Hildebrandt’s tenacity paid off last year, though without him at the helm, as Loblaws bought the company for $170 million or $3.10 per share.
Our two remaining +$1 billion companies, still standing in the structure, at year-end 2016 are Knight Therapeutics and Prometic Life Sciences, the latter still being my longer term favourite Canadian biotech company. While Knight has grown to $1.5 billion by constantly raising capital, Prometic has done so by consuming capital to pursue its growing clinical needs. Knight’s share price has increased 75 per cent since inception in early 2014, after the Endo acquisition and inversion for Paladin Labs, but has built its cash resources by 10 times to reach $750 million by December 2016. It has certainly been a willing and opportunistic banker for a sector that is otherwise unbankable, but one has to wonder what the true objective of this cash hoard is. Prometic raised almost $150 million over the past two years as it regained Canadian institutional investor support following years of barely surviving. In support of its cash needs, it launched an opportunistic takeover of struggling Telesta Therapeutics, and its $34 million in cash, last summer. (Telesta, previously known as Bioniche, has been around the Canadian biotech scene as long as I can remember.) The proposed share exchange had an uncertain closing value which immediately invited arbitrage activity by hedge funds. Once the deal closed, with a share exchange value of $2.98, the stock came under intense pressure from an obviously well planned attack of short selling. The share price was cut in half by December 15th. Initiated by rumours of insider selling in early December, the accelerant was the posting of a spurious blog on Seeking Alpha’s website under the sinister pseudonym BlackMamba. Entitled “Time is up for this Biotech ProMotion”, the blog used the Company’s volatile capital market history to sinister advantage casting aspersions on its drug development efforts that, in reality, have been no different than those of any other biotech company. It then went on to insinuate that no competitive advantage exists for its patented PPPS system by using a series of baseless allegations and half-truths. As the selling became exhausted, the shares finally found concerted support at $1.50, just under $1 billion of market cap, this support just as quickly chased the price back through $2 on the last three trading days of the year, on enormous volume, a time when most investors have closed their books. The short selling pressure appears to have abated just as quickly, but a hauntingly large 40 to 50 million short position remains to be resolved, the bulk of it in the U.S. Clearly this is not the U.S. investor attention usually hoped for by Canadian companies. While it is less than 10 per cent of the total shares outstanding, it will represent a potentially ignitable force for the share price as the company delivers more results from its many assets.
Table 4 shows the rankings by individual share price performance over the two years. Table 5 shows the rankings at year-end by market capitalization.) As was the case in 2014, the top performances were more a function of “low altitude” advances by companies with negligible market caps than the hoped for upward trajectory fuelled by clinical successes of which there were none. One example is GeneNews with an almost 1,000 per cent gain in 2016, after almost disappearing in 2015. Previously known as Chondrogene, this gain was mainly due to the company’s continuing ability to survive after ten years of struggle for adoption of its “bleeding” edge diagnostic screening technology for early stage detection of cancer. While the case for its technology is indisputable, its history is a negative testament as to how difficult it is for the adoption of diagnostic innovation.
Dramatic gains, from virtually zero, accounted for eight of the 15 companies that gained more than 100 per cent. Three more, Response Biomedical, Cynapsus and QHR Technologies resulted from their takeovers discussed earlier. Ceapro, +350 per cent, Medicure, +143 per cent and Centric, +132 per cent were the only companies with +$100 million market caps in the rest of this group. Ceapro, which has been around forever, developing a growing portfolio of healthcare products based on natural sources has finally achieved substantial revenue and profit under the leadership of Gilles Gagnon who took over as CEO in 2008. Similarly, Medicure has achieved a remarkable turnaround since its collapse in early 2008 when its lead product, MC-1, failed a Phase 3 trial. The previous year, in a risk mitigating move, it had acquired the rights to Aggrastat, a clot-busting drug to treat coronary patients which has become a ten year “overnight” success now driving revenues from roughly $2 million in 2013 to $30 million with associated earnings growth and a new acquisition program. It has quietly become a spec pharma success story seemingly from nowhere.
There were 25 companies that “flamed out” by 50 per cent or more during the period with three by more than 75 per cent: Revive Therapeutics, Vanc Pharma, Valeant and Concordia, the latter three reflecting the collapse of interest as “Specialty” Pharma became “Speculative” Pharma. Tiny Vanc Pharma, after a brief flurry in early 2015 to a peak of $2.41, fell 75 per cent over the period but 90 per cent from its peak. Other specialty pharma casualties were Merus Labs down 33 per cent over the two years and 66 per cent from its June 2015 peak. It finished 2016 with a $136 million market cap but only because it was able to raise $87 million during the period. Cipher Pharma after a brief flurry of credibility under new management, now gone, fell 73 per cent from its peak at year-end 2014.
In early 2016 a new specialty pharma called Aralez was formed by merging the Tribute Pharmaceuticals with a U.S. company called Pozen Inc. in an incredibly complicated transaction whereby the shareholders of Tribute retained 36 per cent of the merged company. The intent of the deal was to create a formidable product portfolio backed by a US$350 million committed war chest from a syndicate of healthcare investors. One can only imagine the difficulties of riding this deal through all the subsequent capital market cross currents. From an $8 per share peak last September, the share price has been cut in half so far in 2017. The term speculative pharma could also be applied to, the ironically named, “Revive” Therapeutics that has been trying for three years to develop a small pipeline of repurposed drugs. In early 2017, in a move I can only describe as opportunistic desperation, it announced a new initiative to hitch itself to the cannabis craze by announcing a program to investigate efficacy potential for cannabinoid derivatives in liver cancer. Words fail me.
In tracking Canadian life science companies, I have often had to refer to longer-term price history for companies enjoying current share price performance. I actually ran the historical numbers for the 87 companies on the list at year-end to explore this unfortunate statistic. Relating the 2016 share prices to their historical highs revealed disturbing results. The individual ratios are shown in Table 5 (available at insert link). Of the 87 companies on the list, 71 are 80 per cent below their all-time highs with 46, or more than half, at 95 per cent or more. This means that most Canadian life science companies share prices are priced today at 5 per cent or less of their all-time highs. One can only imagine the aggregate loss of capital this entails. I could digress into a rant about the need and advantages that could come from introducing “flow through” funding but I will resist. Only five companies are within 30 per cent with a further 11 hanging on to between 50 and 80 per cent of their peak values. By this measure, Knight Therapeutics is the only GUD company, pun ended, on the entire list trading anywhere near its recent high of $10.85 last December.
In my last report, I stated, “Among the companies with plus $200 million valuations I believe Prometic Life Sciences will continue its upward revaluation as its multifaceted assets gain more attention from US investors. With the capital raised in 2013 and 2014 (and during 2015, 2016 and just last month) it will be able to fully exploit its plasma-based orphan drug assets while PBI-4050 should make steady progress in the clinic.” Notwithstanding the vicious short selling campaign and the related criticisms, I am sticking with that conviction. Knight Therapeutics continues to benefit from the Paladin Labs halo effect of two years ago but only in building its cash position. Back then I predicted it would be a “must own” for Canadian institutional investors and I expect that to continue as it represents a call on how that cash will be deployed.
Below the $200 million threshold and above $100 million, my unfortunate prediction that Trimel and Titan Medical would “have a breakout year in 2015” was offset by my same prediction for Cynapsus which was acquired for 10x its 2014 price. This year, I would highlight Medicure and Ceapro because I believe their revenue momentum appears to be dialled in and I expect both to dramatically broaden their scope of activities. I also like Aurinia Pharmaceuticals, a company created three years ago through an RTO with Isotechnika, due to the rapidly developing potential for its new Lupus drug candidate, Voclosporin. The stock has been seriously undervalued by confusion over reported mortality associated with its clinical trial program. I also still like Arbutus for which I had enormous hope two years. Its creation from the merger of Tekmira and OnCore Biopharma was intended to extend their respective technologies deeper into the hepatitis B space to chase the same opportunity that had created the blockbuster drug Sovaldi. So far not much has resulted from this creative merger but I believe, if there is an still “explosive ember” in the list, this is it.
Below the $100 million threshold I continue to like Immunovaccine, because, as I said two years ago, its technology “represents one of the few generalized approaches to cancer therapy I have seen relative to the more recent focus on personalized targeting.” Since then the company has created vectors into numerous areas of relevance, from various cancer indications to additional vaccine needs, including the recent Zika panic. I also believe Critical Outcome’s stubborn determination to drive its lead product Coti-2 forward in the clinic could defy the odds of single product success. The other long shot in this bracket is Spectral Medical that was the one Canadian company that might have delivered a Phase 3 success last year. For perspective, my comments in my last report bear repeating;
“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 Euphrates trial on which management has “bet the company” succeeds in 2014, the share price win will be in multiples.”
That “long and painfully dilutive path” must continue, unfortunately. In early October, its trial failed to achieve its end point and the share price plunged 88 per cent. The company had raised an additional $10 million, mainly from its two major shareholders, early in the year of which $7 million remained prior to the results. News of the miss was virtually buried in one of the most positive/negative press releases I have ever read. What was curious was, that in the week prior, there had been a mysterious 60 per cent run-up in the share price apparently fuelled by a series of investor meetings prior to the release of the results. If the company can now prevail on the FDA to still approve the device and its companion diagnostic, it will be the “longest ball” in the history of healthcare.
The Spectral reversal, after so many years of effort, is an example of the question of sustainability which constantly looms over the life science space in Canada. Only three companies disappeared or went into liquidation which, given the tenuous nature of capital market support, is truly surprising. The three, Diagnocure, Imris and Biosign, all failed after prolonged and heavily financed attempts to bring innovative diagnostic and imaging technologies to market. On the plus side, Catamaran, Cynapsus, QHR, Prism, and Medworxx were acquired by opportunistic purchasers who were prepared to pay a substantial premium. Transition Therapeutics, Telesta, and Response Biomedical were “taken under” by new owners for fractions of their historical values after spending millions attempting to advance their various assets. All 11 companies had been around for, in most cases, 20 years.
This leads me to “triage” the remaining companies on the list. I believe only 24 companies still have substantial potential based on their technologies or clinical candidates. Another 19 companies are more or less sustainable by virtue of actual product sales. This leaves 40 companies that are, in my view at least, well past their “best before” date, like stale milk in the fridge. For these companies, if their clinical or operational assets were of any real currency they would have either succeeded or have been acquired by now. For the new total universe of 117 life science companies, referred to earlier, 33 have market caps below $10 million. Also, there are 54 trading at less than $0.30 per share, 40 are trading at less than $0.20 per share and 21 below $0.10 per share. I reiterate what I said in 2015 about the money being sucked into the marijuana space, this is “money the cash-starved real biotech companies could put to much better use.” All of this “debris” is a very weak foundation from which to rebuild a capital market structure. It goes without saying that this is a truly unfortunate condition for the public face of an industry for which there is so much hope and need, particularly given the billions Canada invests in scientific research.
Below $50 million, there were 50 companies at year-end, almost the same number below this benchmark two years ago. From that group, five were taken over as discussed earlier: Prism Medical, Telesta Therapeutics, Medworxx Solutions and Response Biomedical, while Diagnocure and Biosign failed. More importantly, there were huge percentage recoveries: Theratechnologies, 789 per cent, Medicure, 565 per cent and Sophiris, formerly Victoria-based Protox Therapeutics, 418 per cent, Resverlogix, 311 per cent and Ceapro, 233 Per cent. The reasons for the Medicure and Ceapro successes were discussed earlier. Sophiris, Theratechnologies, and Resverlogix were also “rose from the ashes” situations caused by positive clinical news. Quest Pharma, Diamedica, and Medx were also up over 300 per cent. These eight wins plus nine more companies which advanced more than 100 per cent since 2014, means 17, or 32 per cent, of that list, doubled or more.
What is the potential for these types of fireworks from the companies below $50 million today? With apologies for the mixed metaphor, I found four “potential hot spots” among these embers: Avivagen, Antibe Therapeutics, Diamedica Therapeutics and LED Medical Diagnostics.
Avivagen, with a year-end market cap of $36 million, has spent the past four years perfecting and patenting a product that has the potential to replace the current excessive use of antibiotics in animal feed. This use has finally reached global attention as an enormous factor driving antibiotic resistance in humans. Last year the company began its drive to commercialize its lead product, OxC-beta, which caused a 300 per cent gain in its share price. Unfortunately, the pace of adoption in its targeted markets in the Far East failed to meet expectations for early adoption resulting in erosion in its share price and a change in management. I believe the potential for Avivagen, if OxC-beta is successfully adopted as the standard for this need, is massive.
Antibe Therapeutics, with a year-end market cap of $19 million, is targeting an equally large opportunity addressing the growing crisis in pain management, an $80 billion industry. It is driving a novel technology into the clinic which has the potential to address the therapeutic pain gap that resides between conventional NSAIDs, which most use daily, and opioids, which are very much in the headlines, for all the wrong reasons, and are only used in extreme circumstances. The surge of interest in medical marijuana is actually, by inference, the result of the complete failure by major pharma to find a therapeutic agent to address this gap by safe, effective and easily deliverable pharmaceuticals. Antibe’s family of pain medications under development are based on an interesting adaptation of Naproxen, the world’s most popular NSAID, with a gaseous mediator, hydrogen sulphide. This conjugate could address the gastrointestinal risks that limit the ability of NSAIDs to drug this historical “gap’. If it works, it’s worth billions.
Diamedica Therapeutics, with a market cap of $20 million, survived a clinical setback for its original target in the crowded diabetes space in late 2014. Since then, it has been reinventing itself by de-risking and refocusing its lead candidate, DM-199, on a number of new indications. Recent validation from a significant investment last year by China’s Fosun Pharmaceuticals and Koreas’s SK Group has gone largely unnoticed. The investment reflects the significant potential for its lead product as a recombinant alternative to an existing, but controversially sourced, drug already generating sales in the $100’s of millions in the Far East. LED Medical Diagnostics, with a year-end market cap of $6 million, was transformed at the year-end by a $13.5 million funding to support a proposed acquisition of Apteryx, a private company providing custom software development to the dental market place. The potential synergies expected from this business combination should accelerate sales of its oral diagnostic system and become enormously accretive in 2017.
My three remaining favourites have all continued to suffer “failure to launch” both prior to two years ago and throughout 2015-16. Back then CNS Response, now Mynd Analytics, Medifocus and Ventripoint all shared similar characteristics as follows: “These companies all carry the three attributes I look for most in healthcare investing; having little or no regulatory risk, addressing unmet medical needs and having high, therapeutic type, margins.” In spite of these advantages the capital market experience for all three over the past two years has been disastrous. Mynd Analytics survives only through continued investment by its board of directors. It also incurred, yet another crushing share consolidation, this time one for 200. Its only Canadian connection is the recent initiation of a POC trial by the Canadian Armed Forces in Ottawa. Medifocus, under new management, only survived by slashing its costs while maintaining its revenues from its market proven BPH treatment system, Prolieve, at a US$4 million annual rate. Still capital constrained it, at least, reached profitability in the December quarter. Fortunately, Ventripoint, at time of writing, has “flared up” in spectacular fashion allowing for a sudden, positive recapitalization of the company. The announcement that Health Canada approved its new VMS machine launched a massive one day surge in its share price, from .10 to .92 on massive volume. In the two weeks following, over 150 million shares changed hands at an average price of .46, $69 million of trading volume at 4x the price it launched from. The activity allowed the company to completely refresh its ownership, clean up its balance sheet then raise $4 million through new equity and the exercise of warrants. This new capital will allow it to begin sales of its revamped machine which extends its novel imaging capability to all four chambers of the heart, a need for which there is immediate demand. Hopefully, this is a harbinger of things to come from this forgotten sector of Canada’s capital market.
There are promising signs emerging in the private equity markets. The Harper Government’s VCAP program, initiated in 2013, is finally showing results. According to the Canadian Venture Capital Association’s year-end review for 2016, venture investment reached $3.2 billion last year with $730 million invested in 103 life science deals. Three of these, Quebec-based Dalcor Pharmaceuticals, BC’s Zymeworks and Ontario-based Turnstone Biologics, accounted for $270 million of this total. In addition, Toronto’s Highland Therapeutics recently secured US$200 million of venture debt from Wall Street to bank the launch of its very novel ADHD treatment waiting final FDA approval. The size of this commitment implies the potential for a substantial equity win. My fervent hope is that the so-called Trump rally will continue to provide the “framework” to sustain the resurgence in equities which, in turn, will trickle down to allow new winners to emerge and help the sector “rebuild” in 2017.