The Cross-Border Biotech Blog

Biotechnology, Health and Business in Canada, the United States and Worldwide

BIO Panel on Comparative Effectiveness Research Notes “Silver Lining” of Personalized Medicine

Speakers Daniel Todd, from EMD Serono, and Steve LaPierre, from Boston Scientific, were led by Foley Hoag lawyer Jayson Slotnik in a discussion of the final CER legislation and predictions about implementation. The overall tone was skeptical — the panel noted the potential for CER data to ultimately contribute to CMS coverage decisions, and worried about the cost of prospective randomized trials and about potential impacts on the FDA approval process.

They were, however, optimistic about the role of personalized medicine in the CER implementation. Steve LaPierre expects it to be helpful, and Daniel Todd advocates using the reference to molecular and genetic subtypes in the legislation to push for personalized analysis if a product is selected for a CER study. He calls personalized medicine a silver lining.

The panel also noted positive structural aspects, including helpful governance provisions in the CER legislation. Specifically, they were impressed with the public reporting and audit provisions and the availability of comment periods to allow private sector input.

In looking at how CER will shake out, the panel expected progressive adaptation of the program over the next 3-7 years.

Daniel Todd emphasized the importance of picking a first recommendation to establish credibility. The controversy this year about breast cancer screening recommendations shows the loss of credibility that can come from a debatable result, so they expect CER to ramp up over time.

He also predicted that dissemination of CER results through social media may drive bottom-up adoption of findings, and that defensive medicine may also contribute to adoption.

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Biotech Trends Update: Non-Dilutive Financing and Fundraising by Partnering with Nonprofits

As noted in the lead up to BIO, several of the conference sessions touch on industry trends we’ve been following here on the blog. One of these was today’s session entitled “A New Kind of Non-Dilutive Financing and Fundraising: Partnering With Not-for-Profits,” which we’ve been following as commercialization by non-profit foundations. Our coverage of that trend started off focusing on the financial advantages to companies of finding a commercialization-minded nonprofit partner, but recently we’ve also noted the strategic advantages of these collaborations.

At today’s panel discussion, Genzyme’s Jim Geraghty added to the list of strategic advantages of nonprofit collaborations, echoing Avila’s CEO Katrine Bosely who recently acknowledged the value of the Leukemia and Lymphoma Society’s network of clinician and patient relationships. Geraghty added:

  • access to scientific data that may have benefits to other company programs; and
  • relationships with governments and other clinical gatekeepers.

Most interestingly, Geraghty noted the contribution that nonprofit collaborations can make to employee goodwill and morale in an environment where pursuit of profit can run contrary to the norms that attracted employees to the field of biotechnology in the first place.

The panel also drove home the enormous role the Bill & Melinda Gates Foundation has played in changing the way nonprofits think of their roles in health. Gina Rabinovich from the Foundation was unwavering in stating their commitment not to publications or conference output, but to measurable health outcomes like reducing infant mortality. Kudos.

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Battelle-BIO Data on Biotech Investment and Jobs

I just came from a breakfast meeting between Ontario’s Ministry of Research and Innovation and the Governor of Victoria, Australia. Everyone agreed on the importance of quantitative assessment of the biotech industry, and everyone agreed that finding and measuring (and communicating) success is difficult.

So I was glad to be able to head straight for the Battelle-BIO session presenting data gathered by Battelle, BIO and PMP Public Affairs Consulting tracking “the development of the U.S. bioscience industry on a state and metropolitan area basis .. since 2004.” Much of the data in this year’s report ends at 2008, so it predates the worst of the recession and much of the recent pharma M&A (and associated synergies R&D job cuts). Still, there is some interesting hard data on jobs, investment and best practices to add to this blog’s collection of biotech statistics. Notably:

  • The only job growth 2001-2007 has been in “Research, Testing & Medical Labs,” which Battelle says includes CRO and startup jobs. Jobs have been flat at best in Ag, Drug/Pharma, and Med Device. Reflects increased pharma outsourcing.
  • This data shows a high multiplier, with 5.8 other jobs created per new bioscience job.
  • 27 states have grown at least 1,000 jobs since 2001.

What are the policy initiatives that stand out?

  • 38 states have R&D tax credits, with 7 of these being refundable programs and 4 allowing transfer of credits.
  • 20 states offer tax credits to investors in angel and/or early-stage VC funds.
  • 13 states have fund-of-funds programs, 10 states have made direct LP investments and 14 states have made direct investments in bioscience companies.

Here’s a link to the full report: http://www.bio.org/battelle2010

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Monday Biotech Deal Review: May 3, 2010

I guess the excitement of BIO was driving deals this week. To the delight of the economic development folks, government was in on the action — Ontario announced a BIP investment and announced a whole new strategy, and OICR funded three equity deals. The private sector was also out in force, with four new licensing deals (including some interesting structures) and more securities than the week might otherwise … warrant. Keep reading after the jump…

PubMed Central Canada Opens for Business: Free Online Access to Life Sciences Journals

The PubMed Central Canada project (noted here last July) is now open for business at http://pubmedcentralcanada.ca/ This collaboration — between the NRC’s Canada Institute for Scientific and Technical Information, the Canadian Institutes of Health Research (CIHR), and the U.S. National Library of Medicine — “aims to provide a freely accessible, Canada-based archive of biomedical and health research findings.”

It also allows CIHR-funded researchers to comply with the Institute’s Policy on Access to Research Outputs, which requires grantees to make their peer-reviewed publications freely accessible online within six months of publication. There’s a login-based manuscript submission system, but since I’m not CIHR funded, I can’t check it out. If you are, and you do, let us know how it works.

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This Week in the Twitterverse

Here’s some reading for the weekend from our Twitter stream on @crossborderbio:

Ontario’s New Life Sciences Commercialization Strategy Announced by Minister of Research and Innovation John Milloy

At a press conference in London today, Ontario’s Minister of Research and Innovation, John Milloy, is scheduled to announce the Province’s new $161 million Life Sciences Commercialization Strategy.

The bulk of the money ($114 million) is allocated to the Global Leadership Round in Genomics & Life Sciences (GL2), though $100 million of that was announced last year. Recent announcements under this program include $8.1 million for the International Barcode of Life Project, an $8.8 million grant to SickKids for autism genomics research, and $24.8 million to a posse of University of Toronto genomics researchers.

Of the remaining new money:

 The Ministry is also planning to:

  • Build out investontario.com, and
  • Initiate a Life Sciences Partnership Council to facilitate inter-ministry communication with industry

Other than the shut-down of BIP (not before a last hurrah), no program changes are being made right now.  OETF, OVCF and OITC will continue in their current form.

Here’s a link to the full strategy document (pdf).

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Biotech Trends at BIO 2010

As I’m preparing for the BIO conference in Chicago next week, I’m excited to see that several of the biotech trends we’ve been following on the blog are showing up as conference sessions.

  • Interested in “A New Kind of Non-Dilutive Financing and Fundraising: Partnering With Not-for-Profits”? Get an early start at our trends page on Commercialization by non-profit foundations!
  • Does “Comparative Effectiveness Research and the Government Role” or “Transforming Health Care Through Personalized Medicine” catch your eye? Check out the stories we’ve highlighted on Comparative Effectiveness and Personalized Medicine!
  • Of course, with the new regulatory pathway created by Health Reform legislation in the U.S., Follow-on Biologics (aka Biosimilars) are all the rage at BIO this year.
  • and the whole thing kicks off with Lilly’s General Counsel speaking on “Leveraging IP to Spur Global Biotechnology Innovation, Investment and Jobs” – emphsizing the link between IP Constituencies and Global Innovation that we have been following for some time.

Stay tuned for news from these and other sessions as we hit the conference next week!

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Monday Biotech Deal Review: April 26, 2010

This week’s deals are highlighted by a new TSX-V listed biotech, a $16 million D round, five collaborations a FedDev win for Bioniche, and updates on this month’s flurry of financings. Read more of this post

This Week in the Twitterverse

Here’s some reading for the weekend from our Twitter stream on @crossborderbio:

  • Canadian Foundation for Innovation’s Leaders Opportunity Fund supports 10 McGill researchers http://bit.ly/aRuStd for $1.7M
  • Medicago $MDG headed for the TSX big board (from the Venture exchange) http://bit.ly/cY68Dl Congratulations!
  • Genome Canada discloses planned allocation of $75m 2010 budget http://bit.ly/ccANNC
  • Canada’s drug spend hit $30b in 2009 (85% prescription,15% OTC), but rate of increase (5.1%) was the lowest in a decade http://bit.ly/blfWbR
  • Ontario is contributing $11.5m to Dr. Mick Bhatia’s lab at McMaster University for stem cell-based therapies http://bit.ly/a6dodA
  • Excellent post at the Genomics Law Report on the complexities of informed consent for genomic studies: http://bit.ly/96DAboh
  • Finishing the job of polio eradication worldwide is an ethical obligation! http://bit.ly/9BYTeR
  • cleantech with $ > biotech w/o RT @JohnCFierce: Alimera slashes its IPO price, Codexis delivers at low end of range… http://bit.ly/9z2m2q
  • Two very different and fun approaches to forward-looking information disclaimers noted in this post. Why be boring? http://bit.ly/96T5PO
  • Canada’s Gemin X picked up a $16 million Series D. http://bit.ly/9GgZpN
  • Updated Pharma and Healthcare Social Media Wiki @ http://bit.ly/aCDtoI Great tool to find companies, patient communities, industry observers
  • Genomics Law Report gets an early start on DNA Day hosting Blawg Review http://bit.ly/aPDmk1 & Scientia Pro Publica http://bit.ly/dmpOSs 
  • WSJ VC Blog looks at share of VC investment by industry since 2001 – decline of IT is the primary trend http://bit.ly/cSBNGr
  • Biomarker breakthrough highlights potential of adaptive trials. http://is.gd/bzuqb 
  • Bioniche Receives $750,000 from FedDev for Fermentation Scale-Up for New Vaccine Manufacturing Centre
  • Experts share tips for developing drugs using a virtual model. http://is.gd/bzlZA << good clinical trial CRO plan advice 
  • Vineland Research and Innovation Centre collaborates with Raytheon on radiowave prototype to protect crops from frost http://bit.ly/9JRfMr 
  • Ten Types of Hair on Early-Stage Deals http://bit.ly/9M8sos

Canadian Flax Growers Plan a Roundup Resistant Strain That May Also Resist EU’s GM Resistance In New $5.5m Collaboration with Cibus Global

Canada, the world’s largest flax producer, is looking to maintain its dominance. Growers want the economic advantages of a roundup-resistant variety without jeopardizing sales into the European Union. The E.U. accounts for 60% of Canadian flax exports, but genetically-modified crops face continued resistance in many E.U. countries.

The solution may be generated by a collaboration announced yesterday between the Flax Council of Canada and San Diego company Cibus Global.

According to an article in Xconomy San Diego today, the Flax Council is “investing about $5.5 million” to develop a new strain of Flax using Cibus’ Rapid Trait Development System (RTDS).

Cibus’ technology is a targeted mutagenesis approach that “harnesses the natural DNA repair system in plant cells.” According to the Flax Council’s press release, the technology is exempted under the E.U. Directive on GMOs and is classified as “non-transgenic” by the USDA.  Of course, regulatory compliance in the E.U. does not guarantee political or commercial success.

Two interesting take-aways from a commercialization perspective:

  1. $4 million of the $5.5 million paying for the Flax Council’s half of the project comes from the Canadian Government’s Developing Innovative Agri-Products program (DIAP).  It is unusual for federally-funded development programs to flow so readily to projects executed outside the country. 
  2. Revenues from developed products would be split between the Flax Council and Cibus.

The project aims to bear fruit generate a commercial seed product by 2015.

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Health Canada’s Statistics on Patent Listings and Generics Litigation

In Canada, Under the PM(NOC) Regulations, the Minister of Health maintains a Patent Register (the analog to the U.S. Orange Book).  Health Canada collects statistics on patent listings and litigation, and Ogilvy Renault’s Life Sciences team recently put out a bulletin summarizing some of the data.  A few highlights:

  • Out of 248 applicable generic drug submissions, the generic manufacturer obtained the consent of the patent owner to market its product in Canada prior to patent expiry in only 1% of cases; and in 47% of cases the generic manufacturer intended to challenge the listed patent(s).
  • In litigated cases, generic manufacturers were successful in 67% of all decided cases, and the brand manufacturer / patent owner was successful in the remaining 33% of cases.
  • 495 different medicines are currently listed on the Patent Register.  49% of these products have one patent listed on the Register (by DIN).  23% have two patents on the Register.  43% of products have three or more patents on the Register.  One product has 22 patents listed on the Register.

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Biotech Trends Update — Commercialization by Foundations: Lymphoma and Leukaemia Society’s Preclinical Program Has Advantages for Companies

In my first post noting the trend of non-profit foundations stepping in to support commercial projects, I held out the  Leukemia & Lymphoma Society (LLS)’s Therapy Acceleration Program as a key example.

LLS recently made another investment from that program, giving $3.2 million to get Avila Therapeutics’ AVL-292 into trials for B-cell cancers (pdf).  In writing about this trend originally, I had emphasized the value for the recipeint companies of a non-dilutive investment in a difficult funding environment; but John Carroll’s article at FierceBiotech on the LLS-Avila deal notes another key advantage of these collaborations:

“The LLS offers a developer like Avila other strategic advantages, says [Avila's CEO Katrine] Bosley. The society doesn’t just support patients, it also has ‘a network of relationships with clinical investigators.’ The LLS can help make introductions between the biotech and the investigators who can provide important insights on clinical trial protocols.”

The advantage for LLS? As Louis DeGennaro, Ph.D., LLS’s chief mission officer, says:

“Last year we had three partnerships, each of which triggered a clinical trial of an agent that would not have been tested in blood cancers if not for our dollars.”

A win-win situation that you can expect to see more of.

Monday Biotech Deal Review: April 19, 2010

This week’s deals are headlined by Æterna Zentaris’ $15 million placement (on the back of positive regulatory news over the last couple of weeks). Æterna Zentaris’ is joined by a passel of other private placements, but not much else.  As a bonus for a slow deal week, though, we’ll throw in a name change and a Parkinsons research funding win!

Read more of this post

This Week in the Twitterverse

Here’s some reading for the weekend in case you missed these items the first time around on @crossborderbio:

Biotech Trends Update — Social Media for Biotechs: Building Momentum Toward Critical Mass

In December, I wrote a post listing the top 3 reasons biotech companies should use social media and noted that we would be following adoption and use of social media by biotechs as one of our Trends in 2010.

The 2010 Dose of Digital Dosie Awards held voting for finalists this week, including for Best Facebook Page, Best YouTube Channel, Best Twitter Feed and Best Blog (in a number of categories).  The pharma and healthcare social media wiki that Dose of Digital maintains is a growing list, but still doesn’t include very many biotech companies. 

So, why haven’t we seen more social media among biotechs? 

Is it fear of FDA admonishment?  This blog post/video clip from Future of Pharma spends some time blaming the FDA’s evolving social media policy.  If the FDA were the problem, though, pharma companies wouldn’t be moving into social networking either.  But they are.

Is it fear of creating reporting obligations because of casual mentions of adverse events?  Looking at one community shows that a significant number of reportable adverse events could be unearthed; but Dose of Digital doesn’t view this as a risk or an excuse for avoiding social media, and explains why here.

The real answer is simpler: the value of a social network is the network.  Until a critical mass of biotechs seed a social media presence, most other companies will not realize sufficient value in being online themselves.

The critical mass is starting to build: Michael Gilman, the Founder/CEO of Stromedix is on Twitter, as is Richard Pops, the CEO of Alkermes.  On Twitter, they interact with investors, journalists and patient communities; which points out that it’s not just a critical mass of other biotechs that creates social media value. 

For example, the HIV Vaccine Trials Network (HVTN), at Fred Hutchinson Cancer Research Center in Seattle, is running a series of ads on Facebook to recruit patients to its trials; one of their sites is using Craigslist and individual patients are reporting about their experiences with the trials on blogs and on Facebook.  The Canadian Breast Cancer Foundation and the McGill University Health Centre are also using social media for outreach.

My bottom line: social media will be an increasingly common tool for biotech companies in business development, corporate communications, patient recruitment and for employee recruitment and development.  The sooner you start the more expertise you’ll have.

Monday Biotech Deal Review: April 12, 2010

This week deals are back in full force, despite the fact that Tengion’s IPO was less popular than expected and Neovacs scaled back its planned IPO.  Highlights include Patheon raising $280 million from its note placement, Verio Therapeutics getting phagocytosed by Fate (but remaining in Ottawa) and Lorus Therapeutics’ F-1 filing for a $17.5 million unit offering. Read more of this post

2010 Gairdner Award Winners Announced

This year’s Gairdner Award winners were announced this week.  The Gairdners are a fantastic Canadian contribution to the world of medical research, with seventy-three Gairdner winners over the past 50 years also becoming Nobel laureates.  Here is this year’s batch:

The Gairdner International Award winners:

  • William A. Catterall Ph.D., Department of Pharmacology, University of Washington Seattle, “for discovery of the voltage-gated sodium channel and calcium channel proteins and the elucidation  of their function and regulation.”
  • Pierre Chambon M.D., Institut de genetique et de biologie moleculaire et cellulaire, France, “for the elucidation of fundamental mechanisms of transcription in animal cells and to the discovery of the nuclear receptor superfamily.”
  • William G. Kaelin Jr. M.D., Dana-Farber Cancer Center and Howard Hughes Medical Institute,  Peter J. Ratcliffe M.D., University of Oxford, and Gregg L. Semenza M.D., Ph.D., The Johns Hopkins Institute for Cell Engineering, each “for identification of molecular mechanisms of oxygen sensing in the cell

The Gairdner Wightman Award, given to a Canadian who has demonstrated outstanding leadership in medicine and medical science, will be given to Cal Stiller C.M., O.Ont., M.D.,  Professor Emeritus, University Western Ontario & Chair, Ontario Institute for Cancer Research “for his pioneering work in transplantation and diabetes, and as a remarkable entrepreneur  and builder of  private and public institutions that have greatly enriched the research landscape of  Canada.”

The Global Health Award, in its second year at the Gairdners, will go to Nicholas White, M.D. D.Sc., Mahidol Oxford Tropical Medicine Research Unit, Faculty of Tropical Medicine, Bangkok “for his definitive clinical studies on the effectiveness of artemesinins in the treatment of malaria and elucidating the basis for the use of ACT to prevent resistance.”

Congratulations to all the winners!

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This Week in the Twitterverse

Here’s some reading for the weekend in case you missed them the first time around on @crossborderbio:

Comparative Effectiveness and Personalized Medicine are “Part of the Same Question” Collins Confirms

In a very informative Kaiser Health News interview (via GenomeWeb), Francis Collins says that

“personalized medicine strategy and CER strategy are part of the same question. … There will often be more than one therapeutic intervention, so you have to compare them. But you also want to know what’s different about the individual that might have an influence on that answer.”

Couldn’t have said it better myself.

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State of the Biotech Industry — Heading into BioFinance

As the BioFinance conference in Toronto starts up today, I thought it would be worth looking at a few recent data points for the biotech industry:

  • The Q1 Burrill data (via PharmPro) shows above-market gains for public biotechs (up 8% in Q1), $6.1 billion of pharma partnering deals were done, and total biotech VC investments were up 7% in Q1 (over Q4 ’09) though follow-on VC rounds were down 52%.
  • Regenerative medicine company Tengion Inc. is heading for an IPO this week, aiming (low, says John Carroll) for 4.4 million shares at $8 to $10 apiece, with current stockholders taking about $15 million of the offering.  Watch this one for a good barometer of what a clinical stage biotech (lead product in Phase II) can aspire to.
  • Public investment is still running strong in many jurisdictions as well.  Ontario is waiting to learn how MRI’s new money will be spent; Palm Beach Gardens in Florida is setting aside 681 acres for a biotech park; and the Washington DC region continues to invest in its strong cluster, including a new tax law in Virginia that “creates a three-year window under which entrepreneurs and investors can start and invest in early stage technology companies in Virginia without having to pay any long-term capital gains taxes on the returns those companies generate.”

Stay tuned here and @crossborderbio on Twitter for updates from the conference.

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Monday Biotech Deal Review: April 5, 2010

The past week was consumed with religious holidays and summer weather, and also with year-end earnings announcements, so there was less deal activity than usual.  Still, there’s about $500 million of goodies to check out after the jump, thanks mostly to MDS and its delightful Dutch auction. Read more of this post

This Week in the Twitterverse

It was a quiet week on the blog (confluence of holidays), but here are some good tidbits to catch up on over the weekend in case you missed them the first time around on @crossborderbio:

Top 5 Reasons the Myriad Genetics ALCU Patent Ruling Is Not a Big Deal

Right in the middle of Passover, Judge Robert W. “Let my Patents Go” Sweet released his 152-page ruling (pdf), granting summary judgement to the ACLU and invalidating several of Myriad Genetics’ patents on the sequence and use of the BRCA1 and BRCA2 genes.  It was greeted by some as the 11th plague, and by others as a national liberation; but the truth is it was neither.

Here are the top 5 reasons the ruling is not a big deal:

  1. The business model is changing.  Genomics Law Report (as part of a great series on the Myriad decision) quotes the New York Times and references the Secretary’s Advisory Committee on Genetics, Health and Society (SACGHS) report (pdf) all pointing out the fact that multi-gene tests and whole genome sequencing are becoming much more common diagnostic tools than those along the lines of Myriad’s BRACAnalysis(R) test.
  2. The market says so.  As the New York Times reports, “two major [biotech] indexes … [fell] by less than 1 percent each.”  Part of the reason for this is averaging — many companies benefit if the gene patent anticommons takes a permanent hit – but even Myriad shareholders weren’t too phased.  The shares dropped less than 5% on the news and are back up 1.5% today. 
  3. Diagnostics like Myriad’s may not need patent protection to promote innovation.  Although there are many areas of biotechnology in which patent protection is a crucial incentive, the New York Times quotes James P. Evans, a professor of genetics at the University of North Carolina, who says: “one does not need gene patents in order to see robust development of these tests.”  BIO disagrees.
  4. “The Federal Circuit is likely to reverse this decision.” Dennis Crouch at Patently-O puts it succinctly.  The case may one day lead to “an important Supreme Court showdown,” but that day is not today.
  5. The patents in suit, and many similar patents, may well expire before the case is finally adjudicated.

Keep following the case, though.  It has many people thinking hard about DNA, genomics and innovation, including commentators and judges; and that’s never a bad thing.

Monday Biotech Deal Review: March 29, 2010

This week’s Canadian biotech deals include an acquisition by Biovail, Hæmacure’s BIA filing comes to a predictable end, MethylGene finds $8.9 million in its couch cushions from some Ontario numbered corps, Leap Medical leaps ahead with $1 million from MSBiV and other Quebec favourites, and BioSyntech borrows against its SR&EDs.  Those, plus more securities, debt and commercial deals after the jump…

This Week in the Twitterverse

Here are some good tidbits to catch up on over the weekend in case you missed them the first time around on @crossborderbio:

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Ontario Budget 2010: Reserving Final Judgment

In the post below, I noted the increased budget for the Ministry of Research and Innovation. More than one little birdie says this increase portends significant pending program changes. So put away your poison pens for now and we’ll keep our ears to the ground for good news from the deployment of that additional funding.

Update: I have received confirmations/assurances this morning from several additional sources that MRI announcements will be made in the next few weeks. Stay tuned.

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2010 Ontario Budget Stands Still on Innovation

Ontario’s 2010 budget was released today.  It contains no new innovation-related initiatives, leaving the province to fall further behind competitive jurisdictions. Read on for more detail, but also see this post noting that signs point to further announcements.

Despite recent strategic initiatives in Québec and across the U.S., and despite opportunities to improve funding for biotech companies without any new expenditure, the 2010 budget chooses to rest on last year’s now questionable laurels. 

The section on “Innovation” in the 2010 budget’s Sector Highlights reads, in its entirety, as follows:

“From the discovery of insulin to the BlackBerry ®, the impact of Ontario inventions has reached around the world.

Today, Ontario’s economic and social prosperity has come to depend on its ability to innovate and compete in the global marketplace. Recognizing this, the McGuinty government is investing in an aggressive innovation agenda to ensure the province is one of the winning economies in the 21st century.”

The remainder rehashes prior years’ initiatives. 

There are two hints  of possible improvements directed at innovation:

  1. A bullet in the “Small and Medium-Sized Businesses” section says the government is “[p]roposing to extend the refundable Ontario Innovation Tax Credit to more small and medium-sized businesses.”  There is no further detail that I can locate on this proposal anywhere in the budget documents.
  2. The Ministry of Research and Innovation gets an increased budget, from $295 million in 2008-2009 to $343.8 million in 2009-2010 and $411.5 million in 2010-2011.  There is no information that I can locate on how these additional funds would be deployed. 

No detail is provided on either item, so the underlying goals or likely effects are impossible to determine.  Although there are increases for post-secondary education and general improvements to the corporate tax environment (the net effect of which against the HST is uncertain), the overall impression is undeniably disappointing.

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Capstone Therapeutics’ Proposed Put Rights Put the Company’s Future in Investors’ Hands. Here’s How they Work, and Why.

Capstone Therapeutics (NASDAQ: CAPS)  got a lot of press today (DealBook, FierceBiotech, etc.) for the “put rights” it’s proposing to give its shareholders. 

If shareholders agree at Capstone’s May 21 AGM, they will each get “the right to require the Company … to purchase for cash all or a portion of [their] shares [for cash] on or about July 31, 2011.”  By then, Capstone will have the results of its Phase II POC trial for its lead compound, expects it will have some cash left in the bank, and wants to give investors the choice of whether to continue with the company or not.

Three aspects of the Capstone Puts are interesting:

  1. How do they work?
  2. Why would a company offer them?
  3. How did investors react?

1. How do Capstone Puts Work?

To get more information about how the Capstone Puts work, I checked out the company’s proxy statement.  Here are some of the highlights that make them workable for the company:

  • The Capstone Puts terminate on certain events: a change of control, or entry into an agreement for a partnering, development or any other transaction, whether commercial, investment or otherwise,  that the Board in its sole and absolute discretion determines is material.
  • The Capstone Puts are priced after paying off all liabilities: the redemption amount would be 90% of “available cash” as of June 30, 2011, with available cash defined as “Net Liquid Assets” less “Commitments and Contingencies.”  Commitments and Contingencies are ”all obligations and liabilities of the Company, including contingent obligations and liabilities.”
  • The Capstone Put process turns into dissolution or liquidation: if 100% of the puts are exercised, the Board would propose a plan of dissolution or liquidation to stockholders for approval in accordance with the Delaware General Corporation Law, instead of paying the formula price.

As you can see, some of these terms, like the conditions under which the put rights terminate, are similar to mandatory conversion provisions of convertible debentures.

Which brings us to…

2. Why Would a Company Offer Capstone Puts?

As the Reuters opinion piece by Robert Cyran says:

“the Capstone puts are valuable protection for investors. Biotech executives prefer not to throw themselves out of a job. Often, a new drug of questionable merit is suddenly found in the labs, [or the company merges] with a private biotech company, trading cash for a pipeline. … Shareholder activists have pushed similar companies … into liquidation, but the campaigns can be expensive and the payoff uncertain.”

Again, an idea similar to convertible debentures.  If convertible debentures come due without a mandatory conversion event, the holders will be able to demand the principal amount and may well be able to drive a restructuring or insolvency process.  The popularity of convertible debentures, particularly among biotech VCs in the last few years, attests to their value.  Unlike debentures, though, the Capstone Puts will be issued to all shareholders.

Another interesting aspect is that the Capstone Puts should ensure a floor for Capstone stock – based on the “available cash” — in the event the Phase II trial fails.

3. How did Investors React?

Capstone’s plan seems to be designed to provide added value for shareholders, so you might expect the shares to trade up on the news. 

Did it work?  Not exactly.  At the end of trading today, Capstone’s shares were at $1.03 — exactly where they closed yesterday. 

Maybe the added value is negated because the plan could also be perceived as a signal that the company lacks confidence in its program?  Maybe it’s just that no-one knows how they’ll turn out next year.  So…

My bottom line: Stay tuned for July, 2011.

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Biotech Trends Update: ChemGenex and the Importance of Companion Diagnostic Development

Australian cancer drug developer ChemGenex was scolded by the FDA’s oncology panel for “fairly sloppy drug development.” The company’s mistake? It presented its leukemia drug, designed for patients with a particular genetic mutation, without a validated diagnostic test for the mutation.

ChemGenex says it’s a matter of months, not years, before it gets a test validated for Omapro; but the company’s stock took a beating on news of the FDA’s decision, losing 37% of its value on record volume.

Many companies, unwilling to risk such delays, have already shifted to a joint Dx/Rx co-development model.  Until it was bought by Qiagen, DxS was making an entire business out of developing companion diagnostics in partnership with pharmaceutical companies.  Similarly, Dako Denmark is developing companion diagnostics for AstraZeneca’s oncology pipeline.

The FDA’s message here is pretty clear: the quality of companion diagnostics matters.  One day, when everyone’s genome is fully sequenced, many personalized products won’t even need diagnostics.  Until that day, when you’re developing a personalized product, don’t give the diagnostic short shrift.

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