The Cross-Border Biotech Blog

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

Q4 2013 and Annual Share Price Performance for the Canadian Healthcare Sector: Another upbeat quarter for the larger cap public companies (Part 1)

Wayne Schnarr - seriousIn order to assess share price performance in 2013 among the Canadian public healthcare companies, I used an initial portfolio of 118 companies. The portfolio was split into three parts according to the closing share price on December 31, 2012: $1.00 or more (38 companies); $0.10 to $0.99 (53 companies); and less than $0.10 (originally 27 companies).

In this blog, I am going to comment on the Q4 and annual performance of the first group of companies with share prices of $1.00 or more to start 2013. The quarterly share price performance was upbeat again and the annual performance was strong.

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Share Price Performance in Q3 2013 for the Canadian Healthcare Sector (Part 2): Extraordinarily positive results for the smaller cap public companies

Wayne Schnarr - serious

In this blog, I will focus on the Canadian public healthcare companies which started 2013 with share prices between $0.10 and $0.99 (53 companies). While the results for the larger companies covered in Part 1 of this blog were strong, the results for the smaller cap companies were even stronger. Some caution is needed as many of the share prices bounced off 2013 lows on low trading volumes and minor events.

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Share Price Performance in Q3 2013 for the Canadian Healthcare Sector: An upbeat quarter for the larger cap public companies (Part 1)

Wayne Schnarr - seriousIn order to assess share price performance in 2013 among the Canadian public healthcare companies, I have used an initial portfolio of 118 companies. The portfolio has been split into three parts according to the closing share price on December 31, 2012: $1.00 or more (38 companies); $0.10 to $0.99 (53 companies); and less than $0.10 (originally 27 companies).

In this blog, I am going to comment on the Q3 and 9-month performance of the first group of companies with share prices of $1.00 or more to start 2013. Whereas there is usually little share price movement in the slow summer quarter, Q3 2013 was very upbeat and the performance in the first 9 months of 2013 is actually strong.

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Some thoughts on Personalized Medicine

Wayne Schnarr - seriousA simple definition of personalized medicine is healthcare designed for each individual patient. I think it is a worthwhile long-term healthcare objective, with emphasis on long-term, because clinical data on the benefits (to both patients and health systems) of such approaches, along with the required array of diagnostic tools and treatments, is currently not available. Personalized medicine has achieved a substantial buzz level despite limited, slow progress to date. This blog contains some of my personal thoughts on defining personalized medicine and its path forward.

The first step in current medical practice is generally the diagnosis of the presence or absence of various medical conditions. The standard tools include family medical history, blood and urine analysis, ECG and basic medical imaging. The first step in personalized medicine will also be diagnosis but with an added focus on the relative risk for disease development using a more complex set of tools. One idea is that an enhanced medical profile, probably including a genomic / proteomic profile, will allow the assessment of an individual’s relative risk of developing a series of serious medical conditions. However, many questions remain around how this will be implemented and what the benefits would be:

  • Which serious medical conditions should be assessed in an enhanced medical profile?
  • For which serious medical conditions could a relative risk be assigned today based on an enhanced medical profile?
  • When will it be reasonably possible to assess relative risk for all serious medical conditions included in an enhanced medical profile? Are new diagnostic tests or technologies needed or just long term clinical data?
  • What is the cost of the initial profiling?
  • Will the profiling have to be repeated? If yes, at what cost?

The next step in medical practice is to treat the medical condition. There are serious medical conditions for which there are no cures and treatments have limited benefit. Will an enhanced medical profile provide any benefit for these patients? I believe that the answer is yes, since the patients, their families and the healthcare system can prepare for the care and treatment which these patients will need. In addition, there will be a profiled population available for research and clinical trials, involvement in which must still require the patient’s informed consent.

There are some serious medical conditions which can be prevented. The two major tools which are available now for disease prevention are vaccines and lifestyle adjustment.

  • Vaccines have been able to eradicate some very serious diseases (i.e. smallpox), substantially reduce the incidence of most childhood infectious diseases, and more recently impact the incidence of some adult medical conditions (hepatitis B and cervical cancer). However, development of novel vaccines is difficult – nothing yet for HIV and hepatitis C – and expensive. It does not currently make economic or clinical sense to personalize childhood vaccination programs – the universal programs work at reasonable costs. Adult vaccination programs are personalized taking into consideration the potential exposure based on type of work and travel.
  • Lifestyle adjustment – the worldwide healthcare system could potentially reallocate trillions of dollars spent on treating the results of only two lifestyle problems, obesity and smoking. These are conditions where the patient probably needs personalized human support during lifestyle adjustment more than they need personalized diagnostics and drugs. Healthcare systems are good at fast treatment with defined tools that produce immediate results – they are less effective with soft tools that take much longer to show any potential benefit.

There are many medical conditions for which most patients are adequately treated with the current basket of diagnostics and drugs. It would not make clinical or economic sense to do universal enhanced profiling for these medical conditions. It would probably make sense to do enhanced profiling for those patients where current therapies do not adequately control these medical conditions.

Personalized medicine can probably provide the greatest benefit for serious medical conditions such as cancer. New cancer therapies have specific targets, including over-expressed cell surface antigens and enzymes in the complex web of growth signaling pathways. The cancer drug basket was once filled primarily with non-specific cytotoxics, but new additions to the basket are usually targeted therapies. Instead of a simple visual assessment of biopsy samples looking for abnormal cells, personalized medicine might eventually include an assessment of all drug targets and even an assessment of the activity of various drug combinations against biopsy samples.

The buzz achieved by personalized medicine is a two-edged sword: It looks great during fund-raising campaigns and on grant applications, but if expectations are too high and progress continues to be both limited and slow, governments, philanthropists and investors will turn their attention elsewhere.

For any agency, fund or individual considering an investment in personalized medicine, there are many questions which need to be asked, including:

  • What is the product or service being developed;
  • Is there a path to regulatory approval (if needed);
  • Assuming successful development, can it be used on approval or are other products or long-term data needed for it to be clinically useful;
  • Will use of the new product require healthcare professionals to make major changes to the way they practice medicine; and
  • Does the clinical benefit justify the proposed pricing?

Pulse of the Canadian healthcare sector (Part 3): improving the funding for early stage companies

Wayne Schnarr - seriousBased on personal discussions and CVCA financing data (see Part 2 of this blog series), I conclude there has been insufficient funding available for the quality early stage Canadian healthcare companies and technologies for several years. I am going to outline my perspectives on three groups of options for improving the funding.

  • Can some of the funding sources which have left the sector be enticed to come back?
  • Can the funding level from some of the current sources be increased?
  • Are there new sources or formats for funding?

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Share Price Performance in Q2 2013 for the Canadian Healthcare Sector: Negative results for the smaller cap public companies (Part 2)

Wayne Schnarr - seriousFollowing on from Part 1 of my analysis of the share price performance in Q2 2013, this blog will focus on the Canadian public healthcare companies which started 2013 with share prices between $0.10 and $0.99 (53 companies).

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Share Price Performance in Q2 2013 for the Canadian Healthcare Sector: Relatively flat for the larger cap public companies (Part 1)

Wayne Schnarr - seriousIn order to assess share price performance among the Canadian public healthcare companies, I started with a portfolio of 118 companies for the 2013 assessment. The portfolio has been split into three parts according to the closing share price on December 31, 2012: $1.00 or more (38 companies); $0.10 to $0.99 (53 companies); and less than $0.10 (now only 25 companies; Victhom acquired and PharmaGap cease traded in Q2).

In this blog, I am going to comment on the Q2 and H1 performance of the first group of companies with share prices of $1.00 or more to start 2013 (a subsequent blog will comment on the other two groups of companies in the sector).

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Pulse of the Canadian healthcare sector (Part 2): funding continued development of early stage companies

Wayne Schnarr - seriousThe second question posed in Part 1 of this blog series was how can the continued development of these early stage companies be financed?

Ten to fifteen years ago, funding of early stage companies came primarily from the following sources.

  • There were VC groups within the major Canadian banks, which no longer exist as the banks decided this was not an appropriate use of their capital.
  • A key player in many syndicates was MDS Capital Corp., which had both a classical VC fund and managed the labor-sponsored fund CMDF. Now Lumira Capital, it is focused on exiting from its many U.S. investments but looks at new investments in later stage Canadian companies, such as the $35 million financing by Thrasos Therapeutics in October 2012.
  • Large pension funds were limited partners in some VC funds but have now generally opted for direct, lower risk and income-generating healthcare investments.
  • Retail-based funds were created as a result of government tax incentives, including the LSVC or labor-sponsored venture capital funds. Poor performance resulted in many of these funds facing redemptions which have been substantially higher than new investments for several years. The situation was compounded by some provinces (e.g. Ontario) eliminating their portion of the tax credit and now the federal tax credit will be slowly withdrawn.
  • Some investment funds were mainly funded by provincial governments, primarily in Quebec.
  • U.S. VC funds were syndicate partners in some of the larger financings.

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Pulse of the Canadian healthcare sector (Part 1): the pipeline of new technologies and early stage companies

Wayne Schnarr - seriousI attended the two Canadian healthcare conferences organized by Bloom Burton on May 21st and 22nd, 2013. Other important conferences were also held in May, including BIO, CVCA (Canadian Venture Capital Association) and most recently ASCO. A report on the Canadian sector has been released recently by PwC Canada and Ernst & Young released their 27th annual biotechnology industry report. All of this activity and information has prompted me to review my perspective on the pulse of the Canadian healthcare sector.

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Valuation and other biotech mysteries – Part 26: Some Final Thoughts

[Ed. This is the twenty-fourth part in Wayne's series. You can access the whole thing by clicking here
As with all commentary on this blog, these comments do not consider the investment objectives, financial situation or particular needs of any particular person, and investors should obtain professional advice based on their own individual circumstances before making any investment decision.]

Wayne Schnarr - seriousIt has now been 35 years since I earned my Ph.D. in chemistry and started wondering how I would make a living and what my career path would be. I sent out over 50 letters to the pharma companies in Canada in 1977 – I got one reply, from Eli Lilly I think – to fill out a form. After 30 years in the pharma/biotech and financial industries, I have had the opportunity over the last few years to sit back and observe those industries, as well as having drinks and chats with many friends who are still working in those industries. Here are a few final thoughts for your consideration.

  • The only constant is change – whether it is disease treatments, the pharmaceutical industry, capital markets or your career paths.
  • The pharma industry is alive and well. Annual global sales of prescription and non-prescription drugs are over $1 trillion and still growing at a higher rate than GDP growth. The U.S. will remain the single largest market at over 30% and Canada will remain at about 2% of the global market.
  • In 2005, the industry spent almost as much on share buybacks plus dividends as it did on R&D.
  • The pharmaceutical industry has historically and will continue to adapt to dramatic scientific, medical, economic and political changes. Just consider a few things which have shaped the industry we see today.
    • Antibiotics from fungal sources
    • Vaccines for polio and smallpox in the 1950s
    • Thalidomide, increased government regulation and the focus on safety in the 1960s
    • Rational drug design
    • The blockbuster era starting about 1980 with the first billion dollar drug Tagamet
    • The U.S. Drug Price Competition and Patent Term Restoration Act of 1984, usually referred to as the Hatch-Waxman Act, and the emergence of generics
    • Biotech equivalents of natural human proteins, including HGH, insulin, G-CSF and EPO
    • The emergence of monoclonal antibodies
    • The biotech boom of 1999-2001
    • Annual drug costs approaching $500,000 annually for certain orphan diseases
    • Restrictive formularies and comparative efficacy analysis by governments and other payers
    • The blockbuster patent cliff
    • ?????
  • M&A is not a new growth strategy for pharma – just look at the list of companies bought by Pfizer over the last 30 years.
  • In the 1980s, the big pharma companies sold off everything that did not look like a blockbuster. Now they are buying back those assets for steady revenue and growth.
  • We could not predict the timing of past biotech booms and we probably cannot predict when the next biotech boom will occur. In my opinion, the biggest boom was just luck – proteomics and genomics came along just as a huge capital pool was exiting the tech boom and looking for an alternative high return investment. Other smaller booms have risen and fallen along with the broader capital markets.
  • The biotech industry had dreams of being different and perhaps better than pharma in terms of development success rates and clinical impact of the products. Its tools were initially different and some independent biotech companies thrived. However, there is really only a single industry with some company differentiation based on therapeutic focus and types of products.
  • The fate of most biotech companies is to fail. Most junior mining companies doing exploration over the last few years have failed to make discoveries which justify building a new mine. It is just a fact of life in these industries.
  • Successful biotech companies will most likely face the ‘acquire or be acquired’ situation. The fate of most successful biotech companies is to be acquired. Investors usually prefer the premium share price that goes with being an acquisition target. Management would naturally prefer to be the acquirer and keep their jobs.
  • Is there an alternative to acquire or be acquired? Is it possible to give 10% of the revenue stream from a licensed drug to the management and let them try to repeat their success, while 90% of the revenue stream is distributed to shareholders?
  • Nobody in pharma or biotech or among their investors can consistently pick winners. Some are more selective in their initial investments and others may exit their losers more quickly.
  • One of the hardest lessons to learn in biotech investing was ‘good companies are not always buys’.

I hope this blog series has been at least interesting and perhaps even useful to its readers by pointing out the many questions which you need to ask.

Valuation and other biotech mysteries – Part 25: Undervalued compared to its peers?

[Ed. This is the twenty-fourth part in Wayne's series. You can access the whole thing by clicking here
As with all commentary on this blog, these comments do not consider the investment objectives, financial situation or particular needs of any particular person, and investors should obtain professional advice based on their own individual circumstances before making any investment decision.]

Wayne Schnarr - seriousAnalyst reports will usually verbally describe a stock as fairly valued, under-valued or over-valued. For profitable companies, this verbal description is usually based on a comparative numerical analysis where the company valuation based on share price is compared to an analysis such as NPV. Analysts do make assumptions in this analysis but they usually start from a solid financial history and also have management’s guidance.

The situation is substantially different for a company at the clinical development stage for a new drug product. The only financial history is the cash burn and any NPV analyses have so many assumptions that the analyses are of questionable absolute value. If there is no useful NPV-based comparator, analysts and CEOs sometimes turn to the valuations of their peers for comparisons.

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Valuation and other biotech mysteries – Part 24: Event-Based Trading

[Ed. This is the twenty-fourth part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series. 

As with all commentary on this blog, the opinions expressed herein are the author’s own and are not to be construed as investment advice. The author and his immediate family members may have long or short positions in the shares of some companies mentioned in or assessed during the preparation of this blog and may buy, sell or hold such securities at any time. Past share price performance may not be an indicator of future share price performance. This blog and its contents do 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.]

Wayne Schnarr - seriousEvent-based trading is actually a very common investment strategy. For public companies in many industrial sectors, the key events are the quarterly and annual financial results. The timing of these announcements is regulated (no later than x days after period end) and, if the release date is not announced by the company, investors can approximate the short period within which the financial results will be released. Trading strategies are based on actual and anticipated shorter term share price movement and not necessarily on the longer term prospects for a product or company.

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Positive Share Price Performance in Q1 2013 for the Canadian Healthcare Sector (Part 2)

Wayne Schnarr - seriousIn this blog, I will focus on the Canadian public healthcare companies with share prices on December 31, 2012 between $0.10 and $0.99 (53 companies).

  • Advancers outnumbered decliners by 28 to 25
  • Average and median share price changes were 11% and 0%, respectively
  • No company had a share price decline of more than 40%
  • Eight companies had share price increases of 40% or more
    • Northstar Healthcare (258%) – the share price had been slowly increasing from a bottom reached in November 2012, but no single event could account for the Q1 increase. It was probably a combination of an equity financing, new executive appointments, new surgeons utilizing the surgery center and good Q4 financial results.
    • Stellar Biotechnologies (129%) – the Stellar share price steadily climbed from a November 2012 low. Stellar made preclinical and manufacturing progress with its immune-stimulating protein, KLH, and completed two private placements.
    • SQI Diagnostics (73%) – at the risk of repeating myself, this share price climbed steadily from a December 2012 low. The major product announcement in Q1 was the rapid development of a Multiplex Heparin Immunogenicity Assay with partner Alorithme Pharma. SQI also announced that it had established a special committee to review strategic alternatives.
    • Adherex Technologies (60%) – following its extraordinary Q4 share price performance, based on expectation and then release of preliminary Phase 2 eniluracil data, Adherex announced in Q1 that enrolment was complete and top line data would be released in either Q2 or Q3 2013.
    • CRH Medical (59%) – another company whose share price climbed steadily from a December 2012 low, based probably on expectation and then announcement of increased revenues and profitability.
    • ProMetic Life Sciences (47%) – the ProMetic share price climb started in early October 2012 with the announcement of agreements with Shenzhen Hepalink Pharmaceutical (China), including a substantial equity investment. This investment was completed early in Q1, followed by U.S. FDA approval of Octapharma’s Octaplas (a ProMetic resin is used in its manufacture).
    • Theralase Technologies (46%) – the Theralase share price bottomed in December 2012 and the Q1 increase has been volatile on low trading volume.
    • BioSyent (45%) – this share price has been climbing for almost two years now, probably on increasing sales and profitability.

The first 7 of these companies have moved up from share prices which were not only 2012 lows, but were all-time lows in 5 cases and 30-month lows in the other 2 cases. These companies come from all four of my product / service groupings: therapeutics, diagnostics & devices, services, and other healthcare products & services. The probable triggers for the share price movements include financial results, product data, partnerships and equity financings.

[The opinions expressed herein are the author’s own and are not to be construed as investment advice. The author and his immediate family members may have long or short positions in the shares of some companies mentioned in or assessed during the preparation of this blog and may buy, sell or hold such securities at any time. Past share price performance may not be an indicator of future share price performance. This blog and its contents do 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.]

Positive Share Price Performance in Q1 2013 for the Canadian Healthcare Sector (Part 1)

Wayne Schnarr - seriousIn order to assess share price performance among the Canadian public healthcare companies, I have selected a portfolio of 118 companies for the 2013 assessment. The portfolio has been split into three parts according to the closing share price on December 31, 2012: $1.00 or more (38 companies); $0.10 to $0.99 (53 companies); and less than $0.10 (27 companies).

In this blog, I am going to comment on the Q1 performance of the first group of companies with share prices of $1.00 or more to start 2013 (a subsequent blog will comment on the other two groups of companies in the sector).

• Advancers outnumbered decliners by 24 to 14

• Average and median share price increases were 12% and 3%, respectively

• Six companies had share price increases of 40% or more (3 companies in each of the Therapeutics and Devices & Diagnostics groups)

• Response Biomedical (227%): the share price increase was probably triggered by two new distribution agreements, the first on January 3 with Laboratory Supply Company, Inc. and the second on January 24 with Fisher HealthCare, part of Thermo Fisher Scientific

• Resverlogix (71%): the expectation of data from the Phase 2b ASSURE clinical trial was probably the key trigger for this share price

• TearLab (71%): although listed on the TSX, this company is virtually unknown in Canada and almost all trading occurs on NASDAQ; share price movement in Q1 2013 appears to be a continuation of a product sales-based bounce from a bottom in Q4 2011

• NeoVasc (63%): continued share price momentum also appears to be a key for this stock, which bounced off a September 2011 bottom and, starting September 2011, increasing sales appear to be moving it off a share price plateau

• Cangene (57%): the base for the Q1 movement may have been good financial results reported in December 2012, followed by approval of two products, VARIZIG and BAT, by the U.S. FDA in Q1 2013

• Cipher Pharmaceuticals (41%): Cipher had the largest share price increase in this group in 2012 at 291%; the key event in Q1 2013 was probably the release of 2012 financial results, which showed net income of $2.5 million ($0.10 per share) and a cash balance of $15.8 million at December 31, 2012

• One company had a share price decline of more than 40%

• Trimel Pharmaceuticals (-59%): the decline mostly occurred after the announcement on March 20 of a proposed equity financing

[The opinions expressed herein are the author’s own and are not to be construed as investment advice. The author and his immediate family members may have long or short positions in the shares of some companies mentioned in or assessed during the preparation of this blog and may buy, sell or hold such securities at any time. Past share price performance may not be an indicator of future share price performance. This blog and its contents do 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.]

2012 Canadian Healthcare Financings – strong but very selective

Wayne Schnarr - seriousLarge profitable public companies had no problem completing financings, especially those in the seniors housing and long-term care field (the gross proceeds for this category are listed below).

  • Catamaran – $541.8 M (equity)
  • Chartwell Seniors Housing REIT – $339.3 M (equity and convertible debt)
  • Extendicare – $126.5 M (convertible debt)
  • HealthLease Properties REIT – $110.0 M (IPO)
  • Leisureworld Senior Care – $56.4 M (equity)
  • Medical Facilities – $41.8 M (convertible debt)
  • Patheon – $30.0 M (equity)

Some development stage and not yet profitable public companies were able to complete financings over $10 million, a level which allows most of these companies to execute growth strategies and not strictly be in survival mode. The total for these 13 financings was $334.3 million.

  • YM Biosciences – $80.5 M (equity)
  • Novadaq Technologies – $40.3 M (equity)
  • Neptune Bioresources – $34.1 M (equity)
  • Centric Health – $27.50 (convertible debt)
  • Methylgene – $26.1 M (equity)
  • Resverlogix – $25.0 M (debt)
  • Oncolytics Biotech – $21.3 M (equity)
  • Bioniche Life Sciences – $20.0 M (debt)
  • BELLUS Health – $17.3 M (includes plan of arrangement proceeds)
  • Aeterna Zentaris – $16.5 M (equity)
  • Trimel Pharmaceuticals – $13.3 M (equity)
  • TearLab – $12.4 M (equity)
  • Merus Labs – $10.0 M (equity)

A total of $165.2 million was raised through financings less than $10 million each. Some of these financings would have provided only survival funds while some companies with low cash needs may have been able to grow.

The total equity and convertible debt funding raised by development stage companies in 2012 was just slightly lower than in the previous three years, but was almost 60% lower than the 2005-2007 average.

[The data in this post was compiled for the upcoming 2012 Canadian Healthcare Annual Review, co-authored by myself and Ross Marshall, Senior Vice President, The Equicom Group Inc., a wholly-owned subsidiary of TMX Group Inc.]

2012 Canadian Healthcare Share Price Performance – volatile with opportunities

Wayne Schnarr - seriousA group of 96 Canadian healthcare companies, which was assessed for 2012 share price performance is extremely diverse, with market caps ranging from about $1 million to $10 billion, but most less than $100 million.

The 2012 share price performance of the group showed:

  • Median and average share price changes of -11% and +7%, respectively; and
  • Decliners outnumbered gainers by 54 to 42.

In addition, the sector continued to show high volatility, with 46% (44 of 96) of the companies having share price changes of 40% or more. The 19 companies with share price increases of 40% or more are listed below by sector.

Therapeutics:

  • Cipher Pharmaceuticals (291%)
  • Tekmira Pharmaceuticals (223%)
  • iCo Therapeutics (222%)
  • BioSyent (122%)
  • Acasti (87%)
  • YM BioSciences (70%)
  • Lorus Therapeutics (59%)
  • Transition Therapeutics (54%)
  • Microbix Biosystems (46%)

Devices & Diagnostics:

  • TearLab (280%)
  • biOasis Technologies (161%)
  • Novadaq Technologies (76%)
  • Medifocus (50%)
  • Amorfix Life Sciences (41%)

Services Sub-group:

  • Lifebank (191%; acquired)
  • Patheon (161%)
  • Audiotech Healthcare (79%; taken private)
  • Catamaran (63%)

Other Companies Sub-group:

  • Prometic Life Sciences (104%)

 [The data in this post was compiled for the upcoming 2012 Canadian Healthcare Annual Review, co-authored by myself and Ross Marshall, Senior Vice President, The Equicom Group Inc., a wholly-owned subsidiary of TMX Group Inc.]

Investing in Junior Mining –Consider Biotech Stocks Also: Part 23 of Valuation and Other Biotech Mysteries

[Ed. This is the twenty-third part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.
As with all commentary on this blog, these comments do not consider the investment objectives, financial situation or particular needs of any particular person, and investors should obtain professional advice based on their own individual circumstances before making any investment decision.]

Many Canadian small cap investors have probably done most of their investing in resource companies. Although monoclonal antibodies, gold, copper and oil have substantially different chemical properties, discovery activities, manufacturing processes and commercial uses, the investment strategies used are more similar than one might expect because the commercialization processes are similarly long, expensive and high risk.
Read on for similarities, differences and strategies…

Some Questions When Considering Investing in Canadian Healthcare Stocks: Part 22 of Valuation and Other Biotech Mysteries

[Ed. This is the twenty-second part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

Note: as with all commentary on this blog, these comments do not consider the investment objectives, financial situation or particular needs of any particular person, and investors should obtain professional advice based on their own individual circumstances before making any investment decision.
If you and your financial advisor(s) are discussing investing in Canadian healthcare stocks, here are some points for you to consider. Read more of this post

Capital Markets – The Biotech Analyst: Part 21 of Valuation and Other Biotech Mysteries

[Ed. This is the twenty-first part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

In the 20 years since I started my first stint as a biotech stock analyst, both the biotech and financial industries have seen major changes. I was the third new biotech analyst hired in 1992 by a Canadian investment dealer, bringing the total to 5 or 6 at that time. During the biotech boom there were over 30 analysts in Canada but that number has declined back to the 1992 levels. There were only about a dozen public Canadian biotech companies in 1992 whereas there are now about 100 developing therapeutics, diagnostics and medical devices. Here are answers to three common questions about biotech stock analysts: Read more of this post

Q3 2012 in Canadian Healthcare Financing: Slow As Expected

The third quarter has always been the slowest for financing public Canadian healthcare companies and 2012 followed this pattern. Gross proceeds of equity and convertible debt financings closed in Q3 totaled only $69 million. Only three companies closed financings over $10 million in Q3 2012:

  • Trimel Pharmaceuticals       $13.2 million (equity – announced in Q2);
  • Centric Health                          $27.5 million (convertible debt); and
  • Resverlogix                               $25.0 million (debt).

During the first 9 months of 2012, decliners outnumbered gainers by 61 to 37 and 43% of the companies had share price changes of 40% or more in a group of 98 Canadian healthcare companies being assessed for share price performance. A good flow of positive product and company news has been balanced by negative news from some of the well-known companies in the sector, including Aeterna Zentaris, Cardiome Pharma, Theratechnologies and Nordion.

The Canadian sector has also not had that major perception-changing event in 2012, such as a licensing deal by a Canadian company with a major pharma partner and a big dollar up-front payment. While the timing of licensing deals and acquisitions is not predictable, companies expecting to report late stage clinical data in Q4 include:

  • Allon Therapeutics – pivotal clinical trial evaluating davunetide for PSP; and
  • Trimel Pharmaceuticals – Phase 3 clinical trial evaluating CompleoTRT™ in patients with male hypogonadism.

[The data in this post was compiled for the upcoming Q3 2012 Canadian Healthcare Review, co-authored by myself and Ross Marshall, Senior Vice President, The Equicom Group Inc., a wholly-owned subsidiary of TMX Group Inc.]

Biotech Capital Markets – Who are the players? Part 20 of Valuation and Other Biotech Mysteries

[Ed. This is the twentieth part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

I am starting the final part of this blog series with a description of the main players in the capital market – what do they do, who do they interact with and how do they generate revenue. These blogs will be written for the person who has little or no knowledge of capital markets. For simplicity, I am only going to deal with equities (stocks) in the public market.

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Financings by Public Canadian Healthcare Companies in H1 2012

Public Canadian healthcare companies raised over $1 billion in equity and convertible debt financings in the first half of 2012. Before anybody wonders whether another biotech boom has suddenly appeared, a closer look at the details shows a different reality.

Large equity and convertible debt financings by profitable Canadian healthcare service companies in the first half of 2012 totaled $1,048 million. These are profitable companies, three of which do monthly distributions to shareholders. These companies fit the current risk profile of many investors, who are looking for profits, value and yield.

  • SXC Health Solutions                                      $541.8 million
  • Chartwell Seniors Housing REIT                $339.3 million (equity and convertible debt)
  • HealthLease Properties REIT                      $110.0 million (IPO)
  • Leisureworld Senior Care                             $  56.4 million

The total for the rest of the sector was about $288 million for equity and convertible debt deals closed in H1 2012. A financing over $10 million indicates that a company, especially one developing a novel therapeutic, may have a chance to plan its future, as opposed to just survive. This list includes:

  • YM BioSciences                            $80.5 M
  • Novadaq Technologies              $40.3 M
  • Oncolytics Biotech                      $21.3 M
  • Bioniche Life Sciences               $20.0 M (debt)
  • BELLUS Health                              $17.3 M (includes plan of arrangement proceeds)
  • Merus Labs                                     $17.3 M (equity plus debt)

Removing these large financings leaves about $127 million for the remaining over 100 companies in the sector to share. A small amount of additional funding came from exercise of warrants, government grants and milestone payments from partners.

The financing numbers in this post were compiled from the Q2 2012 Canadian Healthcare Review (pdf), co-authored by myself and Ross Marshall, Senior Vice President, The Equicom Group Inc., a wholly-owned subsidiary of TMX Group Inc. 

The Biotech Partnering Process – Questioning The Deal Structure: Part 19 of Valuation and Other Biotech Mysteries

[Ed. This is the nineteenth part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

The deal structure as outlined in Part 18 of this blog series is not meant to be a perfect, detailed model, or even realistic. However, this is a model which can be easily used to change assumptions and see what the impact is on the cash flow and NPV. Here are two examples.

Read more of this post

Q1 2012 in Canadian Healthcare

Investors are looking for positive events, share price increases and yield from their various Canadian healthcare investments. This quarter’s review looks at delivery on these objectives during Q1 2012. Click here to download the 2012 Q1 Equicom Healthcare Review (pdf).

The Partnering Process – Deal Structure: Part 18 of Valuation and Other Biotech Mysteries

[Ed. This is the eighteenth part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

Assuming that a partnering deal is signed, what are the usual financial components?

  • Up-front cash usually has no conditions and is a non-dilutive financing. Big pharma generally does not want equity as it just clutters up their balance sheets and is an even bigger problem if the partnership gets terminated.
  • Clinical and regulatory milestone payments are fairly standard. The basic milestones are the initial U.S. and E.U. approvals but may include approvals of additional indications if they increase the market potential.
  • Sales milestone payments have become more common in the last decade. If the pharma partner does not believe the market potential, milestones can be included for reaching certain annual or cumulative sales milestones.
  • Royalties on sales are generally no longer a simple X% on net sales. They can be tiered, increasing after annual or cumulative sales milestones are reached.
  • If there is an R&D program, who conducts it and who pays for it?
  • Who executes and pays for the clinical and regulatory programs?
  • Some companies would like to retain or have an option on some sales and marketing rights in specific territories. These rights may cease to exist if there is a change of control at the smaller company.

The only way to learn about deal structures is to create a fictional deal, make the spread sheet and start looking at the impact of structural changes on the product NPV. The following assumptions have been used to create the attached Excel workbook. Read more of this post

The Partnering Process – Before Crunching The Numbers: Part 17 of Valuation and Other Biotech Mysteries

[Ed. This is the seventeenth part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

Assuming that all interested potential partners know that you have a specific asset for sale, how does a licensing deal get completed?

Sellers should place themselves in the chair of the person at the potential licensing partner. From the potential partner’s perspective, there are four basic criteria which would need to be met before licensing a product or technology. Read more of this post

Some Partnering Basics: Part 16 of Valuation and Other Biotech Mysteries

[Ed. This is the sixteenth part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

If partnering is basically the process of selling an asset, the first step is to let people know more about the asset which is for sale. Three initial questions to be answered are:

  • What companies do you talk to;
  • Who do you talk to at these companies; and
  • What do you tell them?

The answer to the first question is easy – you talk to all companies which may have an interest in commercializing your asset. The list of companies should be easy to prepare by looking at information sources already discussed in this blog series, including:

  • Annual reports and pipeline reviews by pharma and biotech companies;
  • Searching www.clinicaltrials.gov for all companies running clinical trials in the therapeutic fields targeted by your asset; and
  • Subscription newsletters and databases.

The people who need to be targeted are those who are both directly and indirectly involved in the partnering process. Since you can never predict which initial contact will lead to the deal, you have to target all potential contacts at all potential partners. Read more of this post

Partner, Sell, or Go it alone: Part 15 of Valuation and Other Biotech Mysteries

[Ed. This is the fifteenth part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

This is a discussion that the management and board of a company need to start as the company is being formed and continue throughout the development of a new drug product. The decision on any specific drug product is probably as unique as that drug product and can change along with the market in which that drug will compete. There is a fourth option – stop all product development – which also needs to be assessed at each review. In this blog, we will assume that the information is positive and the product merits further development.

There are many interested parties in this decision, each of which may have different objectives. Read more of this post

Some Top-Line Numbers From 2011 For Public Canadian Healthcare Companies

The numbers have been crunched in preparation for the 2011 Canadian Healthcare Annual Review, which I co-author with Ross Marshall, Senior Vice President at The Equicom Group. Prior to its publication later this month, we are going to give you a look at some of the top-line numbers.

The biggest concern in the sector is financing, both in Canada and globally. Two groups of numbers are shown below for our universe of public Canadian healthcare companies (132 companies to start 2011) – total equity and convertible debt financings by the group, and financings by development stage companies only (shown in millions of dollars). The 2011 total for the development stage companies is about the same at it was for the prior two years but is less than half of the average raised in 2005-2007.

Another major concern for both companies and shareholders is share price performance. We monitor share prices of a group of companies which started 2011 with a share price of $0.10 or higher and also look at two sub-groups. There were 104 companies in this group to start 2011 but only 97 companies actively trading as healthcare companies at the end.

The Equicom 2011 Canadian Healthcare Annual Review will look more closely at these numbers and the events from 2011, and discuss the results of its recent investor survey.

Assessing Potential Market Share for a New Drug: Part 14 of Valuation and Other Biotech Mysteries

[Ed. This is the fourteenth part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series.]

In the previous post, we looked at epidemiology and pricing to estimate the market size for a new drug. As we continue to look at the potential rewards from successful drug development, we need to consider market share.

A new drug product which is being assessed will probably share its market with:

  • currently approved drugs;
  • some drugs currently at the same or later stage of development; and
  • some drugs which are at an earlier stage of development. 

An assessment of market share is not static and should be continuously updated as new information becomes available. Until all of the Phase 3 data is available on a new drug, market share assessments are really guesstimates. Phase 3 data from two new drugs which were compared to either a placebo or an older standard of care, but not to each other, might not be sufficient to allow a winner to be selected. A major pharma licensing deal with a product that is two years behind might change your ranking of that drug. Read more of this post

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