The Cross-Border Biotech Blog

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

Potential Rewards from Successful Drug Development: Part 13 of Valuation and Other Biotech Mysteries

[Ed. This is the thirteenth 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.]

Finally we have reached the point of looking at the potential rewards from successful drug development. The potential reward can be estimated using the following step-wise analysis. Read more of this post

Expansion and Diversification Strategies in the Pharmaceutical Industry: Part 12 of Valuation and Other Biotech Mysteries

[Ed. This is the twelfth 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.]

Brand, human prescription drugs is the core business of the pharmaceutical industry. Risk can be diversified and potential reward can be increased by having drugs in multiple therapeutic areas. Expansion and diversification could also involve other types of drug products and healthcare activities. The best current example of healthcare diversification is Johnson & Johnson. If you look at the longer term stock chart (NYSE:JNJ), you will see that the share price continued to climb from 1999 to 2005 and has since been in a volatile trading range.

This post will look at expansion and diversification into generics, vaccines, consumer products, diagnostics, medical devices, animal health and pharmacy benefits management. Read more of this post

Q2 2011 in Canadian Healthcare – Commercial Events were the Focus

There is a tendency to focus on clinical and regulatory events when looking at the biotech sector. However, the list of sector events in Equicom’s Q2_2011 Canadian_Healthcare_Review (which I co-author with Ross Marshall, Senior VP at Equicom) shows a greater number of commercial events, including mergers, acquisitions, in-licensing, partnering, R&D agreements and product launches. In the initial weeks of Q3, commercial events have continued to be the focus.

From a financing perspective, it was very similar to Q1. Gross proceeds of equity financings completed in Q2 totalled $157.3 million, with 5 companies completing financings over $10 million: $46.01 million – Leisureworld Senior Care; $34.49 million – MethylGene; $17.40 million – Medicago; US$13.07 million – YM BioSciences; and $12.60 million – Resverlogix.

The financings for public development stage companies in the first six months of 2010 and 2011 were almost the same at $187.9 M and $200.9 M, respectively. There were 16 financings under $10 million with total proceeds of $33.7 million in Q2, versus 25 financings for $37.8 million in Q1.

We often group companies according to their product focus – therapeutics, drugs & diagnostics, services, and others. The companies could also be grouped according to their revenues and profitability. The following assessment was based on a review of the most recent financial statements from each company and occasional assumptions by the authors on performance expected in 2011.

  • Revenues – 50 public companies, or about one third of the public Canadian healthcare group, are anticipated to have revenues of $5 million or more in 2011.
  • Profitability – 25 of these 50 companies are profitable based on positive net income or, in the case of some REITs, on positive AFFO (adjusted funds from operations). Additional companies have positive EBITDA or cash flow from operations and are close to profitability.
  • Dividends and distributions – 10 companies in the sector provide dividends or distributions, important attributes to some investors.

There is something in Canadian healthcare for all types of investors.

Valuation and Other Biotech Mysteries – Part 11: Changes in Pharmaceutical Industry Product Portfolios and Strategies

[Ed. This is the eleventh 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 described in the prior post, the modern pharmaceutical industry has evolved from the patent medicine companies selling herb and alcohol combinations into an industry developing complex and personalized medicines such as gene and cell therapy. The first blockbuster drug, Tagamet (cimetidine), developed by Smith, Kline & French (SK&F) is a great base for a case study of various industry strategies. Read more of this post

Valuation and Other Biotech Mysteries – Part 10: Some Pharmaceutical Industry History

[Ed. This is the tenth 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.]

Very few novel drug development companies have made, or are likely to make, the transition to profitable and sustainable entities which market their own drugs in competition with pharma companies. Most companies have chosen to license their products to larger pharma companies, generally during the clinical development program. In addition, all drug development companies are potential acquisition targets. Since the larger pharma companies play such an important role in the fate of the smaller companies, it is important to understand both the history and current status of the pharmaceutical industry. Read more of this post

Valuation and Other Biotech Mysteries – Part 9: Retail Investors

[Ed. This is the ninth 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 addition to the private institutional VCs, there are the retail investors who are willing to take similar risks with both private and public companies. I will focus on Canadian retail investors in this post.

Retail investors who invest in private companies usually do so through a fund which offers tax incentives. I have discussed flow-through funds, which are not currently available to biotech companies, in a previous series of posts. Historically, the largest investment vehicle has been the LSIFs or labour-sponsored investment funds, which are now being referred to as RVC funds or retail venture capital funds. There are a number of fund managers and the tax incentives vary by province.

Read more of this post

Valuation and Other Biotech Mysteries – Part 8: The Current State of Healthcare Venture Capital

[Ed. This is the eighth 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 world of healthcare VCs has changed dramatically in the two decades which I have spent in capital markets. VCs are impacted by changes in the broader capital markets, changes in healthcare capital markets and changes in the industries on which they focus. Read more of this post

Valuation and Other Biotech Mysteries – Part 7: Funding the Cost of Developing a New Drug

[Ed. This is the seventh 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 the average direct cost of developing a new drug through regulatory approval will be at least $200 million, how and where do small companies get that funding? While these companies should access all potential sources of funding including government agencies and disease associations, the major sources of funding will likely be capital markets and pharma partners. Read more of this post

Valuation and other biotech mysteries – Part 6: The cost of developing a new drug

[Ed. This is the sixth 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 Tufts Center for the Study of Drug Development has been the source of the most comprehensive studies of new drug developments, including costs, success rates and strategies. Their estimates include the cost of the failures and the lost income from simply investing in government bonds. Neither of these factors is relevant to our current discussion although the former is critical to the success of the industry.

The clinical development pathways for both Theratechnologies Inc. (TSX:TH) (NASDAQ: THER) and Oncolytics Biotech (TSX:ONC)(NASDAQ:ONCY) have been outlined in previous parts of this blog series  and it is appropriate to look at the expenses for these companies. The expenses of Cardiome Pharma Corp. (NASDAQ: CRME) (TSX: COM) in their development of both intravenous and oral forms of vernakalant are also shown below. The information for all three companies was found from their annual financial statements at www.sedar.com in about 30 minutes.

Read more of this post

Valuation and other biotech mysteries – Part 5: More strategy and structure for Phase 3 clinical trials

[Ed. This is the fifth 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 case study, we looked back at Theratechnologies and theFDA approval of EGRIFTA™ (tesamorelin for injection). Now let’s look at a product still in Phase 3, REOLYSIN®, a formulation of the reovirus being developed for the treatment of cancer by Oncolytics Biotech (TSX:ONC)(NASDAQ:ONCY). Read more of this post

Pharma / Biotech R&D Budgets – A Proposal For Measuring Performance

During the BioFinance 2011 conference held in Toronto last week, one presenter showed a slide that outlined the number of new chemical entities (NCEs) approved by the FDA over a number of years. Since this slide was used in the context of the increase in global industry R&D budgets, it was meant to show that the huge increase in R&D budgets had not produced an appropriate increase in NCEs approved at the FDA. Is this the correct way in which R&D performance should be measured?

Read more of this post

Valuation and other biotech mysteries – Part 4: Strategy and structure for Phase 3 clinical trials

[Ed. This is the 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.]

Very few independent Canadian biotech companies have successfully completed the development of a novel drug – so my first comment is congratulations to Theratechnologies. Now, let’s study what they did so we can learn how to assess other companies attempting the same feat. To repeat, my approach is to start at the end – regulatory approval – and study the pathway to that endpoint.

The FDA approval states that EGRIFTA™ (tesamorelin for injection) is indicated for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy. This approval is based primarily on proof of safety and efficacy from the Phase 3 trials. In order to determine their Phase 3 clinical strategy, Theratechnologies ran Phase 2 trials for a variety of indications, including COPD, sleep disorders, HIV-lipodystrophy, hip fractures, type 2 diabetes and flu vaccinations. They chose HIV-lipodystrophy as the best entry point for the commercialization of tesamorelin and may have considered the following factors in choosing this strategy.

  • Relative strength of the Phase 2 data for the various indications
  • Probability of success in Phase 3
  • Ability to recruit patients for the Phase 3 trials
  • Easily defined and measured clinical endpoints
  • Market potential for each indication
  • Interest of potential commercial partners for each indication

These are typical strategy and structure questions which help assess the risks and rewards about any pending or ongoing Phase 3 clinical trial program. We will look at quantifying potential rewards and more complete assessment of risks later in the series.

Here is a list of some clinical and regulatory events which occurred during the Phase 3 trials and subsequent regulatory review of tesamorelin (pulled from various AIFs in about 20 minutes).

Year

Month

Event

2004

June

Announced Phase 3 clinical strategy

2005

March

FDA approval to start first Phase 3 trial
 

June

First patient enrolled in first Phase 3 trial

2006

March

Patient enrolment completed in first Phase 3 trial
 

August

SPA for second Phase 3 trial
 

October

Last patient in first trial completed 3 months of treatment
 

December

Positive 3-month data from first Phase 3 trial

2007

January

Started patient enrolment in second Phase 3 trial
 

May

52-week treatment completed in last patient in first Phase 1 trial
 

September

Completed enrolment in second Phase 3 trial
 

October

Positive 52-week data from first Phase 3 trial

2008

April

26-week treatment completed in last patient in second Phase 3 trial
 

June

Positive 26-week data from second Phase 3 trial
 

October

EMD Serono licensed U.S. rights to tesamorelin
 

December

Positive 52-week data from second Phase 3 trial

2009

May

Filed New Drug Application (NDA)
 

November

Announced that the FDA will schedule an advisory committee meeting

2010

January

Announced that FDA will reschedule advisory committee meeting due to administrative delay at FDA
 

May 25

Briefing documents for advisory committee released
 

May 27

Advisory committee meeting; 16 – 0 vote in favour of recommending FDA approve tesamorelin
 

November

EGRIFTA (tesamorelin for injection) approved by the FDA for the treatment of HIV-lipodystrophy

By looking at this list, we can create a general list of Phase 3 questions. It is unlikely that any company will answer all or even most of these questions, so other sources such as analyst reports are useful.

  • How many Phase 3 clinical trials will be needed?
  • How many patients will have to be enrolled in these trials?
  • Will the trials be run concurrently or consecutively?
  • How long do you expect patient enrolment to take?
  • What is the timing of the interim analyses at which an independent board will assess continuance of the trials?
  • How long do you have to treat and follow the final patient before you can compile the final data?
  • What delay do you expect from the time top-line final data is released until an NDA (or BLA) can be filed?
  • Will the NDA be subject to accelerated or standard review timelines?
  • What will the cost of these clinical trials be, exclusive of ongoing corporate expenses?

The most complete outline of the clinical trial structure is contained in the Investigators Brochure and Clinical Trial Protocol but these are confidential company documents. The best current disclosure on trial structure is usually found at http://clinicaltrials.gov. This searchable database can be used to find the structure of a specific clinical trial, all clinical trials for specific medical conditions, the drugs being tested in those trials (competition information) and much more.

For the biotech investor, run a historic price chart for TSX:TH, plot all of the events in the table above and see what effect, if any, there was on the share price. If you did this for several companies that took products through Phase 3, whether successful or not, you may be able to spot some trends on what events you think impact share prices. Remember that share prices will also be impacted by other factors including company financings, announcements from competitors, sector trends and global financial events.

Valuation and other biotech mysteries – Part 3: What are you valuing?

[Ed. This is the 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.]

Most likely you will be valuing a company, a product or a technology. The valuation of the stream of expenses and revenues for the development and commercialization of a product or a service is the simplest situation. If you are valuing a company, you are valuing its portfolio of products and technologies. In most cases, the current and potential future value of a single product, which is usually the lead product, probably accounts for the majority of the value of a biotech company.

Valuing a technology can be more difficult. Many companies claim to have a platform technology, which can be used to develop multiple products, potentially with multiple partners in multiple therapeutic areas. When a technology has a portfolio of products and partners, there is diversification and reduction of risk. If you want to take a simple and conservative approach to the valuation of a technology, do a valuation of the most important product in that portfolio, which is often the most advanced product. There are situations where technologies get ‘hot’ and valuation of only the lead product is not a useful valuation tool – we will look at ‘hot’ technologies later on in this series.

Therefore, you are probably valuing a product and I am going to assume it is a novel drug. In order to generate substantial revenues, that drug will have to be approved by the U.S. regulatory agency (Food and Drug Administration or FDA) since the U.S. is still the largest single pharma market. The U.S. and EU markets still account for about 75% of worldwide pharma sales.

The approval will be for one or more specific therapeutic uses of the drug, each specific therapeutic use being defined by the disease and the patient population. When you start the valuation of a product, two of the first questions will be ‘What specific therapeutic uses will be approved by the FDA’ and ‘What is the pathway to that regulatory approval’.

For those blog readers who have not looked at these questions before, one of the best teaching tools is a case study. The first case study will be Theratechnologies (TSX:TH) and the recent FDA approval of its lead drug EGRIFTA™ (tesamorelin for injection). At this point, I want to highlight two important sources of information (remember – get information and ask questions).

Valuation and other Biotech Mysteries Part 2: Some Basic Mathematics

[Please note that this blog series has not been pre-written. The subject of the next post in the series will be determined by where the current post leaves off and any questions that readers send me or leave as comments on the posts.]

When you create a valuation spreadsheet, you are plugging in numbers representing revenues and expenses which are going to occur over several years. When you do the basic addition and subtraction in this spreadsheet, you hopefully end up with a positive number because, if the number is negative, you are valuing something that is not economically viable.

However, we all know that a dollar received now is worth more than a dollar received ten years from now. This is extremely relevant for a biotech company because most expenses occur before any of the revenues. You need to adjust all future revenues and expenses so they are calculated in current dollars and the sum is called the ‘net present value’ or NPV. The key factor in this calculation is the discount rate or ‘risk-free cost of capital’. At this time, I would use a discount rate of 8% in doing an NPV analysis. You can get more detailed information from statistics textbooks or entering NPV in your web browser or spreadsheet help function.

While we all generally accept that a current dollar is worth more than a future dollar, you actually have to do the calculation to see the impact of time on the value of your money. The table below shows the NPV of a guaranteed $100 payment received now or from one to ten years from now, using discount rates of 8% and 20%.

Year

Discount Rate

 

8%

20%

Now

$100.00

$100.00

1

$92.59

$83.33

2

$85.73

$69.44

3

$79.38

$57.87

4

$73.50

$48.23

5

$68.06

$40.19

6

$63.02

$33.49

7

$58.35

$27.91

8

$54.03

$23.26

9

$50.02

$19.38

10

$46.32

$16.15

I used the term ‘risk-free’ above because it does not take into account the risks associated with biotech, which can be large and numerous. There is a continuous need to understand and balance the risks and potential rewards. In the next few parts of this series, we will continue looking at valuation of the potential rewards before we move onto looking at the risk side of the equation.

Q1 2011 Canadian Healthcare Review: some financing carry-over from the strong Q4 2010

The ‘Q1 2011 Canadian Healthcare Review’, which I [Wayne Schnarr] co-author with Ross Marshall, Vice President Healthcare at The Equicom Group, has now been published. Click here to download the full report (pdf).

The public Canadian healthcare sector started 2011 with a steady but relatively quiet flow of events until Valeant Pharmaceuticals announced that it had made a proposal to acquire Cephalon for US$73 per share in cash. This is just one example of trends which the larger, profitable pharmaceutical and biotechnology companies appear to have carried over from 2010 – growing the top line and product portfolios using acquisitions and growing the bottom line from rationalizing operations, including their R&D infrastructure.

The financing climate for Canadian public healthcare companies was unexpectedly strong in Q4 2010. Some of this strength appears to have carried over into Q1 2011, with gross proceeds of equity and convertible debt financings completed in Q1 totalling $208.2 million. The companies with financings over $10 million which were completed in Q1 2011 are:

  • $58.2 million – GLG LifeTech
  • $40.3 million – Paladin Labs
  • $21.5 million – Centric Health
  • $15.0 million – Novadaq Technologies
  • $14.5 million – Oncolytics Biotech (two warrant exercises)
  • $12.7 million – Bioniche Life Sciences (Canada/Australia offering)
  • $12.1 million – EnWave
  • $12.0 million – IntelliPharmaceutics

Two additional financings (MethylGene for $34.5 million and Medicago for $17.4 million) were announced in Q1 but did not close until April. The first three companies mentioned above are not development stage biotech, being either profitable (Paladin Labs, Centric Health) or focused on manufacturing and marketing (GLG LifeTech) and they account for 58% of the healthcare sector total. Outside of the deals mentioned above, there were 24 financings under $10 million with total proceeds of only $36.4 million, an average of about $1.5 million per financing. Fourteen of the financings were for $1 million or less.

Flow-Through Shares for Healthcare Part 3 of 3: What If It Actually Happens

Part 1 of this series described the basics of flow-throughs and Part 2 examined both the structure and the level of financing that flow-through shares have provided to the mining and oil & gas industries. This part analyzes the factors contributing to a decision by the government to expand flow-throughs to healthcare and biotech companies, and the impact that decision might have on the industry.

Read more of this post

Flow-Through Shares for Healthcare Part 2 of 3: Flow-Throughs in Mining and Oil & Gas

In Part 1 of this series, we mentioned two flow-through share financings completed in 2010 (chosen at random for illustrative purposes). The following discussion examines those financings in more detail, and puts them in the context of overall funds raised by the mining industry in recent years.

Read more of this post

Flow-Through Shares for Healthcare Part 1 of 3: What Are Flow-Through Shares?

The extension of flow-through tax incentives to development stage biotech and healthcare companies has been discussed for many years, including twice previously on this blog (here and here). One of the most recent articles supporting this change was written by David Allan, a former investment banker who is a founder and current Chairman of YM Biosciences (Biotechnology Focus, March 2011). In order to properly assess what impact this action might have on our industry, we need to first understand how flow-through shares work. Read more of this post

2010 Canadian Healthcare Review: Success and Momentum Building

We had just finished the Q3 2010 report when I attended BioContact Québec in early October and the mood was discouraging. My co-author on these reports (James Smith, VP-Healthcare at Equicom) was in San Francisco in January for the annual JP Morgan conference and he described the overall mood as optimistic. What happened in those three months?

The subtitle for the 2010 Canadian Healthcare Review (pdf) is “Successes and Momentum Building.” The momentum building comes partially from the increased financing which occurred in Q4, and which appears to be continuing in 2011 – Bioniche’s Australian tranche and Paladin Labs’ bought deal.

The momentum also comes from the clinical and regulatory successes in 2010. Three novel products developed by Canadian companies were approved – Cardiome’s IV BRINAVESS (vernakalant), Theratechnologies’ EGRIFTA (tesamorelin), and one which we tend to forget because it was acquired by Medtronic in 2008 is CryoCath’s Arctic Front cryoablation system. Cipher and Labopharm also had specialty pharma products approved and many companies were successfully progressing products through Phase 2 and 3 clinical trials.

These successes are usually dwarfed by the failures but this was not the case in 2010. There were only two Phase 2 or 3 products for which development was terminated. There were three other products which had Phase 2 hiccups but for which product development is continuing. On balance, 2010 was a successful year for product development and regulatory approvals.

In any discussion of successes, we cannot forget the investors, who measure success by increases in share price. From a group of 105 companies we assessed, there were 17 companies with share price increases of 40% or more in 2010 (actually 18 as Nightingale Health Care should be added to the list). This is balanced by 32 companies which had share price decreases of 40% or more.

Success for the industry in 2011 will be defined by its clinical, regulatory and financing successes, and by share price performance of the companies. Some of the companies which made progress in 2010 with their Phase 2 and 3 clinical trials and regulatory filings will have data or decisions in 2011, while others will still be advancing their programs. If the industry is able to repeat the clinical and regulatory success rate of 2011, we expect that financing and share price performance will likely follow.

Biotech Financings: Preview of 2010 Data Shows Momentum for 2011

The ‘2010 Canadian Healthcare Review’, which I co-author with James Smith, Vice President Healthcare at The Equicom Group, will be published in about two weeks. One of the components of this review is a summary of the financings by public Canadian healthcare companies.

Equity and convertible debt financings by public Canadian healthcare companies totaled $866.9 million in 2010. This financing number does not include debt, warrant exercises, license fees and milestones, and government grants. When financings by larger profitable companies are subtracted from this amount, financings by development stage companies in 2010 totaled $529.7 million, slightly higher than the $498.2 million raised during 2009.

The Q4 total of $259.3 million was almost half of the total raised in 2010, providing some momentum going into 2011.

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