|Profit from Canadian-Based Biotechs and Specialty Pharmas: Philippa Flint|
|By George S. Mack of The Life Sciences Report|
|Friday, 13 July 2012 08:12|
The Life Sciences Report: Most of your coverage is Canadian-based. Why limit yourself to that?
Philippa Flint: We are a healthcare-specialized boutique investment firm with a primary goal to provide coverage of the Canadian healthcare space. We have long-standing histories with the management teams of the companies we cover, and intimate knowledge of the businesses. We feel that we have home-turf advantage. Because of our physical location in Toronto, we have good access to management, and we can distill stories down. That is not to say we won't cover companies based outside Canada in the future, but at this point in time, we can add value for U.S., Canadian and European clients taking a close look at Canadian companies.
TLSR: As we approach the age of the non-blockbuster and become focused on more personalized therapies, do you see biomarkers and drug development occurring together more commonly?
PF: Definitely. We're already starting to see it. The trend will continue, with companies developing drugs for a specific, appropriate patient population and ensuring that drugs are not given to incorrect patient populations. In times of economic constraint, like we are in now, drug development companies need to make sure they have the greatest chance of success with products.
This also highlights the importance of understanding the biology of a disease during drug development. Companies need to take the time early on, from a preclinical perspective, to understand what they have and how it could potentially be used before progressing to the clinic. We are seeing steps in that direction and it will continue. I have one company under coverage, AEterna Zentaris (AEZS:NASDAQ), that has stated it will not start a phase 3 trial with its targeted oncology drug AEZS-108 (zoptarelin doxorubicin) until it has a diagnostic, so it can most appropriately pick the right patients for treatment.
TLSR: Would you talk about a few of your ideas under coverage?
PF: Sure. Oncolytics Biotech Inc. (ONCY:NASDAQ; ONC:TSX) is fascinating, and it is very much at a critical juncture in terms of company development. We are waiting for data from the first 80 patients of a phase 3-randomized trial of Reolysin (human reovirus) in squamous cell head and neck cancers. These metastatic patients are refractory to platinum-based therapy and are taxane-naïve. This will be the first truly randomized data in a controlled setting for the product.
The downside comes if the results are negative, as Oncolytics is a one-product company. Although it has four or five randomized phase 2 trials that are ongoing or about to start, investors might not give it the benefit of the doubt, and the stock could drop precipitously. Reolysin is unlicensed and unpartnered, so the data are expected to have a huge impact on the valuation and future of the company.
TLSR: These squamous-cell carcinomas of the head and neck are extremely difficult to treat under any circumstances. These patients are treatment-experienced and that compounds the difficulty. Is this uphill all the way for the company?
PF: I am very encouraged by the phase 2 data, but I am cautious because the head-and-neck data were from an uncontrolled, single-arm study on a limited number of patients. That said, the response rate for Reolysin beats that of anything else on the market. There are very limited choices on the market. The most notable competitor is Erbitux (cetuximab), which can be used in advanced disease but has a response rate of 13% versus Oncolytics' Reolysin, which has a 42% response rate in a phase 2 U.K. study. If Reolysin shows good PFS data, it's off to the races. There will be a lot of interest in the stock, not only from potential partners but also from the standpoint of expanding and gearing up for other indications as quickly as possible.
TLSR: Oncolytics raised $21.3 million ($21.3M) in Q1/12. It was a bought deal that showed a tremendous amount of confidence in the company from the Street.
PF: There are a lot of high expectations for these data. The stock has come off a little from where it was in Q1/12. The proof will be in the pudding, and for many cancer companies, until you have randomized phase-3 data, there is always risk.
TLSR: I made a list of oncolytic viral therapy companies that is not complete but includes Introgen Therapeutics Inc. (INGNQ.OTCPK; filed for Chapter 11 bankruptcy in 2008), BioVex Inc. (acquired by Amgen Inc. [AMGN:NASDAQ] in January 2011), Crusade Laboratories Ltd., GenVec Inc. (GNVC:NASDAQ), Viralytics Ltd. (VLA:ASX), Cell Genesys (merged with Biosante Pharmaceuticals Inc. [BPAX:NASDAQ] in 2009; its oncolytic viral assets were then sold to Cold Genesys Inc.), Neotropix Inc. and Wellstat Biologics Corp. I haven't heard much about these companies or this technology. Does Oncolytics Biotech have an edge in this space?
PF: When I look at Oncolytics Biotech, I don't necessarily see it as a virus company, although it is developing a virus. To me, the competition is with drugs developed for a specific indication regardless of mechanism of action, whether it's a monoclonal antibody like Erbitux or a small molecule. That is what Oncolytics will be competing against in the marketplace, not necessarily another virus company. The products of other viral companies can work in very different ways in the body. I look at the competition in the indication, as opposed to the mechanism of action.
TLSR: When will we see phase 3 data?
PF: Perhaps within the next month, but certainly in Q3/12. I expected it in Q2/12 because I thought management would take a look at these patients earlier. But the company has stated that it will wait until all 80 patients have received Reolysin for at least 12 weeks to ensure that there is a treatment effect. The effect will become more evident after the PFS curves have had a chance to separate. This strategy gives the drug the best chance of success.
TLSR: What kind of response do you want to see for this company to meet your expectations?
PF: Historically, the median PFS for a control group is six to eight weeks. I would like to see at least 50% more—a PFS of 12 weeks. Then there would be confidence that on the primary endpoint, which is overall survival (OS), it has a good chance of meeting expectations in the second phase of the trial.
TLSR: What would be your ideal OS?
PF: It is relative to the control group. If the control group is in the typical five- to seven-month survival timeframe, I would like to see at least eight to nine months in the Reolysin group. But the results are relative to the control group, so they may vary.
TLSR: Do you see Reolysin as a first-line therapy or will it be used as a combination therapy with other first-line therapies, such as platinum or other chemotherapy?
PF: That is an interesting question with regard to head and neck cancers. Certain types of head and neck cancers respond very well to surgery. Once you get into chemotherapy, there is potential for Reolysin to be used in a first-line combination, but much more testing would be required.
TLSR: Are you still at a $10 target price and Speculative Buy on Oncolytics Biotech?
TLSR: Another company?
PF: Paladin Labs Inc. (PLB:TSX) is a Canadian-based specialty pharma company. It has a very solid management team. It has grown organically as well as through product and company acquisitions. The majority of its business is in Canada, but it has expanded internationally and notably, most recently, into South Africa. I nickname it the "Bank of Paladin" because it has completed a series of deals where it has used cash (and it currently has more than $250M in cash) to provide loans to other companies. It gets a great return on its investments. It assumed the debt of ProStrakan, and when ProStrakan was acquired by Kyowa Hakko Kirin Co. Ltd., the debt was repaid plus a fee. Paladin earned more than $8M in about five months on that investment. Just recently, it has agreed to loan up to $8M to Nuvo Research (NRI:TSX), another Canadian-based company. Paladin manages all aspects of its business very well.
TLSR: Paladin's loan to Nuvo Research includes a license for Nuvo's local anesthetic patch Synera (lidocaine + tetracaine). It had done a lot of due diligence before making this loan. Do you consider the "Bank of Paladin" to be a serious part of its business model?
PF: No, but I point it out because Paladin is not only looking for products and companies that will help expand its business, but also uses its cash in an opportunistic, low-risk manner to get a very attractive return. Other companies do not necessarily do that.
TLSR: Speaking of low risk, Paladin is consistently one of the best market performers. It has quadrupled its share price over the last five years, unlike many other specialty pharmas and biotechs. The stock has a beta of 0.36. It has a conservative business model. You rate it a Buy, but I'm curious about why you think it is an above-average risk company?
PF: My above-average risk qualifier is against the broad spectrum of companies, not just healthcare. Within healthcare, I think Paladin is relatively low risk.
TLSR: The company made a significant acquisition recently. Will that be accretive and when?
PF: The most recent major event on the acquisition side was the closing of the Litha Healthcare Group Ltd. (LHG:SJ) purchase. Litha is a South African company. That deal closed on July 2. I believe the impact of the Litha deal is not fully reflected in analysts' consensus yet; however, it is in my numbers. Paladin indicated that if the deal had been done in 2011, it would have added $25M in earnings before interest, taxes, depreciation and amortization (EBITDA) and Paladin would have recorded about 44% of that, which would have been just over $11M. When Paladin starts to report on a consolidated basis, starting in Q3/12, we'll see a significant bump up in revenues and EBITDA. I believe investors will continue to be very satisfied with year-over-year growth as a result of this acquisition and other products that Paladin is introducing.
TLSR: Will this acquisition represent an opportunity to improve scale and margin?
PF: The margins on the Litha business are not as good as on the Paladin business. Litha has a large vaccine business in South Africa. Although Litha is taking steps to improve its margins, I don't think that business will be as profitable as Paladin's, partly because of the nature of its product portfolio. But it will be an accretive acquisition that will be beneficial for Paladin.
TLSR: Your target price on Paladin is $50. That does not represent a lot of upside.
PF: No. But over the last few weeks the stock has been improving steadily, which is great. Maybe people are starting to realize the potential upside with Litha. When Paladin reports next quarter, we'll take another look at our numbers and see if we fully reflected the additional value that could be created. We had to make a number of assumptions on the Litha deal, but once we get the Q3/12 numbers, expected near the end of the year, we will be in a better position to see just how much value will be created.
TLSR: You follow QLT Inc. (QLTI:NASDAQ), rated a Speculative Buy with a target of $10, correct?
TLSR: What is your investment theory here?
PF: QLT, as I'm sure you know, just had a shakeup on its board, with a new board elected. The stock reacted favorably to that, but we still see the company as undervalued based on its cash position. It has more than $4/share in cash. It also has about $1.80/share in contingent consideration from its 2009 sale of Eligard (leuprolide acetate, for the treatment of advanced prostate cancer) to Tolmar Holding Inc. Right there, we have almost $6/share worth of value. It also sells Visudyne (verteporfin) to treat wet age-related macular degeneration (AMD). Although we see Visudyne's sales slowly declining, it still earns about $30–35M annually from sales, royalties and manufacturing revenues, which is more than $0.50/share. When you take those three things into consideration, we're looking at around $6.50 in value, and the stock is now trading at $7.80–8. I believe there is little value being given to the potential of the pipeline.
The new board at QLT recently announced it will focus on its synthetic retinoid program for Leber congenital amaurosis (LCA) and retinitis pigmentosa (RP). It intends to divest its punctal plug program for glaucoma. The board also cut almost 70% of its workforce, including the CEO and CFO, and it intends to return $100M in capital to shareholders. It appears the new board is focusing on cost control. We believe significant value could be created in the retinoid program. It is expected to be in phase 3 trials in 2013. Given where the stock is trading, we think there is enough return to our price target to warrant the Buy rating, although we also believe that the risk profile of an investment is slightly increased with the latest board announcement, as the product pipeline will become less diverse.
TLSR: Spinning out the punctal plug system for glaucoma seems like an outstanding way to monetize less valuable intellectual property and allow QLT breathing room to develop its more valuable synthetic retinoid product. With regard to the synthetic retinoid (QLT091001) for treatment of RP and LCA, I noted that headaches occurred in 94% of the patients, which are children. How will the regulators view that?
PF: Headache was reported in 94% of patients. This was observed within the seven-day treatment period, but the efficacy was looked at over months. When physicians and patients look at this disease, they must consider that while a patient may have a headache rated mild to moderate, that child may also have recovered meaningful parts of his or her vision. I believe the benefit-to-risk profile is in the patient's favor. This is a terrible disease, and there are no real treatment options on the market at this point in time. If a drug can help a child see better, it's worth trying. The investigators involved in the study did not see headache as a deterrent to use. Patients were willing to undergo retreatment despite the side effects, which speaks to the tolerability.
TLSR: Philippa, I enjoyed speaking with you very much. Best wishes.
PF: Thank you very much for your time.
Philippa Flint has more than 11 years of experience in drug development and regulatory affairs at big pharma, combined with 10 years of capital markets experience as an equity research analyst. Prior to working at Bloom Burton & Co., Flint was an equity analyst at RBC Dominion Securities, providing research coverage of small- to mid-cap biotech/pharma companies. She has been consistently ranked the top earnings estimator in Canada in the healthcare sector by StarMine, including over the period from 2004–2008 and in 2011. Prior to this, Flint was the vice president for medical affairs at AstraZeneca Canada, managing a department of 150 people working on more than 100 clinical trials. She led the merger of Astra and Zeneca in Canada, prior to which she was the vice president for regulatory affairs and corporate project management at Astra Canada. Flint holds a master's of science degree and a master's degree in business administration.