Life sciences may be hot alternative for 300 Club Agoracom investors

Mon 1:25 pm by Anwar Ali

With junior miners taking it on the chin for several years now, investors are scouring the small cap landscape for growth plays in other sectors.

One sector garnering interest is life sciences. There are reasons: the combined market capitalization of the 111 firms that trade on the Toronto Stock Exchange and the TSX Venture is $25 billion.

Companies raised a collective $363 million in equity last year, although that figure is down from the previous two years when the total breached $500 million. Though the sector isn’t sensitive to a particular material, as is the case with mining stocks, it faces challenges of its own.

"There's a real dichotomy in Canada," says David Sable, Portfolio Manager, Special Situations Funds, who spoke last week at the Bloom Burton Healthcare Investor Conference on an investor panel.

Sable, who specializes in life sciences investing, told an audience of investors that the quality of science in this country is high, but regulatory constraints are a challenge. "There are a lot of life sciences companies that are better at creating intellectual property than appealing to investors."

Zeal often spreads at the sign of clinical breakthroughs, but Rachel Davies, associate portfolio manager at AGF, says companies that go through clinical phases too quickly, as she says was the case in the mid-2000s, won't necessarily bring products to market.

"We need to see some success stories," says Davies, who also appeared on the panel. "There's reticence to invest in companies with development risk."

Indeed, a company with ambitions to take a breakthrough drug all the way to market has a small probability of doing it on its own. Partnership appears to be inevitable.

“The idea that you can go from beginning to end” and evolve into a world-class company doesn’t work anymore, says Medicago (TSE:MDG) chairman Randal Chase, who presented at the conference.

The panel discussion was a conference backdrop to several Canadian-listed companies like Medicago showcasing their pipeline strategies. The participants, rounded out by Spencer Smith of Aisling Capital and Adam Bristol, a portfolio manager at Aquilo Capital Management, also touched on the issue of raising capital and liquidity.

The views were split; an argument was made that liquidity is dilutive. Smith, whose $650 million private equity fund focuses on mid-to-late stage therapeutics, says he loathes what he calls "opportunistic financing."

Davies agrees. "As a long-term shareholder, you're left with a stock that's worth significantly less." Her advice to management is to avoid five-year warrants, which wasn't necessarily a bother to all.

"As a value guy, I'm less concerned about liquidity," said Bristol, whose firm leans towards companies in the discovery and development stages. "If the fundamentals work out, the share price will catch up to [a company's] value."

Here’s a sample of the companies making a sales pitch:

Oncolytics Biotech’s (TSE:ONC) efforts centre on potential cancer therapies including Reolysin, a proprietary isolate of the reovirus that can destroy cancer cells. The company estimates the global cancer treatment market will be worth $105 billion by 2016. So far, Reolysin has been used on more than 600 patients.

Oncolytics says it has been issued 360 patents internationally, including the pharmaceutical use of reoviruses in transplants and combination therapy with radiation, chemotherapy and immune suppressants.

The company has a commercial manufacturing agreement in place with SAFC. Once Oncolytics gets regulatory approval, SAFC will manufacture all required product from clinical testing to commercially-ready stock.

Shares rose last Wednesday after the company, which has a market capitalization of $230 million, reported promising Reolysin results as a treatment for melanoma. The stock reached a 52-week high of $4.93 in early February.

Oncolytics says its REO 018 phase 3 trial in head and neck cancers will be pivotal this year.

The dual-listed AEterna Zentaris (TSE:AEZ) (NASDAQ:AEZS) says although it doesn’t have any partners for its oncology and endocrine therapy program yet, the company is open to discussions.

“The strategy is, generally speaking, to be in touch with the right players at the right time,” says senior vice-president and CFO, Dennis Turpin.

The Quebec City-based company has one product already on the market, Cetrotide, which helps to prevent premature ovulation. It says the near-term catalysts to watch are its prostate cancer vaccine, AEZS-120, which is currently in the pre-clinical stage; AEZS-108, a phase 2 product designed to fight ovarian, prostate, bladder and breast cancer; and AEZS-130, which stimulates the growth hormone secretions in cases of deficiencies.

In the case of AEZS-108, AEterna Zentaris says there isn't a similar drug approved in the U.S. or Europe. In the U.S., estimates suggest there will be close to 50,000 new cases of endometrial cancer this year. Now that the product is in phase 2, Turpin says partnership “discussions will be easier at this level.”

Although Turpin wouldn’t specify, he said for AEZS-120, the company “already has some interest.”

Meanwhile, Resverlogix (TSE:RVX) is in the midst of splitting up the company to bring more attention to the “unrealized” value of the company’s epigenetics platform.

President and chief executive officer Donald McCaffrey says its RVX-208 clinical program “accounts for the entire market share of Resverlogix.” RVX-208 is currently being examined in a phase2b clinical trial for its effect on atherosclerotic disease. Resverlogix will hang onto RVX-208 and ApoA-I, which can remove atherosclerotic plaque in cardiovascular disease patient. The company will spin off the remaining epigenetics patents into RVX Therapeutics, the working title of the new operation.

The goal of the spin-off, set for June 3, is to make Resverlogix more attractive to prospective buyers that may not be inclined to invest in the epigenetic intellectual property. Resverlogix is already in talks with buyers. Shares reached a 52-week high of $3.83 last week.

iCo Therapeutics (CVE: ICO), which is focused on ocular disease, was profiling its lead phase 2 program for diabetic macular edema, the leading cause of blindness in adults. The company describes itself as a “project management team”, which acquires licenses to reformulate drugs with a built-in clinical history.

This month, iCo completed a 9.7 million unit offering priced at $0.35 per unit, comprised of one share and a warrant to buy an additional share at $0.40. Shares are trading in a 52-week range of $0.25 to $0.89 per share.

Medicago (TSE:MDG) is betting on being prepared for the next pandemic flu outbreak, when, not if, it happens. The Quebec-based company will stockpile “as much product as possible.”

The latest concern is the H7N9 virus in China, where there have been 32 deaths and 131 confirmed cases. Medicago has a commercial agreement with Philip Morris for influenza vaccines in China. Earlier this month, the company successfully produced a virus-like particles (VLP) vaccine candidate for the H7N9.

Medicago has completed a phase 2 pandemic flu study in Canada, with results expected this summer, and is working on a phase 2 seasonal influenza program in the United States. Shares have soared nearly 90 per cent this year.

Transition Therapeutics (TSE: TTH) (NASDAQ: TTHI) has two lead drug candidates: one is TT-401, a type 2 diabetes and obesity drug, and ELND005 for the treatment of Alzheimer's disease and bipolar disorder.

Its phase 2 trial is ongoing for ELND005, for which Transition has partnered with Elan. Transition, which has about $22 million in cash and an annual burn rate of about $7 to 8 million, expects to receive $133 million from Elan.

Transition says it should be getting news soon from Eli Lilly, its TT-401 partner, on how the pharma giant plans to proceed with the drug. If Lilly takes the drug in-house, Transition says it is “well-prepared” to move ahead with other pipeline projects.

The company announced results of a five-week proof-of-concept clinical study of TT-401 late last month that showed “significant improvements in glycemic control and reductions in body weight.” Shares jumped on that news and have risen about 40 per cent so far this year.