By Peter Winter
Special To BioWorld Financial Watch
Canada's publicly listed biotechnology companies took a beating in 1997.
Apart from one or two notable exceptions — including Empyrean Diagnostics Inc., of Vancouver, British Columbia, whose stock (VSE:EMD) soared by 188 percent in 1997, and IGT Pharma Inc., also of Vancouver, whose shares (VSE:IGT) gained 104 percent — most companies in the sector are trading well below their 1996 year-end prices. In fact, on average, the stocks lost 10 percent of their value between the last trading day of 1996 and Dec. 19, 1997. Moreover, the overall value of the same stocks dropped by 22.4 percent over the same period. (See the chart on p. 3 for details.)
Life sciences analysts, including Ezra Lwowski, of Toronto-based Yorkton Securities Inc., point to a number of reasons for the biotech sector's underperformance in 1997, including the significant returns that investors have been able to achieve elsewhere in less risky, blue chip companies. In addition, with the nervousness in the marketplace following the Asian stock meltdown in late October, investors have shied away from putting their money into development phase, small capitalization biotech stocks.
Lwowski explained that the Yorkton Life Sciences Index (YLSI) — an unweighted average of all 48 biotechnology stocks that trade on the Toronto Stock Exchange — is down about 13 percent. The index measures the changes in daily closing prices relative to a base price. The base value for the index is 1,000 as of the close of trading on Jan. 5, 1990. At the beginning of 1997, the YLSI was just above 3,500, and its value has steadily slipped to on or slightly above the 3,000 mark during the month of December. In contrast, the index soared during 1995 and 1996, growing 94 percent in value over that two-year period.
One of the biggest biotech losers in 1997 has been Hyal Pharmaceutical Corp. (TSE:HPC; NASDAQ:HYALF), whose share price is down 86.7 percent this year. The stock had already been drifting downwards with the rest of the pack, but on Dec. 17, when the Mississauga, Ontario, company announced disappointing results from the Phase III trial of its lead product, Hyanalgese-D, for osteoarthritis, the stock went into free-fall. The product did not show pain relief that was statistically significant over placebo. As a result, the company has discontinued development of Hyanalgese-D, a topical non-steroidal anti-inflammatory drug. The product, formulated as a gel, utilized Hyal's platform drug delivery technology, HIT (Hyaluronan Induced Targeting), to deliver the active ingredient, diclofenac, to the site of application.
But many Canadian biotech stocks experienced significant price erosion even though the companies reported no negative news per se. Even positive news was often not enough to shore up the share price — a phenomenon experienced by both Inex Pharmaceuticals Corp., of Vancouver (TSE:IEX; a 70.2 percent loss), and AltaRex Corp., of Edmonton, Alberta (TSE:AXO; a 52.4 percent loss). Each of these companies reported positive product developments over the course of the year.
For instance, AltaRex's lead therapeutic cancer vaccine, Ovarex, a murine monoclonal antibody, is currently in Phase II/III clinical trials in Canada and Europe and in Phase IIb trials in the U.S. — all for treating advanced ovarian cancer. In September, the company presented data on the vaccine's mechanism of action and on long-term survival of 100 patients treated since 1989 at the annual meeting of the International Society of Oncodevelopmental Biology and Medicine, held in Montreux, Switzerland.
Inex, which has been developing transmembrane carrier systems for localized drug delivery, has been conducting Phase II clinical trials on its lead product, Onco TCS, for treating pancreatic and colorectal cancer since mid-1996. The company's transmembrane carrier system is designed to protect and carry drugs and genetic compounds to targeted disease sites and even into the interior of diseased cells; the active ingredient in Onco TCS is the anticancer drug vincristine. In September, the company filed an investigational new drug application in Canada to start Phase II clinical trials of this product in patients with non-Hodgkin's B cell lymphoma.
Even Allelix Biopharmaceuticals Inc.'s shares (TSE:AXB) have dropped — by 38.4 percent — in the face of the extremely positive news that the company's alliance partner, Astra AB, of Sodertalje, Sweden, has decided to take Allelix's lead product, ALX1-11, a recombinant human parathyroid hormone, into Phase III clinical trials for treating postmenopausal osteoporosis. Astra's decision triggered a C$17.1 million payment to Allelix as part of the partners' June 1996 agreement to develop and commercialize ALX1-11 worldwide. Allelix is scheduled to receive up to C$50 million from Astra in licensing payments, clinical development milestone payments and annual development support.
Graham Strachan, president and CEO of the Mississauga firm, said ALX1-11 is one of the few recombinant proteins to make it through to Phase III trials, a significant achievement for a Canadian biotech company. But even this noteworthy event wasn't able to keep Allelix's stock from sinking with the rest of the sector. In the current investment climate, he said, "There isn't too much you can do, except continue to meet your business milestones and hope that the market will eventually reward these achievements."
Bad Year For IPOs
Not surprisingly, the opportunity for an initial public offering (IPO) during the year was relatively nonexistent. However, Angiotech Pharmaceuticals Inc., of Vancouver, successfully raised C$22 million on Dec. 18 in an offering of 2.2 million common shares at a price of C$10 per share in what will be the biotech industry's only major IPO of the year. Angiotech is now trading on the Toronto Stock Exchange under the symbol ANP.
The only other imminent biotech IPO — by Montreal-based RTP Pharma Inc. — had been scheduled for December but was instead postponed due to market conditions, according to president and CEO Gary Pace. The company will now hold off until the capital market environment improves. RTP Pharma is developing novel formulations of drugs that are insoluble or poorly soluble in water through the application of its proprietary Insoluble Drug Delivery (IDD) technology.
Angiotech also is in the business of drug delivery, as well as the development of new treatments for chronic inflammatory and angiogenesis-dependent diseases and conditions, such as rheumatoid arthritis, restenosis, cancer, multiple sclerosis and psoriasis. In July 1997, Angiotech signed a co-exclusive, worldwide licensing agreement allowing Boston Scientific Corp., of Natick, Mass., and Cook Inc., of Bloomington, Ind., to use its chemotherapeutic compound paclitaxel and related compounds as coatings for stents and other endoluminal devices for treating vascular and gastrointestinal diseases.
Venture Capital Thrives
The biotech public stock sector's listless behavior stands out in sharp contrast to the events taking place amongst Canada's private companies. Since our last report in BioWorld Financial Watch (Dec. 30, 1996), which indicated that venture capital was fueling the growth of small- and medium-sized biotechnology businesses in Canada, the situation has improved even more.
Over the last 12 months, a variety of dedicated venture capital funds have contributed well over C$300 million to the life sciences sector. This investment is creating rapid expansion of the industry as new start-ups appear almost monthly. With the emergence of the "virtual" biotech company, it is difficult to get an accurate figure for the number of Canadian biotechnology companies now operating, but consensus appears to be that the Canadian biotech sector now encompasses well over 350 firms.
The Canadian Medical Discovery Fund (CMDF), of London, Ontario, has led the charge in new biotech investments this year. (See the chart on p. 5.) Since its inception in December 1995, CMDF has invested C$98.89 million in 33 life sciences companies. In 1997 alone, it invested C$51 million in new and follow-on financings. According to Calvin Stiller, chairman and CEO of the fund, CMDF emphasizes investment in early-stage companies because they offer the greatest profit potential. Typically, between C$1 million and C$15 million will be invested in private Canadian companies at staged intervals.
But the CMDF is not the only source of venture capital financing available to Canadian start-up firms today. There's actually a large pool of venture capital available for life sciences companies, and early-stage companies with excellent technology are able to attract financing from groups of willing investors.
For example, Sofinov, Societe financiere d'innovation, of Montreal, Neuroscience Partners L.P., of Toronto, and CMDF invested C$1 million each in Exogen Neurosciences Inc., a start-up business created to develop treatments for diseased or traumatized nervous systems. The new business was formed to identify small-molecule compounds that activate or inhibit neural pathways. Exogen Neurosciences also intends to identify medications, screening systems and medical treatment methods applicable to a wide range of deficiencies and neurodegenerative diseases, such as Parkinson's, Alzheimer's and herpes virus infection. The company, which is located in Montreal, was founded in 1997 by three McGill University scientists — Phil Barker, David Kaplan and Freda Miller — and its activities will be concentrated in the research laboratories of McGill University and the Montreal Neurological Institute.
Other Active Funds
Although CMDF has contributed the greatest amount of new capital to young biotech companies, a number of other funds also have played a significant role in 1997. For example, Sofinov, a subsidiary of the Caisse de depot et placement du Quebec, offers strategic financing for innovative technology companies showing good potential for growth. Its portfolio includes close to 40 investments totaling more than C$300 million in companies in various sectors, including health and biotechnology.
And The Neuroscience Partners Fund, formed in 1994, has raised over C$52 million in investment capital for neuroscience-based businesses in Canada and internationally. Managed by MDS Health Ventures Capital Corp., of Toronto, The Neuroscience Partners Fund provides financial and management support for scientific research. In fact, MDS Capital Corp. is one of Canada's premier venture capital firms focusing on health and life sciences companies. It has just added a sixth fund to its stable — the MDS Life Sciences Technology Fund — which will invest in companies that have demonstrated broad-based technology platforms in the expanding area of genomics and related technologies. According to Ed Rygiel, president of MDS Capital Corp., genomics applications are currently driving growth in areas such as disease management and drug development. These new "genomics tool box" companies can assist biopharmaceutical companies by accelerating the product discovery process and potentially shortening the time to market.
With the launching of the MDS Life Sciences Technology Fund, MDS Capital Corp. now targets approximately C$600 million towards the health and life sciences sector. Its other venture funds are: MDS Health Ventures Inc., The Health Care and Biotechnology Venture Fund, Neuroscience Partners Limited Partnership, British Columbia Life Sciences Fund and the Canadian Medical Discoveries Fund. Since the late 1980s, when it first began infusing capital into life sciences companies, MDS Capital Corp. has invested approximately C$94 million in more than 40 health care companies.
Genomics To The Fore
Genomics is also the focus of another new fund, GeneChem Technologies Venture Fund L.P., a venture capital fund sponsored by Canada's leading biotech company, BioChem Pharma Inc., and its newly created subsidiary, GeneChem Financial Corp. BioChem Pharma, based in Laval, Quebec, is investing C$30 million in the fund, which has committed capital of C$100 million from Canadian investors. The fund will invest in academic projects and early-stage private or public companies, in the area of genomics and related technologies for human application. According to Gervais Dionne, BioChem Pharma's executive vice president, research and development, genomics represents the focal point for the discovery of innovative medicines in the future. "Our investment in this fund will broaden our access to scientific breakthroughs in this field," he added.
One of GeneChem's early investments was in Chromos Molecular Systems Inc., of Vancouver; GeneChem took part in Chromos' C$10.8 million private placement in July 1997. This syndicated financing was led by the company's bankers, the Royal Bank of Canada, through the Vancouver offices of its venture capital subsidiary, the Royal Bank Capital Corp. The other investors included Working Opportunities Fund Ltd., of Vancouver, Trian Equities Inc., of Vancouver, Tera Capital Inc., of Toronto, Inex Pharmaceuticals, of Vancouver, and private investors in the United States and Canada. Chromos claims to be the world leader in the development and application of mammalian artificial chromosomes for use in cellular and transgenic protein production, xenotransplantation and animal models, and gene/cellular therapy.
Another fund that has contributed significant amounts of capital to young biotech firms is Toronto-based Working Ventures Canadian Fund Inc. — Canada's leading labor-sponsored investment fund. It has invested a total of C$123 million in 73 companies since January 1997, and, of that total, C$40 million has gone into 18 life sciences companies. Included among Working Ventures' 1997 investments are: DC DiagnostiCare Inc. (C$5 million), currently the largest nationwide provider of diagnostic imaging services in Canada; Apoptogen Inc., of Ottawa, Ontario (C$1 million), an early-stage biotechnology company focused on the discovery, development and commercialization of novel diagnostics and therapeutics for neurodegenerative disorders and cancer; and Imutec Pharma Inc., of Scarborough, Ontario (C$1.99 million), a publicly traded biopharmaceutical company (TSE:IUT) engaged in developing therapeutic products to treat cancer and other diseases associated with immune system disorders.
The Working Ventures investment in Apoptogen in September 1997 was part of a private financing of C$8.0 million to advance the company's programs for the discovery and development of novel therapeutics to target the abnormal cell death process implicated in such conditions as stroke, Parkinson's disease, glaucoma, spinal muscular atrophy and cancer. Also participating in the financing were an original Apoptogen investor, Canadian Medical Discoveries Fund, as well as Neuroscience Partners Limited Partnership and Sofinov.
BioCapital Investments L.P., of Montreal, is a publicly traded C$63 million, closed-end limited partnership that invests in health care and biotechnology companies with high growth potential. BioCapital's major partners include the Fonds de Solidarite, Societe Innovatech, BioChem Pharma, Royal Bank Capital, National Bank of Canada and Banque de Vizille. BioCapital's installment receipts are traded on the Montreal and Toronto stock exchanges under the symbol BCK.IR.
Normand Balthazard, president and CEO of BioCapital, said, "BioCapital has had a definite impact on Quebec's biotechnology industry. Although investment in start-up situations was initially projected at no more than 30 percent to 35 percent of the portfolio, experience has proven that the finest opportunities and the greatest needs were found in this particular niche, where downturns are virtually nonexistent.
"The availability of venture capital in Quebec is also very attractive to American research firms. Many institutional investors, especially government-related, have become involved in the past years in the biotechnology industry. Montreal's advantage has enabled us to persuade six American companies to establish facilities in Quebec," Balthazard added. BioCapital has participated in the creation and development of some 20 Quebec health care and biotechnology companies. Some of the companies in which BioCapital has invested in 1997 are listed in the chart on p . 7.
The excellent support that the Quebec biotech sector has received from all levels of government and the venture capital community seems to have paid off. According to professional services firm Ernst & Young's report Canadian Biotech '97: Coming of Age, Quebec is now the leading province in Canada in terms of biotech industry investment and growth. The province also ranks among North America's top 10 biotech areas in terms of revenues (C$280 million), up from 13th position in 1994, while Ontario now ranks 13th (C$146 million) and British Columbia 16th (C$81 million). "We were surprised at how well Quebec has performed — this is truly one of the success stories in biotech at the moment," said John Goudey, director of life sciences for Ernst & Young Canada and one of the authors of the report.
Government Invests Heavily In Biotech
The Canadian federal government also has signaled its intention of playing a significant role in investing in the biotechnology industry in Canada. Through its Technology Partnerships Canada (TPC) program, the government has made several investments of note — including C$60 million towards a total C$350 million, 10-year cancer vaccine research initiative created by Pasteur Merieux Connaught, of Toronto. The project represents the largest biotechnology investment ever made in Canada.
Maureen Lofthouse, director of enabling technology at TPC in Ottawa, said the government's investment in this project, which represents about 22 percent of the program's eligible costs, will eventually have to be repaid. The repayment will be based on royalties tied to product sales, which have been projected to be as much as C$10 billion during the first 10 years of commercialization of any successful vaccines.
TPC is highly focused on firms involved in the areas of environmental technologies, enabling technologies such as biotech, and aerospace and defense, that meet rigid criteria. In particular, the companies should be financially sound, generate lasting, quality jobs during the partnership, and have clearly identified market opportunities. It is a vehicle designed to create partnerships and leverage private sector spending on near-market development of products and processes.
The latest beneficiary of this TPC program is MethylGene Inc., a young Montreal-based biotechnology company, which has received a C$4.77 million repayable investment. According to MethylGene President and CEO Don Corcoran, the company will use the funds to expand its current antisense research aimed at inhibiting the proliferation of cancer cells.
MethylGene was formed in January 1996 as a C$8.5 million spin-out joint venture between Hybridon Inc., of Worcester, Mass., and three Canadian investors — BioCapital, Le Fonds de Solidarite des Travailleurs du Quebec (a venture capital pension fund) and the Societie Innovatech du Grand Montreal, a venture capital agency backed by the Quebec government. The company is 51 percent-owned by the Canadian investors, with Hybridon holding a 49 percent minority interest.
Despite the current downturn in the capital markets for public biotech companies, the Canadian biotechnology industry is in excellent shape right now. Analysts claim there are about 20 companies waiting to go public, once the IPO window opens again. As long as the flow of venture capital continues at its current pace, a record amount of capital likely will be invested in the life sciences during 1998.