In conversation with Tony Pullen
Tony Pullen is one of the deans of Canadian capital markets. His career in biotech traces its roots to 1985 as an advisor to Cangene, which merged with Emergent BioSolutions (NYSE:EBS) in February. He also was instrumental in raising the initial capital for MDS Health Ventures, which went on to become MDS Capital Corp., formerly a leading biotech venture capital firm. In 1991, Mr. Pullen played a leading role in the formation of the biotech technology boutique within Yorkton Securities, which dominated a surge in sector financing until the early 2000s. After a restructuring of Yorkton, Mr. Pullen joined Paradigm Capital as a biotech investment banker and then subsequently left to work on his own with 15 to 20 relationship clients. He continues to work with his clients under the umbrella of D&D Securities. In this interview with BioTuesdays.com, Mr. Pullen reflects on the earlier contraction of the Canadian biotech sector, recent stirrings of a revival and companies with potential for success.
Let’s start with the recent upturn in the sector.
It’s been more a question of a recovery in the U.S. market and whether it can spill over into Canada and be sustainable. Since the beginning of December, 65 stocks in the sector in Canada have gained around 30%, with some 11 stocks posting more than triple-digit gains. Rather than news driven events, investors today are looking for sectors that might catch up to gains in the U.S. market.
What turned around the U.S. biotech sector?
It has history and momentum on its side. What’s unique in Canada is that we have had so many late-stage clinical failures. Too many companies were allowed to go too far in their clinical programs. The U.S. has had failures, but they’ve had a lot of successes too. The financial meltdown in 2008-2009 did the same damage in both countries, but in the U.S., the sector has come back to being viable and financeable. The case for a Canadian bull market in biotech is that valuations reappearing in the U.S. will make for heady comparisons for similar science north of the border.
Has there been any change in institutional interest in Canada?
With the exception of Valeant Pharmaceuticals (NYSE, TSX:VRX) and Catamaran (NASDAQ:CTRX; TSX:CCT), and, to some extent Paladin Labs which was recently acquired by Endo Health Solutions (NASDAQ:ENDP), institutional interest has dwindled in the Canadian sector. These are the only two big cap survivors of the sector’s post-boom and bust since the early 2000s, when we had more than 170 biotech companies in Canada. That’s contracted down to around 65 today. In the mid-2000s, there were 17 companies with a market cap of more than $200-million; today, there are 12 companies. Market caps between $50-million and $200-million is where institutional interest in Canadian biotech starts. Back in 2007, there were 40 companies in this bracket; today, there are only 19 companies.
What would it take to rekindle institutional interest?
We would need a substantial number of company and stock market winners to emerge from what’s left of the sector to rekindle the greed factor. Plus, we would need critical mass in terms of the number of entities and trading volumes. There isn’t enough liquidity in the space today to accommodate any serious investment interest from institutions. In Canada, that requires a market cap of $100-million; in the U.S., it’s $1-billion. Take the case of Valeant, which emerged as a transition story from the ruins of Biovail in 2010, with the Valeant management team running the merged company. The stock began its ascent from about $13 and has never stopped. The share price led to more financing ability and acquisitions, and the company kept growing around its new structure, reaching a market cap of some$47-billion. Shares of Valeant closed at $141.11 on Friday. That’s any institutional investor’s dream, where you have an emergence story with a massive valuation change, and you can participate in it.
Is there another Valeant out there?
There are not many companies in Canada with Valeant’s chance of institutional attention. That being said, I am now being inundated with new entities wrapped around interesting science, which has massively improved over the years. Can it be translated into capital market support? That will be the question.
Are capital markets getting behind medical advances?
Companies that were financed in the past boom wouldn’t be worthy of mention by the standards of today’s scientific knowledge. The role of stem cells was barely a glimmer before 2000. Orphan drugs are now its fastest growing category as Big Pharma’s search for the next blockbuster has been replaced with the realization that personalized medicine is not only more possible but is the only path to true efficacy. And companion diagnostics are fast becoming a necessary component of any potential therapeutic agent.
How do capital markets perceive biotech today?
The original model was based on a belief that investors would have the patience to match money with milestones, waiting for value creation over timelines measured in years. In Canada, that model went out with too many clinical failures and the 2008-2009 financial meltdown. Today, the model is vastly different. Companies cannot raise money without a much more visible and tangible path to real financial returns. And that means financial milestones and expectations driven by third party validation, partnering or outright acquisition.
Let’s talk about some companies you like and why?
Companies I like are those with relevant technologies for the future. Take Titan Medical (OTCQX:TITXF; TSX-V:TMD), for example. Robotics pioneer, Dr. Reiza Raymond, is developing a surgical system at Titan with more flexibility and versatility than Intuitive Surgical’s (NASDAQ:ISRG) da Vinci robotic system. When the Titan system is de-risked, I believe Intuitive will have to buy Titan at a huge price for a seamless transition to a new product line.
I like Trimel Pharmaceuticals (TSX:TRL), notwithstanding the selling pressure from its founding shareholder, because it has a better solution for the delivery of a topical treatment of low testosterone in men. The sleeper is that it has the same delivery system for women, where there is a major unmet medical need for female orgasmic disorder.
What about a few microcaps that stand out?
I’ve always been struck by how the three assets in Microbix Biosystems (TSX:MBX) could be worth at least $50-million each, while the company has a market cap of around $30-million. Nevertheless, Microbix is now cash flow positive, which may now generate market recognition.
CNS Response (OTCBB:CNSO) has a software diagnostic solution for mental health, where none exists today. This is a huge unmet medical need, because there is no diagnostic for anti-psychotic and anti-depression drugs. It’s now pure trial and error. And the company is conducting one of the largest trials in psychiatric history with the cooperation of the U.S. military.
Medifocus (OTCQX:MDFZF; TSX-V:MFS) is another largely undiscovered story. It has a market cap around $25-million but is worth four times that, based on the Prolieve medical device, a minimally invasive in-office treatment for the symptoms of enlarged prostate in men. The current Medifocus team designed and developed the device while at Celsion (NASDAQ:CLSN). Medifocus recently re-acquired Prolieve from Boston Scientific (NYSE:BSX) and is re-establishing the product’s revenue stream to offset the company’s oncology platform.
After Ventripoint Diagnostics’ (TSX-V:VPT) VMS heart analysis system was rejected by the FDA in November, the two parties worked together on identifying the best and quickest way possible to obtain clearance. Last month, the FDA approved VMS to be an adjunct to all existing 2D ultrasound-imaging systems.
What CNS, Medifocus and Ventripoint have in common is that they are basically U.S. entities that came to Canada to raise money versus being homegrown Canadian companies.
What do you look for in an investment?
My key criteria are: one, addressing an unmet need; two, little or no clinical risk; and three, huge, therapeutic-like margins. For example, Medifocus is pioneering microwave energy to shrink tumors to the point of elimination. And Ventripoint has a simple way of being able to view the critical right side of the heart on a very cost-effective basis.
What about bigger cap companies you like?
I like Prometic Life Sciences (OTCQX:PFSCF; TSX:PLI), because it is a company that will continue to migrate to a much higher market cap. Its platform of transformative technologies is finally producing consistent revenue, and its therapeutic portfolio is gaining market recognition. Once its market cap reached $100-million, the trip to $750-million was very truncated, reflecting U.S. investor attention and valuation comparables. There is no reason its platform can’t be valued at $2-billion to $3-billion.
Oncolytics Biotech (NASDAQ:ONCY; TSX:ONC) is a survivor of the old model of patient money, waiting for milestones to drive valuations. But it seems its Reolysin lead compound is working more than it isn’t. The company has continued to successfully finance its clinical programs, and Reolysin, I believe, is on its way to becoming a recognized therapeutic agent.
The market caps for Tekmira Pharmaceuticals (NASDAQ:TKMR; TSX:TKM) and Novadaq Technologies (NASDAQ:NVDQ; TSX:NDQ) got to where they are, because U.S. investors, not Canadian, got on board. Take Tekmira, for example. In November 2012, the RNA-interference pioneer was trading at about its cash value of $5 a share after it settled litigation with partner, Alnylam Pharmaceuticals (NASDAQ:ALNY). It was the most undervalued situation that I’d ever seen in Canada. Tekmira closed at $21.51 on Friday.