Banking on chemistry: a chemist's guide to Canadian biotech investing.
Are biotechs entering a bull market? Which Canadian companies have what it takes to become the next Amgen? With biomedical stocks trading at all time lows, how much longer can this bear market last? Investors have been plagued by these questions and other problems associated with biotechs. There is no simple answer to these questions, however, this article will help to alleviate some of the difficulties encountered with these stocks.
In '90-91 biotechnology was a very hot group, then, in '92, the stocks collapsed. Since the biotech bull market, this sector has seen volatility which has been fueled mainly by news reports. With biotech stocks performing individually rather than as a group, it clearly stresses the importance of carefully choosing a company. In order to decrease the risk to reward ratio, investors should purchase a basket of companies which are in different clinical stages of development, using different technologies, and are targeting different diseases.
Evaluating the biotechs
A biotech "checklist" which is useful for evaluating companies requires that they have at least 36 months cash cover, a discovery capability, a strong patent portfolio, and products with blockbuster potential. Also to be considered is the number of products in clinical trials and the speed at which those products are moving through the trials. There are only a few Canadian companies which meet all or most of these criteria. It is for this reason that it is expected that there will be a certain restructuring of the industry. Described later in the article are some of the Canadian biotech companies that have tremendous potential, each at different stages of product development.
A recent biotechnology report by Ernst & Young stated the strengths of Canadian companies. Among its praises of Canada's companies were that we had an excellent science base, attractive tax credits, capital for investment, universal healthcare system, accessibility to U.S. and Mexico, and an open public attitude. Since the Canadian market is considerably smaller than the American biotech industry, there are fewer companies to choose from, thus emphasizing how careful one must be in choosing biotechs.
One of the most important criteria in evaluating biotechnology companies is determining if the technology has a reasonable chance of passing the rigorous clinical trials. Most stock market investors tend not to invest in areas where they are knowledgeable. An analogy of this scenario are physicians who may find themselves investing in oil and gas stocks rather than pharmaceutical companies, due to the belief that the grass is always greener in somebody else's pasture. For this reason a chemist investing in biotech stocks will always have an edge, by being in a position to learn of important changes in the pharmaceutical industry. Chemists having a scientific background, should also be able to quickly identify if a biotech company has "sound science." That is, by reading journals or patents issued by the company one can quickly grasp the true potential of the product. Also, companies with products with easily measured clinical-trial endpoints should be targeted. For example, if a drug is targeting osteoporosis, will the drug increase bone mass? That is, if the biotech company does not have well defined clinical trials, how will one determine if the drug is working?
One cannot stress the importance of partnerships or alliances for biotech companies. The first reason is that the drug company will pay for a good share of the development of the drug. Once a drug has passed the approval process, the biotech firm will get a 10%-15% royalty from the sales, which can be a very substantial investment return. The second reason, is that a large pharmaceutical company such as Glaxo will not invest in a biotech firm unless they believe that the company's science is sound and marketable.
Investing in biotech companies also requires some understanding of the approval process. Before a company licenses a new drug for sale, the drug must pass lengthy and stringent efficacy/safety tests. The standards for these tests are set by the Food and Drug Administration (FDA) in the U.S. or the Health Protection Branch of Health and Welfare Canada. The phase one trials are conducted on healthy volunteers to determine the maximum allowable drug dosage. In phase two, the drag is given to a small group of patients afflicted with the illness in order to set an effective dose. Phase three the final test, is a large clinical trial to determine if the drug works. More often than not, it is in the phase three clinical trials where a company's drug will fail.
Hot Canadian biotechs
Xillix Technologies (TSE/XLX) is currently developing, manufacturing and marketing medical imaging devices used by physicians for the diagnosis of lung, cervical and other types of cancers. Lung cancer is the leading cause of death from cancer in North America, claiming approximately 160,000 victims annually. Since conventional diagnosis allows for detection of lung cancer only in later stages, oncologists agree that earlier detection leads to less radical therapy and better patient outcome. Xillix's strong technology base includes its LIFE or Laser Imaging Fluorescent Endoscope which detects and pinpoints lung cancer. The LIFE imaging system utilizes the lung tissue's natural ability to fluoresce when exposed to light. The scientific basis of the LIFE system lies in the marked difference in the natural fluorescent signal from diseased tissue.
Allelix Biopharmaceuticals (TSE/AXB) is one of Canada's best drug discovery and development companies, with a pipeline of potential therapeutics, including promising treatments for osteoporosis, and AIDS. Of particular interest is its lead product, ALX1-11, for treating osteoporosis, which unlike existing therapies has been shown to stimulate new bone formation in osteoporotic patients. The U.S. annual therapeutic revenue for osteoporosis is estimated to be more than US $ 1 billion and is expected to grow to more than US $ 3 billion by the year 2000.
ID Biomedical Corporation (VSE/IDB, ME/IDB), is a biotechnology company that is developing a new generation of clinical tests for infectious diseases, based on their proprietary technology for DNA probe diagnostics. The company's main product is a rapid tuberculosis test that will provide a physician with definitive results within two hours of submitting a sample. Tuberculosis (TB), after several years in the decline, is now rapidly spreading in North America, Japan and most of Europe. Since there is a growing problem with resistance to anti-TB drugs, physicians must be able to detect TB quickly and efficiently. ID Biomedical's test is very promising not only because it is fast, and sensitive, but it can also be easily automated.
DUSA Pharmaceuticals (TSE/DSP, NASDAQ/DUSA) is working in the field of photodynamic therapy (PDT). PDT is a two-step treatment process requiring the application of a drug (termed a photosensitizer) and a controlled light source. Photodynamic therapy has been used for treating three types of disease: (i). superficial cancers and pre-cancers which can be penetrated by light, (ii). shrinking or partial removal of large cancers, in order to relieve symptoms, and (iii). non-cancerous conditions, by destroying abnormal tissue. DUSA Pharmaceuticals' photosensitizer is called ALA or 5-aminolevulinic acid which is found naturally in most human cells, and is converted into a photosensitizer in the target tissues. The most important properties of ALA is that it is the only PDT agent which has been used topically, orally and intravenously. When it is applied to the target organ it is preferentially absorbed, with a 40:1 to 7:1 selectivity of diseased cells to normal cells. ALA is then converted biosynthetically to protoporphyrin IX (PpIX), a natural photosensitizer [ILLUSTRATION FOR FIGURE 1 OMITTED]. Exposure of PpIX to red light PpIX activates it, producing singlet oxygen, causing diseased cells to be killed or injured, with minimal damage to normal tissue. One of the problems of photodynamic therapy is that patients are sensitive to light after their treatment. Another favourable property of ALA is that light sensitivity reaches a maximum near three hours and declines to background levels within 24 hours.
When the first antibiotics were discovered they were termed magic bullets for their ability to kill bacteria. Today with the problems of bacteria developing resistance to conventional antibiotics, new drugs are in dire need. Micrologix Biotech Inc. (VSE/MBI), an emerging company, is currently developing novel antibiotics which should help solve this problem. MBI is currently developing antibiotics which work via a novel mechanism and may be used for the treatment of various microbial infections such as prevalent hospital infections (nosocomial pathogens), and drug-resistant Tuberculosis. MBI has worldwide rights to any patented intellectual property that is being developed by the Canadian Bacterial Diseases Network (CBDN) - a consortium of more than 30 universities, government and industrial research laboratories. MBI has access to the latest microbial technology that is being developed allowing for rapid growth of their product line. This will allow MBI to have a virtually unlimited number of products in the pipeline. Micrologix Biotech Inc. is appealing because of its potential to partially penetrate the $21 billion a year anti-infective world-wide market.
Biochem Pharma (TSE/BCH, ME/BCH) is near the completion of its phase three trials for their lead antiviral compound 3TC. The early development of 3TC was done by the late Bernard Belleau, a former McGill University Professor and world renowned chemist. Two North American and two European studies, involving more than 850 patients, showed the advantages of AZT and 3TC over AZT alone or over the combination of AZT and ddC [ILLUSTRATION FOR FIGURE 2 OMITTED], as measured using viral load and CD4 T cell counts. For patients with no prior AZT treatment, a combination of AZT and 3TC showed a 1.0 log decrease in viral load and a 30% increase in CD4 T cell levels. In patients pretreated with AZT, 24 weeks on 3TC/AZT reduced their viral load by about the same as those who had the same treatment with AZT/ddC, however, the 3TC/AZT patients showed increased CD4 T cell counts, while those on AZT/ddC showed decreased CD4 T cell counts. Due to the problem of HIV drug resistance, it is the opinion of several Canadian antiviral researchers that 3TC will be used in conjunction with two NNRTI's (non-nucleoside reverse transcriptase inhibitors) for the treatment of AIDS patients.
Clearly, one has to remember that even if biotech companies have excellent science and management, drugs very often fail in their clinical trials. Only time will tell if Canadian biotech companies can turn their products into gold.
Andre H. Uddin, MCIC, is currently in his final year of a PhD in Chemistry at McGill University under Masad J. Damha, MCIC. He has worked as a consultant for brokerage firms in the area of biotechnology. You can contact him via E-mail at UDDIN@OMC.Lan.McGill.CA.
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|Author:||Uddin, Andre H.|
|Publication:||Canadian Chemical News|
|Date:||Sep 1, 1995|
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