Local biotech and pharmaceutical companies are posting first-half financials that demonstrate why the life-sciences sector is not for the faint-of-heart investor.
While Angiotech Pharmaceuticals recapitalizes in the wake of creditor protection, two of Vancouver’s other major players in biotech – OncoGenex Pharmaceuticals Inc. (Nasdaq:GXI) and QLT Inc. (Nasdaq:QLTI; TSX:QLT) – burned through millions in the first half of 2011 to post operating losses of $9.6 million and $8.7 million, respectively. While those companies are well capitalized and enjoy steady revenue from previously approved drugs, market volatility threatens smaller startups, which need venture capital to fund horrendously costly clinical trials.
“When we see these major volatility swings, I think you can only describe it as gut-wrenching,” said Bob Butchofsky, president and CEO of QLT, which has emerged in recent years from a series of major divestments and restructuring to find itself on solid financial ground.
Starting in 2005, QLT, which specializes in treating eye diseases, had to lay off half its workforce and sell off assets. The company is now growing again, collecting royalties on drugs it developed – Visudyne (used to treat macular degeneration) and Eligard (a prostate cancer drug) – and is hiring.
The company sold Eligard for $230 million and has increased its head count by more than 50 in the last year-and-a-half to 170.
“We’re pretty much unlike every other biotech in town,” Butchofsky said. “We’ve got $200 million in cash, we’ve got no debt, we’ve got positive cash flow and we have two very exciting programs in the ocular space.”
Companies that don’t have QLT’s royalties must rely on equity markets, which are again in flux, as they were in 2008 when investors pulled their money out of biotech.
The Nasdaq biotech index was down more than 15% midweek, which may spell bad news for smaller biotech firms depending on how long the contraction lasts.
“Those companies typically get started with venture backing and the venture market has really dried up,” Butchofsky said.
That may explain why iCO Therapeutics Inc. (TSX-V: IC) has hired Equicom Group Inc. to help raise capital. Equicom specializes in life sciences in Eastern Canada.
“They’re probably trying to get their stock price up,” said Jim Heppell, president and founder of Lions Capital Corp. “It sounds like iCO is looking to expand their investor base over to Eastern Canada.”
One advantage iCO has over other small pharmaceutical companies is that it focuses more on search and development than research and development – obtaining rights to drugs that have already been approved or are partway through clinical trials and then repurposing them for treatments for which they were not originally designed. That approach reduces the amount of money the company must spend on clinical trials.
John-Paul Heale, assistant director for the University of British Columbia’s industrial liaison office, which helps scientists commercialize their ideas and inventions, said the biotech sector has been recovering from the shock of 2008’s sudden withdrawal of capital.
“If there is a double-dip recession in the U.S., it will affect investor cash and biotech will suffer,” he said.
But Heppell said there’s reason for optimism, because large pharmaceutical companies with expiring drug patents are facing competition from generic drug-makers and are therefore in buy mode.
He added that because of biotech’s high overhead and high risk, it’s a lot like gold mining, and tends to attract only the savviest venture capitalists. It’s also like gold mining in its potential payoffs.
Lions Capital was a lead first-round investor in Aspreva Pharmaceuticals, the Victoria company that Galencia Group bought in 2007 for $1 billion.
Lions Capital got back 23.4 times what it invested in the company.
“That’s why people invest in life sciences,” Heppell said. “It’s risky, but when you hit it right, it’s a lot of fun.”
The problem for biotech is the high cost of proving new drugs or treatments through human clinical trials. Heppell estimated that because clinical trials are expensive a biotech’s monthly burn rate is anywhere from $300,000 to $1.5 million.OncoGenex, for example, which specializes in cancer treatments, posted first-half financials last week that showed a net loss of $9.6 million in 2011’s first six months.
When a company doesn’t have strong, steady revenue from its previously approved products, it can run into debt quickly. That was the case with Angiotech, which found itself unable to pay its creditors after royalties from its Taxus coronary stent started falling. In January, Angiotech filed for creditor protection, and its stock was delisted from the Nasdaq and Toronto Stock Exchange. Angiotech emerged from creditor protection in May after a recapitalization.