Q1 2018 Share Price Performance

Analysis: Healthcare Outperforms the Market

Starting this quarter, the Bloom Burton equity research team has taken over responsibility for the “Share Price Performance for the Canadian Healthcare Sector” blog from Wayne Schnarr. With the blog, Wayne created an essential light-reading but information-heavy resource for investors in the Canadian healthcare sector. We intend to continue Wayne’s tradition by documenting each quarter, share price performance across the sector, as well as providing commentary on select stock movements and overall market trends.

This is our first blog post in the series and, as a result, you may notice some changes as we refine the new format.

Inclusion Criteria

Our analysis includes all Canadian publicly-listed healthcare companies, defined as companies that are Canadian headquartered and/or listed on Canadian exchanges, with a market capof C$10 M or greater. Our definition of “healthcare” includes companies operating in the following areas: therapeutic R&D; commercial therapeutics; healthcare services; healthcare IT; medical devices; medical supplies; diagnostics; consumer health and veterinary. We do not include medical cannabis producers (unless they are developing cannabis-based products under the traditional drug development regulatory process) or companies that operate long term care facilities. Based on these criteria we identified 86 companies.

We classify companies as “Tier 1” and “Tier 2” based on their enterprise values (EV) – Tier 1 companies are those with EV >C$100 M and Tier 2 are those with EV <C$100 MM (for a complete listing of companies included in Tiers 1 and 2 of Bloom Burton’s “blog universe”, please see Appendix 1 at the end of the blog).

1Q-2018 Performance

• The 86 Canadian healthcare companies included in Bloom Burton’s 1Q-2018 blog edged up 3.9%in 1Q-2018, outperforming the S&P/TSX Composite Index (-5.8%) and the S&P/TSX Venture Composite Index (-8.5%), which were weighed down by general market weakness and the poor performance of cannabis and cryptocurrency stocks. We believe the resilience of healthcare stocks despite the broader market softness was due to the event-driven nature of the industry (eg. clinical readouts) and the spillover of biotech investor enthusiasm south of the border in early 2018, on the heels of the J.P. Morgan Healthcare Conference and U.S. tax reform (trends in Canadian healthcare stocks usually lag behind their U.S. counterparts).
• Stocks of the smaller Tier 2 group of companies appreciated 4.8% during 1Q-2018, outperforming their larger Tier 1 counterparts which moved up only 1.8% during the same period. Tier 2 strength was led by Antibe Therapeutics which exited the first quarter 200% higher, on the back of positive phase 2b clinical results for lead drug, ATB-246. As a result, Antibe also takes home the prize as the “1Q poster child” for the rapid, outsized returns that can be realized when small cap biotechs report positive clinical results. It is also worth noting that during 2017, Tier 1 stocks substantially outperformed Tier 2 stocks (up 32% on the year vs 10%), so the 1Q-2018 Tier 2 outperformance may be due, in part, to a reversion to the mean.
• In the U.S., following a strong showing in January, healthcare stocks finished 1Q-2018 down (NASDAQ Biotechnology Index (NBI) dropped -2.5% and NYSE Pharmaceutical Index (DRG) dropped -3.8%), due to the underperformance of large cap biopharmas, low M&A activity despite U.S. tax reform, and broader U.S. market weakness after the “Trump bump” faded. Some of these headwinds may persist moving into 2Q-2018, but we believe that companies with solid cash flow outlooks and/or major milestone events on tap can rise above the broader volatility if performance tracks to expectation, and milestones are positive.

The best performing healthcare subsector was the therapeutics R&D space (38 companies – see Appendix 1) which was up 13.2%, driven by positive company-specific milestone events (see Antibe commentary, above). The worst performing subsectors were consumer health (5 companies), down 21.9%, and diagnostics (4 companies), down 23.3%. However, both the consumer health and diagnostics subsectors included only a small number of companies and the poor performance of these subsectors this quarter was due to a few poorly performing stocks, rather than broader market trends.

1Q-2018 Healthcare Stock Performance (%) By Sector

Best performing healthcare subsection: Therapeutics R&D
Worst performing healthcare subsection: Consumer Health and Diagnostics

Tier 1 Company Performance

• Overall, we included 27 companies in our Tier 1 analysis with an EV of $100 M or greater, which collectively had a 1Q-2018 return of +1.8%.
• The number of Tier 1 advancers (14) just edged out the number of decliners (13) this quarter.

Notable advancers in the quarter include:

• Zymeworks – The stock finished 1Q-2018 up 58.3%, recovering much of the losses sustained during 2017, after the stock traded down following its April 28, 2017 IPO (from US$13.00 to as low as US$6.25). The rebound comes in anticipation of several upcoming clinical milestones during 2018, including: reporting additional data from the phase 1 study of Zymeworks’ lead product candidate, ZW25, a bispecific antibody targeting HER2-expressing cancers (breast and gastric); filing an IND for its second product candidate, ZW49, an antibody-drug conjugate also being developed for HER2-expressing cancers; and the advancement into clinical studies of product candidates partnered with Eli Lilly, Merck and Daiichi Sankyo.
• Cardiome Pharma – The stock spiked up at the end of March, closing out 1Q-2018 up 57.6%, following the news that Cardiome was selling its Canadian business to Cipher for proceeds of US$19.5 M. Cardiome’s Canadian business includes two commercial assets (Aggrastat and Brinavess) and two pipeline assets (Xydalba and Trevyent), which we estimate to have contributed <US$0.5 M in net sales in 2017. A key part of the deal was also tax losses of ~$190 MM which were not being utilized by Cardiome and will be transferred to Cipher.
• Theratechnologies – The finished 1Q-2018 up 29.9%, following the FDA approval of the HIV-1 inhibitor, Trogarzo, for multidrug resistant HIV-1.

Notable decliners in the quarter include:

• Prometic Life Sciences – The stock was down 32.3% in 1Q-2018, losing much of its value at the end of the quarter when Prometic reported its 4Q-2017 financial results. Concurrent with reporting 4Q-2017 results, Prometic announced that its lead drug candidate, Ryplazim, would not meet its PDUFA date of April 14, 2018 due to the FDA requiring additional CMC data (which could delay Ryplazim approval by up to 1 year).

Tier 2 Company Performance

• Overall, we included 59 companies in our Tier 2 analysis (EV between $10 M and $99 M), which as a group had a 1Q-2018 return of +4.8%.
• The number of decliners (35) outnumbered the number of advancers (20), but overall return indicates that the winners more than offset the losers in 1Q-2018.

Notable advancers in the quarter include:

• Antibe Therapeutics – The stock finished 1Q-2018 up 200.0% after the company announced that its lead drug, ATB-246, met the primary endpoint of improved gastrointestinal safety compared to naproxen in a phase 2b study.
• MedX Health – The stock finished the quarter up 171.4% due to increased promotion of the stock, including a February 16, 2018 discussion on BNN.
• ProMIS Neurosciences – The stock spiked up late January for no obvious reason, resulting in the company issuing a response at the request of IIROC stating that there was no material undisclosed information that would account for the share price increase. However, the stock stayed strong throughout 1Q-2018, finishing up 135.0%, due to a series of publications, investor conferences and the announcement of preclinical data for ProMIS’ lead drug candidate, PMN310, for Alzheimer’s disease.
• Vaxil Bio – The stock was up 130.8% in 1Q-2018 due to a combination of increased promotion (research initiation and investor conferences) and expansion of the immunotherapy platform into infectious diseases.
• Xenon Pharma – The stock steadily increased throughout 1Q-2018, finishing up 73.5%. XENE stock appreciation was in anticipation of several clinical milestones for Xenon’s two novel epilepsy drugs (XEN1101 and XEN901), which are expected beginning in May and throughout 2H-2018, and Xenon announcing another epilepsy clinical candidate, XEN007.
• DiaMedica Therapeutics – The stock was up 51.7% in 1Q-2018, due to promotion of the story at investor conferences and the initiation of enrollment in a phase 2 trial assessing the efficacy of DM199, DiaMedica’s recombinant human KLK1 drug, for acute ischemia stroke.
• Aptose Biosciences – The stock began to climb in December 2017, in anticipation of, and following the reporting of preclinical data for GC806, a pan-FLT3/pan-BTK inhibitor for acute myeloid leukemia (AML), at the American Society of Hematology (ASH) meeting on December 11. Aptose stock continued its climb during 1Q-2018, up 46.0%, as Aptose presented at and announced additional scientific and investor conferences discussing both GC806 (expected to start phase 1 in 1H-2018) and its other drug candidate, APTO-253, a c-Myc inhibitor also for AML (formulation work needed before starting phase 1b).

Notable decliners in the quarter include:

• TSO3 – The stock was down 59.8% in 1Q-2018, with the decline starting after the company provided an operational update on January 25, announcing modifications to its distribution agreement with Getinge (TSO3 will now sell its sterilizers directly in the U.S. and Canada).
• GeneNews – The stock ended 1Q-2018 down 51.1%, due to missing revenue targets, financing concerns and a delay in a previously announced US$10 M equity and debt financing from Milost Global.
• Protech Home Medical (previously Patient Home Monitoring) – The stock was down 50.0% in 1Q-2018 as investors responded to performance misses and a lack of visibility on deal flow.
• Sierra Oncology – The stock was down 44.5% in 1Q-2018, losing much of the gains it achieved during 4Q-2017, following the release of preclinical data for SRA737, its Chk1 inhibitor in phase 1/2 development for cancer.

Appendix

Disclosures:
This Research Report is issued and approved for distribution by Bloom Burton Securities Inc. (“Bloom Burton”), a member of the Investment Industry Regulatory Organization of Canada.
This Research Report is provided for informational purposes only and is not an offer to sell or the solicitation of an offer to buy any of the securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this Research Report may not be suitable for all types of investors. This Research Report does not take into account the investment objectives, financial situation or specific needs of any particular investor. Recipients of this Research Report should not rely solely on the investment recommendations contained herein and should contact their own professional advisors to determine if an investment is suitable for them.
The information contained in this Research Report is prepared from sources believed to be reliable but Bloom Burton makes no representations or warranties, express or implied, with respect to the accuracy, correctness or completeness of such information. All opinions and estimates contained in this Research Report constitute Bloom Burton’s judgment as of the date of this Research Report and are subject to change without notice.  Past performance is not necessarily indicative of future results and no representation or warranty is made regarding future performance of the securities mentioned in this Research Report. Bloom Burton accepts no liability whatsoever for any direct or consequential loss arising from any use or reliance on this Research Report or the information contained herein. This Research Report may not be reproduced, distributed or published, in whole or in part, without the express permission of Bloom Burton.
Company Specific Disclosures

• Bloom Burton & Co. or its affiliates have provided investment banking services for Cipher Pharmaceuticals, Knight Therapeutics, Nuvo Pharmaceuticals, CRH Medical, BELLUS Health and Titan medical during the 12 months preceding the date of issuance of the research report or recommendation.
• Bloom Burton has managed an offering of securities by Knight Therapeutics and Titan Medical in the past 12 months.
• The research analyst responsible for this report and recommendations may hold securities discussed in the report indirectly through Bloom Burton Canadian Healthcare Fund, LP which is indirectly affiliated with Bloom Burton & Co.
• The research analyst responsible for the report or recommendation or any individuals directly involved in the preparation of the report hold or are short the securities of Trillium Therapeutics Inc., Xenon Pharmaceuticals Inc., Hamilton Thorne Ltd., Bellus Health Inc., and ESSA Pharma Inc. directly or through derivatives.