Analysis: Healthcare Stocks Slide
In this blog post, the Bloom Burton equity research team summarizes the performance of the Canadian healthcare sector during 2Q-2019, and provides commentary on select stock movements and overall market trends.
Our analysis includes all Canadian publicly-listed healthcare companies, defined as companies that are Canadian headquartered and/or listed on Canadian exchanges, with an enterprise value (EV) of C$10 MM 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; and consumer health. 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 93 companies.
We classify companies as “Tier 1” and “Tier 2” based on their EV – Tier 1 companies are those with EV of >C$100 MM and Tier 2 are those with EV of <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).
- The 93 Canadian healthcare companies included in Bloom Burton’s 2Q-2019 blog were collectively down -5.6% in 2Q-2019, underperforming the S&P/TSX Composite Index (+1.7%) and coming in just ahead of the S&P/TSX Venture Composite Index (-6.6%). After a strong 1Q-2019 (Bloom Burton’s 1Q-2019 blog were collectively up +18.4%; S&P/TSX Composite Index up +12.4%; S&P/TSX Venture Composite Index up +12.5%), during 2Q-2019, the broader markets were weighed down by continued trade tensions between the U.S. and China and concerns that strong U.S. employment numbers will keep the U.S. Federal reserve from cutting its benchmark interest rate. The technology and healthcare sectors were hit particularly hard due to sector-specific factors including expectations of weak quarterly earnings and the anticipation that President Trump will sign an executive order geared to reining in drug prices.
- Among Canadian healthcare companies, smaller Tier 2 companies are generally more volatile than larger Tier 1 companies (mostly due to the higher risk-reward nature of smaller, earlier stage healthcare companies compared to their larger, more established peers) but in 2Q-2019, Tier 2 companies declined less than their Tier 1 counterparts (down -4.0% vs -9.1% respectively). Weakness of Tier 1 stocks in 2Q-2019 was due in large part to Prometic Life Sciences (-93.0%), which skewed the overall performance of the Tier 1 group.
- The performance of Canadian healthcare stocks largely follows that of healthcare stocks south of the border where the NBI performed worse than the NYSE Pharmaceutical Index (DRG) in 2Q-2019 (-2.4% vs -0.7% respectively), and both underperformed the broader U.S. markets (S&P 500 Index up +3.8%; NASDAQ Composite +3.6%). While the large cap pharma companies that make up the DRG continue to face headwinds related to identifying new sources of growth to replace aging blockbuster drugs, they tend to be more resilient to macroeconomic fluctuations (discussed above) than biotech companies that make up the NBI.
- While all healthcare subsectors in Bloom Burton’s Canadian tracking universe were down in 2Q-2019, the best performing subsectors were therapeutics R&D (37 companies – see Appendix 1 for full list: -2.6%), medical devices (15 companies: – 5.0%) and medical supplies (5 companies: -5.4%). The worst performing subsectors were commercial therapeutics (16 companies: – 19.1%) and consumer health (9 companies: – 9.2%).
[table id=12 /]
*1Q-2019 and FY 2018 values were based on an analysis of 91 companies (30 Tier 1 and 65 Tier 2) that fit the inclusion criteria.
2Q-2019 Healthcare Stock Performance (%) By Sector
Tier 1 Company Performance
- Overall, we included 30 companies in our Tier 1 analysis with EV of $100 MM or greater, which collectively had a 2Q-2019 return of -9.1%.
- The number of Tier 1 advancers (10) was lower than the number of decliners (19) this quarter.
Notable Tier 1 advancers in the quarter were:
- Milestone Pharmaceuticals – The stock rose +76.6% during 2Q-2019, following its IPO in May 2019 (raised $88 MM) and in anticipation of several clinical milestones for its cardiovascular drug etripamil (topline phase 3 results in paroxysmal supraventricular tachycardia in 1H-2020; phase 2 initiation in atrial fibrillation in 2H-2019; and phase 2 initiation in angina in 2020).
- BELLUS Health – The stock finished 2Q-2019 up +70.7%, with the rise following Merck’s R&D Day on June 20, where it highlighted its phase 3 chronic cough drug, gefapixant, which has a similar mechanism of action as Bellus’ lead drug BLU-5937.
Notable Tier 1 decliners in the quarter were:
- Prometic Life Sciences – The stock was down -93.0% during 2Q-2018, after the company announced a series of refinancing transactions on April 15 to restructure its outstanding debt and raised $75 MM in cash through an equity financing.
- Nuvo Pharmaceuticals – The stock finished 2Q-2019 down -69.1%, following the news on May 15 that the U.S. Court of Appeals reversed an earlier New Jersey District Court’s decision and ruled that claims on certain VIMOVO patents are invalid, opening the door for potential generics.
- Arbutus Biopharma – The stock was down -46.1% following the reporting of 1Q-2019 results and providing a corporate update.
- Novelion Therapeutics – The stock was down -41.8% in 2Q-2019 after the company announced on May 20 that its subsidiary, Aegerion, was recapitalizing through a court supervised process in which Amryt Pharma was acquiring 100% of reorganized Aegerion stock.
Tier 2 Company Performance
- Overall, we included 63 companies in our Tier 2 analysis (with EV of less than $100 MM), which as a group had a 2Q-2019 return of -4.0%.
- The number of advancers (25) was lower than the number of decliners (37) this quarter.
Notable advancers in the quarter include:
- Sirona Biochem – The stock was up +181.1% in 2Q-2019, following the reporting of clinical results on May 15 for its skin lightening compound TFC-1067 from a clinical trial being conducted in China.
- Medicenna Therapeutics – The stock was up +98.7% in 2Q-2019, with the stock rising following the release of initial clinical data for MDNA55, its IL4-guided toxin for the treatment of recurrent glioblastoma, on June 8.
- SQI Diagnostics – The stock appreciated +83.3% in the quarter, with the rise coming after the company announced the closing of the final tranche of its $2 MM private placement.
- Kane Biotech – The stock was up +60.0% in 2Q-2019, following the company announcing 1Q-2019 financial results and providing a corporate update on May 18.
- Sernova – The stock was up 44.1% in 2Q-2019 following the announcement of the first transplant utilizing the company’s Cell Pouch technology to transplant insulin-producing islet cells in its U.S. phase 1/2 clinical trial in type 1 diabetes patients.
Notable decliners in the quarter include:
- Helius Medical Technologies – The stock was down -67.5% in 2Q-2019 after the FDA declined its request for de novo classification and 510(k) clearance of its PoNS device for chronic balance deficit due to mild to traumatic brain injury on April 10.
- Tetra Bio-Pharma – The stock finished 2Q-2019 down -55.5% after the company announced a director resignation in June 14 and provided an update following a Type B Meeting with the FDA for its PPP003 program for painful dry eye on June 17.
- NanoSphere Health Sciences – The stock was down -46.0% in 2Q-2019, continuing the slide since the company announced the closing of a $2 MM private placement on February 21.
- Novoheart Holdings – The stock was down -44.9% during 2Q-2019, corresponding to a series of events including the reporting of 3Q-2019 financial results on May 17, the acquisition of Xellera Therapeutics on May 28 and the announcement of a new CFO on June 17.
- Aeterna Zentaris – The stock finished 2Q-2019 down -43.6% after reporting 1Q-2019 results on May 7, losing all the gains it achieved after it reported 4Q-2018 results on March 26.
- InMed Pharmaceuticals – The stock finished 2Q-2019 down -43.1%, continuing the slide that began after the company reported 2Q-2019 financial results and a business update on February 12
- Hemostemix – The stock was down -42.7% in 2Q-2019, the decline beginning after the company announced a convertible debenture financing of $6 MM on April 15.
[table id=13 /]
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.