Q2 2018 Share Price Performance

Analysis: Healthcare Outperforms the Market (For the Second Quarter in a Row)

In this blog post, the Bloom Burton equity research team summarizes the performance of the Canadian healthcare sector during 2Q-2018, and provides commentary on select stock movements and overall market trends.

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 93 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).

2Q-2018 Performance

• The 93 Canadian healthcare companies included in Bloom Burton’s 2Q-2018 blog were up 8.8% in 2Q-2018, outperforming the S&P/TSX Composite Index (5.9%) and the S&P/TSX Venture Composite Index (7.1%), buoyed by a broad-based rally in Canadian stocks (due to the strong performance of growth and energy stocks and a lower loonie), the lower exposure of healthcare companies to trade disputes, and the spillover of continued investor enthusiasm for small- and mid-cap healthcare stocks south of the border (NBI increased 3.0% during the second quarter – outperformance of Canadian healthcare companies perhaps reflecting a delayed “catch-up” to U.S. peers which had outperformed in previous periods).
• As in 1Q-2018, when the stocks of larger Tier 1 companies underperformed the smaller Tier 2 companies (up 1.8% vs. 4.8%, respectively), Tier 1 companies continued to lag behind their Tier 2 counterparts in 2Q-2018 (up 7.0% and 9.8% respectively), although there was more of an evening in performance this quarter, with the large-cap group lifted by Valeant’s/Bausch Health’s successful re-financing of US$1.5 B of 2020-2021 senior notes near the end of the first quarter, then beating on 1Q-2018 earnings and raising full year revenue and EBITDA guidance ranges in May.
• As mentioned above, in the U.S., the NASDAQ Biotechnology Index (NBI) was up 3.0% while the NYSE Pharmaceutical Index (DRG) dropped -0.3%, dragged down by the weak performance of large-cap biopharma stocks, which make up a larger proportion of the DRG index. This group continues to struggle to identify new sources of growth and faces significant pricing pressure on legacy products. Conversely, small- and mid-cap healthcare companies continue to be favoured by investors due to the perception that biotech has become “the fountain of drug innovation”, and expectation that small biotech companies will become M&A targets for growth-challenged, but cash-rich, large biopharma companies.
• The best performing Canadian healthcare subsector was the healthcare IT space, which included only a single company, Eyecarrot Innovations Corp., which was up 50.0% in 2Q-2018 due to increased product shipments and promotion of the stock. Aside from healthcare IT, the best performing subsectors were the medical supplies (6 companies – see Appendix 1) and therapeutics R&D (38 companies) sectors which were up 34.8% and 16.6% respectively, due to company-specific milestone events. The worst performing subsectors were veterinary (2 companies), down -12.9%, and diagnostics (3 companies), down -8.5%. However, both the veterinary and diagnostics subsectors included only a small number of companies and performance of these subsectors can be skewed by single stocks, rather than reflecting broader trends.

2Q-2018 Healthcare Stock Performance (%) By Sector

Tier 1 Company Performance

• Overall, we included 32 companies in our Tier 1 analysis with an EV of $100 M or greater, which collectively had a 2Q-2018 return of +7.0%.
• The number of Tier 1 advancers (18) was higher than the number of decliners (14) this quarter.

Notable advancers in the quarter include:

• Covalon Technologies – The stock finished 2Q-2018 up 116.2%, more than making up for the losses sustained during 1Q-2018. The rebound comes after the company announced that it was awarded a series of sales contracts in the Middle East with an estimated value of $100 MM over 3 years.
• Xenon Pharmaceuticals – The stock continued its strong run which began in 1Q-2018, up 87.8% in 2Q-2018 and 225.7% YTD. The runup was in anticipation of and following the reporting of interim phase 1 data for Xenon’s two antiepileptic drugs, XEN1101 and XEN901, which included transcranial magnetic stimulation (TMS) results (pharmacodynamic effect supportive of antiepileptic activity).
• Correvio Pharma (formerly Cardiome Pharma) – The stock was up 62.9% in 2Q-2018, corresponding with the announcement that the FDA has permitted Correvio to resubmit a new NDA for, Brinavess, the company’s atrial fibrillation (AF) drug which is currently approved in 42 ex-U.S. countries. The drug has been on clinical hold in the U.S. following the suspension of the ACT 5 trial in 2010 after a patient receiving the drug developed cardiogenic shock.
• Bausch Health Companies (formerly Valeant Pharmaceuticals International) – The stock was up 46.0% in 2Q-2018 following a series of events including the refinancing of $1.5 B of 2020-2021 senior notes, FDA approval of the company’s colonoscopy preparation PLENVU and the release of positive 1Q-2018 financial results including the raising of FY 2018 guidance.

Notable decliners in the quarter include:

• Aquinox Pharmaceuticals – The stock was down -81.2% in 2Q-2018, following the announcement of topline results from the phase 2 LEADERSHIP 301 study of oral rosiptor in interstitial cystitis/bladder pain syndrome (IC/BPS), which failed to meet the primary endpoint.
• Aralez Pharmaceuticals – The stock was down -76.7% in 2Q-2018 following the reporting of 1Q-2018 financial results, at which time the company also announced it was planning to discontinue its U.S. operations, including ceasing the promotion of peripheral arterial disease (PAD) drug Zontivity.
• Concordia International – The stock was down -57.1% in 2Q-2018, after the company executed a support agreement with debtholders which will result in a recapitalization transaction that will raise US$586.5 MM and reduce the company’s outstanding debt by US$2.4 B, but leave existing shareholders holding only 0.35% of the recapitalized company’s equity. Concurrently, Concordia announced leadership changes, including the departure of the CEO.

Tier 2 Company Performance

• Overall, we included 61 companies in our Tier 2 analysis (EV between $10 M and $99 M), which as a group had a 2Q-2018 return of +9.8%.
• The number of decliners (31) outnumbered the number of advancers (27), but overall return indicates that the winners more than offset the losers in 2Q-2018.

Notable advancers in the quarter include:

• iCo Therapeutics – The stock surged in late June, finishing 2Q-2018 up 342.9%. The rise was in anticipation of and following the June 27^threporting of phase 1 results for the company’s antifungal drug candidate (an oral reformulation of amphotericin B).
• ImmunoPrecise Antibodies – The stock increased 94.9% in 2Q-2018, following a series of events which included reporting 3Q-2018 results (ended January 2018), acquisition of Modiquest Research BV for $11.2 MM and the opening of a full-service B-cell contract research facility.
• Arch Biopartners –  The stock was up 76.9% in 2Q-2018 concurrent with the company announcing the scheduling of a pre-IND meeting with the FDA for its drug candidate Metablok for the treatment of acute kidney injury, as well as listing on the OTCQB exchange.
• Theralase Technologies – The stock finished 2Q-2018 up 68.9% after the company provided an update on its ongoing phase 1b study of its lead photodynamic compound (PDC), TLD-1433, in non-muscle invasive bladder cancer.
• DiaMedica Therapeutics – The stock was up 61.4% in 2Q-2018, following the closing of a US$6.3 MM private placement and promotion of the story at investor conferences.
• Crescita Therapeutics – The stock was up 57.8% in 2Q-2018, with the stock price appreciation coming after the company reported 1Q-2018 financial results.
• Eyecarrot Innovations – The stock finished 2Q-2018 up 50.0%, as the company announced increased shipments of its Binovi Touch vision performance hardware, presented at several conferences and partnered with academic institutions.

A number of small Tier 2 companies made notable percentage gains for reasons we could not discern: Portage Biotech +62.5%; Quest PharmaTech +54.2%; Protech Home Medical +44.4% – perhaps due to volatility of these microcap names.

Notable decliners in the quarter include:

• MedX Health – The stock finished 2Q-2018 down -50.0% following a very strong 1Q-2018 (+171.4%).
• Kalytera Therapeutics – The stock was down -50.0% in 2Q-2018 due to a financing overhang (US$1.9 MM in cash as of March 31, 2018), as the company plans to initiate a phase 3 study of cannabidiol (CBD) in graft versus host disease (GVHD).
• Acasti Pharma – The stock was down -44.1% in 2Q-2018 on the back of a $10 MM public offering for the continued development of its product candidate, CarePre (omega-3 phospholipid).

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.