Q3 2018 Share Price Performance

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

In this blog post, the Bloom Burton equity research team summarizes the performance of the Canadian healthcare sector during 3Q-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 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; 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 85 companies.

We classify companies as “Tier 1” and “Tier 2” based on their market cap – Tier 1 companies are those with market cap >C$100 MM and Tier 2 are those with market cap <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).

3Q-2018 Performance

• The 85 Canadian healthcare companies included in Bloom Burton’s 3Q-2018 blog were up +1.0% in 3Q-2018, outperforming the S&P/TSX Composite Index (-1.3%) and the S&P/TSX Venture Composite Index (-4.2%), due to the perceived lower exposure of healthcare companies to trade disputes which weighed down Canadian stocks, the event-driven nature of healthcare stocks and the spill over of investor enthusiasm for healthcare stocks south of the border (NBI up +11.1% and DRG up +12.5% during the third quarter – Canadian healthcare stocks typically follow their U.S. counterparts, but with a delay).
• As mentioned above, in the U.S., the NASDAQ Biotechnology Index (NBI) was up +11.1% and the NYSE Pharmaceutical Index (DRG) was up +12.5% during 3Q-2018, on the back of strong 2Q-2018 earnings and the perceived defensive nature of healthcare (less susceptible to trade disputes and economic downturns). However, in October, there was a sharp decline in healthcare stocks, particularly biotech (NBI down -15.0% and DRG down -3.6% from September 28 to October 30), which wiped out earlier gains for the year, due to recent drug pricing proposals from the Trump administration, continued uncertainty regarding potential new drug pricing regulations in the lead up to the U.S. midterm elections and broader market weakness (S&P 500 Index and NASDAQ composite down -7.9% and -11.0% respectively in October).
• Unlike the last two quarters, when the stocks of larger Tier 1 companies underperformed the smaller Tier 2 companies, in 3Q-2018, Tier 1 companies performed significantly better than Tier 2 companies (up +9.3% vs. -2.9%, respectively). There were more advancers (18) than decliners (8) among the Tier 1 companies, with BELLUS Health (up +91.1% in anticipation of phase 1 data for lead drug BLU-5937 in 4Q-2018) and HLS Therapeutics (up +53.9% following the release of strong clinical efficacy data for its in-licensed drug Vascepa) leading the pack. Conversely, the number of advancers (17) was lower than the number of decliners (38) among the Tier 2 companies.
• The best performing Canadian healthcare subsector was therapeutics R&D (36 companies – see Appendix 1) which was up +7.3% as a group, driven by company-specific milestone events. Aside from the therapeutics R&D group, the best performing subsectors were the healthcare services (7 companies; up +5.5%), commercial therapeutics (13 companies; up +4.6%) and medical supplies (5 companies; up +3.6%) sectors, also driven by company-specific milestone events. The worst performing subsectors were diagnostics (down -21.4%) and healthcare IT (down -20.0%), which both included only a single stock, skewing the trends, followed by the medical devices (13 companies; down -16%), consumer health (8 companies; down -5.1%) and veterinary (1 company; down -4.1%) sectors.

3Q-2018 Healthcare Stock Performance (%) By Sector

Tier 1 Company Performance

• Overall, we included 27 companies in our Tier 1 analysis with market cap of $100 M or greater, which collectively had a 3Q-2018 return of +9.3%.
• The number of Tier 1 advancers (18) was higher than the number of decliners (8) this quarter.

Notable advancers in the quarter include:

• BELLUS Health – The stock finished 3Q-2018 up +91.1%. The run up began after the company reported its 2Q-2018 operating results and announced that it had initiated a phase 1 clinical study for BLU-5937, its lead drug candidate for chronic cough, which is expected to have results in 4Q-2018.
• HLS Therapeutics – HLS stock was up +53.9% in 3Q-2018, fueled by partner Amarin’s September 24 reporting of strong efficacy results for cardiovascular drug Vascepa, a pure EPA omega-3 prescription product that HLS has in-licensed for the Canadian market.
• Resverlogix – The stock was up +40.7% in 3Q-2018, following a series of updates including: confirmation of the NDA filing pathway in cardiovascular disease for lead drug apabetalone (on June 4); presentations at two Alzheimer’s disease medical conferences (in July); the announcement of an intention to pursue a U.S. listing (on July 31); and the closing of $26 MM private placement.

Notable decliners in the quarter include:

• Sierra Oncology – The stock was down -42.4% in 3Q-2018, losing much of the gains it achieved during 2Q-2018, following: the release of 2Q-2018 results (on August 9); the acquisition of momelotinib, a phase 3 JAK1/2/ACVR1 inhibitor for myelofibrosis, from Gilead for US$3 MM upfront and up to US$195 MM in milestones (on August 22); and the announcement of a US$15 MM debt facility from Silicon Valley Bank.
• Prometic Life Sciences – The stock finished 3Q-2018 down -38.5%, following the reporting of 2Q-2018 operating results (on August 15) and due to continued balance sheet risk and uncertainty regarding timelines for NDA resubmission for lead drug candidate, Ryplazim.

*Concordia International return post recapitalization on September 11, 2018

Tier 2 Company Performance

• Overall, we included 58 companies in our Tier 2 analysis (market cap between $10 M and $99 M), which as a group had a 3Q-2018 return of -2.9%.
• The number of decliners (38) outnumbered the number of advancers (17) this quarter.

Notable advancers in the quarter include:

• Acasti Pharma – The stock surged in late September, finishing 3Q-2018 up +139.4%. The ramp in stock price followed the company’s clinical update (on September 18) for its prescription omega-3 product candidate, CaPre, for the treatment of severe hypertriglyceridemia, which is on track to complete enrolment of its two phase 3 studies this year (topline results expected by end 2019). The share price appreciation also coincides with competitor Amarin reporting strong efficacy results for its omega-3 drug, Vascepa (on September 24).
• IntelGenx Technologies – The stock increased +74.3% in 3Q-2018, spiking after the company announced a letter of intent with Tilray to enter into a worldwide exclusive agreement to produce cannabis-infused products using IntelGenx’ VersaFilm oral film technology (on September 20).
• Hemostemix – The stock was up +69.2% in 3Q-2018, rising after the company announced (on August 16) that it had received approval to add two additional institutions as clinical trial sites in its ongoing phase 2 study in critical limb ischemia for its cell therapy, ACP-01.

Notable decliners in the quarter include:

• Titan Medical – The stock finished 3Q-2018 down -62.9%. During the quarter, Titan announced the achievement of all 2Q-2018 development milestones for its robotic surgical system, SPORT Surgical System, for minimally invasive surgeries (on July 9), and announced a US$19 MM public offering to fund the continued development of SPORT.
• Lifestyle Delivery Systems – The stock was down -40.5% in 3Q-2018, after the company provided an update (on July 10) on revenue generated on the sale of its infused strips for its affiliate, CSPA Group, which totalled $0.2 MM during the last week of June.

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.