January 22, 2018

Q4 & Annual 2017 Share Price Performance - Part 2

Tier 1 Canadian Healthcare Companies: Balanced Q4 but a Negative and Volatile Year

In this blog, I am going to comment on the Q4 and annual performance of the group of 51 companies with share prices of $1.00 or more to start 2017 (excluding Novadaq Technologies and Merus Labs as they were acquired in Q3).

Q4 2017 Performance

  • Decliners slightly outnumbered advancers by 28 to 23
  • Average and median share price changes were -2.7%% and -4.2%, respectively
    • These share price changes indicate a reasonable balance between winners and losers in Q4
  • For the following nine companies with share price movements of 40% or more in Q4, I will give my personal opinion on why the share prices moved and whether the movement could have been predicted
  • Five companies had share price increases of 40% or more
    • Sierra Oncology (formerly ProNAi; NASDAQ only; US$; +141%) – a clinical failure caused the share price to drop from just over $30 after its NASDAQ IPO to trade in at a $1.30 to $2.00 range. The company still had over $100 M to start Q4, trading at about the cash value per share. Sierra Oncology’s Q4 increase was related to the release of preclinical data at a conference on a Phase 1 cancer drug. The key factors were probably the quality of the data and the potential use of this drug candidate in combination with the hottest area in anti-cancer drug development – immuno-oncology.

Knowing that a company will be presenting data at a conference, an investor needs to ask what the market is expecting and then assess what is presented – tough to do without a scientific and/or medical background.

This conference probably had more than a thousand posters and presentations on hundreds of anti-cancer drug candidates. You could prepare a list of targets, drug candidates and companies to assess at the conference but I do not think anybody can reliably predict the data or share price winners ahead of the data.

    • Aptose Therapeutics (formerly Lorus; +50%) – the shares had dropped in 2015, traded around $3 for most of 2016 but in late 2016 dropped to a $1 to $2 trading range, bottoming in late April. The share price climbed slowly throughout the remainder of 2017, picking up its pace in Q4 on a financing, and both the expectation and presentation of preclinical data on two anti-cancer drug candidates at ASH, the 2nd largest cancer conference after ASCO. Similar situation and comments as for Sierra Oncology.
    • Valeant (+47%) – for context, look at a long-term chart, at least 10 years, then look at a 2-year chart and see the share price drop below $40 in March 2016 and bottom in April 2017 at about $12. There were some ups and downs in this period but there appeared to be a more sustainable upward movement in Q4. Third-quarter financials were positive, some debt was paid down or refinanced, and there was no bargain-basement sale of assets.

I see two ways to look at Valeant – a deep-dive into the financials to say the assets are under-valued and new management will deliver a solid return over a number of years, or there will be shorter-term trading opportunities.

The questions investors now need to ask include when will the fourth-quarter report be released, what are the market expectations and do they think Valeant will meet or beat market expectations?

    • Trillium Therapeutics (+43%) – the Trillium situation is similar to Sierra and Aptose above but the share price movement in Q4 was different. Preliminary clinical data on a Phase 1 anti-cancer drug was to be presented at ASH and I assume the share price almost tripled on the expectation of good data, which raises the first question for investors – do you sell all, part or none of your holdings after a double? In the midst of this run, the company did a financing at US$8.50 per share (good management decision – take money when it is available). After the data was presented, the share price dropped to just above the financing price, an indication that the data was good but not great; some investors might have decided to take some profits and wait for more data.
    • Resverlogix (+40%) – Resverlogix is nearing the end of enrolment in its Phase 3 trial of apabetalone, which was first tested in humans almost 10 years ago. During that 10 years, the share price has generally been in a trading range of $1 to $3 with occasional movement on either side of that range. The Sept. 30 financials reveal that the company was almost out of cash, had a cash burn of almost $4M per month but a financing with a partner during the following quarter gave it cash to survive into the first half of 2018, when the Phase 3 enrolment should be complete. I am confident that they will be able to finance themselves to the data but investors need to ask when the data will be available. The company can tell investors when they expect enrolment to be complete, when it is complete and that they will treat patients for 2 years, with a short follow-up safety period. The company knows but following industry practice does not tell investors the assumptions they made in planning the trial, such as the expected MACE rate (material adverse cardiac events); the DSMB has told the company to continue as planned, so the actual clinical event rate is still within the assumptions. I assume that at some point in the next 2 ½ years, without any warning, the company will say that the 250th MACE has occurred and the top-line data will be announced shortly or just announce the top-line data. The company’s press release on Jan. 11 stated that FDA approved patient enrolment in the U.S. The press release also stated that enrolment was at 2,200 of the target 2,400 patients, which indicates to me that patient enrolment will probably reach that target before any U.S. patients are enroled. The release also states ‘this number may be increased if required,’ referring to the enrolment target. The usual market reaction to a company announcing an increase in the number of patients is strongly negative due to increased costs and time to data.
  • Four companies had share price declines of more than 40%
    • Concordia Healthcare (-45%) – the company has been dealing with huge debt obligations, increased market competition and declining sales. The biggest share price decline resulted from the announcement of debt renegotiations under the CBCA (Oct. 20). The stock bounced when about 25M shares, almost half of the shares outstanding, traded on 3 days in mid-December. I am not aware of any filings indicating that any one group has taken a reportable position.

The key question for investors is whether they think the debt can be restructured or the company will be forced into bankruptcy

    • Novelion Therapeutics (formerly QLT; NASDAQ only; -56%) – the Novelion share price has been in decline for over 3 years, with periodic spikes up. Potential investors need to consider (in US$) cash at Sept. 30 of $70 M, cash used in operating activities of $39 M in that quarter, $250 M in convertible notes due in 2019 and potential legal liabilities in U.S.
    • Neovasc (-64%) – there were no negative events in Q4, excluding a final ruling on a US$112M payment due to CardiAQ, which I assume most investors thought could not be avoided. The share price killer was a debt and equity financing, needed to pay the legal settlement and fund clinical trials, but which included share purchase warrants which will result in massive dilution for then current shareholders (the term exploding warrants has been used for similar structures).
    • TearLab (-70%) – the share price has been in decline since it peaked at about C$150 in mid-2013. Q3 financial results showed slow growth of its existing business, continuing losses and declining cash (helped by a small offering with both a short and longer-term warrant).

Are investors willing to bottom-fish and at what price and time, considering the potential impact of the short-term warrants?

2017 Annual Performance

  • Decliners almost doubled the number of advancers by 33 to 18
  • Average and median share price changes were +1.3% and -25.0%, respectively
    • These share price changes indicate that there were a small number of big winners and large number of moderate losers
  • Volatility created trading opportunities as 24 of 51 (47%) of the companies had share price changes of 40% or more
  • Nine companies had share price increases of 40% or more
    • Fennec Pharmaceuticals (formerly Adherex; +379%) – positive clinical data, financing
    • Covalon Technologies (+183%) – major sales increase
    • Theratechnologies (+162%) – increased sales, pipeline progress
    • Sierra Oncology (formerly ProNAi; +150%) – preclinical data, bounce off lows
    • CohBar (+136%) – financing, preclinical progress
    • Arbutus Biopharma (formerly Tekmira; +106%) – partner’s clinical data
    • Aurinia Pharmaceuticals (+102%) – positive Phase 2b data, large financing
    • Helius Medical Technologies (+66%) – extension of development agreement with U.S. Army
    • Aptose Therapeutics (formerly Lorus; +54%) – preclinical data, bounce off lows
  • Fifteen companies had share price declines of more than 40%
    • ProMetic Life Sciences (-42%) – nothing negative, decline from highs
    • Cardiome Pharma (-49%) – negative FDA comment on product data package
    • Crescita (-53%) – nothing negative, decline from highs
    • CRH Medical (-54%) – lower reimbursement expected in 2018, lowered Q3 guidance
    • Novelion Therapeutics (formerly QLT; -63%) – continued trend, financial concerns
    • Xenon Pharmaceuticals (-63%) – negative clinical data
    • DelMar Pharmaceuticals (-66%) – no negative news, decline from 2016 highs
    • Neovasc (-68%) – dilution from financing structure
    • Aralez Pharmaceuticals (-70%) – financial results did not meet market expectations
    • Concordia Healthcare (-71%) – debt obligations, increased market competition and declining sales
    • Ceapro (-71%) – decreased sales and profits, decline from 2016 highs
    • IntelliPharmaCeutics International (-74%) – negative FDA advisory committee vote
    • Critical Outcome Technologies (-77%) – nothing negative, decline from 2016 highs
    • ESSA Pharma (-91%) – need for higher dosing of EPI-506
    • TearLab (-92%) – financial losses, decline from 2013 high continued
  • If the top performer in the group is dropped from the analysis, the average share price change drops from +2.5% to -6.0%. If the top 3 performers in the group are dropped from the analysis, the average share price change drops to -13.5%.

The focus of my blogs has always been capital gains from share price increases. However, six of the seven companies in the Services group also provide income through a monthly dividend / distribution.

In the next blog, I will asses the Q4 and annual 2017 share price performances of the Tier 2 Canadian healthcare companies and report on the performance of the cannabis/marijuana sector.

[The author and his immediate family members may have long or short positions in the shares of some companies mentioned in or assessed during the preparation of this blog. Past share price performance may not be an indicator of future share price performance. This blog does not consider the investment objectives, financial situation or particular needs of any particular person. Investors should obtain professional advice based on their own individual circumstances before making an investment decision.]

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