The Life Sciences Report: James, what financial fundamentals have caused you to diversify your portfolio into the life sciences?
James West: The fundamentals impacting the resource industry are decidedly poor in terms of profitable investment opportunities. But the improving valuations in the life sciences sector relative to the resources sector, as evidenced by several takeovers in progress, are catalyzing a renewed interest in biotech. Biotech investing requires more focus and study than investing in mining, however. It is more complicated and tougher to understand.
TLSR: Let's spend a minute on metal resource investing. How do you assess that situation in terms of the next couple of years?
JW: The prospects for exploration in metals, in my opinion, are not going to improve dramatically in the next two years. The best representative gauge of what has happened in global metals exploration is the Standard & Poor's/Toronto Stock Exchange Venture (TSX.V) Index, which has lost 55% of its value since September 2011 highs. Gold has been depressed since its $1,924 per ounce ($1,924/oz) high in September 2011. It has been range-bound between $1,190/oz and $1,380/oz. And the continued absence of response from gold to geopolitical events is disillusioning investors.
Also, despite the fact that we have supply shortages in copper, zinc and other metal commodities, there is a question of whether or not the Chinese economy can grow sufficiently to carry the demand that has propped up the industry since 2008. The China question is undermining demand for investment in resource exploration and base metals, and the global supply/demand metrics do not look good.
"Theralase Technologies Inc. has remarkable early and advanced-stage data coming in for a cancer cure."
The TSX.V is a benchmark index for junior exploration in resources of all types and it is dismal, trading sideways for the last six months with minor feints to the upside. Mining companies are missing filing deadlines and falling off the board. The bad news is that the economic fundamentals are undermining the prospects for junior exploration going forward. And they are not set to change dramatically during the next 24 months. In contrast, the life sciences are a bright spot.
TLSR: What is going on in the life sciences sector that draws you to it?
JW: Because there is less investment for gold exploration, and because the energy exploration stage in Canada and the U.S. is maturing, there is a growing demand for early-stage life sciences companies listed on the TSX.V. The transition of resource investor cash to life sciences and technology is creating more opportunity there for investors.
There are some big takeovers in the space. Valeant Pharmaceuticals International Inc. (VRX:NYSE; VRX:TSX) is trying to take over Allergan Inc. (AGN:NYSE) in a cash and stock deal worth $47 billion ($47B), and Pfizer Inc. (PFE:NYSE) was forced to abort its attempted takeover of English drugmaker AstraZeneca Plc (AZN:NYSE), as its $118B bid was insufficient to entice shareholders of Astra.
Takeover activity is indicative of overall demand for biotech investment. It perks up ears and drives retail investors to look more closely at the life sciences and technology, as the resource exploration company universe becomes much smaller in a natural "survival of the fittest" environment.
TLSR: Cancer detection is a stable topic in any biotech investment model. Do you have any hot picks in that space?
JW: Verisante Technology Inc. (VRS:TSX.V) is headquartered where I am, in British Columbia. The company's platform was developed in partnership with the University of British Columbia and the BC Cancer Agency. Verisante's technology, now commercially available, has revolutionized the diagnosis of skin cancer. Its product is called the Aura. And the company's complementary product, the Core detection system, detects internal cancers, such as lung, kidney, and bladder cancers. Core is undergoing regulatory testing for licensing in Canada and Europe, and Verisante soon will seek U.S. Food and Drug Administration (FDA) approval for Core.
TLSR: How do these products work?
JW: Verisante's skin cancer detection technology spectroscopically analyzes skin blemishes that could be cancerous growths and, within one second, delivers a result with 99% accuracy. This is a vast improvement over the current technology, based on biopsies that puncture the skin and can infect healthy skin tissue in the process. Biopsy results have to be sent off to a laboratory and can take up to two weeks to come back. The key to survival is early detection. With the Aura system, a doctor can take a light spectroscopic image and compare it to a database to quickly make a diagnosis.
TLSR: What does the Aura system look for?
JW: It shines light through cells and analyzes changes in the color spectrum of the reflected light. Different cellular compositions have different light reflection characteristics, and cancerous cells can be quickly identified.
TLSR: When can we expect Aura to be on the market?
JW: Verisante has already sold several Aura units in Canada. Its sales force is rolling out a marketing program in Canada and Europe, where the product is also licensed. It is expecting word on FDA approval before the end of 2014, which will enable the company to market Aura in the U.S. It is still early days, though, and Aura is not widely known within the industry. The real momentum in the marketing program is yet to be realized.
"Improving valuations in the life sciences sector, relative to the resources sector, are catalyzing a renewed interest in biotech."
TLSR: Can a local doctor's office buy the Aura machine?
JW: Verisante leases the Aura system to doctors. It only takes four diagnoses to break even on the lease cost of the unit. Aura is designed as a floor model with a small footprint that can occupy a corner of a doctor's office. The doctor can offer skin cancer diagnostics onsite, with an instant-turnaround result, for a very reasonable cost that is covered by medical insurance plans in Canada and Europe. That coverage is, as yet, uncertain in the U.S.
TLSR: How does Core work?
JW: The Core detection system uses a similar spectroscopic approach to Aura. But the Core device attaches to the end of an endoscopic probe that can be introduced into the body internally and analyzes lesions for malignancy on the spot. It is primarily designed to detect lung cancers, but Verisante is creating variations that will detect other forms of cancer—gastrointestinal, colorectal, cervical, bladder.
TLSR: And Core is on the market now?
JW: Core is not yet on the market. Verisante has just completed an International Organization for Standardization (ISO) quality recertification for use in Canada. Currently, the company has applications for approval for use pending in Canada, Europe, the U.S. and in China for lung cancer, specifically.
TLSR: How has Verisante's stock been responding to the company's achievements?
JW: Verisante trades on the TSX.V, so it has been painted with the mining company stigma that all TSX.V companies struggle with presently, since more than half of the constituents of the TSX Venture Index are mining companies. The stock has been trading sideways within a range of $0.14–0.24/share for the better part of the last six months. This strikes me as a great point of entry. Verisante has a very advanced technology that is market-ready and already approved in Canada and Europe. The catalyzing event will be FDA approval in the U.S., which will attract the interest of larger pharmaceutical device companies attracted to the low valuation. I covered Verisante in the April edition of The Midas Letter, and the response was terrific.
TLSR: Are there any TSX.V firms that you favor in the cell repair/replacement/regeneration space?
JW: I have recently become acquainted with RepliCel Life Sciences Inc. (RP:TSX.V; REPCF:OTCQB). It has a fibroblast therapy that induces cells to regenerate themselves. It has applications in tendon repair, hair regeneration for pattern baldness, and rejuvenation of aging skin.
TLSR: Are these products part of a new proprietary approach by RepliCel?
"Takeover activity is indicative of overall demand for biotech investment."
JW: There are other companies involved in the scientific space, but RepliCel is the first company to ready the technology for the market. It is developing the therapies in partnership with several big pharma firms in Japan, South Korea and China. The Japanese partner is Shiseido Company Ltd. (4911:TSE). The regenerative method was derived from a collaborative research agreement with the University of British Columbia. RepliCel is seeking to license the new technology, but it requires more development at this stage.
TLSR: How long has RepliCel been on this type of therapeutic trajectory?
JW: In 2009, a study called "Treatment of Lateral Epicondylitis Using Skin-Derived Tenocyte-Like Cells" was published in the Journal of Sports Medicine. That was a clinical pilot study in the tendon regeneration application, so the products have been in the pipeline for about five years.
TLSR: Have you come across any products or firms that you think are poised to make any great waves in the cancer treatment space?
JW: I covered Theralase Technologies Inc. (TLT:TSX.V) in our March newsletter. It has remarkable early and advanced-stage data coming in for a cancer cure. Theralase is focused on bladder cancer, because that is one of the most fatal cancers. The new product uses photodynamic compounds—drugs that become active cancer destroyers when exposed to laser light. The testing done so far on lab mice has demonstrated 100% efficacy with 0% recurrence and no side effects—a 100% rate of survival in mice, which is incredible. There are anecdotal instances of human use of photodynamic compounds that have successfully destroyed tumors and put cancer into complete remission. Because this photodynamic compound therapy has not yet been introduced into the standard lexicon of cancer therapies, Theralase is at the forefront of developing this type of cancer treatment.
TLSR: Are there other companies in this field besides Theralase?
JW: I do not know of any company in the field of photodynamic compounds that is anywhere near as advanced as Theralase.
TLSR: Have you looked at the company's financial fundamentals? Has it taken on a lot of debt? How is it poised in terms of cash flow and price/earnings?
JW: Theralase did a capital raise of $3M in November 2013, which is why its shares are being beaten up a bit through free trading. But Theralase also generates revenue from devices that it sells to doctors for treating joint pain, tendon pain and tennis elbow through the application of laser light. It is not strictly dependent upon the equity markets for its ability to push forward on the development of cancer treatment technologies. It has a powerful partnership with the Princess Margaret Cancer Centre in Toronto, which is one of Canada's foremost cancer research facilities. In short, there are many unique aspects to the Theralase financial picture: revenue from its pain mitigation therapies; a partnership within a university hospital whose main reason for existence is development of cancer therapies; access to equity markets.
TLSR: Do you foresee a wave of biotech acquisitions in the low price climate that currently prevails?
JW: In the life science markets there is always a background level of takeover activity. Bigger companies are constantly swallowing smaller ones. In the smaller-cap space, more suitable for comparing the possibilities for Theralase, there are also large takeovers. In January 2012, Janssen Pharmaceuticals Inc. and Forma Therapeutics Inc. (private) entered into a $700M collaboration. There was a $500M deal in June 2010 between OncoMed Pharmaceuticals Inc. (OMED:NASDAQ) and Bayer (BAYN:XETRA). And there are others.
Big transactions get done even when the market is fluctuating wildly. They get done because there is a standard level of maturity that the major pharmaceutical companies look for in developing pharmaceutical companies. When the fundamentals and the financials make sense, they make an offer—they simply must acquire the new product before somebody else gets it.
TLSR: Have any other biotechs caught your Midas eye?
JW: Titan Medical Inc. (TMD:TSX.V) has a single-port, surgeon-controlled robotic platform known as SPORT (single port orifice robotic technology)—in other words, a robotic surgery device. The company just raised $25M through Dundee Securities Ltd., and is well capitalized. It did a deal with a university hospital in the U.S. to use its device on a trial basis. That gave the stock momentum.
TLSR: James, it was nice talking to you.
JW: Thank you.
James West is publisher and editor of The Midas Letter, an independent capital markets entrepreneur and investor. He has spent more than 20 years working as a corporate finance advisor, corporate development officer, investor relations officer, media relations and business development officer for companies involved in mining, oil and gas, alternative fuels, healthcare, Internet technology, transportation, manufacturing and housing construction.
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1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Theralase Technologies Inc., Verisante Technology Inc. Streetwise Reports does not accept stock in exchange for its services.
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