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Griffiths McBurney & Partners
145 King St. West, Suite 1100 Toronto, Ontario M5H 1J8
tel. 416-367-8600 fax 416-367-2756
Helix BioPharma Corp.
HBP: C$1.41
BUY
TARGET: C$2.60
HIGHLIGHTS
* Poised for tremendous growth through the marketing of a large number of generic drugs developed by the company and recently licensed from Bausch & Lomb and Copley.
* A cohesive management team with a track record of running profitable businesses.
* Core businesses - the distribution of research and diagnostic reagents, and DNA identity testing services - generate healthy cash flow that helps to offset development costs.
* Anti-adhesin compounds have potential for the prevention and treatment of fungal and bacterial infections, and heterodimer technology could become a valuable tool in protein purification.
* The four principals of the company have significant exposure to the performance of the shares, since they hold 42% of Helix's stock.
Helix BioPharma Corporation (Helix) was formed in July 1995 through the amalgamation of International Helix Biotechnologies Inc. and Intercon Pharma Inc. The company generated an estimated 58.1 million in revenue in fiscal 1996 through the distribution of diagnostic products, DNA identity testing and the marketing of pharmaceutical products. Helix recently entered into two agreements and became the exclusive Canadian distributor of certain prescription pharmaceutical products for Copley and Bausch & Lomb. In addition, Helix is positioned to capture significant biopharmaceutical opportunities through collaborative research and development in the areas of infectious diseases, and protein identification and purification.
Note: Within the previous 12 months Griffiths McBurney & Partners has acted as underwriter or has performed paid services for the issuer of this security.
THE COMPANY
Helix Biopharma Corporation (Helix) was formed in July 1995 through the amalgamation of International Helix Biotechnologies Inc. (IHB) and Intercon Pharma Inc. (Intercon). Prior to the amalgamation, IHB had been in operation for 15 years, involved primarily in providing DNA identity testing services. IHB became a public company in 1987 through a reverse takeover, and its business continued after the amalgamation. Intercon was founded in 1988 by Mr. Jerry McElroy and remained a private company until its amalgamation with IHB in 1995. It was involved primarily in the distribution of pharmaceuticals and laboratory supplies. Intercon's businesses also continued after the amalgamation.
The company's strategy is to "continue profitable growth of its core businesses, continue registration and sales of market-proven pharmaceutical products, and develop new pharmaceutical and biotechnology products through collaborative R&D".
Financial highlights of IHB and Intercon prior to the amalgamation are summarized in Table I below. Subsequent to the amalgamation, the year-end for the new company became July 31.
Table 1: Financial highlight of IHB and Intercon prior to amalgamation.
MANAGEMENT
Jerome F. McElroy, M.A.Sc., P.Eng., Chairman of the Board. Mr. McElroy was one of the founders of MDS Health Group Limited and acted as Chairman of the Board between 1969 and 1975. He left MDS in 1975 to form TIL Consultants Inc., which specialized in technology transfer, as well as clinical and regulatory services in the pharmaceutical industry. In 1988, Mr. McElroy founded Intercon Pharma Inc. and was a director and President of Intercon until its 1995 amalgamation with IHB. He has been a director and Chairman of the amalgamated company since its formation.
Terrence G. Owen, Ph.D., M.B.A., President. Dr. Owen founded IHB ( under the name "Helix Biotech Ltd.") in 1980 and had been President and Chairman of IHB since its inception. He has been a director and President of Helix since it was formed in 1995. After obtaining his Ph.D. in Zoology in 1974 from the University of British Columbia and prior to founding Helix Biotech, Dr. Owen held several teaching and research positions, including a research directorship for Syndel Laboratories Ltd.
Donald H. Segal, Ph.D., Vice President, Pharmaceuticals. Upon completion of his Ph.D. in 1975, Dr. Segal founded RIA Inc., a manufacturer of immunodiagnostic products that gained a private label contract to manufacture diagnostic kits for Miles Laboratories, a subsidiary of Bayer. Dr. Segal left RIA in 1980 to found Joldon Diagnostics Inc., a Scarborough-based manufacturer of diagnostic products. In May 1994, Joldon Diagnostics was acquired by Intercon Pharma Ltd (The Intercon Group at that time), which in turn was amalgamated with International Helix Biotechnologies Inc. in July 1995. Dr. Segal has been a member of the Biotechnology panel for the Natural Sciences and Engineering Research Council (NSERC) as one of the few industry representatives involved in the research granting system.
Garth Likes, B.Sc., Vice President, Laboratory Products. Prior to founding PDI BioSciences in 1989, Mr. Likes held a variety of research and business positions in the pharmaceutical industry with Merrel Dow Canada, Becton Dickinson Canada and Sci Can Diagnostics Inc. In April 1992, PDI BioSciences was acquired by Intercon Pharma Ltd. (the Intercon Group at that time). Mr. Likes has been a director of Helix since it was formed in 1995.
Each of the four principals of Helix had run profitable and successful businesses prior to the amalgamation, and appears willing and able to work closely as part of a team to develop Helix into a significant Canadian healthcare company. The consensus strategy is to offset the company's research and development costs with income generated by its distribution business and DNA testing services, rather than becoming either a pure-play in the stable core businesses or an R&D company.
The four principals and their family members own an aggregate of 5.8 million shares of Helix, or approximately 42% of the company.
Other directors of the company's seven-member board are Mr. Ken Cawkell, a business lawyer specializing in finance, Mr. Harry Jaako, a venture capitalist specializing in technology companies, and Dr. Richard Rossman, a physician who is on the Executive Board of the Ontario Medical Association, Gastroenterology section. In addition, the company has a Medical Advisory Board made up of several prominent medical researchers and physicians.
OPERATIONS
Helix operates through two business divisions. The Laboratory Division is the company's core business unit. It generated over 90% of the company's revenues in fiscal 1996, through the distribution of reagents and supplies to research and clinical laboratories, and the provision of DNA identity testing services to legal and government agencies, as well as to the general public. The Pharmaceutical Division develops and markets prescription and over-the-counter pharmaceutical products. Recently, the Pharmaceutical Division gained exclusive Canadian distribution rights to certain generic drugs from Copley Pharmaceuticals Inc., a subsidiary of Hoechst-Celanese, and Bausch & Lomb Pharmaceuticals Inc. The company is responsible for securing Health Protection Branch approval in Canada for some of the products to be distributed and has recently raised $5 million, primarily for the purpose of registering and marketing these and the company's own products.
LABORATORY DIVISION - DISTRIBUTION OF PRODUCTS
The distribution business is currently directed by Mr. Likes and is located largely in Aurora, Ontario. The company offers a wide range of products to biotech and medical research laboratories, as well as clinical diagnostic laboratories in hospitals and the private sector. It is estimated to have generated over $5 million in annual revenues in fiscal 1996. Currently, Helix's distribution business represents 17 different manufacturers and suppliers, and distributes over 14,000 products. For example, it distributes J.T. Baker's line of fine chemicals and is the exclusive Canadian distributor for Strategen, a niche supplier of molecular biology reagents that are widely used by biotech research laboratories.
The Canadian market for biomedical research and diagnostic products is estimated to be in excess of $1 billion and is dominated by large multinational chemical and reagent companies. The trend toward centralized purchasing is expected to continue in this market and will likely benefit larger distributors that can offer "one-stop shopping" and which enjoy economies of scale. Helix's emphases are quality and cost, both of which are important factors for the company's customers. In addition, Helix serves specific customer needs that are neglected by larger distributors. For example, Helix sells re-packaged products, which carry a higher margin.
The distribution of laboratory supplies is generally a competitive and low-margin business. However, there is room for some small distributors in Canada, and the growth outlook for the company's distribution business is dependent on its ability to secure new products for distribution.
LABORATORY DIVISION - DNA IDENTITY TESTING SERVICE
DNA identity testing involves the extraction and comparative analysis of deoxyribonucleic acid (DNA), the blueprint for life forms such as humans. A small percentage of DNA is unique to an individual, and this difference can be detectable by various DNA identity testing systems. Since 1989 Helix has been the exclusive Canadian licensee for the DNA-PRINT Test System, developed by U.S.-based Lifecodes Corporation. Both the Lifecodes patent and the licensing agreement expire in 2003. After that time the technology is free for everyone to use. The licensing agreement allows Helix to use the DNA-PRINT Test System to determine familial relationships in paternity, immigration, estate and criminal cases, in exchange for royalty payments to Lifecodes.
Currently headed by Dr. Owen, Helix's DNA identity testing business has been in operation for seven years and has a good client base and reputation. Most of the revenue from this business is derived from tests for the determination of familial relationships. A child inherits half of its DNA pattern from each parent. Whether or not the child is the true biological offspring of either or both of the parental candidates can be determined by computer analysis of the individuals' DNA patterns. The actual tests require a small blood sample, about the quantity collected during an annual physical checkup. These samples can be collected in any one of the hundreds of sample collection laboratories across Canada and are shipped to the company's Vancouver-based central laboratory for analysis. Results are usually available within a few weeks. Helix advertises its services through targeted mailings, as well as legal and medical journals. Prices vary, depending on the size and complexity of the legal case. Helix does not
The DNA-PRINT Test System is based on a method known as Restriction Fragment Length Polymorphism (RLFP), which to our knowledge remains the most reliable tool for DNA identity testing, despite recent developments in other technologies, such as Polymerase Chain Reaction (PCR). PCR is more sensitive and can be applied to degraded DNA samples, and may therefore have an advantage in forensic cases where sufficient fresh samples are unavailable. Another technology competing with RLFP for identity testing is Human Leucocyte Antigen (HLA). This involves the identification of certain molecules found on the surface of blood cells. HLA testing is an older technology and is less accurate than RFLP, but it is still fairly widely used. We believe that RLFP will likely remain a cornerstone technology for DNA identity testing in the foreseeable future, and that other technologies will not be a serious threat to Helix Biotech's core business. However, the company does intend to make a moderate in
vestment in PCR-based technologies, as well as DNA sequencing equipment and technologies, and expects to enter the emerging genetic testing business. The upside potential for DNA testing in diagnosing genetic diseases and predispositions is very large, and because of the company's infrastructure and expertise in the DNA identity testing business, Helix is well positioned to capture a piece of this new market.
In the DNA identity testing market, Helix competes directly with other smaller providers of paternity testing and the police laboratories for forensic testing services. One of the private laboratories is being sued by Lifecodes Corporation for patent infringement. Helix has a large share of the DNA identity testing market. While the company expects to maintain its leading position, growth in this segment is likely to be moderate.
PHARMACEUTICAL DIVISION
The Pharmaceutical Division is headed by Dr. Segal and is the company's focus for future growth. Helix has several products that are marketed in Canada and Europe, and has recently licensed a larger number of generic pharmaceutical products from Bausch & Lomb and Copley Pharmaceuticals.
Klean-Prep(tm)
The Pharmaceutical Division's lead product is Klean-Prep(tm), which is the company's brand name for a formulation of polyethylene glycol that is used to cleanse the bowels prior to surgery or X-ray examinations. This product was launched in Europe and Canada in the early 1990s and competes in the $60-100 million worldwide market for bowel evacuants. Under a licensing agreement between Intercon Ireland, a wholly-owned subsidiary of Helix, and Helsinn Birex Pharmaceuticals Limited of Ireland (Helsinn), Klean-Prep(tm) has been manufactured and distributed by Helsinn in Europe and South Africa. In return, Intercon earns a 10% royalty on net sales of the product. In Canada, Helix sells Klean-Prep(tm) directly to hospitals.
Klean-Prep(tm) is non-toxic, tastes pleasant and is priced at a slight premium to alternative products. It is not a patented product but is expected to maintain its strong foothold in Europe for the foreseeable future. Annual sales of Klean-Prep(tm) in Europe have grown at a rate of greater than 20% per year and are expected to increase by over 50% before the end of the century.
The United States represent a potential new market for Klean-Prep(tm). The company is currently assessing U.S. registration requirements and plans to pursue regulatory approval in the near future. It also intends to seek a U.S. marketing/distribution partner for Klean-Prep(tm). Assuming no major regulatory delays, Klean-Prep(tm) could be launched in the U.S. within a couple of years.
Pro-Lax(
Pro-Lax( is a passion-fruit-flavored laxative drink originally developed by Intercon. It gained Canadian marketing approval in October 1995 and was recently launched in Canada. Pro-Lax( is manufactured by Sandoz and is now available as an over-the-counter (OTC) product in drug stores countrywide. A 10 packet box is priced at slightly under $10, which is comparable to other laxatives. Like Klean-Prep(tm), Pro-Lax( is a formulation of polyethylene glycol. It acts as a "lubricant" and does not disturb the body's metabolism.
The laxatives market is estimated to be $40 million in Canada and over $2 billion worldwide. Pro-Lax( is positioned as a "maintenance of regularity" therapy and does not directly compete with most of the existing laxatives that are positioned as anti-constipation treatments. Pro-Lax( is gentler and tastes pleasant. We expect good consumer acceptance but do not expect Pro-Lax( to dominate the market, unless it is licensed to and marketed by a consumer giant like Proctor & Gamble or Johnson & Johnson. Without a major marketing partner, Pro-Lax( could capture 2.5% to 5% of the Canadian laxative market and reach mature sales of $1.5 million within the next few years.
Helix is contemplating tapping the U.S. and European laxative markets and has identified potential clinical investigators to conduct pivotal clinical trials for registration purposes. The company intends to seek input from the U.S. Food and Drug Administration (FDA) before finalizing the protocol of clinical trials and expects to hold discussions with the FDA within the next few months.
In addition to Klean-Prep(tm) and Pro-Lax(, Helix has developed and marketed several other products that target mostly gastrointestinal diseases and disorders.
Generic Pharmaceuticals Licensed From Bausch & Lomb and Copley
In June 1995, Helix licensed 31 products from Bausch & Lomb, most of which are generic, prescription ophthalmic drugs. Some products have already been registered in Canada and were launched last summer, and seven major products are expected to be launched within the next six to fourteen months, subject to regulatory approval.
Under an exclusive distribution agreement signed in January 1995, Helix gained rights to market a number of Copley's generic prescription drugs in Canada. These are largely cardiovascular and dermatology products.
For both the Bausch & Lomb and Copley licensing agreements, there were no up-front licensing fees, but Helix is responsible for registering some of the products in Canada. Exclusivity is subject to minimum sales levels. Because of competition issues, lists of the products licensed from these two companies can not be revealed to the public.
Sales And Marketing
Like most small pharmaceutical companies, Helix does not have its own sales force for its pharmaceutical products and relies on contract sales representatives. Helix is responsible for their training. Compensation structures vary but typically include a combination of payment per sales call and a commission ranging from 10% to 20% of sales.
Ampligen
Developed by HEMISPHEREx Biopharma Inc., a U.S. biotech company, Ampligen is an antiviral and immune-modulating drug and a potential treatment for immune disorders, such as AIDS, hepatitis, cancers and Chronic Fatigue Syndrome (CFS). Ampligen was invented by Dr. William Carter, who was involved in the development of the now widely used interferon, and has been tested on patients having CFS, AIDS, hepatitis and certain cancers. Results from the CFS trial, showing that Ampligen produced significant physical and cognitive improvements in CFS patients, were presented at the Annual meeting of the American Association for Chronic Fatigue Syndrome in October 1996.
Ampligen became available in Canada under the Emergency Drug Release Program last summer, and Helix is the exclusive Canadian distributor for this product. It is administrated twice a week though an intravenous infusion that can be done on an out-patient basis, and is expected to be priced at US$18,000 to US$20,000 per year to the end user, excluding administration cost. The price tag would appear prohibitive. However, because of the lack of an effective treatment for CFS, which affects an estimated 400,000 people in the United States alone, and the debilitating nature of the condition, individuals who can afford the treatment may be willing to pay. The availability of Ampligen in Canada could attract CFS sufferers from the United States and European countries, where the drug is currently unavailable. Over the next 12 to 18 months, the attraction of Ampligen for non-Canadian residents could lead to millions of dollars in total sales and a significant operating profit for Helix. On
ce Ampligen begins to receive marketing approvals and becomes available in the U.S. and Europe, the loss of non-Canadian patients could be offset, to a certain degree, by an increase in Canadian CFS patients. Although this drug appears to be a promising immune modulator with good upside potential, acceptance is uncertain at this stage because the product is new and expensive. We have not included Ampligen sales in our financial models.
The Generic Pharmaceuticals Industry
Generic drugs have the same active ingredient(s) as patented medicines (brand name drugs) and are sold after patent expiry. They are generally priced at a significant discount to their patented counterparts. In Canada, for example, the first generic product is typically priced about 20% lower than the branded drug, and the entrance of additional generic players reduce prices further. In the U.S., where competition is fiercer among the generic players, generic drugs can carry a discount of as much as 90% of the price of their branded counterparts. Cost cutting in the healthcare sector over the past several years has hastened the growth of the generic pharmaceuticals industry. In North America, annual revenue growth has been over 10% for generic drugs, compared to low-single-digit growth for branded pharmaceuticals. Europe has experienced a similar trend, with Germany emerging as a leader in generic drug use. Sales of generic drugs account for an estimated 30% of total pharmaceutical sales in Germany, compared
The factors determining the success of generic drugs in Canada are the ability to obtain regulatory approval (called notice of compliance, or NOC) and listing on provincial and hospital formularies. Regulatory approval of generic drugs is granted by the Health Protection Branch upon satisfactory review of chemical and manufacturing documents and clinical results. Unlike an innovative drug, which must go through large-scale, lengthy and costly clinical trials to prove that it is safe and effective, a generic drug needs only to be proven "big-equivalent" to the existing brand name product. Bioequivalency studies involve chemical analysis in a laboratory and metabolic studies on healthy volunteers. For government reimbursement purposes, a drug must be listed on the provincial formulary. Insurance companies and corporate drug plans also use the formulary as a guideline for reimbursement.
Both Bausch & Lomb and Copley, a subsidiary of Hoechst, are leading players in the generic pharmaceutical industry. During the period between January 1994 and June 1995, Bausch & Lomb led the pack with 19 FDA approvals of ANDA (Abbreviated New Drug Application, required for approval of generic drugs), followed by Ivax (12 approvals), Teva (11), Novopharm (10) and Copley (10). Bausch & Lomb's ophthalmic product line is particularly attractive because of the wide range of ophthalmic products marketed by the company and the brand name recognition. Neither Bausch & Lomb nor Copley is interested in marketing the products that were licensed to Rivex in Canada because of the relatively small market for each product. With a few exceptions, all the products licensed to Helix have estimated market sizes below the $10 million mark. Helix, on the other hand, intends to be a niche player, specializing in the smaller markets neglected by major pharmaceutical companies.
BIOPHARMACEUTICAL OPPORTUNITIES
Anti-Adhesin Compounds
Through an agreement between Helix, the Protein Engineering Network of Centres of Excellence (PENCE) and the University of Alberta signed last January, Helix has obtained an exclusive option to commercialize and sub-license an anti-adhesin compound, its derivatives and spin-off technologies. In exchange for this option, Helix has agreed to provide certain research and development funding to PENCE. Research to date has shown that this patent-pending, anti-adhesin compound may inhibit and block the ability of certain micro-organisms, such as yeast and bacteria, to bind to host cells, and thus prevent or alleviate infection and diseases. The most promising application appears to be in combating Candida albicans, a yeast strain, and its two most common manifestations: oral infection in immunocompromised individuals, such as AIDS patients and cancer patients undergoing chemotherapy, and vaginal yeast infection. The oral infection market is particularly attractive because the anti-adhes
in compounds could be used as preventive therapies in a targeted group of patients. The preventive market, which does not yet exist, is estimated by the company to be greater than $200 million annually. The first compounds are scheduled for animal testing in late 1996.
The anti-adhesin compound is a naturally-occurring non-toxic disaccharide. Patent applications covering this compound have been filed in the U.S. and worldwide. A disaccharide is a molecule made of two single sugar molecules, oligosaccharides are made of several (usually less than 10) sugar molecules and polysaccharides consist of many sugar molecules. All are members of the carbohydrate group of compounds. Helix and PENCE are neither the first nor the only ones developing carbohydrate compounds as anti-infective agents. Neose Technologies, Inc., a U.S. biotech company specializing in carbohydrate production technologies, has tested naturally-occurring oligosaccharides for the treatment of gastritis and peptic ulcers (Phase I clinical trials), respiratory infections (pre-clinical studies) and transplant rejection (animal studies). Neose is probably a leader, but not a direct competitor of PENCE in developing carbohydrate anti-infectives.
Pending results from animal studies, PENCE's anti-adhesin compound could enter Phase I clinical trials before the end of 1997 and complete the three phases of clinical trials within two to three years. The initial target will likely be a topical application for oral infection, for which clinical end points can be easily defined (e.g. absence of infections and symptoms) and quickly achieved. Hence, clinical trials should be less lengthy and costly than those for medicines taken internally.
Heterodimer Technology
Another licensing agreement with PENCE involves the heterodimer technology, which can be particularly useful in the detection and purification of proteins. This technology is based on the affinity between protein coils that have complimentary sequences. For example, when sequence A is incorporated into a protein, a complementary sequence B in a purification system could "catch and hold" all protein molecules with an "A tail", like a "molecular velcro". This technology is potentially useful in both biotech research and biopharmaceutical production. Generally speaking, conventional drugs are natural or synthetic chemical compounds, whereas biopharmaceuticals, or biotech drugs, are proteins. Therapeutic proteins can now be produced in a variety of hosts, such as bacteria, yeast and mammalian cells. These cells act as miniature factories, manufacturing proteins based on the genetic material (DNA) that is incorporated into the host's own production (expression) system. Separation of the therapeutic protein from t
FINANCIAL POSITION & VALUATION
Helix recently raised $5 million through a private placement of 2.5 million common shares. The company currently has approximately $6.5 million cash, which is sufficient to fund product registration and R&D requirements. The company is expected to incur a loss of $3.3 million in fiscal 1997 and come close to break even in 1998. Financial projections are presented in Appendix 1 (on p. 12), and summarized in Table 2 below, and Figure 1 (on p.10). These projections are based on the assumptions that management will continue achieving historical margins from its existing businesses and will achieve average industry margins in the generic pharmaceutical business. Projections of generic drug sales are based largely on management forecasts, which we believe to be reasonably conservative.
Table 2: Financial projections for Helix Biopharma Corp.
(1) Including product registration costs.
(2) Tax rate is assumed to be 40% for 2000.
Figure 1: Revenue and profit forecast for Helix Biopharma Corporation
Currently, the shares of major multinational pharmaceutical companies trade at approximately 30 times their trailing 12-month earnings and 25 times next year's earnings. A fair PE multiple for Helix as a going concern, when it reaches mature sales in the year 2000, should exceed 20 times. Based on our earnings estimate of $0.34 per share for the year 2000, a very conservative PE multiple of 15 and a 25% discount rate, Helix's shares are valued at about $2.60 for 1997. Valuations vary with PE and discount rate assumptions, as shown in Table 3 below.
Table 3: Value of Helix common shares in 1997, based on EPS forecast of $0.34 for the year 2000.
Our valuation of Helix does not include potential revenue and profit from the genetic testing business, and the commercial products and technologies associated with the anti-adhesin and heterodimer technologies. Success in any one of these three areas could have a substantial financial impact.
RISK FACTORS
The growth potential of the company's existing core businesses, especially the distribution of laboratory products, could be limited. Distribution is a "cutthroat" business, where margin pressure will likely prevail. However, researchers value the reliability and services of niche suppliers, and Helix's distribution business does not appear threatened in the foreseeable future.
The company's revenue and profit growth over the next 5 years will depend very heavily on the success of its generic pharmaceuticals business. Like any company venturing into a new territory, Helix faces uncertainties. The company lacks a track record in this business, and some of its products could face significant competition from a number of strong generic pharmaceutical companies in Canada. However, management's expertise in dealing with the pharmaceutical regulatory systems and drug distribution in Canada, along with the company's strategy of focusing on smaller but profitable segments of the market, will likely make Helix a strong niche player in the Canadian generic drug industry. |
