Medical Marijuana Goes to Market: Daniel Pearlstein of M Partners

The Life Sciences Report: Daniel, you're a sellside analyst in the life sciences today, but in the past you've been a buyside analyst in a venture capital firm, where companies don't file financials and disclosures every quarter. You have to be tenacious to get the kind of information you need from venture-held startups. Was that experience a help to you when you moved to public companies?

Daniel Pearlstein: Yes. I started in technology transfer, evaluating the commercial opportunities of early-stage technologies from universities and research hospitals in the Greater Toronto Area. As an analyst on the life sciences team, I focused on the formation of academic/industry research partnerships, licensing, royalty arrangements and company creation.

I eventually joined one of the medical device startups in a business development role. While there, I was exposed to every facet of the business—sales, marketing, product development, trade shows and more—and gained an appreciation for how dynamic and versatile you must be in that environment. All hands on deck, all the time. Both of those experiences allowed me to move to a venture capital firm looking at North American clinical-stage therapeutics and medical device companies, where I gained many of the skills I use to analyze and scrutinize early-stage companies. In moving to the sellside, I also create new processes and adapt to the kind of information that's presented or withheld in a quarter.

TLSR: What kind of public companies do you follow today?

DP: We generally look at Canadian companies with market caps of $25–500 million ($25–500M), with good management teams that have positive track records, assets that could fill a clinical need, and longevity and protection of intellectual property (IP).

TLSR: You mentioned technology transfer. Technology transfer and IP go together. Do you find that IP diligence is a huge part of your practice? Do you think investors overlook the importance of IP, and assume patents are bulletproof?

DP: To answer your first question, we look at both the IP and proof-of-concept data. As to the second, I wouldn't say IP is overlooked, but some things are easy to miss. I don't think it would be prudent to assume that patents are bulletproof. We take the diligence and research as far as we can. We look at comparable products, we look at what's out on the market, and we do patent searches where necessary. IP is very important.

TLSR: You follow the medical Cannabis industry in Canada. Could you give me some background on this industry and its evolution as it relates to new public companies in this domain?

DP: In the last nine months, the medical marijuana industry in Canada has experienced a paradigm shift that was years in the making. The Canadian government changed the way it grants and distributes licenses for production of medical Cannabis. Under the old system, patients would have to complete a lengthy application to Health Canada to receive a license to do one of three things: 1) grow it themselves, 2) designate a personal grower, or 3) purchase it from Health Canada. The new system, called the Marihuana for Medical Purposes Regulations (MMPR) which came into effect on April 1, 2014, essentially got rid of the first two options and created an oligopoly (a market dominated by a limited number of sellers) by Health Canada licensing a small number of companies to be the producers of medical Cannabis.

TLSR: How many Cannabis companies are now licensed in Canada?

DP: The new system has privatized the production and supply of medical Cannabis, and there are 23 licensed producers (LPs) so far. The new system aims to provide LPs with structured and regulated guidelines for production and for qualified patients, a much easier application process and increased choice of Cannabis strains. The system also provides for a reduced role for Health Canada and reduced costs of administrating the program as compared to before. I should mention that on March 21, 2014, a federal court judge granted an injunction to a group of patients who asked to preserve the status quo—the old system—until a constitutional challenge to the new system can be heard. We expect a decision on that challenge in Q1/15.

TLSR: We see IP/patent issues arise all the time in drugs made from natural products. Is marijuana a public domain commodity?

DP: At this point, LPs have been capitalizing to build up production facilities. They have no incentive to pay for expensive clinical trials or patent anything yet. You hit the nail on the head—there aren't really many properties of the plant that can be patented, and those LPs that have crossed the finish line have no incentive to spend the money to do so right now. Instead of IP being the major barrier to entry for the LPs, it's the license itself. Over 1,100 LP applications have been submitted to Health Canada in the last year and a half, and only 23 licenses have been granted. We believe there is a low likelihood of many new licenses being granted in the near term.

TLSR: With no clinical trials, and therefore no disease indications or approved labeling, is prescribing marijuana products a "practice of medicine" issue at the discretion of the physician?

DP: Yes, the new system is designed to allow physicians to write monthly prescriptions, just like for any other drug.

TLSR: According to Health Canada, 40,000 (40K) patients are qualified for marijuana prescriptions in Canada today. I assume there's a backlog of patients waiting to get approved. Health Canada says that number will jump to 450K patients in a decade. Why is that number going to grow? Is it just awareness?

DP: That is a good question, because it highlights the difference between the old program and the new, which lowers hoops and hurdles to obtaining the product. The number grows so big so quickly because of increased access. Under the old system, getting a personal license required long application wait times—as long as six months for a response. Under the new system, a patient acquires medical Cannabis by going to the doctor, getting a medical document, essentially just like a prescription, sending that document to an LP, and having the product mailed directly to the patient's door. Acquiring medical marijuana now may take a matter of days. There is benefit for all the stakeholders involved.

Right now the LPs are investing in education of key opinion leaders, as well as general practitioners. The latter are the front line; they will see patients first. Patients and their physicians may not necessarily require a prescription as first-line treatment, but they may want to layer on Cannabis as a secondary or tertiary option—for example, to reduce the dependence on opioids or to relieve the pain from chemotherapy treatment. These are some of the growth possibilities.

TLSR: I know you have one medical marijuana company under coverage.

DP: Yes. Bedrocan Cannabis Corp. (BED:TSX.V; BNRDF:OTCQX) is a licensed producer and distributor of medical Cannabis in Canada under the MMPR. The company was formed in February 2012 for the purpose of becoming the exclusive Canadian licensee of Bedrocan BV, the Dutch government-contracted LP that has been operating in the Netherlands for the last 13 years. It is currently the sole Cannabis provider for the Dutch government, and Bedrocan Cannabis Corp. is the only Canadian licensee of Bedrocan BV. In February 2014, Bedrocan entered into an exclusive licensing arrangement for an indefinite term to use the Bedrocan BV brand name and IP. Bedrocan Cannabis is actually one of the first few LPs to go public.

TLSR: It sounds like you believe the Bedrocan BV brand name will add value to Bedrocan Cannabis. Is that the case?

DP: Yes. We like Bedrocan Cannabis because of the track record of its partner, and because of its ability to create a standardized, reproducible product that we believe physicians and patients can trust to receive a genetically identical product each time. We expect that physicians will depend on a standard and consistent product that yields reproducible results to dose and monitor patient progress.

We believe the track record of the Dutch partner is second to none in the industry. The management team at Bedrocan Cannabis is well versed in the sector, with experience working with physicians in the field. Some of the near-term milestones for domestic production may also provide increased margins, as the company switches from importing the product to domestically producing it.

TLSR: Do you feel that there's some stigma attached to prescribing or dispensing marijuana?

DP: Yes, there's still some stigma. But if physicians can improve patient outcomes, and potentially wean them off more addictive opiates, we'll start to see more physician adoption. At this point in time, the physicians in Canada are the key. We need buy-in from the medical community to kick the program into another gear.

The Canadian Medical Association has come out publicly and said it doesn't support the use of marijuana right now, especially when inhaled through the lungs, since many of the patients for whom it may be prescribed may have some comorbidities that could be exacerbated by inhaling. However, the College of Family Physicians of Canada released prescribing guidelines at the end of September 2014 because its member physicians were receiving so many questions from their patients, asking whether marijuana would work for them. Part of the issue right now is that physicians may not know exactly how to prescribe Cannabis. These prescribing guidelines provided a first step, and show the medical community is starting to come around.

TLSR: Medical marijuana has had a strong advocacy movement behind it. Moving into more traditional realms, I'm wondering whether foundation support gives you more confidence in a molecule or platform? I ask because advocacy groups can be very persistent, and tend to focus not just on future product development, but on the day-to-day needs of patients presently suffering with a disease. When you see a foundation funding research in a certain area, does it give you more confidence in a molecule?

DP: Absolutely. Third-party validation is always a good place to see a checked box. One company we cover that actually has had experience in that realm is Cynapsus Therapeutics Inc. (CTH:TSX.V; CYNAF:OTCQX). The company has received two grants totaling $1.5M from The Michael J. Fox Foundation for Parkinson's Research. We believe that vote of confidence is very advantageous, and helps support our thesis on the company.

Cynapsus is developing its lead candidate, APL-130277 (sublingual apomorphine strips), via the defined lower-risk U.S. Food and Drug Administration (FDA) 505(b)(2) regulatory pathway. Apomorphine is already approved and is considered a safe drug for treating Parkinson's disease patients. Cynapsus is pursuing an efficacy pathway to generate its own label.

The drug targets patients having "off" episodes, or hypomobility, with muscle stiffness and difficulty in moving. Off episodes affect up to half of Parkinson's patients. Cynapsus has reformulated apomorphine into a thin, easy-to-use film strip that goes under the tongue. Once commercialized, patients would take multiple doses to replace apomorphine currently used as an injection. It's hard to inject yourself in that off state; it's much easier to slip a thin strip under your tongue.

We believe payers and insurers might reimburse this product, since early results have shown that APL-130277 may have a better adverse effect profile and longer duration of effect compared to the already approved drug, Apokyn or APO-go (apomorphine hydrochloride injection).

TLSR: Back on Nov. 19, the company disseminated results of its Phase 2 CTH-105 study, the first trial ever performed with APL-130277 in actual Parkinson's patients. The trial results were good news, but there were only 16 patients in the study, and it was open-label. Do you feel you can take these results to the bank?

DP: The data results were a good first step, and we think the trial sheds some light on possible dose ranges to be used in subsequent, larger trials. CTH-105 examined the effect of its drug candidate on relieving off episodes over a single day, with dose titration used to determine the appropriate doses and strengths, as well as what could be the starting dose necessary for later efficacy trials. A wider range of doses, but a fewer number of patients, was used in CTH-105, as compared to the larger efficacy and safety trials we expect to be completed in 2015 and 2016.

TLSR: What could happen in a Phase 3 pivotal trial to derail this product?

DP: It's a little bit too early to tell how the trial might be designed, but Cynapsus has a few trials left and we'd expect it to meet with the FDA sometime in Q1/15 to clarify the go-forward clinical plan. A larger efficacy trial, as well as a larger safety study, still need to be completed. But, so far, the results look promising.

TLSR: Cynapsus is up substantially over the past 52 weeks. Is the good news baked into the stock?

DP: No, I wouldn't say so. There's definitely room to go. A large driver of value should be the larger safety and efficacy trials.

TLSR: Can you mention another company?

DP: We're also looking at Antibe Therapeutics Inc. (ATE:TSX.V), a small company out of Toronto that is tackling the multibillion-dollar nonsteroidal anti-inflammatory drug (NSAID) market with its lead candidate, ATB-346. Global sales of NSAIDs exceeded $12 billion ($12B) in 2010 [Business Insights, 2011], and more than 51M U.S. adults aged over 18 have reported being diagnosed with some form of arthritis causing chronic pain, according to the Centers for Disease Control and Prevention. Top selling drugs in the space include Pfizer Inc.'s (PFE:NYSE) Celebrex (celecoxib), Novartis AG's (NVS:NYSE) Voltaren (diclofenac) and Daiichi Sankyo Co.'s (DSKYL:OTCPK) loxoprofen. The over-the-counter drugs are well known, including Aleve (naproxen) and Advil (ibuprofen).

TLSR: With so many NSAIDS on the market, what's the value proposition for Antibe?

DP: The unmet clinical need that Antibe fills is that ATB-346 aims to reduce the negative gastrointestinal (GI) effects, including symptoms of ulcers, bleeding, perforation and obstruction.

Over the last few decades, a few new compounds have been introduced that were expected to be safer and more effective. The discovery and development of selective COX inhibitors were intended to offer anti-inflammatory and analgesic effects with minimal or no serious GI effects. However, the problem was twofold. First, small intestinal damage bleeding can be observed in about 70% of chronic NSAID users. Second, clinical evidence showed that with selective COX inhibitors, negative GI effects were only partially mitigated, and that NSAID use, including COX inhibitors, also increased the risk of cardiovascular complications.

Antibe has generated an extensive amount of preclinical data for ATB-346, and has IP protection until 2030. It has composition-of-matter patents on all of its compounds, combining cardiovascular-safe and FDA-approved molecules with the company's patented hydrogen sulfide (H₂S)-releasing molecules. The company's products are based around H₂S-releasing molecules attached to already safe and approved NSAIDs, and preclinical data have shown reduced GI damage compared to common NSAIDs. The company has recently entered into a Phase 1 clinical trial with ATB-346, and we expect results sometime in Q1/15.

TLSR: Will this be a prescription product, at least to begin with?

DP: That's what the company is going for. Antibe has experienced management and key board members who can help—founder and chief scientific officer Dr. John Wallace is a well-regarded GI researcher. CEO Dan Legault is a director of Green Shield Canada, which is one of the country's health benefit administrators, and chief financial officer Mike Bumby has more than 15 years' experience at Eli Lilly and Co. (LLY:NYSE) in business development and in-licensing roles. Notably, the company's board also includes Jonathan Goodman, the former chairman and cofounder of Paladin Labs Inc. (PLB:TSX) and current CEO at Knight Therapeutics Inc. (GUD:TSX; KHTRF:OTCMKTS), and the 1998 Nobel Prize winner in physiology or medicine, Dr. Louis Ignarro, sits on the company's scientific advisory board.

TLSR: Twenty million people took the COX-2 inhibitor Vioxx (rofecoxib) before its cardiovascular toxicity was exposed. Does that experience put a magnifying glass on clinical trials for Antibe's NSAID?

DP: Absolutely. But the management team is well aware of that. Antibe's Phase 1 trial should shed light on whether ATB-346 can mitigate some of those concerns. This drug candidate is a derivative of the naproxen molecule, one of the more commonly used NSAIDs that can be obtained over the counter. The fact that Antibe is using the naproxen base molecule could reduce the safety risk as the trials move forward.

TLSR: From everything you've said here, it sounds like this product is being positioned as a first-line, go-to intervention for chronic pain, and not an alternative for patients who are having GI bleeding. Is that right?

DP: That's not definitive yet. We believe the company might move to an osteoarthritis kind of indication first.

TLSR: Is there another company you'd like to mention, Daniel?

DP: Another name we like in the biotech space is Aurinia Pharmaceuticals Inc. (AUP:TO) It is racing to develop the first FDA-approved drug for lupus nephritis, an autoimmune disease of the kidney. Right now only 10–12 companies are in this race, and almost all are big pharmas. This makes Aurinia attractive in this space.

The company is led by a strong management team with an excellent transactional track record, and they are well versed in the disease. The CEO, Stephen W. Zaruby, was with ZymoGenetics Inc. when it was acquired by Bristol-Myers Squibb Co. (BMY:NYSE) for $885M in 2010. Chief operating officer Michael Martin and chief medical officer Dr. Neil Solomons were with Aspreva Pharmaceuticals Corp. when it was acquired by Galenica AG (GALN:VTX) for $915M in 2008. As part of Aspreva, members of Aurinia's management team developed CellCept (mycophenolate mofetil) to be used in lupus nephritis, which is the current standard of care.

Aurinia's Phase 2b trial aims to layer voclosporin, a calcineurin inhibitor, on top of CellCept as a treatment for lupus nephritis. The company raised $52M in February, and is now in a fully funded Phase 2b trial that will recruit more than 250 patients in more than 70 sites from approximately 20 countries. It is expected to report top-line data in Q1/16.

We believe the unique mechanism of action of Aurinia's drug, voclosporin, distinctively positions the company in the lupus market. There is still no FDA approved drug for lupus nephritis, and only one drug is approved for systemic lupus erythematosus, but it has shown little effectiveness in treating lupus nephritis. Most products in late-stage development are large, injectable biologics like Benlysta (belimumab; GlaxoSmithKline [GSK:NYSE]), which are meant to inhibit B cells. Voclosporin is an oral small molecule that has been in clinical development for more than 10 years, has generated a substantial amount of data in more than 2,000 patients, and has a unique mechanism as a calcineurin inhibitor, which could allow the drug to be used in combination, even with the commercialization of one of the competing drugs.

TLSR: Are there any other companies you'd like to mention?

DP: Sure. We're also keeping an eye on two relatively mature, revenue-generating companies in the Canadian specialty pharmaceutical space, a subsector of Canadian healthcare that has attracted more than $400M in financing and provided almost 100% returns to investors over the last year.

I'll start with Nuvo Research Inc. (NRI:TSX; NRIFF:OTCPK), which has turned the corner and left a litigation settlement overhang in the rearview mirror. Nuvo developed Pennsaid (diclofenac sodium topical solution) and Pennsaid 2%, which are topical medications for osteoarthritis of the knee. The Pennsaid franchise was originally licensed to Mallinckrodt Plc (MNK:NYSE) in June 2009, but a dispute over the drug's development led Nuvo to sue to get the franchise's U.S. rights back. The litigation was settled in September 2014, with Nuvo receiving the rights and a cash payment. The company quickly flipped the Pennsaid 2% U.S. rights to a more willing partner, Horizon Pharma Inc. (HZNP:NASDAQ), in October 2014. At the time we started looking at it, Nuvo was trading at cash. The recent $10M settlement and a $50M payment for the U.S. rights equate to $5/share in cash. That made Nuvo an intriguing option to monitor going forward.

TLSR: Daniel, I'm noting that Nuvo has something else in development. Can you describe it briefly?

DP: Nuvo has a Phase 2 candidate referred to as WF-10. It's an immunotherapy drug for patients with allergies so severe they must receive regular immunotherapy injections, or allergy shots, for treatment. Nuvo originally acquired the rights to this drug in 2002, completed a small 50-patient Phase 2 in 2010, and now, a much larger Phase 2 is expected to report top-line results in Q1/15.

TLSR: Go ahead with that last name.

DP: We've also been looking at Tribute Pharmaceuticals Canada Inc. (TRX:TSX.V; TBUFF:OTCQX), which has a portfolio of revenue-generating products and a strong sales force. Management brings a strong track record with former big pharma player Biovail Corp., which was acquired by Valeant Pharmaceuticals International Inc. (VRX:NYSE; VRX:TSX). Tribute cofounders and CEO Rob Harris and CFO Scott Langille combined have extensive experience in business development, in-licensing, sales and marketing in both Canada and the U.S. The company's recently acquired assets tuck nicely into its product offerings, without the need for additional sales force hires.

Tribute should be approaching EBITDA (earnings before interest, taxes, depreciation and amortization)-positive quarters for the first time as soon as Q4/14. The company raised $30M in July, and used the majority of proceeds and some debt to acquire the Canadian rights to two new products from Novartis for $32M in October. We feel the company should narrow the valuation gap compared to peers on an enterprise value:sales basis if consistent EBITDA can be generated.

TLSR: Thank you, Daniel.