- The drawn-out bear market that the Canadian tech & healthcare sectors went through for much of the last decade has left many interesting companies valued at levels below other offers.
- Healthcare/biotech and fundamental technologies are two areas where Canada's investment community has not traditionally focused.
- Hugh Cleland and Stephen Ireland, Roadmap Capital principal and healthcare partner, discuss growth names with merit and some brief bonus picks.
Starting a new investment company and investing in very small biotechs can be a minefield. Because the business is fraught with bad science and liquidity traps, it takes insight and industry experience to ensure investment capital doesn't drop down a foxhole. Roadmap Capital CEO and Founder Hugh Cleland is in the process of negotiating the minefield now. In this interview with The Life Sciences Report, Cleland and Stephen Ireland, Roadmap Capital principal and healthcare partner, discuss growth names with merit plus some brief bonus picks.
The Life Sciences Report: Hugh, could you tell me why you formed Roadmap Capital?
Hugh Cleland: I wanted to build a team with deep domain expertise in healthcare/biotech and fundamental technologies-two areas where Canada's investment community has not traditionally focused. There is no shortage of innovation in Canada, but the long bull market and bubble in the resource sector sucked enormous amounts of capital and expertise out of those sectors, leaving a trail of undercapitalized and undervalued assets in its wake, particularly in the private and micro-cap areas of healthcare and technology. I have assembled a team-we are now up to 8 people-that can help me scrounge through the bear market debris left behind in those two sectors.
TLSR: Hugh, it seems you're on your way. You're raising money now. My understanding is that you plan to close your first fund on June 30, 2014. How much in assets will you have under management in this fund? What is your goal?
HC: Right now, in Roadmap Capital, we're just under $50 million [$50M] in total assets. By June 30, we expect that to be in the $75-100M range-hopefully higher.
TLSR: Can you manage $100M efficiently in micro-cap stocks?
HC: Absolutely. But we're not just investing in micro-cap stocks. We're putting a lot of new capital to work in private companies, both those we expect to stay private for the life of the investment, as well as those we expect to bring public within the next six to 24 months. In fact, we will go so far as to be involved in company formation, and also in helping companies go public.
TLSR: Why invest primarily in Canadian companies? If you were exclusively a resource investor, and looking for deep value as well as growth, this is understandable, but in the life sciences sector, where the goal is huge growth, why limit yourself to Canadian stocks? Is it about tax advantages? National pride?
HC: I should point out that the new fund has made investments in the U.S. already, and will continue to do so. But we are focusing primarily in Canada. Frankly, it's about where we see the best opportunities and risk/reward ratio. There's no shortage of innovation in Canada, but the long, drawn-out bear market that the Canadian tech and healthcare sectors went through for much of the last decade has left many interesting companies valued at levels far below what is available in other countries. To give you an example, we're putting money into a company with a $2.5M pre-money valuation. Comparable companies in the States would be valued in the $30-40M pre-money range currently. And we have invested a small amount of money into a private stem cell company called Hemostemix. It is raising money at a $25M pre-money valuation, when its best public comparables in the U.S. trade at valuations in the $200-400M range. It comes down to where we see the best valuation opportunities and risk/reward for our investors right now.
TLSR: Stephen, will you do continuing diligence on current portfolio companies as well as diligence on proposed new additions to your portfolio?
Stephen Ireland: In terms of priority, the focus will be on new diligence activities for companies that we've identified as potential investment opportunities. But there will be ongoing diligence obligations for companies already in the portfolio. We want to make sure that milestones in business plans are met, intellectual property portfolios maintained and clinical trials executed to best affect company value. Performing diligence on new companies and companies already in our portfolio is part and parcel of our skill set collectively.
TLSR: Stephen, you've been in the pharma and biotech industries for more than 25 years, including serving as former senior vice president for business development at North Carolina-based TransTech Pharma Inc., a private biotech company with a lot of strategic partners in drug development. You understand what goes on in a private company. After you sign a confidential disclosure agreement with a private group, do you feel like you know what to look for in a company that does not make quarterly public filings?
SI: Absolutely. The very early, basic discovery-stage science varies from company to company and target to target, and is often shaped by personalities of the founding scientific staff. Once a compound moves into animal trials and, more important, into human trials, there are certain studies regulatory agencies expect a biotech to do. Based on my experience, I have a good idea of the questions to ask to access data at each stage of development, and how to analyze those data. I'm also very familiar with deals biotech companies do with academics, contract research organizations, contract manufacturing organizations and licensing partners, which enables me to evaluate their business obligations and opportunities.
TLSR: Stephen, you've been deeply involved in hands-on negotiations between companies big and small. My understanding is that you have led the charge on deals potentially worth in excess of $3 billion [$3B] with Pfizer Inc. (NYSE:PFE) and Forest Laboratories Inc. (NYSE:FRX). Is it fair to say that you might also be involved in business development as far as negotiating between your portfolio companies and the companies you've had experience with in the past?
SI: I hope I'm able to facilitate that. I believe my experience adds value to the various processes companies undertake to either sell their assets in a merger-and-acquisition [M&A]-type transaction, participate in outlicensing activities or partner for skill sets that they may not have.
TLSR: Which company did you want to speak about next, Hugh?
SI: I'd like to mention Immunovaccine Inc. (OTC:IMMVF) [IMV:TSX.V]. I'm a fan of immunotherapies for cancer, and think some cancers will ultimately be cured using some form of targeted immunotherapy. There are significant hurdles to overcome, including 1) how to defeat the defense mechanisms that tumors have developed to evade innate immune responses, 2) how to mount a strong CD8+ T-cell response in the tumor microenvironment, and 3) how to engender an adaptive, durable and sustained T-cell memory for the particular antigen.
Immunovaccine has a novel technology that addresses these issues in its DepoVax platform. The DepoVax vaccine is an antigen-plus-adjuvant combination that's encapsulated in a liposome, which is then surrounded by an oil emulsion. The result is a depot release leading to sustained and specific immune response to the therapy.
In its phase 1 study, Immunovaccine has been able to demonstrate strong CD4+ and CD8+ T-cell responses and, in particular, specific responses to survivin, a well-validated negative regulator of apoptosis in many types of cancer. The company has good dose response data from its phase 1 study, and is preparing to launch two phase 2 studies with its DPX-Survivac therapy, one in ovarian cancer and one in glioblastoma.
TLSR: Stephen, are we looking at a very long development track with these vaccines?
SI: It's certainly longer than those faced by other companies that we've discussed. Ovarian cancer is an orphan indication, and glioblastoma has very few therapeutic regimens that work. Intervention in each is typically surgical. Regulators are motivated to consider fast-track approval status for any company that can show compelling clinical data in these indications, and I think that's what Immunovaccine is looking to do.
HC: Let me point out that there will be significant value-creation milestones along the way. Successful phase 2 results are often the largest value-creating events in the drug development cycle.
SI: I agree with Hugh. Positive phase 2 proof-of-concept data can be a tremendous value driver for a biotech company, and often is the trigger for M&A-type discussions with large pharma partners.
HC: I'd like to touch quickly on two more companies before we finish up. Tekmira Pharmaceuticals Inc. (NASDAQ:TKMR) was one that I highlighted back on June 27, 2013, when it was $4.76. It's been a spectacular rocket ride. We think it will continue to be successful for investors. The two best U.S. comparables in Tekmira's space are Alnylam Pharmaceuticals Inc. (NASDAQ:ALNY) and Arrowhead Research Inc. (NASDAQ:ARWR). These comps suggest Tekmira has plenty of valuation upside, even without further fundamental developments.
TLSR: Thank you, Hugh and Stephen. I enjoyed it.
HC: Thank you very much.
SI: Thank you.
This interview was conducted by George S. Mack of The Life Sciences Report and can be read in its entirety here.
Hugh Cleland, BA, CFA, is cofounder, CEO, president, CIO and principal portfolio manager of the Roadmap Innovation Fund I and the Roadmap Trust. He is also portfolio manager, through a subadvisory contract between Roadmap Capital and BluMont Capital, of the BluMont Innovation PE Strategy Fund. Cleland earned a bachelor's degree with honors from Harvard University, and his CFA designation in 2001. After graduating from Harvard, Cleland worked in the research department at Midland Walwyn Capital [subsequently Merrill Lynch Canada] as research associate to the senior telecommunications services analyst. From March 1998 to March 2001, Cleland worked at Interward Capital Corp., first as an analyst, and later as associate portfolio manager, specializing in technology equities. He was founding portfolio manager at Northern Rivers Capital Management, where he worked from May 2001 until Northern Rivers was acquired by BluMont Capital in February 2010. Together with Riadh Zine, he cofounded Roadmap Capital Inc. in August 2013.
Stephen Ireland, healthcare specialist and a principal with Roadmap Capital Inc., has been involved in the pharmaceutical, specialty pharmaceutical and biotech industries for more than 25 years. He was the former senior vice-president business development at TransTech Pharma. Ireland managed transactions in 2006 and 2010 with Pfizer and Forest Laboratories, respectively, valued in excess of $2B. Ireland received his bachelor's degree in biological sciences with honors from Brock University, Ontario, Canada.
1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
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3) Hugh Cleland: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Stephen Ireland: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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