Tap into Low-Risk Biotech and Specialty Pharma for
Growth: Steven Palmer
Source: George S. Mack of
The Life Sciences Report
The somewhat obscure specialty biotechs and pharmas seek to
add value by giving new life to older technologies and molecules.
President and Chief Investment Officer Steven Palmer of
AlphaNorth Asset Management embraces this strategy to generate
exceptional returns while mitigating some of the risks inherent
in drug development. In this exclusive interview with
The Life Sciences Report
Palmer shares favorite life sciences names that could offer huge
The Life Sciences Report:
Steve, you've had some really striking successes in the past few
years. Your AlphaNorth Partners Fund, a hedge fund, was up 160%
in 2009 and over 100% in 2010. What did you do in those years to
make those kinds of returns?
One thing we did not do is change our strategy during the
financial crisis. Many investors changed their strategies, and it
didn't work out so well.
After the crisis period in 2008, you had a lot of value in your
fund. Is that what you mean?
Yes. We stuck with the names we believed in and added to them at
their very depressed prices. They rebounded quite strongly.
At the end of January of this year you had $90 million (
) under management in your AlphaNorth Partners Fund. How large
would you allow this fund to grow? At what point would you cut
We have already implemented restrictions to new investors. I
always said, from the launch of the AlphaNorth Partners Fund,
that once it got to $100M in assets, we would take steps to limit
new investors. We have been allowing limited new investments
recently, but this opportunity will soon be closed. Our focus now
is on building assets in our mutual fund, the AlphaNorth Growth
Staying with your AlphaNorth Partners Fund for a moment, it was
up 5.6% in January. How did you do in February?
We were up 2% in February.
You were weighted at about 11% in biotech, which did quite well
in January. Was your biotech performance strong enough to do some
of the heavy lifting?
January was not particularly good for our sector weighting in
biotech. In Canada, the best performing sector in January was
materials. We have a couple of biotech names that did well in
February, but not so much in January when they were somewhat
Do you intend to add any more biotech or specialty pharma
companies to your portfolio?
Yes. I am always looking for good opportunities. The current
weighting of about 11% is probably adequate, and that is
significantly higher than its index weight in the S&P/TSX
Composite, which is only 1.7%. So, we are already considerably
If you wanted to, could you add private equity to your Partners
Yes, we do private sometimes.
Would you consider biotech, specialty pharma or any life sciences
companies as a private equity holding?
I would consider it, but generally I try to stay away from the
private life sciences companies because that really implies they
are much earlier stage. The earlier stage you go in biotech, the
higher the risk. So I tend to focus on some of the later-stage
companies, which implies that they are public already.
In your AlphaNorth Partners Fund you have energy, metals,
precious metals, technology and life sciences. Did you just find
your great biotech ideas, or did you consciously set out to allot
a segment of your portfolio to it?
We like to maintain a diversified portfolio. Many funds in Canada
are solely resource-focused, but I find that to be much higher
risk. So we maintain a balance of biotech and technology, as well
as resource investments. In the late 1990s, when I was managing
another small-cap portfolio, we had significant weightings in
tech and biotech, so it is something I have always watched.
Resources have been more of a focus for many investors in recent
years because biotech companies haven't performed as well.
Everything is cyclical, and I think the life sciences merit
exposure in the portfolio.
With energy, you can drill a well and develop it in a few years.
It's the same with a mine. But it could take 10-15 years to
develop a drug. Biotech presents special due diligence
considerations, doesn't it?
The timeframe is not dissimilar. You start from square one in the
clinic in a biotech situation, progress through phases 1, 2 and
3, and then make the new drug application (NDA). That takes many
years. But the same thing applies on the mining side, where you
go from grassroots exploration to getting some initial good
results, then proving up the resource, doing your feasibility
study, spending all the capex to build the mine and getting into
production. That is all a very long process as well.
Would you consider a biotech company that has nothing in the
clinic and has a long way to go before it could monetize any of
its technology? How do you choose a biotech stock?
For me, it is all about risk versus reward. So we look for
companies that are working on products that have huge market
potential and situations that we view as lower risk. We also
prefer companies that have multiple products. I view biotech
similar to mining companies actually. Whether it is exploration
success or clinical success, the rewards can be dramatic.
Do you look for takeout candidates in biotech, or do you look for
companies that are going to continue to grow organically?
It is always good when you have a company that is a takeout
target, but in biotech it is much harder to predict compared to
some other sectors, where it is more obvious. At the end of the
day, it is all about the company fundamentals. If a company gets
taken out at a premium valuation, that is just a bonus.
Do you have an overall theme with respect to life sciences?
Three things: late-stage products; multiple products, meaning no
one-trick ponies but lots of avenues to success; and low-risk
products from companies that have already started to generate
revenue from their products.
Can we talk about some of the life sciences companies you
I can comment on
Trimel Pharmaceuticals (TRL:TSX)
An exciting company, no pun intended.
It is interesting because it attracts a lot of media attention
with its unique application. Its lead product, CompleoTRT
(intranasal gel formulation of testosterone), is a phase 3
product for testosterone replacement in men, which is more of a
problem than people realize. Often men who have low testosterone
are misdiagnosed and symptoms are attributed to other problems.
Current treatment is to put a testosterone cream on a patient's
skin and have it absorbed. The problem is that there is often a
high degree of side effects. Clothes can't be washed with other
family members' clothes or the testosterone can get transferred
onto them. If you have young kids, and testosterone gets
transferred onto their clothes or their own skin by contact with
a patient who is using it topically, it could have an impact on
them and cause them to mature prematurely, for example. You
cannot get the cream on the bed sheets or touch anybody with it,
or it may be absorbed by them. It is a $1.5 billion (
) market for the existing products in the U.S., and Trimel is
just entering phase 3. It could have an approved product next
The difference here is that it is an intranasal delivery system.
Perhaps this market could be expanded, with the urologist or
internist being less hesitant to prescribe it for a patient?
Yes, for sure. I do think that.
And Trimel also has Tefina (intranasal low-dose gel formulation
of testosterone) in phase 2 for women who have been unable to
achieve orgasm. Recent data show a 27% overall response in the
experimental arm versus 10% for placebo. The stock has reacted
quite well to that recent news.
Yes, Trimel presented the data on Valentine's Day in Toronto at a
small conference. Product results were very favorable.
I realize it was only 56 patients, and the overall response was
statistically significant, but I was wondering if you thought it
justified that kind of dramatic uptick in mid-February.
To get statistical significance in a sample that small is quite
promising. The lead investigators of this drug are very
optimistic that phase 2 will show similar results.
Is Trimel fairly valued now, with a market cap of around $285M,
or is there a lot more upside?
If clinical trials continue to be successful and these products
go on to be approved, there is lots of room. The stock price will
go up multiple times from where it is currently. These are
multibillion dollar markets. Some people compare the female
sexual dysfunction product, Tefina, to Viagra (sildenafil
citrate), and we know how big a market Viagra-type drugs are. So
there is huge potential there.
What other companies would you like to mention?
Another company that I am excited about is
Zecotek Photonics Inc. (ZMS:TSX.V; W1I:FSE; ZMSPF:OTCPK)
. I like to invest in companies that have multiple paths to
success. This is the situation with Zecotek. The company has
several products, plus a lawsuit. Each of these things could have
a significantly positive impact. Zecotek's current market value
is only $35M. We think the value of the lawsuit could be $200M or
more. The company also has a 3D screen technology that doesn't
require glasses, a laser division, and patented technology for
crystals used in PET scanners for the medical industry. Each of
these, if successfully commercialized, could also be worth
several hundred million dollars in value to the company.
Merus Labs (MSL:TSE)
, acquired the Canadian rights to an antibiotic product
vancomycin for Clostridium difficile infection (
). This company has a lower-risk strategy. Merus is acquiring
rights to noncore drugs, where the market is quite small, from
big pharmaceutical companies. Where Trimel has multiple products
in phase 2 and phase 3 stages of development, Merus Labs already
has a product that it is selling. In fact, in its Q211, ending
Nov. 30, it did $2.5M in revenue with a gross margin of $2.2M.
Should it do over $10M in revenue in just that one product this
year it would be highly profitable, with a gross margin of almost
90%. It also has other products in the wound care area in its
pipeline. The strategy with this company is similar to
Paladin Labs Inc. (PLB:TSX)
, another company with a similar business model and a much larger
The patent on vancomycin expired more than two decades ago, which
is why it's such a small product. It is an interesting strategy.
A larger pharma doesn't want to divert the attention of its sales
force for these smaller products.
Some of the large pharma companies like to sell the rights to
drugs in smaller markets. They would rather focus on the
$500M-annual revenue and up drugs, so they divest some of the
noncore stuff. Small companies like Merus Labs can take advantage
of this. Where it is not a significant product for a multibillion
dollar company, it could have quite an impact for a small company
like Merus Labs.
The next one you wanted to speak about?
ProMetic Life Sciences (PLI:TSE)
is in a similar situation. It has multiple, lower-risk products.
It is not trying to cure cancer or anything. Basically, it has
technology to separate proteins in blood. Its pharma customers
require specific proteins to be used in their own products, and I
believe there are now more than 10 companies that rely on
supplies of products from ProMetic, so it has existing revenue.
It recently announced some additional contracts that will boost
revenue more than 100% in 2012. It will also be turning cash flow
(EDITDA)-positive this year. That's often a very significant
milestone for these types of companies.
Did you have one more that you could talk about?
. I like this one because it offers multiple avenues to success
with multiple product lines. It is a drug delivery company, and
it has three platforms. One is its immediate-release VersaFilm,
which is placed on the roof of the mouth where it gets absorbed.
One great benefit is that a drug can get into a patient's system
much more quickly than in pill form. It also has its mucoadhesive
tablet, AdVersa, and its multilayer VersaTab
controlled-time-release tablet. The company also has many drugs
in the pipeline; some of them are later-stage drugs.
I like Intelgenx because the company has demonstrated that it
can take a product right from the clinic through drug approval,
which is what it did recently with the antidepressant drug
CPI-300 (bupropion HCL, the active ingredient in Wellbutrin XL
). This is a generic drug, but the company has devised a new
dose. Instead of having to take two pills, you can just take one.
It is well established that patients do better when they have
fewer pills to remember to take each day. The company has
recently partnered with Edgemont Pharmaceuticals (private) to
commercialize CPI-300. It will get a $1M upfront payment and a
I note that the company is also partnered with
Jazz Pharmaceuticals (JAZZ:NASDAQ)
. When these drug delivery models work, they are very
interesting, especially when they bring in double-digit
The other thing that lowers risk with a company like this is that
it is not trying to develop new molecules to cure diseases. This
is just a drug delivery technology, where it takes existing drugs
already shown to work and finds a better way to deliver the
Considering the tiny $24M market cap, double-digit royalty stream
and multiple partners, it looks to have big market-moving
The potential gains with all of these companies are multiple
times the money. I buy these not to generate a 20% return or
anything like that. I'm looking for five times my money,
Steve, I've enjoyed speaking with you.
Thank you very much.
is a founding partner and chief investment officer with
AlphaNorth Asset Management. He began his career in the
investment industry in 1995. Prior to founding AlphaNorth in
2007, from July 1998 to August 2007, he was vice president of
Canadian Equities, at one of the world's largest financial
institutions, where he managed the Canadian equity assets of
approximately $350M. Palmer managed a pooled fund that focused
on Canadian small capitalization companies from its inception
to August 2007, achieving returns that were ranked #1 in
performance by a major fund ranking service in its small-cap
pooled-fund category (35.8% over nine years as compared to 10%
for the S&P/TSX Composite Index and 13% for the BMO
Weighted Small Cap Total Return Index over the same period). He
also managed a large-cap fund that ranked in the first quartile
of performance among other Canadian equity pooled funds for the
following time periods: 1-year, 2-year, 3-year, 4-year, 5-year
and 10-year. From September 1997 to July 1998, Palmer was
employed as a portfolio manager at a high net worth investment
boutique. Palmer started his career in January 1995 as a
research associate and progressed to research analyst. He
earned a bachelor's degree in economics from the University of
Western Ontario and is a Chartered Financial Analyst.
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1) George Mack of
The Life Sciences Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Life Sciences Report:
Zecotek Photonics Inc. Streetwise Reports does not accespt stock
in exchange for services.
3) Steven Palmer: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. I was not paid by Streetwise
for participating in this story. Funds managed by AlphaNorth
Asset Management own shares of the companies mentioned in this
The Life Sciences Report
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