Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
This week’s discussion topic
I. Tiny biotech with world class potential trading well below cash value
Thallion Pharmaceuticals (TSX: T.TLN, Stock Forum; 12 cents)
www.thallion.com
Shares outstanding: 32 million/ Market cap: $3.8 million
Cash & investments Aug 31: $9 million (28 cents/share)
Debt: $1.8 million ($ - 0.06/share)
Thallion is an unknown, thinly-traded biotechnology company focused on developing new pharmaceutical products in the areas of infectious disease and oncology, with a current emphasis on the development and commercialization of Shigamabs®, a dual antibody product for the treatment of Shigatoxin-producing E. coli (“STEC”) bacterial infections).
Thallion is partnered with a pharmaceutical major from France and if all milestone payments were hit over the next couple years, they would be entitled to payments approaching $150 million - this in theory would be worth $3 to $5 per share and ignores value and revenue from their own licensed territory. All of this, however, is contingent on drug trials currently underway in South America.
E.coli is a deadly and daily occurrence around the world. It is associated with raw vegetables or undercooked meat - although this weekend a British study revealed that one in six mobile phones had human feces on them along with strains of E.coli – a great topic of conversation for the coffee room at work.
Sadly the government and the food safety industry seem to have a higher tolerance at source for E.coli than we should be comfortable with – they often leave it upon the consumer to properly cook or handle their food (see the section in this report on how easily it is transmitted).
It is not until major outbreaks occur that everyone panics as the media discusses the fatality numbers. This became painfully evident in June 2011, with the outbreak in Germany that resulted in dozens of deaths and hundreds of cases of kidney failure and permanent kidney disease – which may have been prevented with Thallion’s drug treatment as discussed below.
What was particularly disturbing about the outbreak in Germany was that it was a mutation, making it more toxic and more infectious. E.coli spreads rapidly and can cause permanent kidney failure or death within a week. There is substantial future risk that something on a grander scale will happen in North America (or anywhere else for that matter). The treatment options are very limited and for this reason Thallion “may” be sitting on a potential biotech gold mine.
Biotech a different breed
Be forewarned that these are not for the faint of heart. While the rewards can be dramatic, they can be boring and require long-term patience. In the past three years Thallion is only the third biotech I have owned. The first (YM) did exceptionally well (chart below) and the second (TSX: V.MWC) I sold after eight months near break-even because of (what appeared to be) weak management.
In Q4/08 following the financial collapse, I picked YM Biosciences to follow because of their growth potential and substantial discount to cash value. At the time the stock was trading near 40 cents and we took 700% gains by Q3/09. The stock eventually hit $3.70 this summer.
Small biotech companies are tough to follow (especially in Canada) because the overall sector has done poorly for years. I cannot remember the last time the sector itself had a rally (unlike golds and techs for example) and unlikely it will in the foreseeable future so you have to pick and choose very carefully.
With Thallion I am employing the same strategy I used with YM. Trading at a substantial discount to cash value, a strong underlying story offering substantial growth potential if drug trials work out (always the primary risk), controlled expenses or burn rate, low market capitalization, and trading near the lower end of a chart.
If you find the right combination of these and have the patience (and risk tolerance), the capital gains can be quite dramatic as we saw with YM Biosciences. Thallion has another interesting aspect in that it is priced in the low teens so a person can hold a nice share position without risking a fortune.
Germany June 2011 - Worst E-Coli outbreak on record
Most of you will remember what happened in Germany this summer. The E.coli outbreak caused dramatic economic and health damage as the strain was abnormally dangerous and difficult to treat.
The only known method of treatment was experimental and originated from Soliris, which is produced in Europe by Alexion Pharmaceuticals. They did not have formal approval for the drug but doctors were using it out of desperation to try and reduce the deaths and kidney failure. Alexion was giving the drug away to avoid long delays.
Forbes reported in 2010 that Soliris may be called "the world's single most expensive drug." The drug costs patients and insurers over $400,000 per year. It has not been formally approved as a treatment for patients with STEC-HUS (the type of E-coli outbreak in Germany).
Importance of Shiga, STEC, and HUS
The people affected were suffering from... Shiga-toxin-producing E.coli haemolytic uremic syndrome, or STEC-HUS, a potentially life-threatening outcome of enterohaemorrhagic E.coli, or EHEC. Important is remembering - Shiga, STEC and HUS.
HUS is a life-threatening complication of E. coli infections. The syndrome, which results in the destruction of red blood cells and severe kidney problems, usually arises about a week after diarrhea starts.
EHEC is a particularly deadly strain of the common bacteria found in the digestive systems of cows, humans and other mammals. The mutation in Germany was hitting young people hard (very abnormal). Here is a good explanation from a blog in Europe:
What makes these strains different is that they have picked up (courtesy of a cross-species virus infection) genetic material from shigella bacteria, and therefore can express shiga toxins (STEC = shiga toxin-producing E. coli), in a classic case of horizontal genetic transfer. The O104:H4 variety is very rare, and has only been found in one human patient before - in Hong Kong.
Unlike infection with shigella, where treatment with antibiotics can and often does make sense, the E. coli (O104:H4, O157 or other such strains) behave differently in the gut, and treatment with antibiotics can often make things worse, by causing a whole lot of shiga-toxins (also known as verotoxins) to be released at once. The Hemolytic-uremic syndrome (HUS) means the arterioles and capillaries of the body become blocked - leading to such odd things as (if the patient survives) blindness.
There have been outbreaks before of lethal E. coli varieties, including in the USA where another subtype of O:104 - this time O104:H21, as opposed to the O104:H4 now current in the German outbreak - in the USA in 1994.
This has been a disaster for farmers - German farmers are shredding and composting vegetables to a total worth of two to three million euros a day. The big question of course is possible geographical spread of O104:H4 to France, Britain etc.
Thallion treatment (Shigamabs) overview
Thallion’s Shigamabs is currently in a phase II trial in South America. The product candidate consists of two monoclonal antibodies designed to bind specifically and exclusively to either Shigatoxin 1 ("Stx1") or Shigatoxin 2 ("Stx2") secreted by Shigatoxin-producing E. coli ("STEC").
Ignoring what happened in Europe this summer with the more violent strain, STEC affects an estimated 314,000 people annually in the industrialized world. In a significant proportion of people that experience Shigatoxin-mediated events, clinical outcomes include hemorrhagic colitis, Hemolytic anaemia, thrombocytopenia, kidney failure, brain damage, Hemolytic uremic syndrome ("HUS") and, for 3% to 5% of the latter patients, death.
STEC is the principal cause of HUS, a life-threatening condition that appears more frequently in infected children and is the most common cause of acute renal failure in these patients. There is no approved treatment for STEC infections and antibiotics have been shown to increase the risk and severity of Shigatoxin-mediated events.
Thallion has completed four Phase I clinical trials evaluating the safety of Shigamabs. The clinical trials demonstrated that the antibodies are safe and well tolerated when administered both individually and in combination at various dose levels. No serious adverse events were experienced in any of the 50 healthy volunteers that have received Shigamabs.
In preclinical studies employing a lethal mouse model of infection, Shigamabs® demonstrated a significant protective effect at relatively low doses and animal rescue was possible, even when Shigamabs® was administered 72 hours post-infection.
Thallion’s Shigamabs represents the most advanced clinical treatment in development for the prevention of a condition in which the current standard of care is simply to hydrate, wait and then monitor disease progression," said Dr. Allan Mandelzys, chief executive officer of Thallion Pharmaceuticals.
This outbreak in Germany should be a warning sign to Americans to remind us of the dangers E. coli poses in the food supply. As Dr. Philip Tierno, aka "Dr. Germ," told Fox News Health, just because the E. coli strain in Europe seems to be particularly vicious, it doesn't make it any more lethal than the strain we commonly see here in America called E. coli 0157:H7. He simply put it like this: "It can kill you just as effectively."
Partnership with LFB of France
On February 12, 2010, Thallion signed a definitive development and license agreement with LFB Biotechnologies, of France, a subsidiary of the Laboratoire français du Fractionnement et des Biotechnologies ("LFB"), a French state-owned company.
Thallion received payment of the up-front licensing fee of C$2,140,050 further to and in connection with the LOI. Pursuant to this agreement, Thallion can receive payments of up to 95 million Euro, including the up-front licensing fee, quarterly funding for substantially all future clinical development costs, as well as potential milestone payments associated with the development, approval and commercial sales of Shigamab.
LFB received commercial rights to Shigamabs for Europe, South America and other territories of strategic interest to LFB, including Russia, Turkey, China, South Korea and Northern African countries, while Thallion retained the rights for North America and the rest of world.
In addition, Thallion will receive tiered, double-digit royalties based on product sales. Thallion has retained primary responsibility for the conduct of the clinical program. Furthermore, Thallion and LFB have shared certain initial chemistry, manufacturing and control ("CMC") costs pertaining to the manufacturing of new Phase II materials and LFB will be responsible for the manufacture and supply of Shigamabs for both Phase III clinical study and commercial sale.
"LFB shares Thallion's vision of developing new treatments for under-served markets," stated Christian Béchon, LFB's Chairman & CEO. "Shigamabs® is particularly well suited to broadening LFB's portfolio of monoclonal antibodies and, as an Orphan Drug, perfectly fits with our commitment in rare and severe diseases. We look forward to moving Shigamabs® into the Phase II clinical trial."
About LFB Group
https://www.lfb.fr/en/home.html
Leader in France in the field of plasma-derived medicinal products - sixth player worldwide, LFB Group is also one of the leading European companies for the development of monoclonal antibodies and new-generation proteins based on biotechnologies
376 million euro in sales
76 million on 2010 R&D
1,700 employees
Statement May 30th from Guillaume Bologna - Head of LFB Public Affairs and Executive VP of Development Affairs - contained in a joint Thallion / LFB news release.
"We believe a clear medical need exists for the treatment of STEC infections, and the recent German outbreak, where approximately 300 cases of haemolytic uraemic syndrome (HUS) and 10 deaths have been reported, is an unfortunate reminder of that,"
News excerpt Oct 11th
"We are well positioned to capture the beginning of the high season for Shiga toxin-producing E. coli (STEC) infection, which we expect to result in a similarly high-patient recruitment rate as we experienced during enrolment of the low-dose cohort."
Guillaume Bologna, executive vice-president of business development and development programs at LFB Biotechnologies, commented: "The human and economic toll of the recent German STEC outbreak demonstrated the urgent need for an effective treatment for STEC. Fortunately, the recent suspension and resumption of the Shigatec trial did not adversely impact our overall clinical development timelines in a material way."
About the Shigatec trial
The randomized, double-blind, placebo-controlled trial will enroll 42 patients, aged six months to 18 years, testing positive for STEC infection, distributed in two cohorts. The first cohort examines standard of care combined with a low dose of Shigamabs (one milligram per kilogram per dose), compared with standard of care with placebo. The second cohort will examine standard of care combined with a high dose of Shigamabs (three milligrams per kilogram per dose), compared with standard of care with placebo. The primary end points for the Phase 2 trial are safety and tolerability. Secondary end points include pharmacokinetics and objective measures of efficacy using single and composite end points.
How easily E.coli can spread
Excerpts from Food Safety News – Oct 16, 2011
…. review what happens to E. coli O157:H7 bacteria that are found on the surface of intact meat cuts shipped into commerce by the source-originating slaughter plants, with full agency endorsement.
Let's assume a retail meat market purchases beef top inside rounds, which are an intact cut of meat. Let's further assume that E. coli 0157:H7 bacteria reside on the exterior surface of these intact cuts. An employee of the meat market opens the vacuum-pack bag in which the intact cut of meat is packaged, removes the meat, throws the empty bag away, and places the meat on his/her meat cutting table or power saw for processing.
At this point, the E. coli bacteria have already cross-contaminated the meat cutter's gloves, apron, the cutting table and the power saw. The meat cutter deftly processes the meat into round steak, round roasts, cube steaks, stew and the trimmings go into ground beef. A meat wrapper then wraps the pieces, and places the finished product into the meat case.
Now, the E. coli have likewise cross-contaminated the meat wrapper's gloves and apron, as well as the wrapping station. Unfortunately, the bacteria are now on the meat cutter's knife (blade and handle both), as well as on the power saw when the saw is used. All meat which subsequently comes in contact later that day with the employees' aprons and gloves, knives, the wrapping table, the power saws and cutting tables are highly likely to pick up residual E. coli bacteria.
Conclusion
Thallion is by no means a short-term trade. It is intended as a mid-to-long-term speculation of six to 18 months. If they hit a significant snag on drug trials I would typically drop coverage - or if the cash burn saw an abnormal increase. For the past several months it has traded decent volume in the 10 cent to 13 cent range and this has moved paper into more stable hands.
However as markets have cleaned up since October 4, so has Thallion. I am introducing it now to the Stockhouse community as some may wish to take advantage of any tax loss selling opportunities over the next three weeks.
I personally bought the stock during the German E.coli outbreak in June and added to the position during market selloffs in August and September. My intent at this stage is to hold through 2012 pending outcome of the drug trials in South America.
With small biotechs I try to minimize risk by identifying best-in-class with little competition. Of particular importance, if a person is buying discounted cash only, there is no direct or implied value on the business model or the drug itself - even though the partnership with LFB of France could generate dramatic future returns.
Disclosure: Danny Deadlock owns 100,000 shares of Thallion Pharmaceuticals (TSX: T.TLN)