Haviland Enviro Corp V.HEC

National Post Article

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I'm surprised no one has mentioned this article on the cover of FP Investing in todays National Post. Here's the link, and a copy of it https://www.nationalpost.com/financialpost/story.html?id={CE52FDF6-74E6-4D4D-AF3B-33A1483D4B30} ___________________________________________ The challenge: cash in before cash runs out Hemosol racing clock Michael Lewis Financial Post Shares in Hemosol Inc. staged a relief rally in late November after a U.S. Food and Drug Administration approval put the blood replacement developer's key clinical test program back on track. But analysts say previous delays and missed milestones mean the company still faces the risk of failing to deliver a viable product before the cash runs out. Mississauga, Ont.-based Hemosol's stock (HML/TSX) rose by as much as 49% on Nov. 21, closing up 20¢ at $2.90 on the heels of FDA clearance for a new trial involving orthopedic-surgery patients using its lead blood cell product, Hemolink. The stock also got a boost from Hemosol's forecast that it won't need another Phase II study before it moves on to final, Phase III testing -- critical to U.S. market approval. That means an additional cardiac surgery study using higher volumes of Hemolink and a greater number of subjects, known as the "re-do trial," won't be necessary after all, the company said. Hemosol had already completed Phase III trials in both Canada and Britain, but Canada would not approve the product without additional information and Britain, analysts believe, is waiting for results of final U.S. testing. Still, Hemosol is probably in a better position than it ever has been to at least know what regulators want, said David Dean, an analyst at Sprott Securities. "It allows them to advance Hemolink in the clinic. They're moving forward," added Mr. Dean, whose firm has had an investment-banking relationship with Hemosol. The FDA news came days after the company, which had $31.2-million in cash at the end of September, announced a $20-million replacement loan guaranteed by life-sciences firm, MDS Inc. MDS, Hemosol's largest shareholder with an 18% stake, on Dec. 12 reported a 20% increase in fourth-quarter operating earnings. The loan is expected to cover clinical trial costs until late 2003, said John Kennedy, Hemosol chief executive. He said Hemosol will need $100-million in total to bring Hemolink to commercial launch in the United States, which will occur no earlier than 2005. With the MDS-backed loan, it will take an addition $60-million for the program to reach a successful conclusion. "What some people don't seem to understand is that we don't need this all from one source, or all at once," he said in an apparent response to analysts including Dimi Ntantoulis of National Bank Financial, who advise that "investors sell any holdings" or risk being diluted again when Hemosol has to finance its clinical program beyond Phase II. To avoid severely diluting shareholder value, Hemosol has said it is looking at alternatives such as a big pharma partnership, or government funding. But Shameze Rampertab, biotech analyst at Canaccord Capital who rates Hemosol "underperform," said even if these options are successful, they may not be enough to satisfy the company's cash requirements overall. Mr. Rampertab initiated coverage on Hemosol in June with an "underperform"recommendation, a target price of $1.50 -- and a 36-page report detailing the company's "bloody mess." At the time, the shares (HML/TSX) were trading at the $2.50 level. They closed in Toronto yesterday at $2.30, up 20¢. He said Hemosol will need an additional cash infusion of more than $150-million to commercialize Hemolink, which, if funded entirely through equity, would result in the issuance of 27.5 million shares at current prices. That would dilute outstanding shareholder value by 60%. Moreover, he said the stock's recent runup is surprising, since an announcement of an orthopedic surgery trial to replace a second cardiac surgery study was expected. "This is replacing a trial that wasn't working out, so the [cash] burn continues." And although Hemolink has demonstrated efficacy in tests so far, along with a strong safety profile compared to rival products, he said the company has a poor track record of delivering timely clinical trial data needed for marketing approval. And the temporary shuttering of its production facility may have limited product inventory available to complete trials, Mr. Rampertab added. Mr. Kennedy, however, noted that construction of the facility is back on schedule and said the company has enough inventory to complete current trials and initiate next phase studies. As well, he repeated that a share offer will likely be only a component of an overall refinancing effort. "We have a list of options that we are actively exploring." Analysts said funding could come from the Medical Research Council of Canada, which has already invested $3.4-million in Hemosol, or involve an additional loan from MDS, and or a cost-sharing agreement. Mr. Kennedy said the ideal would be a transaction that offsets cash burn but leaves Hemosol with ultimate control of its alternative hemoglobin products -- and its cell therapies being developed to treat HIV/AIDS and cancer. And while the company in June said it expected to take a $1.5-million charge as it laid off more than a third of its staff and delayed the $25-million final phase of its production facility, he said Hemosol has lowered monthly cash burn to $3-million from $5-million without cutting scientific or regulatory staff. Mr. Kennedy said the company does not see an immediate need to cut spending further -- and has no plans to narrow its product pipeline. The cuts were announced along with delays in clinical test program to cap a year of bad news that saw the FDA suspend clinical trials of Hemolink and order changes. Health Canada said the red blood cell substitute would not be approved for use in 2002, sending shares down by 29%. Stock in Hemosol -- the company lost $11.8-million or 26¢ in the quarter ended Sept. 30 to bring its total deficit to $229-million -- has traded in a range of 62¢ to $9.38 over the past 12 months, off 65% over the period. Of nine analysts who cover the company, only one, Charles Olsziewski of UBS Warburg, has rated the stock a "buy" or "strong buy." Late last month, Mr. Olsziewski dropped his US$10 target price on the shares in half, but still managed to lay out a bullish forecast to clients. The shares (HMSL/NASDAQ) closed in New York yesterday at US$1.46. Without one-time charges, Hemosol posted a per-share loss of US11¢ in the quarter ended Sept. 30, an improvement over the US15¢ loss a year earlier, he noted. The improvement was due to "better-than-expected operating expense control," he said. He sees the firm losing US64¢ a share next year, after a loss of US72¢ in 2002. The payoff, he figures, will come in 2004 when he sees Hemosol earning US20¢ (down from US40¢ in his earlier forecast). He comes up with his US$5 forecast by applying a 35-times multiple to that expected profit, after accounting for a 40% discount given that the earnings are still two years away. However, ultimately analysts say further approval delays could be fatal, leaving Hemosol to run out of money before it has commercialized Hemolink. Lenders including Bank of Nova Scotia would inherit a worthless company and shareholders would lose everything. But, if all goes according to Hemosol's plan from here on, the company would receive U.S. marketing approval in time to catch the wave of demand around the world for a safe blood substitute. If that happens, Hemolink, designed to take the place of donor blood for patients undergoing heart and other surgeries, could also be a significant aid to hospitals allowing them to use less blood from their blood banks during high-demand periods. HEMOSOL INC.: Chief executive: John W. Kennedy Listed: Toronto Stock Exchange Toronto Ticker: HML Nasdaq Ticker: HMSL Address: 2585 Meadowpine Blvd., Mississauga, Ont., L5N 8H9 Telephone: [phone] www.hemosol.com [e-mail] © Copyright 2002 National Post