Therapure Biopharmaceuticals: The Risky Decisions of a Growing Company
By: Kevin Romanick
The outlook for Therapure Biopharmaceuticals Inc. was very promising in the summer of 2015. Nicholas Green, president and CEO of Therapure, had led the first-of-its-kind biopharmaceutical company through another outstanding year, establishing itself amongst the top 100 companies of the Profit 500 List of Canada’s fastest growing companies (Therapure Biopharma Inc., 2015). Indeed, Therapure had a great performance record, and was recognized as one of the fastest growing manufacturing companies in Canada.
In early 2016, Therapure began experiencing growing pains. They had recently received $20 million in funding from Feddev Ontario’s Advanced Manufacturing Fund, and sought to expand the company’s research and development (R&D) division, Therapure Innovations (Therapure Biopharma Inc., 2015). Expansions in R&D meant pushing the company into a high stakes arena, where drug discovery can make or break a company.
To this point, Therapure had succeeded in developing three novel therapeutics. Two of these drugs had already passed FDA approval to begin phase I clinical trials. Green knew the potential risks associated with drug development, but he also knew that getting either of these drugs to the market meant substantial gains for the company, and ultimately an opportunity for Therapure to establish itself amongst the multinational pharmaceutical entities.
What Green didn’t know was the long-term plans that parent company Catalyst Capital Group Inc. had in store for Therapure. Would they provide financial security while Therapure pushed new drugs into clinical trials? Or would Catalyst pull out of this high risk investment?
Therapure Biopharmaceuticals Inc. is a Canadian biopharmaceutical company that was established in 2007. The Mississauga based company acquired its state of the art 130,000sq ft facility from the former Hemsol Biopharma Inc. Therapure was funded through private equity, with Catalyst Capital Group Inc. as the major shareholder. Catalyst uses a “loan to own” strategy, acquiring the discounted debt of failing companies, taking over the business, then selling at a profit after improving operations (Bloomberg, 2017; Delevingne & Tivak, 2018). Catalyst acquired Hemosol Biopharma Inc., a large scale manufacturer of protein therapeutics, in 2005 (Grant, 2007). Hemosol’s crippling debt forced them to lay off 50 of their 75 employees and the company eventually filed for insolvency in 2005 (Grant, 2007). After acquiring Hemosol, Catalyst restructured the company, expanded the facility and operating capabilities, and renamed the company Therapure Biopharmaceuticals Inc.
Therapure opened their doors in 2008 as the first Canadian company of their kind (Therapure Biopharma Inc., 2008). Therapure was initially a contract development and manufacturing organization (CDMO) for complex therapeutics, but later divided the company into three separate divisions. The two additional divisions, Therapure Biologics and Therapure Innovations focussed on plasma protein therapeutics, and drug research and development, respectively. Thomas Wellner, the CEO at conception, had strategically structured the company in a way that allowed for rapid expansion. Having Therapure split into three divisions meant that they could form partnerships with other firms for the CDMO division, where they could generate steady revenue through large scale production of protein therapeutics, and finance their research and development division using this revenue stream.
Therapure’s CDMO business, Therapure Biomanufacturing, makes up the bulk of the company and serves as the company’s primary revenue generator. The Therapure Biomanufacturing business model addresses a major challenge in the Canadian biotechnology industry; the need for Canadian start up companies to seek resources outside of the country to manufacture products (Therapure Biopharma Inc., 2008). Therapure Biomanufacturing operates by forming partnerships and long term contracts with other biopharmaceutical and biotech companies who have developed effective therapeutics, yet lack the manufacturing capabilities to bring their drugs to market. The CDMO division is highly flexible and capable of handling a wide variety of pharmaceutical contracts, from cell-line development to protein purification. The division’s ability to tailor their manufacturing processes to each individual customer’s needs is reflected in the CDMO division’s initial performance (Therapure Biopharma Inc., 2008).
Early Successes & Growth
Less than a year after their doors opened, Therapure signed several major contracts with a variety of clients. Early partnerships with companies like BioVectra Inc. saw the development of proprietary purification techniques for the production of new drug delivery mechanisms (Therapure Biopharma Inc., 2009). Other partnerships with firms such as LFB Technologies saw the development of plasma derived medicinal products (Therapure Biopharma Inc., 2009). In the first two years of business, Therapure had established enough partnerships and development service contracts to see signficant earnings, setting the bar high for subsequent years. With Thomas Wellner at the helm, Therapure sought to max out manufacturing capacity using an aggressive revenue growth plan for 2009 and beyond (Therapure Biopharma Inc., 2009).
As part of Wellner’s aggressive growth strategy, the company initiated two new divisions, the first of which, Therapure Biologics, was formed from the acquisition of plasma protein purification technology from Upfront Chromatography A/S. This proprietary technology, called PlasmaCap EBA, enabled Therapure to drastically improve efficiency and precision in the extraction of plasma proteins (Therapure Biopharma Inc., 2013).
The third division, Therapure Innovations, specializes in drug discovery, research and development. Specifically, Therapure Innovations have developed novel protein therapeutics for treatment of liver cancer, anemia, and hepatitis, some of the most difficult to treat conditions in modern society (American Society of Clinical Oncology, 2017). This division has three pipeline drugs to treat these conditions, TBI302, TBI304H, and TBI301. Of these drugs, TBI302 and TBI304H have been approved by the FDA to commence phase I clinical trials (Therapure Biopharma Inc., 2015).
Failed IPO & Buyout
The addition of Therapure’s Biologics and Innovations divisions imposed a financial stress on the company early in 2016. To remedy this, Catalyst Capital Group, having control of the company, stepped in and attempted to take Therapure public with an initial public offering (IPO). The proposed IPO had the company valued at $867 million, however many pundits viewed this critically, suggesting it was overvalued (Delevingne & Tivak, 2018). The overvaluation of Therapure resulted in a failed attempt to hold an IPO, and consequently, Catalyst began searching for alternative ways to secure funding for Therapure Innovations. As a result, Catalyst agreed to sell off Therapure Biomanufacturing and Therapure Biologics in a joint venture between 3SBio, a Chinese biotechnology company, and CPE Funds for $290 million, a valuation of less than half of Catalysts 2016 company valuation (PBR, 2017; Delevingne & Tivak, 2018).
The Pharmaceutical Industry
Challenges in Big Pharma
The Canadian pharmaceutical industry is a volatile climate and has experienced several challenges in the past decade. Canadian pharmaceutical market growth has been declining since the 2008 Great Recession, which saw a number of companies declaring bankruptcy or being acquired by larger multinational companies (Government of Canada, 2014). In addition to a global financial crisis and economic downturn, the lack of new successful drugs, slow uptake of new products, more rigid drug approval processes, and loss of market exclusivity have culminated in decreased market growth (Government of Canada, 2014). To handle market declines, pharmaceutical companies have restructured their companies to diminish the effects.
Emergence of Contract Service Providers
As large multinational companies such as Pfizer, Merck, and Johnson & Johnson look to cut costs, production has been moved to emerging markets overseas (Government of Canada, 2014). Employment in pharmaceutical manufacturing has contracted 8% since 2007, with approximately 27,000 employees nationwide (Government of Canada, 2014). Manufacturing facilities of several multinational entities (AstraZeneca, Pfizer, Novartis, Roche, Shire and Teva) have been shut down in Canada and moved to emerging markets such as China (Government of Canada, 2014). With global pharmaceutical companies decreasing their level of direct investment by outsourcing production, contract service providers have began to fill vacant facilities. For example, Teva Pharmaceutical’s Montreal facility was sold to Halo Pharmaceuticals in 2012 after moving production to China. Similarly, Pfizer sold its Arnprior facility to Korean-based Keata Pharma, both of which are contract service providers (Government of Canada, 2014).
Biotech & Specialty Pharma
Another way that pharmaceutical companies have coped with difficult economic conditions is by investing in biotechnology and specialty drugs. There are currently 532 biotechnology companies in Canada, representing a $4.2 billion dollar industry (Therapure Biopharmaceuticals, 2017). By 2012, biologics and specialty drugs such as protein therapeutics lead growth in Canadian sales by market segment, boasting a 12.4% growth rate (Government of Canada, 2014).
In these economic conditions, companies with pre-established CDMO business strategies, and producers of protein therapeutics and specialty drugs were at a significant advantage. Given the high demand for these complex products, small biotechnology firms could form partnerships with contract service providers to scale up production.
Therapure’s Market Position
While the pharmaceutical industry markets were a nightmare for large multinational companies, companies that could quickly change their business models were highly successful. For example, prior to market declines, Roche invested heavily in specialty therapeutics and emerged amongst the top ten corporations by annual sales in Canada for the first time ever, grossing over $700 million per year, with a compound annual growth rate (CAGR) of 3.9 from 2007 to 2010 (Government of Canada, 2014).
A Good Fit
In the midst of the unique situation affecting the Canadian pharmaceutical industry, Therapure excelled as one might have expected. As a biopharmaceutical and specialty therapeutics corporation whose emphasis was on their CDMO division, this was the ideal market for Therapure based on their business model. Furthermore, Therapure was equipped with the facility, equipment, and expertise needed to produce large quantities of product for partners of their CDMO division. With these capabilities, Therapure secured several large contracts and was growing at a time when most companies were struggling to keep their doors open. By 2017, Therapure ranked 115th of the Profit 500 List of Canada’s fastest growing companies, their fourth year consecutively (Therapure Biopharma Inc, 2015).
The long term plan for Therapure would see the three-division company producing products for partners while also producing their own line of novel therapeutics. With three pipeline drugs in development, Therapure Innovations was at a crossroads with their R&D. They could invest heavily in their pipeline drugs and potentially see significant returns, or they could divest their R&D division and focus on their CDMO. Most companies were not investing in their R&D due to high costs and unsteady economic climates. The industry had seen a significant declines in R&D growth, and even contracted 0.9% in 2009 (Government of Canada, 2014).
To make matters worse, Therapure would need hundreds of millions, if not billions of dollars to finance clinical trials for their pipeline drugs. In 2014, the cost of drug development had increased by 146% since 2003, averaging a staggering $2.6 billion dollars (Mullin, 2014). When Catalyst had valued the company at $867 million, an initial public offering (IPO) appeared to be the best way to gather funding for clinical trials. However, Catalyst ultimately pulled off the IPO, citing volatile markets, while critics speculated that the failed IPO was a result of Catalyst’s inaccurate valuation (Baigorri & Deveau, 2017). Why the IPO failed did not matter anymore, Therapure needed money, and needed it fast if it were to continue with its R&D division.
The failed IPO meant two things, 1) Therapure would not have enough money to finance clinical trials under their current business model, and 2) company expansion was becoming less of a reality. Therapure’s parent company, Catalyst Capital Group, saw this as an opportunity to pull out it’s investment by divesting the CDMO division, and hired Wells Fargo & Co. to help find a buyer (Baigorri & Deveau, 2017).
When Catalyst sold Therapure Biomanufacturing and Therapure Biologics to 3SBio and CPE Funds for $290 million in September of 2017, Nicholas Green was left with Therapure Innovations and their three pipeline drugs. Despite Catalyst’s move to dismantle the company, Green maintained a positive outlook. In a press release with Therapure, Green said:
“This transaction is exciting for the future of Therapure and for the Canadian biopharma industry, it will be a powerful enabler for further growth and expansion of both 3SBio and Therapure in high growth areas of the market through our combined capabilities. This will put us in a stronger position to lead, innovate and grow, and further support our current and future clients.”
From Green’s perspective, the acquisition of Therapure Biomanufacturing and Therapure Biologics by 3SBio meant that all of Therapure’s remaining resources could be funneled towards drug development.
High Risk, High Cost & Long Waits
Drug development is an extremely expensive endeavour, with costs ranging from $1 billion to $3 billion, and averaging near $2.6 billion in 2014 (Institute of medicine, 2009; Mullin, 2014). Drug development is not only expensive, it is a painfully long process to bring a drug to market, and the probability that the drug makes it to the market is very low (Bains, 2004).
The process begins with the disease. R&D aims to discover everything there is to know about a particular disease, ultimately identify ideal drug targets (what the drug will act upon). Once the disease is fully understood, high throughput screens assess millions of chemicals in search of the molecule that interacts with the disease target (Bain, 2004). Once a molecular candidate is identified, it will go through preclinical testing, where drug toxicity, distribution, metabolism, and excretion will be studied. If the drug is not toxic on animal models, including mice and primates, it will be approved by the FDA for phase I clinical trials (Bain, 2004). Pre-clinical drug development has a 69% failure rate, takes approximately 4 years to complete, and costs upwards of $400 million (Bain, 2004).
Clinical trials are the most expensive and time consuming components of drug development. In Phase I clinical trials, drug efficacy and pharmacokinetics are studied in a small, healthy population. If the drug is found to be effective and safe, it will proceed to phase II clinical trials, where the drug is tested on a small group of patients carrying the disease of which the drug is meant to treat. Again, if the drug is found to be effective and safe, the drug will move forward to phase III clinical trials. To this point, phase I and phase II clinical trials require $400-500 million, have 75% and 35% failure rates respectively, and take 2-3 years each to complete (Bain, 2004).
Phase III clinical trials are the single most expensive component of the drug development process, with costs exceeding $350 million (Bain, 2004). Phase III clinical trials assess the drug’s safety and effectiveness in a large and diverse population, in addition to looking for adverse effects. It serves to validate dosages and formulations, and provides the first platform for marketing material. Phase III clinical trials have a failure rate of 58% and take approximately 2 years to complete (Bain, 2004). Upon successful completion of clinical trials, pharmaceutical companies typically launch massive marketing campaigns and begin selling at high prices as they look to gain returns on their longterm, high risk investment.
All Their Eggs in One Basket
With a sleeker Therapure that had fewer moving parts, Green could thoroughly re-assess the company’s needs. To be successful, Therapure Innovation needed to find success with at least one of their pipeline drugs, and needed to finance clinical trials. Having 3SBio’s newly acquired facilities in-house made production of the therapeutics fast and cost effective. Downsizing the company to a single R&D firm meant fewer expenses, and the company could function for longer on less. To this day, Therapure Innovations has no money coming in, and needs new revenue streams.
In the long term without external investors, Therapure Innovations cannot afford to bring their three drugs to market, however, they may be able to bring one drug to the market. If Therapure Innovations can succeed in bringing just one of their candidate drugs to market, they will generate enough revenue to continue operations. This may be accomplished through private investors, or by going public with an IPO. An IPO would bring in an estimated $100 million, according to company insiders (Baigorri & Deveau, 2017). Additional funding may be secured by selling off the remaining pipeline drugs to other companies who can develop them. On March 28th 2018, Therapure Innovations announced that the company confidentially submitted a draft registration statement on Form F-1 with the U.S. Securities and Exchange Commission (SEC), relating to the proposed initial public offering of its common shares. The IPO is expected to commence after the SEC completes a thorough review (Business Wire, 2018).
The Buyout Fever
Therapure’s proprietary drug candidates increase the company’s value significantly, positioning Therapure for a buyout by a larger pharmaceutical company. In what has been termed the “Biotech Buyout Fever,” 2017 saw several major pharmaceutical companies buying out smaller biotech (Brush, 2017). Takeda Pharmaceuticals bought cancer drug biotech company Ariad Pharmaceuticals for a 75% premium, resulting in a 400% increase in Ariad’s stock value (Brush, 2017). Derma Sciences, another biotech company, jumped 40% after being acquired by Integra LifeSciences, and CoLucid Pharmaceuticals jumped 32% after its acquisition by Eli Lilly and Company, a global pharmaceutical giant (Brush, 2017). These trends are expected to continue well into 2018 and beyond, as large pharmaceutical companies struggle to accommodate the rapidly changing industry.
This trend is due in part because large pharmaceutical companies are running out of ideas for drug development. In 2016, the FDA approved only 22 new drugs, none of which were “blockbuster” drugs ((drug revenue exceeds $1 Billion per annum) Brush, 2017). Brian Skorney, a biotech analyst from Baird Equity Research, suggested that pharmaceutical companies are going stale and experiencing an “innovation gap,” as few new revenue generating products are being developed (Brush, 2017). Big pharmaceutical companies will look to fill these gaps by acquiring other companies.
Wanted: a New Home
Therapure Innovation is in a situation that begs for a buyout. With two drugs ready to begin phase I clinical trials, a larger pharmaceutical company could acquire the company and immediately begin clinical trials, wasting no time on R&D. Therapure must raise hundreds of millions of dollars to initiate clinical trials, while the chance of any drug candidates reaching the market remains dreadfully low (Bains, 2004). A buyout would provide Therapure with stability and opportunity to develop new therapeutics while their current pipeline drugs are undergoing clinical trials, ultimately maximizing the possibility of a drug reaching the market.
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