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  Cangene's cheap, with a balance sheet as clean as a lab

BENJ GALLANDER and BEN STADELMANN

Friday, July 9, 2010

The industry-funded biotechnology association BIOTECanada met last month to confirm a team of leaders dedicated to supporting Canada's $84 billion bio-economy. This is an initiative to promote awareness of the important role this sector plays in ensuring a strong economic future for Canada. It even has a catchy name, &lquo;Beyond Moose and Mountains,&rquo; which seems faintly reminiscent of an independent film from the '70s.

The member firms want Canadian biotech to thrive in a healthy business and regulatory environment, while securing access to capital and other resources to further innovation. One of the association's board members is John Langstaff, who is also president and CEO of Cangene Corporation, a stock that was added in January to the Vice-President's Portfolio.

This company, one of Canada's largest and oldest biopharmaceuticals, was launched in 1984 and listed on the Toronto Stock Exchange in 1991. It's a business with two segments: biopharmaceutical operations and contract services. With three facilities, it manufactures and develops its own products and undertakes contract manufacturing, while also running plasma-collection facilities that are vital to the hyperimmune production process.

In addition, the firm develops therapeutic proteins for those nasty infectious diseases and biodefence applications we hear about and sometimes fear. The FDA or Health Canada has approved five of its products. The company has others in development that could turn out to be diamonds or dust.

Fiscal 2009 was a great year for Cangene, as it booked its highest annual profit ever, aided by a plump increase in deliveries on two U.S. government contracts to supply the U.S. Strategic National Stockpile. These were worth $147.1 million, increasing total revenues that year by 44 percent to $238.8 million. Net income hit a record $59.9 million, compared with $29.6 million a year earlier.

But the company needs to find other sources of revenue as the terms of these agreements have changed, causing recent quarterly revenues to fall by more than 35 percent to $41.1 million.

The first drug Cangene ever sold, WinRho SDF, just happens to be its most successful. It was introduced to the commercial market in 1980 and received FDA approval in 1995, but carried a caveat regarding the possibility of complications. However, in March of this year, it was labelled with a stricter FDA &lquo;black box&rquo; warning due to some deaths. This notifies doctors to perform extra monitoring and additional testing when using the drug. Some may not be willing to do this, which will negatively impact revenues.

On June 1, a distribution agreement for WinRho SDF with Baxter Healthcare Corporation, in effect since 2005, was terminated, supposedly mutually. Cangene then reassumed the commercialization rights for the U.S. The company says that this move is in line with the goal of optimizing its assets and gaining market position, but that rather sounds like an attempt to gloss over the loss of a well-entrenched distributor.

It's difficult to predict the degree of impact on the future revenue stream for this drug, but it's reasonable to expect it to be lower and margins to be somewhat higher in the near term.

There is some good news. In February, the firm's second-largest selling product in North America, HepaGam B, was approved for sale in the European Union.

When we select companies, the balance sheet is of prime importance, and Cangene's happens to be as clean as a lab. In January, cash was sitting at $30.2 million. Add the fact that nary a financial institution holds a debt claim on the firm, and there is good reason to show patience with this outfit. And we contrarians tend to be unusually patient investors.

The timing of purchases is always tricky, and less enthusiasm would've helped when Cangene was added to the portfolio at $5.18. The stock has since fallen and sits at a low seen only once since the last millennium. With the sell target range set at $10 to $12 a share, it now has the possibility of a triple. However, the enterprise will have to boost sales for that to happen.

Are other companies coveting this enterprise? It's possible that a large U.S. pharma outfit or private equity firm could take them out. But a more likely scenario concerns its majority shareholder, Apotex. It would not surprise to see this huge company take Cangene private. It is definitely cheap by many metrics.


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