Frank Holler, Angiotech | BCBusiness
Frank Holler was among the early backers of Angiotech.
Not so long ago, B.C.’s biotech industry was on a roll, with QLT leading the way and a couple of others following it into black-ink territory. Then QLT began its long, slow slide, and fate dealt a losing hand to Angiotech, one-time poster child for B.C.’s biotech industry.
We like to think that the business world is a meritocracy; that companies owe their success to the genius and hard work of the people who run them. And why not? The greatest business leaders – think of legends such as Henry Ford, Bill Gates and Steve Jobs – not only build industrial empires; they revolutionize how people lead their daily lives. The worst of the bunch – hello, Enron’s Ken Lay, or former Lehman Brothers boss Dick Fuld – can blow up the world’s economy along with their companies.
But how then, do we explain the rise and sudden collapse of B.C. biotech cornerstone Angiotech, which filed for bankruptcy protection this year? Just six years ago, the province was building a biotech cluster around the company, whose principal product had generated $1.4 billion in sales in just its first nine months on the U.S. market. Now B.C. has been left without a single profitable biotech firm, and frightened investors are starving the sector of capital. The usual culprits – hubris, lack of foresight or vision – are missing. Looking back, it’s hard to attribute Angiotech’s downfall to anything but the fickleness of fate.
The company had built its fortunes on a single device called a drug-eluting stent. A coronary stent is a tiny thing. Picture a fishnet Slinky shrunken down to a diameter of 2.5 millimetres, and inserted into your blood vessels like the submarine of the campy sci-fi classic Fantastic Voyage. In 1966, the year of that film, such life-saving medical devices didn’t exist, so to fix a blockage, the filmmakers imagined sending a nano-sized Raquel Welch in to clear things up. Times changed. In the 1970s, doctors began inserting and inflating balloons to open clogged arteries. Unfortunately, nearly a third of arteries closed back up after surgery. Surgeons tried lasers, shavers, and rotational polishers to keep blood flowing, but the problem persisted. Then came the stent, a metal scaffolding meant to prop open the blood vessels, first used in 1986. It was effective, but still a quarter of treated arteries kept reclosing.
Arteries often didn’t take to the miniature Slinkies embedded in them. Scar-like tissue would build up and grow through the stents’ scaffolding like a jungle reclaiming old ruins. That scarring, known as restenosis, stifled blood flow. In the early 1990s, a radical, potential solution sprang from the UBC campus. William Hunter, then a third-year medical student, was giving a talk about using cancer drugs in small doses to combat localized misbehaviours of non-cancerous cells. Interventional radiologist Lindsay Machan – the kind of doctor who puts catheters, stents and other little devices into small spaces – listened to the talk, and afterward tossed Hunter the idea of combining those cancer drugs with some of his devices, thinking it might make an interesting combination. Machan never expected that Hunter would come back to him a couple of months later with a proposal to do exactly that. The two men, along with Hunter’s then-graduate supervisor, Larry Arseneault, founded Angiotech in 1992.
Years of determination in labs and boardrooms produced Taxus, a stent that kept restenosis at bay by gradually releasing a repurposed anti-cancer drug called paclitaxel.
The revolutionary combination of drug and device was released in Europe in 2003, won regulatory approval to enter the critical U.S. market in 2004, and went on to be sold by the millions through a partnership between Angiotech and Boston Scientific Corp. Angiotech grew into a $2-billion-plus market-cap company and a jewel of Canada’s new economy. Shares soared more than tenfold from 1999 to 2004. Five million patients’ lives were renewed by Taxus stents. B.C. investors and politicians dreamed of the province blossoming into a biotech cluster – a Silicon Valley of life sciences. All of this was due in large part to the serendipitous meeting of those two minds, and their subsequent invention.
But suddenly, it all came falling apart. Even as Taxus made its first sales, Angiotech began to be pummeled by a series of financial and scientific difficulties. Questions arose about the safety of Taxus stents, questions that, along with competition, gutted the company’s central pillar of revenues, beginning in the fall of 2006. Angiotech had piled up debts attempting to broaden its sources of income, but the startling loss of revenues made those debts unsustainable.
The slide was swift, and Angiotech filed for protection from creditors under the Companies’ Creditors Arrangement Act in January of this year; it was subsequently delisted from the TSX and NASDAQ stock exchanges and old shares became worthless. Once a beacon of hope for B.C.’s biotech industry, Angiotech has also become a lesson about how quickly dreams in this sector can shatter. The rest of the province’s biotech firms have been anxiously following Angiotech’s saga, and trying to adapt to life in its wake.
The high-risk biotech industry
The biopharmaceutical industry is notoriously risky, with startups facing a long and uncertain path to success. Angiotech was one of only three publicly traded biotechs in B.C. to have ever earned a profit. The other two are QLT Inc., whose own troubles sent share prices falling from a high of $115 in 2000 to less than $7 today, and Aspreva Pharmaceuticals Corp., which was acquired in 2007 by the Swiss-based Galenica Group. The typical biotech firm is a small spin-off from a university lab, employing perhaps a couple dozen researchers. Like their dot-com cousins, these startups focus on developing new technologies. Big pharmaceutical companies like Boston Scientific, Pfizer, and others, look to these firms for innovation, licensing their products, forming partnerships or buying the smaller companies outright. Some biotechs aspire to grow into sustainable, integrated companies in their own right, instead of just temporary R & D shops for Big Pharma. But only a minority survive as far as commercialization, let alone develop into integrated firms as Angiotech did. The problem is that biotech firms face unrivalled scientific challenges in developing their products, and enormous regulatory burdens to ensure those products are safe.
Frank Holler was a founding director of Angiotech, helping raise money to get it off the ground, and staying on the company’s board until it went public in 1997. He’s now the chair and CEO of Lions Capital Corp. and a director of a number of B.C. biotech firms. Part of his attraction to the company was that it targeted a very common affliction: heart disease.
“There could be some very large market opportunities,” Holler recalls thinking in the hopeful days of the early 1990s. In an industry where development of a single product can take longer than a decade and burn through hundreds of millions of dollars, it helps to have a huge pot at the end of the rainbow. And Angiotech was developing something special with the Taxus stent. “At that time, Angiotech was one of the first companies in the world to consider the combination of drugs and medical devices,” Holler says: “Today, it’s quite common. But back then, it was really a novel approach.”
Boston Scientific’s rival Johnson & Johnson produced Cypher, the first drug-eluting stent to hit the market, in April 2003 – beating Taxus to the U.S. market by nearly a year. But when Taxus launched, it quickly grabbed more than 70 per cent of the market share in what was then a $5-billion-a-year duopoly. Boston Scientific markets Taxus, and pays a percentage of the stent’s net sales to Angiotech in the form of royalties, even today. In 2005, Angiotech’s revenues approached US$200 million, almost entirely from Taxus royalties. But the vulnerability of depending on a lone revenue source was not lost on Hunter, Angiotech’s president and CEO since the company’s founding. The first speed bump had come just four months after Taxus earned U.S. regulatory approval in March 2004. Manufacturing irregularities at Boston Scientific’s Galway, Ireland, production facility prompted the voluntary recall of nearly 90,000 Taxus stents. The setback proved temporary from a sales perspective, but underlined the point that Angiotech had no control over its own fate. It was a foreshadowing. Few realized that 2005 would go down as the high-water mark in Taxus revenues for Angiotech.
In February 2006, Angiotech announced it was buying medical device manufacturer American Medical Instruments Holdings Inc. for US$785 million. Analysts cheered. Investors piled in. The stock soared 11 per cent the day the deal was announced. AMI wasn’t a flashy biotech company. It made sutures, needles, catheters and other devices common to operating rooms everywhere. But the deal brought manufacturing capabilities and a global sales force under Angiotech’s own roof. Plus, Angiotech’s expertise was in putting drugs on stuff like stents, and it had plans to expand into other specialized devices like vascular wraps and catheters. AMI was the maker of exactly such stuff.
Hunter told the media in a conference call that the acquisition was “the last piece of the puzzle” in transforming Angiotech into an integrated company. It would be able to manufacture and market the products it was developing, instead of farming those tasks to other companies. Analysts such as Canaccord Adams’s Prakash Gowd applauded the move, telling the Globe and Mail it was a “strategically sound acquisition.” Angiotech had grown up, and was grabbing control over its own future.
Angiotech borrowed about $600 million in senior term loans, expecting to use Taxus royalties to fund its debt payments until newer products came on line. There was a cliff approaching on the horizon, as competitors had newer drug-eluting stents on track to be approved by 2008. But Taxus sales went off a different cliff much sooner than anyone anticipated. In September 2006, Boston Scientific came forward with evidence that patients implanted with Taxus stents were at a slightly higher, but statistically significant risk of developing a type of clotting known as late stent thrombosis, compared with patients with bare metal stents. Thrombosis is a serious matter, proving fatal in about one-third of cases.
While Taxus remained on the market, surgeons became much more circumscribed in its use. The ink was barely dry on the AMI deal when Taxus royalties began plummeting, from US$184 million in 2005, to US$160 million in 2006, then US$110 million in 2007. Angiotech’s share price dropped 34 per cent in a single day in 2007, when the company reported the decline in its Taxus revenues. Before its 2011 restructuring left common shareholders with nothing, Angiotech reported just US$34 million in royalties in 2010 – a startling 81 per cent drop from its peak. Interest payments alone totaled US$40 million that year.
Angiotech had made what most experts agreed were all the right moves. But the very deal that should have put the company on more stable footing hastened the company’s undoing. “In theory, it was great,” says Rick Smith, a former Angiotech executive who today is the director of investor relations at Vancouver-based biotech firm Allon Therapeutics Inc. “But the ability to fund that acquisition became very challenging after the Taxus revenue declined very rapidly. And here they are today.”
Where they are is on life support, hoping for renewed life after emerging from bankruptcy protection. Angiotech has company in its misery. The other former industry cornerstone, QLT, has also fallen on hard times. Its share price has rebounded to the $7 mark from mid-recession lows of around $1.85, but that’s still a long way from the $115 share price of its glory days in 2000. Together, the two companies’ troubles have cast a pall over B.C. biotech that has scared off all but the most committed biotech investors and made life tougher for the rest of the sector.
“I think definitely on a local level there’s been some significant fear, probably created by the struggles of Angiotech and QLT,” Smith says. “And I think on a macro level across North America, there’s just a reluctance on anything high risk.”
And then there’s the credit crisis of 2008-2009, from which capital markets have yet to fully recover. That’s the other culprit choking off capital for the roughly two dozen B.C. biotech companies struggling to achieve the kind of success Angiotech and QLT once had. The odds were already against another company filling Angiotech’s void, but without capital, that dream is nigh impossible.
Allon, for example, had nearly finalized partnerships with bigger pharmaceutical firms to fund clinical trials for Alzheimer’s disease treatments before the credit markets seized in the fall of 2008 and potential partnerships disappeared. Unable to fund Alzheimer’s trials on its own, Allon switched to pursuing treatments for a rarer, but related dementia-type disorder, progressive supranuclear palsy. The smaller trials required for the rare disease meant costs would be significantly lower, so Allon wouldn’t need a deep-pocketed partner. Also, success in treating PSP could open a side door back into the Alzheimer’s market down the road. The tactical change is an elegant way to keep Allon on the track to commercialization, but it’s not one many other companies could replicate. For the others, Smith says, “It’s live or die.”
And despite how extraordinarily hard it is to develop a pharmaceutical product that will make it to market, it’s a far more difficult feat to create a sustainable, fully integrated company that can provide long-term jobs and fuel economic growth – the kind of company Angiotech was on the cusp of becoming before its collapse.
“When you look at Angiotech and QLT, they were more medical-device,” explains Smith. “Whereas it’s hard to find examples of biotechs today organically growing up. A typical lifecycle for a biotech company – a successful biotech company – is partnership and then becoming acquired.”
Smith points to formerly Langley-based AnorMed as the more typical B.C. success story. In 2006, Massachusetts-based biotech giant Genzyme bought AnorMed for US$589 million, and promptly shut down its operations in Langley. “Friends of mine were quite happy with how they got to see their product grow and become commercialized and actually help patients,” says Smith. “But in terms of what that meant for the local footprint, that was actually jobs that dried up and went away.”
“Ultimately, you need companies that are both successful in the development stage, but then also in the commercialization stage,” says venture capitalist Holler. “Because those are the companies that will go on to create hundreds if not thousands of jobs. And they’ll be the basis for spinouts and other things that help build that industry here in B.C.”
Angiotech’s little stents brought this province tantalizingly close to achieving that dream. But for all the lives they changed, that goal remains out of reach.T