Cleland Fund IGXT comment March 12th - posted by FoDaLongHaul on March 19th that I am reposting and getting added to the sticky notes, because it is important imo.
I posted just the section in regards to IGXT, which is highlighted below and thank you FoDahLongHaul for posting this!
BluMont Capital Corporation
Northern Rivers Funds
70 University Avenue
Suite 1200, PO Box 16
Toronto, ON M5J 2M4
Canada
Tel: 416.597.1226
Fax: 416.597.8926
March 12, 2012
Dear Partners and Friends:
The Northern Rivers Innovation RSP Fund (“the Innovation Fund” or “the Fund”) was essentially
flat in 2011, down 0.1%. Considering how well things had been going earlier in the year, I was
not happy about that. The -35.11% return experienced by the TSXVenture Index, and the
-11.07% experienced by the TSX Composite made it only slightly easier to swallow.
Now, as of February 29, 2012, the fund is up 11.65% in the first two months of 2012.
In fact, this has been a watershed year for a number of the companies in the portfolio, with
each of the top 5 positions in the Fund experiencing developments which position these
companies to achieve what I have always believed they could achieve.
The returns as of February 29, 2012, are set out below.
Average Annual Returns to February 29, 2012*
2012 YTD 1 month 3 months 6 months 1 Year 3 Years Inception**
Northern Rivers
Innovation RSP Fund
*Date of Inception
March 1, 2004
11.65% 5.01% 2.74% -7.84% 6.81% 16.94% 1.15%
2011 highlighted the importance of the private equity structure and approach
In the second half of 2011, with investors once again believing that the world was ending,
money started pouring out of equity funds around the world. If the larger fund after which the
Innovation Fund is modeled had been subject to redemptions during that time, we could have
become embroiled in the same downward spiral that has taken down so many small and
microcap funds over the past four years. As it was, with no redemptions (and indeed no
possibility of redemptions, because of the private equity structure around that portfolio), I was
able to continue focusing on what I am supposed to focus on: helping the companies create and
realize value.
2011 also highlighted the value-add of the Fund’s Advisory Board
In fact, the companies which are now the fifth and sixth largest positions in the Innovation
Fund (Zaio Corp. and ICO Therapeutics) both got the “thumbs up” from the Fund’s Advisory
Board, and have performed extremely well, up 120% and 50% respectively since being added
to the Fund (not including the return on the warrants).
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It truly is a remarkable group of people advising me. The four of them have created over
$10billion in shareholder value in the companies they have founded and/or led. (See page 12
of the offering memorandum for the BluMont Innovation PE Strategy Fund to see short bios on
three of the four members.) So far, since I created the Advisory Board, we have had 4 twoday,
in-person Advisory Board meetings, numerous group calls, and countless one-on-one calls.
I wrote in the December 14, 2010, letter for the Northern Rivers Innovation LP: “An external
Advisory Board has been created for the BluMont Innovation PE Strategy Fund I. The purpose of
the Advisory Board, comprised of successful professionals with relevant business experience, is
to 1) advise me on how to realize as much value as possible from the existing investments, 2)
act as a source of new ideas, and 3) provide a due diligence resource for ideas shown to them.”
Well, as most of my investors know, these individuals are not just advising me on how to create
and realize as much value as possible from our investments—they are rolling up their sleeves,
and joining Boards and management teams, and actually playing a direct role in value creation
in a number of companies in the Fund. More on that later. But their value as a source of new
ideas and as a due diligence resource is also shining through, and it is primarily the Innovation
Fund which benefits from this aspect of their contribution.
Thumbs up/thumbs down as a powerful analytical tool (!?!)
During calendar 2011, 16 companies presented (or were presented) in person to my Advisory
Board. Distilling their input to a simple thumbs up or thumbs down yielded some very startling
results, suggesting that my Advisory Board is adding even more value than I was hoping!!
I grouped the ‘thumbs up’ and ‘thumbs down’ into 2 categories: ‘2 thumbs up or less’ (less than
a majority), and ‘3 thumbs up or more’ (a majority). Eight companies received 2 thumbs up or
less, and eight companies received 3 thumbs up or more. I calculated subsequent stock
performance (after the face-to-face meeting) for the companies in each category1:
2 thumbs up or less: 8 companies, with returns ranging from +1.7% to -56.7%
3 thumbs up or more: 8 companies, with returns ranging from +7.8% to +177.8%
I love the fact that the lowest return in the “3 thumbs up or more” group is HIGHER than the
highest return in the “2 thumbs up or less” group. Obviously, I can’t take credit for how smart
these guys are, or for the over $10billion in shareholder value they created in their prior
enterprises. But I can take credit for assembling them into a fantastically synergistic group
which is rolling up their sleeves for the benefit of my investors, and which seems to have a
particularly savvy and value-add “group think” when it comes to investment.
Let’s go through the major holdings…
INTELGENX: FDA approval for their 1st drug in November + a commercialization
partner for that drug + a deal with Par Pharmaceuticals = lower share price???
This is a completely irrational situation, making IntelGenx a table pounder. As of the close on
March 7, the stock is LOWER than it was before CPI-300 (IntelGenx’ antidepressant) received
FDA approval; LOWER than it was before the deal with Par Pharmaceutical; and LOWER than it
was before the announcement of its commercialization partner for CPI-300. I would argue that
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at $0.55 or lower, the only thing an investor is paying for is CPI-300, meaning that you are
getting the entire thin-film delivery platform and 9 drug pipelines for FREE. Notably, there are
only a handful of thin-film companies out there, and IntelGenx is one of only two that are
publicly traded (that I am aware of). As thin-films become more recognized for their value to
big pharma over the coming years, the scarcity value of thin-film platforms will ultimately result
in IntelGenx’ thin-film platform and pipeline receiving a premium valuation; right now, there is
NO value. Ridiculous. I have put my money where my mouth is recently, and bought shares in
the open market for the second of the two funds I run.
To a certain degree, however, I understand what has happened: there was (unbeknownst to
me or management) a scummy promote on IntelGenx last summer, in which CPI-300 was
hyped as a billion dollar drug. Anyone who knows anything about CPI-300 and its market
knows that that is complete crap. In fact, CPI-300 is the smallest revenue potential drug within
IntelGenx’ pipeline, with peak revenue to Intelgenx’ commercialization partner maybe in the
$60-$100million range. This means that reality has been a big let-down to those who bought
into the billion dollar dream. But the fact is that the commercialization deal and FDA approval
for CPI-300 do two very important things for IntelGenx:
1) Getting CPI-300 approved by the FDA provided concrete illustration that IntelGenx has the
skill set to negotiate the 505b2 pathway to drug approval, which involves both dealing with
the FDA and dealing with the court system. For me, that validation will ultimately lower the
discount rate that is applied to the rest of IntelGenx’ pipeline.
2) The upfront, milestone and royalty payments from the commercialization deal for CPI-300
arguably cover all of IntelGenx’ development costs for its pipeline of thin-film 505b2 drugs.
If this sounds far-fetched, recall that the 505b2 pathway to drug approval is dramatically
different than the conventional PhaseI-II-III pathway, because IntelGenx is simply moving
existing, already-FDA-approved drugs onto a different delivery platform. i.e., IntelGenx is
working on projects such as moving Cialis and a migraine drug onto a thin-film platform. It
is a cheap, and extremely low-risk pathway to getting a drug to market.
The CPI-300 deal with Edgemont Pharmaceuticals: a source of disappointment for the
market; a source of confidence for me
On February 14, IntelGenx announced a commercial license agreement for CPI-300 with
Edgemont Pharmaceuticals. The deal provided for $1M upfront for IntelGenx and a series of
milestones that could reach $28.5M over the life of the agreement. According to the company
up to $4M of these milestones are achievable at the product launch or shortly thereafter.
IntelGenx is also entitled to a double digit royalty on net product sales. The market reaction
thus far to the deal has been negative. It seems many people were perhaps speculating on a
more prominent partner and/or better economics in the deal. However, I think the markets
have misinterpreted the quality of the deal, I think in part due to misjudging Edgemont but also
misunderstanding what CPI-300 means to IntelGenx. On the former, Edgemont is a smaller
private company that has very little visibility to people outside the industry. But a closer
inspection reveals a company with a sales and marketing focus on neurology, a CEO who
formerly ran Novartis' CNS business in the US, and a Board populated with people from some of
the most successful U.S. specialty pharma companies of the past 15 years.
This last point is one of the nuances that the markets really seem to have missed. Two of the
Edgemont Board members are former Kos Pharmaceuticals (formerly Nasdaq: KOSP)
executives who now work for a private equity firm called Vatera Capital. For anyone who hasn't
heard of Kos, they were arguably the most successful specialty pharma company in the U.S. in
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the past 15 years. They created a market for a prescription vitamin called Niaspan, which
paved the way for future prescription vitamin and omega-3 companies like Reliant, Amarin and
Neptune/Acasti. Kos was eventually bought by Abbott for $3.7B, and one of the founders
Michael Jaharis took his money (he is estimated now to be worth $1.9B) and formed Vatera
Capital to invest in businesses like Edgemont. So Vatera's investment in Edgemont gives me
tremendous confidence that IntelGenx has landed a great partner who has the marketing savvy
and financial backing to extract the most value out of CPI-300.
That leads me to my second point regarding the significance of this deal to IntelGenx: In my
opinion CPI-300 will provide IntelGenx the financial platform to aggressively accelerate and
expand its pharmaceutical thin-film business. Thin-films are the big opportunity in IntelGenx'
portfolio. Whether it is drugs for erectile dysfunction, insomnia or migraine, each of these
products represent bigger opportunities for IntelGenx than CPI-300. With Reckitt Benckiser's
suboxone film (one of only two FDA approved thin films) apparently trending toward $1B in
annual sales, it is clear that the market and FDA are receptive to this new delivery system.
Fortunately IntelGenx has a number of products through pilot human studies and one product
(migraine) due to enter pivotal studies shortly, so they would appear to be well positioned with
a number of nearer term thin-film projects. With all this in mind, I believe that Edgemont and
CPI-300 provide a means to a much more lucrative end, that being IntelGenx becoming the
world leader in the growing area of thin film drug delivery and development.
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