Crispin Simon CEO - Interview on Board Talk

08/04/2009

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Board Talk
Interview with Crispin Simon, CEO Biocompatibles
April 8, 2009


Hello, I’m Sandra Spencer and welcome to this addition of Board Talk. My guest today is Crispin Simon, CEO of Biocompatibles. Now before you throw your hands up and say ‘Oh no, not another loss making biotech company always ‘on the scrounge’ for fresh funds, panic not! Biocompatibles increased its revenues by 94% in 2008 to 17.7 million pounds and actually paid a dividend. Moreover, this company is not a recent market listing, it floated 12 yeas ago and at 122p it’s valued at £45 million.

SS: Hi Crispin, welcome to Board Talk.

CS: Thank you Sandra, hi.

SS: Well, your website states that you are a leader in drug device combination products. In plain English, what does that exactly mean?

CS: Well, companies like ours develop products that are typically either a drug or medical device and a drug is like an aspirin and a medical device is like an orthopaedic hip, for example - a large chunk of metal. They are usually either one thing or the other. But if you want to try to concentrate more than one therapeutic effect into one product you may be able to do that more effectively by combining the two products. For example, coronary stents, which is now the most commonly preformed surgical procedure in the world, around a million procedures every year, coronary stents are about the size of a biro spring, they get put in your heart to keep the vessel open, and in the old days they used to block up about 20% of the time. And the companies, ourselves included, a few years ago, developed technology to put a drug on a stent, a very, very thin coating, less than a human hair, and that was enough to reduce the blockage to almost nothing. And that was the best example of a drug and device being combined and that’s now a market of around $5 billion. It’s not very visible to the man on the street, but it’s there.

SS: So this is one company that without this drug device combination are there many other companies?

CS: Well, the leaders in drug eluting stents are the ones that have really made a big success of it. We were in drug eluting stents, we sold that business back in 2002 because we wanted to explore the technology in the field of cancer and that’s what’s brought us to this point.

SS: Now the older part of your business is responsible for the drug beads mechanisms for delivering medication into humans. Now, why is your technology unique and how’s it marketing and what’s the growth potential?

CS: Well, I described a few minutes ago the treatment with a drug as being distinct from the treatment with a device and really the most common treatment for cancer, the main stay, is chemotherapy i.e. a drug or radiation and surgery and usually a combination of those three. The former two, particularly chemotherapy, has dreadful side effects for the patients. For example, a patient who might live 24 months from diagnosis of metastatic disease in the liver might only have symptoms from the cancer for the last 3 months, but if they get chemotherapy, from the beginning they are going to get the side effects for 24 months. Chemotherapy is associated with all the things that the man and woman on the street knows about - acute decline in white blood cell count leaving patients very prone to infection to the extent that they can be hospitalised, gastrointestinal complications that can put them in hospital with dehydration and, of course, hair loss - the one that is distressing for people. What we wanted to set out to do was to see if we could get all that chemotherapy that is otherwise galloping through the body poisoning the patient, into the place that is required. What conventional chemotherapy does if it’s injected into your arm is it circulates in your body within about 2 hours. We now put all that chemotherapy into the beads, the beads go right into the heart of the solid tumour, typically in the liver and will deliver the chemotherapy over a 2 week period. So you’re talking about the difference from 2 hours, versus 2 weeks. That provides a dramatic difference in the side effect profile. We’ve seen that very consistently in all our clinical trials and in patient feedback. All the data says that the Drug-Eluting Beads have vastly fewer chemotherapy related side effects and I think that for people who are facing a cancer treatment that is of tremendous interest to them.

SS: How many people worldwide, what are the statistics like? Is this widespread - the use of Drug-Eluting Beads, for this cancer?

CS: Cancer comes under the heading of the single word and we all know what that means, but there are about 4 very prevalent cancers, lung, breast, colorectal and prostate. But there are actually a further, at least 150, different types of cancer and each of those will come with different stages. For viewers watching, do your tests, do your self-diagnosis because the biggest predictor for cancer survival is not in the treatment, it’s in the stage of diagnosis. So, the earlier the diagnosis, the vastly better chance you’ve got of a cure and of a major survival benefit. So, of those 4 major cancers, we’re mainly focused on one that’s about the 7th most prevalent, which is primary liver cancer. It is growing very, very fast because it’s associated with prior hepatitis or alcoholic liver cirrhosis and with the rate of liver cirrhosis growing from particularly alcohol misuse in the UK, there is a risk that in 10 to 15 years time we will get an explosion of primary liver cancer. That’s the initial focus of the disease, and for patients with that disease nowadays, throughout the western world, probably about 50% of patients will be treated with our Drug-Eluting Beads.

SS: So you are very busy. How do you go about marketing the Drug-Eluting Beads, and how many people around the world know about your product?

CS: Well, first and foremost, we need clinical data; that’s what we as patients require our doctors to understand. We only want to get a treatment if it’s been clearly proven in clinical trials. So we’ve done a series of clinical trials, culminating in a trial with some very positive data, announced in September last year and that’s really the beginning of where the marketing comes from. Around 1,000 patients have been treated in clinical trials, in total, with the drug eluting bead technology and we estimate that around 20,000 patients have been treated by our technology outside the context of human trials. So I think that there are many hundreds, possibly thousands of doctors who also have now had good experience using our product and that really is the best marketing that we could get. Good patient experience, good physician experience.

SS: How long will it take you to be able to use the DEB to cover more than the cancer that you are able to address at the moment, how long?

CS: Well, we estimate around 80% of our usage is in primary liver cancer. A lot of cancers then metastasise to the liver i.e. the cancer cells will break off from the primary tumour float through the bloodstream and eventually settle in the liver where they will then start to grow and proliferate and many patients will die of a liver secondary as opposed to their primary disease, which is very often curable. So, we are looking then as our second stage of our strategy at metastases in the liver. Around 10 different primaries metastasised in the liver have been treated, of which breast and lung are very common unfortunately. Pancreatic cancer, metastasised in the liver, has also been treated by the Drug-Eluting Beads and that, for your operatic listeners of course, is what Luciano Pavarotti ultimately died from.

SS: It must take quite a few years of R&D to be able to put these products out?

CS: Well, the interesting difference from the development of our products stand point is that whereas in coronary artery disease where you are essentially talking about a blockage that could be opened with the stent, cancer is vastly more complicated from a biological point of view. So, we go to an oncologist with our data on primary liver cancer and they say ‘this is all very well and good but I need to see it in every single cancer that I propose to treat patients with your products with’. So we have to - for each cancer - have some kind of clinical programme, because biologically they all behave differently. It may work in one cancer, it may not in another. In every cancer that has been treated so far, the physicians have been pleased with the results but we need to prove that is so. When I go to talk to oncologists around the world, there are those who are keen to adopt new technology and they will say ‘this data is sufficient for me - the data you have today’. We describe our future clinical trials and other doctors will say ‘I like the data that you have today but before I treat my patients with this technology, I need to see more data’. So, it’s really a question of judgement, as it is in every walk of life and that’s why it’s important that the patients are comfortable with the doctor treating them. If they are very aggressive with new therapies, the patients need to realise that the therapy has less proof attached to it. There are other patients who will say that their doctors are too conservative. They need to get a feel for that.

SS: OK, so sometimes it is difficult to give an exact timeframe for when you’ll be able to realise this for certain other cancers, is that true?

CS: We expect to complete the next phase of Clinical Trials by 2011/2012. Our sales are growing at around 50% pa in the Drug-Eluting Beads and we expect to sustain that for the next few years and then afterwards, for that trend to accelerate.

SS: Now, you announced a deal in December with AstraZeneca. What market is that tackling? How big is it and how soon will this impact the bottom line?

CS: Well, cancer is pretty big but the deal with AstraZeneca is in Type II diabetes which is even bigger. That’s all to do with the epidemic of obesity due the bad diet that we have in the western world. Type II diabetes is growing. These patients are not as acutely sick as those with cancer - it is much more of a chronic disease and they will deteriorate over a period of 10 20 maybe even 30 years - but they will get sicker and the treatments that they have at the moment, everybody recognises, are quite far short of what is really required. There have been tremendous advances in the last 30 years in the treatment of cardiovascular disease - the statins and stenting, for example, and the prophylactic use of aspirin, each of which alone would be regarded as a breakthrough. When you add the 3 together, you would say that in cardiovascular disease they have made a lot of progress, but in cancer and in Type II diabetes it’s not really true. The new drugs we have in Type II diabetes are not even now where they should be. We have identified a drug called a GLP-1 type drug and AstraZeneca were very interested in exploring and investing in that field. We had the patent position; we had some early data that they liked, so it was very nice match. We have 2 years of work to do then if AZ chooses to exercise the option to licence the product, then again, we have got a significant increase in the potential value from that point.

SS: Are there any other large collaborations you have in store?

CS: We have a deal with Bayer Pharmaceuticals also and that takes us back to the cancer area. A lot of cancer therapies are given in cocktails of drugs. Ironically, if you find that one drug works, your next clinical trial has to evaluate the new technology plus that old drug and as that continues, you tend to build up these cocktails of drugs as nobody wants to drop any out of the treatment for the control arm patients. But the trouble is you are also building up toxicity, so Bayer Pharmaceuticals identified that they wanted to use a drug that they have developed successfully in combination with the Drug-Eluting Bead therapy. So, those two products are now being combined in treatment and we find that exciting because, as I said earlier, drug therapy is the backbone of cancer care and the idea that a company as sophisticated and as well resourced as Bayer wants to give treatment in collaboration and in conjunction with our Drug-Eluting Bead therapy is a tremendous feather in our cap.

SS: Now, last June you bought a company involved in prostate radiotherapy - this seems like a step out from your core cancer competencies. Why did you do the deal?

CS: Well, prostate brachytherapy is a treatment for prostate cancer, so we are still in the field of cancer and instead of delivering drug from an implant, now we are delivering radiation from an implant so it’s not so very different. Basically, we are saying that the paradigm of cancer care for the last 50 years of a heavy reliance on chemotherapy and radiotherapy and surgery, where you can, is a recipe we would like to push local therapy into. Essentially, you are targeting the disease as closely as you possibly can with a permanent implant either delivering radiation, which was our acquisition last year, or Drug-Eluting Bead therapy. So, it is a similar concept. Plus, that business is in the US, it gave us a US footprint and we all know that the US is the largest healthcare market in the world, so we felt that it did move us forward nicely strategically.

SS: Now, Biocompatibles owns a German company called CellMed. What does CellMed do and what are the prospects?

CS: CellMed also have a bead technology and instead of delivering traditional chemical therapies, they deliver biological therapies which are generally considered to be the drugs of the future; and it was for that capability that we bought our German business. They have 3 important programmes. The first is the AstraZeneca deal that we discussed a moment ago, the second is a deal for a bead with no drug in it at all - it is just a shell - that is used for cosmetic dermatology and that’s partnered with Merz Pharmaceuticals AG, a private mid-sized German company. It’s the whole ageing deal. So, for the customers - I don’t call them patients, these are now customers as they are not ill – customers requiring Botox®, for example, to flatten out the lines on the brow will have Botox, but around the mouth and nose Botox® is not appropriate as it freezes you up in the wrong place. So customers will be using implants which need to be very biocompatible, clearly. Actually, Botox® works through not being biocompatible but really, if you want an implant that’s going to stay there, you want it to be biocompatible. So this bead that CellMed have developed for Merz Pharmaceuticals takes a highly purified alginate material, so that sounds great - everybody likes their beauty therapy to come from seaweed - we’ve got highly purified seaweed that is turned into a tiny pellet and then it’s injected around the patient’s eyes or mouth or nose and it just plumps up the lines nicely. The feedback we’ve had from the customers in the trials that we’ve had, has been outstanding.

SS: So how far may we be from this hitting the market?

CS: That product is going to be launched within the next three months.

SS: And what is the size of the market?

CS: The size of the market is estimated at a billion dollars, so it is huge. This is partnered primarily because our whole management and strategy and capability is organised around trying to make our way in medical areas where people are sick. This is, essentially, a consumer product administered by a cosmetic surgeon or sometimes a dentist and others that I wouldn’t necessarily know about. We prefer to partner this because this is really about consumer marketing which is something we are not great experts in, but we believe that the technology is exactly what is required and Merz do too, which is what’s important. Now, the third programme is then taking that bead - and now we are becoming extremely sophisticated again, we’re back into the field of medicine - and that technology is now going to be applied to patients who have had a stroke. Stroke, like cancer and like, to a lesser extent Type II diabetes, is an area that we think in 50 to 100 years time people will look back and say that, ‘ those diseases were not well treated and we’ve made huge advances’. In stroke, the main therapy that is used that is known to be effective is simply cooling the brain and that is not very sophisticated. There is no drug that works, there is no medical device that works, there’s no electrical stimulation that works; it is, I’m afraid, a disaster zone. So, we have decided to apply a very radical technology. What we are doing – and this concept was invented by our brilliant colleagues in Germany - was to take a stem cell, put the stem cell inside the beads and put the beads inside the brain. The beads then pump out a local drug so they are simply, effectively working as a mini pharmacy in your brain and the drug that it pumps out, is neuro-protective, i.e. it will stop the brain cells from dying which is what they would otherwise do from the stroke. So, it’s a radical therapy you are using - stem cells and you are sticking something that I have said is like a mini pharmacy into the brain. We had some pretty long conversations with the regulators as you can imagine, because their first duty is to ensure that patients treated in the clinical trial are safe. The German regulators said ‘yes’, this does appear to be safe, so we are right at the leading edge here with some very, very sophisticated technology. For patients who have been treated in this clinical trial, the physicians have said that the they appear to be doing extremely well; they also said that in each case they would have expected a recovery to the extent to which these patients have recovered, in only about 20% of cases; so we’ve now got 4 patients with results which you would have only expected one in five times and that’s beginning to look very promising. However, we are not supposed to peek at data during the course of clinical trials.

SS: Have you partnered with a company in Germany for this?

CS: No, we haven’t partnered this at all. The trial is being led by the International Neuroscience Institute in Germany which is one of the top three neuroscience centres in the world. The hospital is actually shaped like a brain – well, that’s what the building looks like - in either a dramatic lapse of taste or a piece of amazing vision by the architect! We’ve received fantastic leadership and guidance from Professor Brinker at the Neuroscience Institute and we are happy being partnered with them for the time being.

SS: You talked a bit before about the recent announcement and deal with Bayer – now I know a lot of smaller companies have a string of big name tie-ups but often these come to nothing. How significant is the Bayer deal to Biocompatibles?

CS: I think all our collaborations are important and we are very anxious not to put out things in Stock Exchange announcements that are not important or that we think may turn to dust latterly. It’s about building trust between the Company and our shareholders and we will never try to get a short term advantage by putting out a good bit of news which is exaggerated, because we will pay the price eventually. So, we believe that all of these relationships are of real, strategic substance. The most important relationship that probably we’ve had in our history, as a company, was with Abbott, in the years in which we were in the drug eluting stent business. That culminated in Abbott buying our cardiovascular stent business for $245 million. So, we do nurture these relationships and we do expect them to go places.

SS: With a significant pipeline of development and given that you did record a small operating loss last year, how can you afford to pay a dividend and why have you done so?

CS: Well, we’ve got a strong cash position. We’ve got £33 million in the bank and we’ve told the market that we will burn around £6 million this year and we burnt virtually nothing last year, so you can see we are going to last for several years without ever needing to go back to our shareholders for working capital and we’ve actually said many times that we will not do that. In 1999, we said that we would not go back to our shareholders for working capital and here we are 10 years later and, in fact, we’ve returned £123 million. So, I think that we are unusual in terms of an emerging healthcare company in the sense that the cash is going back to shareholders rather than vice versa. The flow tends be in the other direction. So, we have money left over from the disposals that we made in 2002 and we’ve been using that money, we believe, prudently - although that word has slightly gone out of fashion recently. In 2007, we got a windfall of royalties and since we’d always said that we had enough money, we’ve now got even more money and we said we should dividend that out. So, we made the decision that from the royalties that we get from Medtronic, we would pay a dividend, worth around £2 million per year. We intend to continue to do that as long as the royalties from Medtronic continue which we expect to be for several years. I think, actually, all of us as a management team and as a Board understand that the shareholders don’t want that dividend to go once it’s come. So, our challenge is ultimately to make sure we can sustain this level of dividend out of retained earnings so we’ve got to get through break-even, to profit, into paying a dividend and keep the dividend constant in the hands of shareholders and then, in due course, start to increase it. We are on the dividend treadmill – we’re happy to be there, we put ourselves there and we think that it’s a plus, but it is unusual.

SS: It sounds like you are pretty confident that you’ll be able to continue to pay the dividend?

CS: Yes, we are. I think it would be a big loss of credibility if we didn’t.

SS: Now, if you have the £33 million in cash and your market cap is £45 million, why is the City valuing your royalty stream and R&D business at such a low level?

CS: I have long given up forecasting what the share price should be or to phone up the broker and complain to them saying, ‘you should be working harder’. I trust the market and the market is not happy at the moment with anything very much and that really affects everybody. We believe we have tremendous value in our pipeline and that’s why you’ve seen a lot of Director-buying recently It’s our job, really, to manage the business and for investors like your clients to work out whether the stock is cheap or expensive.

SS: Given the products under development, where do you think the Company will be in 5 years’ time in terms of sales and profitability and do you expect perhaps to be bought by a major one day?

CS: When we sit down for our management meetings, our goal is always to try and improve the value of the company and improve the quality of the work we do and the way in which we enable doctors to look after patients. That is top of our concerns and I think that if you build a really valuable company operating in a quality-orientated way, that will be reflected in the increase in value on the Stock Market and in recognition amongst the industry leaders who have lots of money for making acquisitions. We don’t particularly develop our business plans to try and target ourselves for a sale, but I think its no secret that the big healthcare companies have problems with their pipeline and don’t have enough products in late phase development bringing them sales in the next 5 years. With products coming off their patents, they will be willing to pay up for high quality companies. So, if we are a high quality company that gets bought or a high quality company that gets developed, I think that our shareholders will do fine with that.

SS: Thank you very much for your time, Crispin.
 

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