By Andrew Patterson
Success doesn’t come easily in the biotech sector.
With significant start-up costs, on-going research complications, the need for extensive clinical trials and the inevitable delays in getting products to market this is not a business for the faint hearted.
While New Zealand’s track record in the sector has been mixed, one stand out survivor has been Auckland based biotech company Living Cell Technologies.
Formed in 2000 and listed on the Australia Stock Exchange in 2004, shareholders have had a white knuckle ride with the thinly traded stock currently languishing at just A0.05c.
Based in the Auckland suburb of Papatoetoe, Living Cell Technologies [LCT] is a cell implant company focused on developing living cell products for the treatment of diabetes and neurological diseases.
However, CEO Dr Andrea Grant describes it as a cell therapy company with a difference. It uses pig cells as the basis of its treatments.
“We have two products in development. One for the treatment of type one diabetes and the second for the treatment for Parkinson's. One of the unique aspects of our business is that we have developed a system called ‘encapsulation’ and that allows us to put the pig cells into a protective capsule.”
“So when we put them into your stomach or into your brain they're not attacked by the immune system. That's due to a technology we’ve developed called IMMUPEL allowing us to transplant animal cells across to humans and for the cells to survive. On that basis we really are right up there with the other innovative cell therapy companies in the world.”
“With the Parkinson’s treatment, which is also based on cell therapy, we're taking cells from the pig brain, again encapsulating them, and then putting them deep into the patient's brain, in the area of the brain that has actually lost all of its dopamine producing neurons.”
“As you may know, dopamine is the key neuron transmitter that's involved in movement as well as emotion and cognition. And so what we're doing is we're replacing them; we're putting a cell in that actually causes those dopamine neurons to regenerate and to reform.”
With over 200,000 diabetes sufferers in New Zealand, and a further 100,000 people who remain undiagnosed, according to the Ministry of Health, the need to develop treatment solutions has never been more urgent.
Living Cell Technologies has focused its efforts on dealing with the treatment of type one diabetes using a concept that sounds simple enough but in reality involves complex research and testing to perfect.
“Type one diabetes occurs as a result of the patient losing their insulin producing cells because they've been attacked by their own immune system so it’s an autoimmune disease. Because the patients have lost their islet cells, which is the cells in your pancreas that produce insulin, what were simply doing is we're giving people with diabetes new islets in the form of pig islets. And they take over patients' blood glucose control and secrete insulin when a patient eats a meal and so on then their glucose rises.”
“The actual execution of the concept has taken a great deal of research. But I'm very pleased to say that we are now in the final stage of our clinical trials with the type one diabetes product. And we have the goal to launch the product in New Zealand in 2016. That's our current target.”
Dealing with the challenges
Running a biotech comes with its own peculiar set of challenges. Without a revenue model, preservation of cash, capital raising and cost containment all become vital in getting the business through to the finish line when significant profits can be made if the treatment ultimately becomes successful commercially.
“Biotechs all over the world suffer the same challenges, which primarily involve securing capital whilst you're still in that pre-revenue R&D phase. It's perhaps a little bit more difficult in New Zealand, because the capital markets here are not as fluid and as large as you would find in the US and Europe who have traditionally been the major biotech funders.”
“Now what we're seeing is a shift towards Asia. Chinese and Japanese companies are actually moving into the partnering domain much more proactively then Europe and the US. New Zealand has a great advantage in this regard as we've shown recently with our partnership with the Japanese.”
Special JV partnership
Living Cell Technologies has been fortunate to partner with one of Japan’s leading pharmaceutical companies Otsuka as a result of a somewhat unique joint venture arrangement.
“We’re very excited about the partnership with Otsuka which is primarily focused around the type one diabetes products. We formed a joint venture, which is a privately held limited company based here in New Zealand. Otsuka and LCT are 50/50 joint shareholders.”
“At the time of formation LCT put the intellectual property around the diabetes product into the joint venture while Otsuka put up $A25 million for the continued development of that product. The company itself doesn't actually do any research and development. They contract that back to Living Cell Technologies and pay service revenues to LCT to continue the development of diabetes cells through to market.”
“Because it's a 50/50 joint venture once the product goes to market and is creating revenue and greater value, then LCT receives 50% of the future profits.”
“Comparing that to a typical biotech deal, where normally a biotech company in a phase 2 stage - which is where we were - would partner with pharmaceutical company. The biotech would receive some cash up front, but most of the value would come downstream when the product came to market in the form of a percentage royalty share. Now at phase two, which is when we partnered with Otsuka, you'd probably do well to get a 1-3% royalty share.
“So now come back to our 50% profit share and assume a 70% profit margin. You'd have to basically secure a 35% royalty share to get the same downstream value returned. So it's a really lucrative model, but there are other aspects to it that make it very attractive and quite powerful for a biotech company.”
The joint venture arrangement also has two other key advantages. It means there’s shared control over the development of the product which capitalizes on LCT's intellectual property and the knowledge and experience it has with its product development. The second aspect has meant the partnership has been able to focus its efforts around a single field of IP - diabetes - meaning that all of the intellectual property, the technology platform, and the know-how can be used and retained within LCT to apply it to other disease areas such as Parkinson's, hearing loss or other neurological conditions.
Life changing outcome possible
So how significant will the impact of this product be for diabetes sufferers in the future?
“The first group of people with type one diabetes that will benefit from our product DIABECELL are patients who are typically called unstable. These are diabetes sufferers who essentially are not able to achieve good glucose control despite receiving the standard care, which is intensive insulin therapy. So these are people who watch what they eat, they're very careful with their health and they manage their exercise well. They also manage their insulin and their glucose testing really well, yet they still can't achieve good glucose control.
“One of the features of this is they experience what are called unaware hypoglycemic events, or unaware hypos. And this is where suddenly their blood glucose drops, but they're completely unaware that it's dropping. So for you and I, we would normally sweat, we'd get the shakes, and we probably get a bit grumpy and we would go, oh well, I need to eat."
“For people who've become unstable diabetics they have no signal, and then they suddenly just lose consciousness, in front of you or become very delirious. Of course if you're on your own and there's no one to help you actually take a bolus of glucose can be very dangerous. And so people who are living with this stage of diabetes tend to be very limited in the job they can do and their quality of life is severely impacted. They're not allowed to sleep alone and their long-term outcome in terms of kidney disease and eye disease is often quite poor.”
The company believes its new products will, in the future, significantly improve the quality of life for these sufferers.
Future of biotech sector
Not surprisingly, Dr Grant is an enthusiastic supporter of the biotech sector’s future despite its roller coaster ride in the past.
“I think that the future looks very bright right now for biotech in New Zealand. It has been a rocky road to this point, but you have companies now like A2, Photon, and Pacific Edge - who recently gained approval to start marketing in the U.S. - Mesynthes and ourselves all growing. There are some really exciting companies out there who are either very close to revenue or are already at revenue stage. I think investors are beginning to recognize that and are starting to come back into the sector again.”
“However, we’re certainly not resting on our laurels. We want to grow to be a significant bio-pharmaceutical company that can fly the New Zealand flag as an example of innovation and commercial success.”
Long suffering shareholders in LCT who have kept the faith will definitely be hoping that happens sooner rather than later.
|Annual growth rate:||50% over past 2 years|
|Ownership:||Public. First listed on ASX in 2004|
|Market size:||$US20 billion (est) globally for diabetes treatments|
|Recent highlights:||Finalist in 2013 High Tech Awards and named 2012 Biotech company of the year|