Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most successful man in life is the man who has the best information
Today I’m speaking with Dr. Philip Toleikis, B.A., M.Sc., Ph.D. and President and CEO of Sernova Corp.
Sernova Corp. TSX:V-SVA is a clinical stage company developing a natural and immune-protected environment for delivering therapeutic cells to patients with chronic diseases such as diabetes. Due to the enormous unmet medical need and market potential, Sernova’s first product focus is on treating insulin-dependent diabetes.
The Standard of Care for patients with insulin-dependent diabetes is monitoring and injecting insulin multiple times a day. Worldwide expenditures on insulin are estimated to be over U.S. $15 billion annually, and growing, while a patient track record of missing dosages and serious side effects result in U.S. $150 billion a year in hospital costs in North America alone.
Sernova’s Cell Pouch System™ is a versatile, scalable, first-in-class medical device, made entirely of FDA approved materials, that provides a natural “organ-like” environment for therapeutic cells, such as islets which control sugar levels that insulin-dependent diabetic patients are normally not able to do. The Cell Pouch System™, being thin and typically smaller than a business card, fits easily under the skin with virtually no visibility.
Think of the Cell Pouch System™ as a potential natural insulin producing pump with the added benefit of fine-tuned glucose control with no need to replenish the insulin. When placed under the skin and filled with islets it develops endocrine pancreas-like characteristics taking over normal glucose control. A key feature of the device is its ability to develop tissue matrix and natural microvessels, thought to be essential for the long-term survival and function of these therapeutic cells.
Rick: Philip can you tell us about yourself, your background?
Philip: I have a strong business and product development background. Having earned advanced degrees from the University of Michigan (MSc.) and the University of British Columbia (Ph.D.), after which I completed postdoctoral research, I worked with a series of successful therapeutic, medical device and combination product development companies.
Rick: Your Ph.D. was….
Philip: I completed my graduate training in the diabetes field focused on the cardiovascular side effects. I then went on and completed postdoctoral training at the British Columbia Cancer Agency which focused on bringing therapeutic products to the cancer patient. I strategically broadened my experience in various diseases in preparation for a career in the medical industry.
Rick: You were involved very early on with an amazing story that relates directly to what we are going to talk about today.
Philip: In 1996, while at the BC Cancer Agency, I was hired by a start-up company called Angiotech Pharmaceuticals. During my tenure at Angiotech, between 1996 and 2006, the company developed the paclitaxel eluting coronary stent and other drug-device combination products. The stent, a small metal tubular cage that props open narrowed blood vessels in the heart typically shut down in 6-9 months due to a scarring process called restenosis. Angiotech studied the mechanism of restenosis and coated the appropriate drug on the stent which alleviated this twenty year old problem, turning a $500 million market into a $4-5 billion a year market with the co-exclusive licensing of the technology to Boston Scientific and Cook. In fact, it was the biggest medical device launch ever.
Rick: That’s extreme value added. What happened next?
Philip: At Angiotech, we wrote a considerable number of patents and conducted resultant product development activities on multiple products. The business, management and product development experience there was second to none. We worked in “dog-years” as the company grew in leaps and bounds. Being a part of that incredible success story had prepared me well for the future.
When I left Angiotech as Vice President of Pharmacology and Drug Screening in 2006, the company had a $1.7 billion market cap and had earned close to $200 million per year in revenues.
Rick: What came next for you?
Philip: I set up my own consulting business and during the ensuing three years consulted for multiple companies. At the same time, I was looking for the next blockbuster product opportunity. Serendipitously, I met a Director of Sernova while collaborating on a project and he was charged with finding a new CEO. He felt my background at Angiotech was a perfect fit.
Rick: You could not have asked for a better situation given your areas of expertise and previous experience.
Philip: My expertise and interest is in finding ways to improve existing products that have the potential to become significant in huge markets with the correct improvements.
For the coronary stent, we improved the function of the device and in turn increased the market by about 10 times. I saw a much bigger opportunity for Sernova.
Sernova is working in the very promising field of regenerative medicine and cell therapy. It is considered the next wave of therapeutics beyond drugs and many big pharma companies are starting to get on the bandwagon because of its multibillion dollar opportunities. Sernova had patents in a technology that could eliminate the need for toxic anti-rejection drugs in patients when placed locally with donor transplanted therapeutic cells to treat diabetes, and multiple other chronic diseases. They were beginning to work on a medical device to contain the therapeutic cells – a key part of the technology.
In the case of therapeutic cells for diabetes, it’s the islets that measure sugar levels in the blood and release insulin to control those levels. In diabetic patients these cells have been damaged or destroyed. The current standard of care for islet transplantation, the Edmonton Protocol, is a method in which donor islets are delivered to a blood vessel in the liver called the portal vein and then patients are given anti-rejection drugs to prevent destruction of those cells by the immune system.
This technique can result in the early death of at least 50% of the islets, a result of being bathed in blood. Thus, patients usually require the islets from between 2-4 donors. Early on the Edmonton Protocol showed a success rate of 40% at one year and 10% at five years. Fortunately, more recent improved antirejection drug regimens such as the one that will be used in the clinical study with Sernova’s Cell Pouch™ have improved long-term insulin independence rates. This in combination with an improved environment of the Cell Pouch™ is expected to increase long term islet survival.
Currently, only a very small number of select patients with insulin-dependent diabetes, of the nine million or so in North America, can be treated with this procedure. These are typically patients with insulin-unawareness, a condition in which patients can die following an insulin injection due to a severe drop in sugar levels. Islet transplantation with its capability to control glucose naturally can alleviate this condition.
Sernova bet that if a product could be developed to improve the safety, efficacy and efficiency of islet transplantation, there was the potential to treat millions of patients a year with the possibility of bringing in billions of dollars in revenue. It was a relatively simple but elegant concept, similar to the drug-eluting stent but with much bigger market potential and the possibility to expand through additional cell therapy treatments.
Rick: Sernova thought they had the answer to keeping the donor cells alive?
Philip: Yes, Sernova is focused on three key components of its technology; an unlimited source of therapeutic cells, an implantable device which forms a natural environment for cells to keep them alive long term and a technology that could protect donor cells within the device from attack by the body. I joined the company as President and CEO to execute on a tiered rational plan to develop these products as a strategy to help millions of patients requiring cell therapies.
This combination could, over time, result in an efficient and efficacious treatment keeping the islets in a natural environment while protecting them using a non-toxic approach. With this approach the number of treatable patients could be increased because of expanded islet survivability and a non-toxic method to protect the cells. With these technologies, one could theoretically treat millions of patients.
When I came on board I hired a core and experienced management team who in turn hired scientists who were very dedicated to our strategic plan.
Rick: To set the scene, you’ve now developed the strategic plan, hired the employees and are now ready for execution of the plan.
Philip: We then received a significant National Research Council (NRC-IRAP) contribution which was a real endorsement of our technology potential and the ability of the management team to execute on the plan. This endorsement then enabled the company to raise funds in the capital markets. These funds, along with additional small private placements and further NRC funding, enabled our R&D team to successfully complete large animal autograft and allograft transplantation safety and efficacy studies in diabetic animals using the Cell Pouch System™. The excellent safety and efficacy results using a much reduced islet dose in these two models was our first validation of the human-scaled technology. Each successful study de-risked the technology and moved Sernova closer to human clinical trials.
Rick: Let’s backtrack a bit. Where did the idea for the Cell Pouch™ first come from? It seems like a bit of a stretch to go from injection into the portal vein to a Cell Pouch™. Where did this come from, the idea behind it.
Philip: For a long time, surgeons realized that the islets were not doing very well in the portal vein so they had been testing different locations in the body to put the islets. Some of these methods did not work, while others were not realistic from an islet dose perspective. Some groups even worked on devices that walled off the immune system from the transplanted cells, but these failed because they prevented key blood vessels from interacting with the islets.
The scientists at Sernova looked at the problems of portal vein delivery and learned about the natural environment of islets. It’s a similar approach Angiotech took in finding the right drug for the stent – understand the biology first and develop the product around that. Our scientists then worked with surgeons to assess their transplant needs, engineers to examine the materials possibilities, and biologists to assess the material effects on the body and came up with an appropriate proprietary design for the device.
We also used polymers that were already approved by regulatory authorities for use in the human body. We developed the Cell Pouch System™ as a novel device taking all these factors into consideration and got it right. It might seem like magic, but a lot of thought and experience went into it. From a manufacturing perspective, our contract manufacturer, Moog Medical Devices Group, with their team of engineers, was very helpful in developing our semi-automated manufacturing process, having previously worked with multi-national device companies. They are confident they will be able to scale-up the process for treating as many patients as required.
Rick: So this is a similar story to what you did at Angiotech. You’re taking something that has shown promise and you’re improving it. What’s the difference in the size of the markets between the stent and Sernova’s Cell Pouch™?
Philip: The market for the drug-eluting stent was $4-5 billion a year. When we combine the Cell Pouch™ with an unlimited source of cells and a cell protector technology, we have the ability to treat up to nine million patients in North America who are taking insulin injections. If we treat one percent of those patients with our Cell Pouch™ it represents $2-$3 billion/year in revenue.
If we move into countries such as China, where there are about 45 million patients with insulin-dependent diabetes, the revenue potential is enormous.
Rick: Paul Lacy was one of the originators of islet transplantation a few decades ago. There have been a lot of attempts to duplicate his work in humans, none being as successful as Dr. Shapiro with the development of the Edmonton Protocol. How did Dr. Shapiro, a key opinion leader in the field, become interested in being the principal investigator in the upcoming human clinical study of the Cell Pouch™?
Philip: It’s all about the solid scientific foundation Sernova’s R&D team built through conducting rigorous scientific studies in multiple models of diabetes, evaluating the safety and efficacy of our products. We have also been presenting our results at international cell transplantation meetings to the physicians who will be using our products in the future. This is part of building a solid foundation for our products and in thinking towards the future.
In fact, we were introduced to Dr. James Shapiro at one of these conferences by the chair of our scientific advisory board, Dr. David White, and he asked to review all our data. We presented our six months isograft (transplant from organisms with similar genetic makeup) data as well as our autograft (transplant from self-tissue) and allograft (donor transplant) safety and efficacy results using the human product. We have shown consistent results in four animal models and three different species. His review of our data convinced him that our product had good potential in humans. This is when he showed interest in becoming principal investigator for our clinical study.
Rick: Sernova will be entering human clinical trials with its Cell Pouch™ in a very short while.
Philip: Yes, Health Canada is currently in the process of reviewing the documents to allow the start of the clinical trial. In addition, we have manufactured the Cell Pouch™ according to ISO13485 standards, which means our device has been made according to the strictest guidelines and meets regulatory standards for Canada, the U.S. and Europe.
The anticipation is that we are going to be starting our clinical trial in early Q2’12, pending Health Canada clearance.
Rick: Could you outline the clinical study and projected timeline once we’re in clinical trials?
Philip: The human study is a Phase I/II clinical study with a primary endpoint of safety and a secondary endpoint of efficacy. Up to 20 patients will be studied at the University of Alberta under the direction of Dr. Shapiro. Eligible diabetic patients will have the Cell Pouch™ implanted. Soon afterwards they will be ready for their islet transplantation. In this study, the patients will be administered the latest improved anti-rejection therapy that has been approved by Health Canada. The primary and secondary endpoints will be measured by three months after a successful transplant in each patient. For the efficacy assessment, we will measure the proportion of patients that are insulin-independent. To assess the long-term impact of the Cell Pouch™, we will be following the patients for a minimum of three years.
Rick: I think it’s important to point out that this is a “real time” study and explain what this means.
Philip: “Real time” study means that the study is designed to have interim study time points. This means that we will be assessing the results in groups of patients while the study is being conducted and could release safety and efficacy data once Dr. Shapiro and the evaluation team feels confident in the results.
Rick: What does it mean for a patient to have this Cell Pouch™, the islets implanted and it works?
Philip: This will mean that the patient no longer will need to take insulin injections. It will be a huge improvement in their quality of life. Even if the patients reduce the number of insulin injections on a daily basis it will be considered an enormous success by the physicians and patients.
Rick: Insulin dependence could be over, is that what you’re saying?
Philip: That’s the holy grail of diabetes treatment, for patients not to have to take insulin injections. The other interesting point about this is when one controls blood sugar levels, like we hope to do with islets in the Cell Pouch™, then it’s known that the severity and the incidence of diabetes side effects actually starts to drop. In North America, that is about $150 billion a year in health care costs. If we can start to chip away and reduce that, it will be a very significant improvement. It’s important not only for the patient, but it’s also important from a reimbursement perspective.
Rick: What’s the end game for investors?
Philip: For investors it is first about increasing the valuation of the company.
Our positive preclinical results, completion of contract manufacturing and submission of documents to Health Canada for the clinical study has significantly de-risked the technology and increased the value of the Company.
Positive results in the study should be a strong value driver for the Company because we’ll have proven the concept in humans. This will give the Company lots of options for growth.
There then may be interest from other companies in our technology as mentioned previously. It is possible that a company may license some of our technology and may combine it with their technology increasing the potential of the product further. Typical of a licensing deal would involve an upfront payment, milestone payments and royalties. Such a deal would substantially increase the valuation of Sernova.
Our plan as we’ve stated from the outset is to demonstrate the safety and efficacy of the Cell Pouch™ in humans and then to add our Sertolin™ local protection technology and then add a source of cells such as insulin controlling stem cells which could provide the treatment of an unlimited number of patients. Each of these would provide further significant increases in valuation.
We also plan to expand the number of chronic diseases we are working on through collaborations.
So, we have a whole series of events that will continue to drive the valuation of the company forward over the next years beyond just the short-term diabetes test results. These events will provide long-term exit strategies for investors as the valuation of the company increases. This, combined with the work we are doing with Russo Partners, our investor relations firm to get the word out about Sernova, should be very beneficial for investors.
Rick: When could we expect our first efficacy results from this Phase I/II clinical trial?
Philip: We’re anticipating that we should have safety results by the end of 2012, with the first efficacy anticipated soon after that. Of course it all depends on approval to begin the study from Health Canada and then the rate of patient enrolment which we will find out as the study progresses.
Rick: If we’re successful in the diabetes study, what other applications could the Cell Pouch™ potentially be used for?
Philip: The Cell Pouch™ could be used for any chronic disease where a deficient or missing protein or hormone can be replaced by therapeutic cell transplantation. A short list includes: parathyroid disease, haemophelia, liver disease, Parkinson’s disease, etc. So, we have quite a number of opportunities.
As we look into the future, our goal is to provide the surgeon with the Cell Pouch™, a vial of therapeutic cells, and a vial of protector cells. So, the physician would then implant the Cell Pouch™, and shortly after, transplant the therapeutic and protector cells. This could eventually occur in any hospital in the world and that would be a significant achievement in the transplantation field.
Rick: Has this approach been tried before?
Philip: We believe the combination of our proprietary Cell Pouch™ and the local immune protection provides the exact natural environment for the body to allow therapeutic cells to function long-term. No one has been able to do that on a commercial scale prior to Sernova. Sernova believes it has a real advantage because it has the right combination of technologies that match the needs of the body.
Rick: There is no competition existing or even close to SVA’s technology development stage.
Philip: Essentially, there isn’t. Our competition, I would say, would be insulin pumps and insulin injections, and that’s what everyone is trying to get away from, the insulin injections.
Rick: There are significant issues with insulin pumps.
Philip: Patients must monitor their blood glucose levels, and there is always the concern that they’re releasing too much insulin, which is actually a very serious problem. It can put the patients into a coma. Of course the pumps have to be maintained and reloaded with insulin on an ongoing basis.
Rick: When do you think we’re going to have our first patients with islets in them?
Philip: I would say probably end of Q2, 2012, again depending on the regulatory authorities. As soon as we get our Health Canada clearance to start, we’ll be able to begin the study and get our first patient enrolled. Then we’ll have a much better idea of when that patient will have their implantation and then transplantation of islets.
Rick: Let’s make it clear. This is a real time study, and you’re not going to be shy about putting out news. It’s going to come out in a very timely fashion.
Philip: Yes, it will come out over time in press releases as the data starts to come in. The key being that Dr. Shapiro and the evaluation team will be reviewing the data as it comes in. When there is clear efficacy data in a number of patients, we’ll be able to release those data.
Rick: You mentioned controlling the money supply and it was difficult at the beginning to raise $400,000 and get the grant and then do another $500,000. We’ve always had a series of small money raises, and yet this last money raise was $3.5 million, and it certainly didn’t take long to fill. What is the difference between raising money last week versus last year? Why was it quicker and easier Philip?
Philip: When we started in 2009 we didn’t have a lot of data. Fortunately, we got that first government contribution agreement for funds. As the data started to roll in from our studies the results looked very positive, we started to reduce the risk of failure. Then Dr. Shapiro came on board, that was a key driver of us being able to raise a million dollars in a very short period of time because Dr. Shapiro was a key opinion leader in the world for islet transplantation.
Knowledgeable investors started to realize the potential of the company.
Rick: Dr. Shapiro’s stamp of approval was a real confidence builder in your technologies and that opened doors.
Philip: Dr. Shapiro is a luminary in the field, having been an important player in developing and improving the current standard of care for islet transplantation. His review of our data was key to his interest in becoming principal investigator of our human study.
The next key aspect of it was when we got all of our regulatory documents completed and were about to submit to Health Canada. Our investors could really see that there’s a transition between a preclinical and clinical stage company, and that’s what Sernova is now, a clinical stage company. So the $3.5 million came in from investors who could see the potential of the stock and of the company going forward, and of us being able to treat diabetic patients with our commercial product and improve their lives at the same time.
I think that as we move forward, there’s going to be more and more interest in Sernova, and we’re getting the word out. We focused our funds during the first three years on the science, and we built a very, very strong foundation for the company. Now we’re entering into the clinic and will build strong human clinical data, and at the same time we’re getting the word out about the company.
Rick: When will we need more money?
Philip: My goal was to raise enough funds to provide the company with a good runway to enable us to obtain clinical results which should drive the valuation significantly and we have achieved this with our $3.6M oversubscribed private placement. We are currently working on non-dilutive grants to expand that runway. As we move forward towards a pivotal study, we will need additional funding, but with positive results this will be at a much higher valuation with less dilution.
Rick: We’ll have efficacy results before we need more money?
Philip: We anticipate having safety and efficacy results in a significant number of patients. That should be a strong driver of the Company valuation.
Rick: Exactly who would be interested in something like this, from a partnership or “we want it” perspective?
Philip: We have the opportunity to partner with large pharmaceutical companies, medical device companies and specialty cell therapy companies. Large pharmaceutical companies are looking for the next therapeutic wave beyond blockbuster drugs.
The word on the street is that the cell therapy market will become as big as the monoclonal antibody market, if not bigger. We are looking at long-term treatment of chronic diseases with fewer side effects and better efficacy than current therapies. So this is an improvement from a safety, efficacy and economic perspective. We have what we think is a better alternative to the insulin pump and have been noted by a number of medical device companies. Specialty cell therapy companies are interested in our ability to house the cells naturally and protect them from the immune environment. It’s a win-win situation for everyone. We have been attending partnering conferences, which brings hundreds of companies together providing the ability for companies to spark collaborations and potential deals. We are working on getting the word out about Sernova. This becomes extremely important with entry into clinical trials and as our clinical data starts to be released.
Rick: What about patents?
Philip: For our Cell Pouch™ device and associated technologies, we have approximately 19 years left of patent protection, and we have filed applications around the world to ensure we are in all the important markets. We also have over 20 patents and applications on our Sertolin™ immune protection technology and related technologies. We have a mandate to develop new intellectual property to expand our product development possibilities.
Rick: Is there anything you want to add?
Philip: Over the past three years, we have significantly reduced the risk and increased the value of the Company. With contract manufacturing and the preclinical package completed, as well as clinical documents in place and a top tiered clinical investigator, we have transformed this company from a shell with intellectual property to a clinical development stage company using less than U.S. $3.5 million in equity. That is an incredible feat in the medical products field and one the team at Sernova is very proud of. This translates to incredible value for shareholders.
Rick: It’s not your intention to build a large integrated pharma company is it?
Philip: Correct, while our business development strategy is evolving, our current strategy is to find and development out-licensing partnerships for our diabetes product and find partners to work with in expanding new clinical indications for the Cell Pouch™. Eventually, Sernova may be bought by a larger company wanting to take advantage of the opportunity at a much higher valuation but we want to build in that increased valuation first. So, we have quite a number of options in front of us. These are exciting times for Sernova and everyone involved.
Rick: Excellent, thank you Philip.
Richard (Rick) Mills
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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.
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