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BluMont Capital Corporation                                                                                           70 U...
-2-   3) Neptune has landed high profile US and Canadian distributors, the most recent high      profile win being a deal ...
-3-       the shareholder base. Prior to this financing, there were 10 institutions listed on       Bloomberg as Neptune s...
-4-The mean reduction in triglycerides was 26% (with a maximum effect of -83%); the meanreduction in LDL (‘bad cholesterol...
-5-INTELGENX: first drug now shipped, launched and selling. And the stock is still below$0.80?? Ridiculous!IntelGenx’s sto...
-6-       3) IntelGenx’s intellectual property and patent strengths have been tested and proven, with          Biovail hav...
-7-With this in mind, I believe that Edgemont and Forfivo provide a means to a much morelucrative end, that being IntelGen...
-8-trying to understand more deeply what has gone wrong. I do know this: as follows from the“PE Strategy”, I will be inves...
-9-In the next letter, I will finally be able to discuss a case study that was presented at theAdvisory Board meeting in F...
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BluMont Capital - Hugh Cleland on IntelGenx


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IntelGenx, through its cutting edge formulation platforms, has developed a broad and diverse product portfolio, including products for the treatment of severe depression, hypertension, erectile dysfunction, benign prostatic hyperplasia, migraine, insomnia, bipolar disorder, idiopathic pulmonary fibrosis, allergies and pain management.


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BluMont Capital - Hugh Cleland on IntelGenx

  1. 1. BluMont Capital Corporation 70 University Avenue Suite 1200, PO Box 16 Toronto, ON M5J 2M4 Canada Tel: 416.597.1226 Fax: 416.597.8926October 12, 2012Dear Partners and Friends:As of September 30, 2012, the BluMont Innovation PE Strategy Fund I (“the Fund” or “BIPES”)is up 35.04% since inception (including distributions), with much of that gain having come in2012. The fund was down 8.5% in Q3-12 after having had a great first half of the year (up42.9%).The months since the last letter was written have been eventful for many of the companies inthe Fund, with most events having been positive (or VERY positive); some stocks have movedin the right direction, some have not; one has been a significant disappointment.The returns as of September 30, 2012, are set out below: Returns to September 30 2012 2012 YTD 1 month 3 months 6 months Inception*BluMont Innovation PE 30.75% -6.00% -8.50% 6.64% 19.75%Strategy Fund I – Series B*Inception date: January 31, 2011. Return is on annualized basis.NEPTUNE: visibility to my long-cited $20+ target for Neptune is even clearer afterrecent developmentsNeptune closed at US$4.20 on NASDAQ yesterday. The last time that Neptune was in the $4 to$4.50 range was during May-August 2011. So many positive things have happened forNeptune and Acasti since then that it is quite puzzling to see the stock still at these levels. Butfrom an investor’s perspective, that just means the entry prices currently available are evenmore attractive.So what has happened since May-August 2011 when the stock was last at these levels? Thefollowing is not even close to being a comprehensive list, but hits some key highlights: 1) Dr Harlan Waksal has joined the management of Acasti Pharma, Neptune’s pharmaceutical subsidiary. (Dr Waksal co-founded Imclone, a biotech company which was bought by EliLilly for $6.5 billion in 2008; clearly, he wouldn’t trouble himself with getting involved in something unless he thought there was substantial upside.) 2) Dr Harlan Waksal has joined the Neptune Board, and is now playing an active role in getting the word out to Wall Street and Bay Street about Neptune (more on this below). He played a key role in getting both Acasti and Neptune financed: the $8million rights offering for Acasti that was completed back in September of 2011; and just last month, Dr Waksal led a Neptune roadshow to US and Canadian institutions in support of the $34.1million financing which closed on October 2.
  2. 2. -2- 3) Neptune has landed high profile US and Canadian distributors, the most recent high profile win being a deal with Jamieson’s in Canada: Jamieson’s home page even features their NKO product now: 4) The “tipping point” has been reached for krill oil, as evidenced by developments such as Dr Oz and The Doctors featuring krill oil as a superior-to-fish-oil source of Omega-3s: John Elway becoming spokesperson for Neptune is just one more development that supports my contention that the tipping point has been reached: John Elway’s personal experience with NKO was strong enough that he now has the entire Denver Broncos team on NKO. 5) These new distribution deals—together with hitting ‘the tipping point’—have translated into a dramatic acceleration in Neptune’s sales of NKO: on September 11th, Neptune guided sales for the August quarter to the range of $7.5-$8million (up from analyst expectations of around $6million). (Note that $30million of revenue—which is approximately the current run rate—to Neptune from selling NKO translates to about $120million of sales at the retail shelf level.) Dr Joseph Pantginis, biotech analyst at Roth Capital, published the following comment on the guidance (note the US$10.30/share target): _2012_Aug.pdf 6) Elemer Piros, PhD, a top-ranked US biotech analyst, picked up coverage on Neptune in August, as follows: Elemer Piros was recognized as the #1 US stock picker in the biotech sector in the 2010 Financial Times/StarMine Analyst Awards, so this is a nice “acquisition” for Neptune: TimesStarMine-Analyst-Awards-Rank-Elemer-Piros 7) Most recently, Neptune closed a $34.1million financing on October 2. It was executed at a price of US$4.10 (C$4.00), and it is significant that it was substantially over- subscribed, and was done without warrants.Neptune’s $34.1 million financing gives the company the launch pad it needs to getover $100 million in revenueThe importance of this financing should not be underestimated. The financing allows Neptuneto achieve a number of key objectives: 1) We now have a very significant institutional component to Neptune’s shareholder base. Harlan Waksal told me that he is thrilled with the quality of institutions that have joined
  3. 3. -3- the shareholder base. Prior to this financing, there were 10 institutions listed on Bloomberg as Neptune shareholders (including a 5.8% position held by Perceptive Life Advisors in NYC). It appears we have tripled that number with this financing. 2) This financing allows Neptune to maintain its stake in Acasti above 50%, even as Acasti executes on its NASDAQ IPO sometime in the first half of 2013. Arguably, Neptune could act as the lead investor for the NASDAQ IPO, helping to set the price. 3) This financing allows Neptune to expand its capacity to 600,000 kg/year. (The stated target for the second phase of its build out is 500,000 kg.) Let’s go through my estimates for the back-of-the-envelope math for the coming scale-up in production capacity: i) Current production capacity is 150,000 kg/year, which represents approximately $30million in revenue at a 20% EBITDA margin. ii) The Phase One expansion (which was already fully financed, fully spoken for, and slated to be on-line in Q1 of 2013) gets capacity up to 300,000 kg/year, which represents approximately $60 million in revenue at a 25% EBITDA margin. It bears emphasis that analysts are saying that existing demand for Neptune’s krill oil already exceeds this capacity—hence the rush to move on Phase Two. iii) Phase Two of the capacity expansion is now fully financed, and—when complete—gets the company up to at least 500,000 kg/year of production capacity, representing $100 million+/year in revenue from nutraceutical revenue, at a 30% margin.The bottom-line is that, from the standpoint of many investors (particularly institutionalinvestors), the stock is now a better, lower-risk buy at $4/share than it was at $2/share,because i) we now know that demand for krill oil is ramping dramatically, ii) we now know thatthe company has the right management and Board in place to execute on their plans, and iii)we now know that the company has all the money they need to ramp their revenues to over$100million. As the largest institutional investor in Neptune said to me after the financing wasannounced: we now have clear visibility to Neptune being worth $10/share simply from thecash flow generated from the nutraceutical operations.ACASTI: anecdotal results from cardiologist-administered Onemia continue to suggestthat Acasti could ultimately have a value in the $1billion to $5billion range……and the results from the clinical studies are on the near-term horizon.In mid-July, Dr Harlan Waksal presented Acasti to institutional investors at the JMP SecuritiesHealthcare Conference in Manhattan. In the PowerPoint presentation was a slide that showedthe “Mean” and “Maximum effect” from 36 case studies of ‘high triglycerides’ patients that weretreated with Onemia. (Onemia is Acasti’s Medical Food that is stronger than nutraceutical krilloil, but not as strong as CaPre, which is Acasti’s drug candidate going through FDA trials.) Thecase studies were provided by nine cardiologists in the US who were treating patients (that hadtriglycerides in the 200-500 mg/dl range) with 1g/day of Onemia for 2-3 months:
  4. 4. -4-The mean reduction in triglycerides was 26% (with a maximum effect of -83%); the meanreduction in LDL (‘bad cholesterol’) was 9% (with a maximum effect of -66%), and the meanincrease in HDL (‘good cholesterol’) was 11% (with a maximum effect of +63%).The bottom-line is that if the clinical trial results we get from CaPre are the same as or betterthan these Onemia case studies, then we should have a blockbuster drug on our hands. (And Ido expect the CaPre clinical trial results to be better than the Onemia case studies.)Why can I say that? It is because we know that GSK’s Lovaza has sold over $1billion/yearsince 2010 on the back of clinical results showing that a 4g/day dose of Lovaza reducedtriglycerides by 25%-45%, but simultaneously increased LDL by 5%-15%. So we know that adrug that simultaneously reduces triglycerides, lowers LDL and raises HDL will be moreattractive to physicians and patients, and should—ceteris paribus—generate more revenue.The valuation that investors have put on Amarin (AMRN on NASDAQ) because of their drugVascepa reinforces this point: In Phase III clinical trials, a 4g/day dose of Vascepa was shownto reduce triglycerides by 21.5% and reduce LDL by 6.2%. These results have led AMRN totrade in a valuation range of $1.1billion to $3.3billion since those results werereleased in April 2011 (despite the fact that Amarin has NO revenue). With the case studiesfrom a 1g/day dose of Acasti’s Onemia indicating a reduction of 26% in triglycerides and areduction of 9% in LDL, there is good reason to expect that a 1g/day, 2g/day and/or a 4g/daydoes of CaPre (which is stronger than Onemia) should show even better results.This is why investors are so impatient to get the results from the two Phase II trials which arecurrently in process. (The two trials are as follows: a 429-patient double-blinded, placebo-controlled PhaseII trial testing doses of 1g/day and 2g/day, and a 274 patient open-labelPhaseII study, testing doses of 1g/day, 2g/day and 4g/day.) It is simply the case that wewon’t know with certainty whether we have a blockbuster drug until we have those trial results.But there is good reason to think we will get results that can vault APO into the $5-$8 rangeafter either of these PhaseII trial results are released, then into the $20+ range once thePhaseIII pivotal trial results are out.I will leave you with the links to two Acasti presentations made by Dr Harlan Waksal betweenMay and July of 2012. The first was an interview he did with in May of2012. The second is his presentation to institutional investors at the JMP Securities HealthcareConference in July of 2012: (You will have to register to listen to this one.)I would encourage all of my investors to take the time to listen to at least one of thesewebcasts. Dr Waksal addresses the issues far more eloquently than I do, and—given hismedical background and the fact he created $6.5billion of shareholder value in his lastcompany—far more credibly.
  5. 5. -5-INTELGENX: first drug now shipped, launched and selling. And the stock is still below$0.80?? Ridiculous!IntelGenx’s stock price continues to make no sense to me, meaning that IntelGenx continues tobe a table pounder. (A search of regulatory filings would show that we have been an ongoingbuyer.)From my perspective, one of the most wonderful developments vis-a-vis IntelGenx since thelast quarter is that I am no longer alone in my contention that IntelGenx is DRAMATICALLY ANDIRRATIONALLY undervalued. Ram Selvaraju, a veteran healthcare/biotech analyst who focuseson the small/mid-cap area—but sometimes ventures down into the microcap world—justlaunched coverage on July 25 with a US$2.50/share target, and then raised his target to $3.00last week. It’s not often that an analyst sticks his neck out on a microcap with a target that is5 times the stock price on launch day. Clearly, this guy is not afraid to make a statement.Here is a link to his initiation report…$2.50_2012_July27.pdf…and to his target upgrade from last week:$3_Forfivo_launch2012_Oct4.pdfWhen Ram raised his target to $3 last week, it brought to mind the concluding sentence fromthe IntelGenx section of my investor letter dated July 29, 2011: “The bottom line here is thatmy target of realizing between $3/share and $8/share over the next 3-5 years seems muchmore achievable in light of the series of very positive developments seen in the last 6 months.”With the known pipeline and a launched drug, $3 seems almost easy now within the remaining2-4 year timeframe (and I like the fact it corresponds to Ram’s target). Whether the $8 upsidepotential can be realized will depend on a number of yet-to-be-known factors, not the least ofwhich are details about the partnership with PAR Pharmaceuticals and the drug they are co-developing. If the PAR partnership blossoms into something special, and/or the two companiesco-develop some drugs with truly big potential, the $5-$10 range becomes a real possibility.Both Ram and I share an affinity for IntelGenx’s business model and proven abilities: 1) IntelGenx primarily uses the FDA’s 505b2 pathway to approval, which minimizes toxicity risk and efficacy risk (which is what kills almost all biotech companies). Efficacy risk and toxicity risk are minimized because IntelGenx is taking existing drugs that sell hundreds of millions (or billions) of dollars a year and moving them onto delivery platforms which make them better/faster/easier (like what Biovail did with Wellbutrin when Biovail developed Wellbutrin XL). 2) IntelGenx’s ability to bring a drug all the way through the FDA’s 505b2 pathway and to launch an approved drug has been tested and proven. There are few companies with an FDA approved drug with a market cap under $100million; at US$0.66, IntelGenx’s market cap is $37million.
  6. 6. -6- 3) IntelGenx’s intellectual property and patent strengths have been tested and proven, with Biovail having lost a patent suit against IntelGenx in court.Importantly, I believe that IntelGenx will be cash flow and earnings positive starting this weekwith the launch of Forfivo by Edgemont. How so? If Edgemont’s launch of ForFivo (which is ahigh dose Wellbutrin XL) is as successful as Edgemont’s launch of their high-dose Prozac,then—once milestone payments are incorporated—IntelGenx should be cash flow and earningspositive going forward. Either way, I expect that yesterday’s launch of ForFivo will be a catalystto increase IntelGenx’s Wall Street profile, and the liquidity and value of the shares, as HorstZerbe (IntelGenx’s founder and CEO) roadshows on the back of the ForFivo launch and RamSelvaraju’s increasingly loud table-pounding.Note that IntelGenx is also on the doorstep of two big catalysts over the next 3-5 months: 1) Horst is on record1 saying he expects a regulatory filing with PAR Pharmaceuticals (assumed to be a New Drug Application (NDA), or—given that PAR is a generics company—an ANDA) by the end of 2012 or early 2013. Given that PAR is a top 5 US generics company that was just bought by private equity firm TPG, the drug they are targeting could very well be a blockbuster; plug a blockbuster generic into PAR’s distribution network and we could very well have a company-transforming drug here. (But we still don’t know what it is!) 2) Horst is also on record saying he expects to file an NDA for IntelGenx’s sublingual migraine strip in Q1-2013.A third NDA filing is expected within 12 months: the company is aiming to submit a 505(b)(2)NDA for its ‘Cialis-on-a-strip” product with the FDA during 2013.What is it about NDA filings that make them catalysts? NDA filings—or the subsequentacceptance of the NDA by the FDA—are used by analysts and portfolio managers as catalysts toincrease the “probability to launch” in their risk-adjusted NPV models, so NDA filings often bringabout significant upward moves in target prices, and NDA filings are often the catalyst to bringnew institutional buying into a stock. NOTE: In the case of IntelGenx’s drug developmentpartnership with PAR, it is significant that Ram has not included ANY value in his risk-adjustedNPV model of IntelGenx (and therefore no value in his $3 target) for the PAR/IntelGenx drug—because we simply have no information on the drug and what value it might have. We will getthat information in the filing expected by the end of the year or early 2013.I will conclude with a “bigger picture” comment about IntelGenx, its ForFivo drug, and its thin-film drug delivery platform: In my opinion, revenues from ForFivo (which begin NOW) willprovide IntelGenx the financial platform to aggressively accelerate and expand itspharmaceutical thin-film business. I believe that thin-films are the big opportunity inIntelGenx portfolio. Whether it is drugs for erectile dysfunction, insomnia or migraine, each ofthese products represent much bigger opportunities for IntelGenx than ForFivo. With ReckittBenckisers 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 deliverysystem. Fortunately, IntelGenx has 6 thin-film drugs in its pipeline, and at least 2 of them arescheduled for NDA filings in the next 12 months.1 July 10, 2012 interview:
  7. 7. -7-With this in mind, I believe that Edgemont and Forfivo provide a means to a much morelucrative end, that being IntelGenx becoming the world leader in the growing area of thin filmdrug delivery and development.FLYHT: the pieces of the puzzle are in place, and now the aviation industry version ofa hockey stick begins…While the last few months have been flat on a share price basis at FLY, the progress thecompany has made continues to keep us excited about the prospects for the longest overnightsuccess story in our portfolio. The fact that the company managed to close a $4.15millionfinancing in the worst markets for a long time shows that there is support for the company. Mydecision to support the company with the lead order for this financing was based upon thesigning of two company-changing deals in the first half of their fiscal year. The long anticipatedNetJets deal was finally inked for 30 aircraft, and a contract with L-3 to provide the AFIRS 228Sproduct as a factory installed option on the A320 line at Airbus has permanently changed thecomplexion of this small also believe that we are now on the assembly line with Bombardier. I am deducing this bypiecing together information from the July 23, 2012 press release “First certification forAFIRS228 Deployment in China”. I think most people missed the significance of the lastparagraph: "Additionally, the CRJ-900 is the first new aircraft to have AFIRS 228 installed priorto delivery to the customer;" i.e., assembly line installation. Of course, CRJ-900s are madeonly by Bombardier, so this press release seems to have been a clever way to announce thatAFIRS228s will now be assembly-line installed at Bombardier. (I am guessing that FLYHT hadto do a release like this because Bombardier wasnt cooperating in putting out somethingtogether with FLYHT.) we have assembly line installation at Airbus, Bombardier and Hawker Beech, acontract representing the beginnings of a wonderful relationship with NetJets, and encouragingwhispers about China and their so-far-slow-motion roll out of this technology for their hugemarket. (See corporate update press release from September 21: )The bottom line is that FLYHT continues to earn my respect and support. We continue to becomfortable thinking that these contracts, agreements and relationships lay the foundation foran installed base of 800-1,200 planes within 2.5-3 years, and an installed base of 2,500-3,500planes within 4-5 years (which is the remaining time horizon on the Fund). The EBITDA pershare off this kind of installed base (my model shows $0.20-$0.30/share in EBITDA for aninstalled base of 3,000 planes) will reward my investors nicely with a share price that I expectcould be anywhere in the $1 to $5 range within 4-5 years.VENDTEK: my biggest disappointmentClearly, VendTek has been my biggest disappointment since BIPES was launched on January31, 2011. Even the long-awaited Petrobras deal, announced this past summer, has beenunable to turn the company’s fortunes so far. Right now, I am in the middle of digging in, and
  8. 8. -8-trying to understand more deeply what has gone wrong. I do know this: as follows from the“PE Strategy”, I will be investing alongside Privinvest (the largest investor in VendTek) in theconvertible debenture that was announced in September. Both Privinvest and I feel that thereis something of value in VendTek, and it is incumbent upon us to explore how to re-build asmuch value as possible from this debacle. It may indeed turn out that the convertibledebenture was an excellent entry point for new money—but that is no comfort. I continue toprefer to hold off on making any in-depth comments until further developments.VENTRIPOINT: VMS systems are now in 24 sites in Europe and North America, andthe data is better than we could have hoped for, suggesting FDA approval is assuredThe company presented the final results of the pilot study undertaken at the University ofChicago, using its VMS™ diagnostic tool, in Pulmonary Arterial Hypertension (PAH). The resultsshowed a non-statistical difference between VMS™ and Cardiac Magnetic Resonance Imaging(CMRI)—which is what we wanted, because the FDA wants to see statistical equivalence ofVentripoint’s VMS with CMRI (which is the existing “gold standard”/standard of care in PAHcardiac imaging). There was an excellent agreement between the two techniques over theentire volume range, both when the heart was filled with blood (end-diastolic volume) andwhen it was finished ejecting blood (end-systolic volume). The FDA has set a requirement ofthe difference to be less than 10% (with a 95% Confidence Interval of 10%), and—based onwhat we have seen so far—it would seem impossible for the company NOT to achieve this goalwith its in-process 75-patient pivotal trial. In fact, the data is so good that the Company isreviewing the numbers to see if the pivotal trial can be reduced in size so we can submit thedata to the FDA earlier. It should also be noted that Dr. Roberto Lang, past President of theAmerican Society for Echocardiography was one of the senior authors on the study. While thecompany should be able to submit the 510(k) application this year, it is unlikely the FDA willrespond to it until the first quarter of 2013.The Tetralogy of Fallot (TOF) pivotal trial is continuing but recruitment has been extremely slowdue to the unappealing requirement for children in the study to have an MRI done. Thisactually reinforces the need for the VMS™ approach (because, post-FDA approval, we eliminatethe need to subject children to MRI and the necessary anesthetization), but is frustrating forthe company and its shareholders. The company has added more centers and now has fivecenters actively recruiting to accelerate the trial. The hearts in TOF patients are some of themost complicated hearts known and so the entire 75 studies will need to be done to completethe study. The company has refreshed its website and has added a heart library so you cannow see a variety of right ventricles in normal hearts and a variety of right ventricles in variousdiseased states - go have a look at There is also a list of all 24 sites inwhich a VMS™ heart analysis system is currently in use.The company continues to aggressively market in Europe by attending conferences such as theEuropean Society for Cardiology Annual Conference (the largest meeting of cardiologists in theworld), the European Respiratory Society Annual Conference, and the European CongenitalHeart Disease Workshop, and expects to install a number of VMS™ machines in major centersto build out the network of expert users and centers where European cardiologists can go andsee the VMS™ in clinical use.
  9. 9. -9-In the next letter, I will finally be able to discuss a case study that was presented at theAdvisory Board meeting in February, 2012. The case study—demonstrating the cost savings,incremental revenues and efficiencies that are available to hospitals that use Ventripoint’ssystem instead of MRI for certain cardiac applications—will help you understand whatVentripoint does, and why I am convinced that Ventripoint’s technology (which is alreadyapproved for sale in Canada and Europe, and expecting two FDA approvals in the first quarterof 2013) will be adopted rapidly (after FDA approval) in a number of cardiac applications.Other positionsIn the next letter, I will cover the three small publicly traded positions in the Fund (each at lessthan 3% weight), as well as give an update on the three private companies which remain in theFund (and represent about 10% of the Fund in total). You will recall that we had a verysuccessful exit with one of our private companies (EcoSynthetix), and distributed the proceedsto you in March of this year.In closing…I am very pleased that BIPES’ “private equity approach to public equities” strategy is alreadyproving itself to be a significant contributor to value creation. I can confidently say that if I hadapproached this portfolio of stocks in the same way as a conventional portfolio manager, theportfolio would not be performing as well. This fund was, in some ways, an experiment, to seeif a truly new approach to structuring and managing a portfolio of small and micro cap publiclytraded equities could solve the inherent difficulties presented by such a portfolio. I and theteam at BluMont Capital and IAM are pleased to report to you that the results from the first 20months of this experiment look very promising indeed, and we look forward to delivering more“proof of concept” in the coming months, and launching BIPES II toward the end of this year.Best regards,Hugh Cleland, CFAExecutive Vice President and Portfolio Manager