Hemosol once seemed doomed, but a strategy shift may stop the bleeding


One of Canada's few biotech darlings, Hemosol Inc., faced corporate Armageddon last year. During the tech bubble, buoyed by positive clinical trial results on an innovative oxygen-therapeutic product called Hemolink, the company's stock climbed to a high of $26.95 in March 2000 from $4.50 the previous December. A key Phase 3 trial of Hemolink in 2000, using patients who needed blood transfusions during surgery, showed that about 80% could completely avoid donated blood. Instead, they could use their own blood during the operations, along with Hemolink, which functioned as a sort of artificial blood, to put it crudely.

The concept was staggering, especially for a country that was still reeling from the tainted-blood scandal of the 1990s. Hemolink's clinical trials hinted that maybe one day we wouldn't need donated blood at all--or at least we'd need a lot less of it. Investors slapped down their cash. And, as in most biotech companies, management believed. The only trouble was that it was going to be tough to find a plant that could produce Hemolink--and no one wanted to waste time getting it to market. So Hemosol decided to build its own. In 2000, it began construction on a state-of-the-art $90-million facility in Mississauga, Ont.

But Hemolink didn't work. Last March, Hemosol announced that another Phase 2/3 trial had shown the product caused "certain adverse events" in cardiac patients, though the company declined at the time to be much more specific. Hemosol's shares went into free fall. Meanwhile, the plant was completed--and slammed by investors and the media as a white elephant. Its shining new tanks and pipes sat idle. Its innovative modular design was cool enough, but it was useless with no product. Management still believed in Hemolink, but scientists went back to the drawing board to figure out what went wrong. And then, as if things couldn't get any worse, Hemosol's president and CEO, John Kennedy, succumbed to lung cancer last June. The one-time biotech star had no money, a skeleton staff and an interim CEO, and its acres of new cubicles and laboratories were a ghost town. Then, opportunity knocked.

ProMetic Life Sciences (TSX: PLI) is a small biotech based in Montreal. It says it has found a revolutionary new way to fractionate, or separate, blood plasma into the proteins that comprise it. ProMetic's technology promises to completely revamp the current fractionation technique, which dates back to the 1940s. The new method, called "cascade technology," not only increases the yields of proteins but also screens out a host of other nasty things in plasma. So far, West Nile virus, hepatitis A and prions--the mutated proteins that cause mad-cow disease and its human variant, Creutzfeldt-Jakob disease--have all been removed using the process. It has not yet been approved by the U.S. Food and Drug Administration or Health Canada, but is expected to be by early next year. And if all goes well, it would mean a major refinement of the fractionation process--kind of like switching from a 386 to a Pentium processor with antivirus software. It's promising enough that the American Red Cross has entered into a partnership with ProMetic to let it screen its blood once the process has been approved. But where would they do it?

That's where Hemosol fits in. When ProMetic was hunting for a facility that could perform the cascade process on a large scale, it called up Hemosol--the only place in Canada that could help. ProMetic could have gone south, or overseas, but it thought Hemosol was the best option. It was close, had passed every approval test and was brand-glistening-new. The fact that Hemosol wasn't scouting out such opportunities on its own simply underscores that its management was hardly in the mindset to become a contract manufacturer; they were still hoping to develop their own hot product. They had yet to humble themselves to the idea that in order to stay in business their company would have to become a bit of a grunt. But once they accepted that, new president and CEO Lee Hartwell, and vice-president of operations Dirk Alkema, went to work making even bigger plans.

The modular design of the Hemosol plant means it's flexible. Vats, tanks, pipes and even walls can be moved around to accommodate different types of products, in effect creating several miniature facilities within a larger one. Hartwell also knew that Hemosol was the only plant of its type in Canada and a Ferrari among the 80 or so in the world that can process blood and blood products. No use letting that advantage go to waste.

So Hemosol did an about-face, and a deal with ProMetic marked the beginning of a major shift in its business plan. Instead of putting all its efforts into taking a single glamorous product to market, Hemosol now expects to survive as a contract manufacturer of blood products and proteins. "This is an entirely different business strategy for them," says David Dean, a biotechnology analyst at Sprott Securities in Toronto and one of the few analysts who still covers Hemosol's stock after it crashed last spring. "What they're doing right now is they're being very creative and resourceful."

Hartwell has dealt with a turnaround situation before--ironically, in a field in which he had little experience. After spending much of his career as vice-president of Baxter International, a division of biotech and drug delivery company Baxter Healthcare, Hartwell joined Southam publishing as a vice-president of operations, where he helped sell off the company's graphics group. Once that was done, enRoute, Air Canada's in-flight magazine, was left over. At the time, it was bleeding cash, but Hartwell wasn't deterred. In 1992, he accepted a job as publisher of the magazine, where he renegotiated the printing contract, brought in more ads and did a bit of downsizing. Anyone who has worked in the sometimes cutthroat world of publishing knows that would not have been an easy job. But Hartwell persevered and made the magazine profitable within five months. EnRoute might not be something you'd buy at a newsstand, but it's a pretty good read, and now it generates revenue.

Hartwell has applied that same work ethic to Hemosol. He's done the rounds at trade fairs and is getting the word out that his once-mighty company is again open for business. Something is clicking. Since June, Hartwell says, upwards of 20 parties have approached him to ask if Hemosol can make their product. "The opportunities have almost all come without us looking for them," acknowledges Hartwell, who has certainly taken notice. "Now we're going to be more proactive." Meanwhile, the company's shares--which traded so low in 2003 they almost lost their Nasdaq listing--zoomed in December to $2 from 80¢ on the news that it had inked a licensing deal with ProMetic to separate plasma from blood for the American Red Cross. The deal is expected to be finalized in coming weeks, but full production won't begin in earnest until 2007.

The December boom was probably evidence that investors were anxious for any glimmer of hope--Hemosol is unlikely to be a $20 stock any time soon. But the company has definitely survived what could have proved a fatal blow--and all by shifting gears. "Before," says Hartwell, "we were taking a lead compound and wanted to get it to market. All our energy went into Hemolink, with a relatively modest budget but a lot of scientific work going into a pipeline. The idea was get it over the goal, start to create the cash flow and we could fund other drugs and other activities." The target now, he says, is to still be in drug discovery and development--but to add manufacturing to the mix. "We want to use our manufacturing expertise to generate some revenue and to offset our drug development."

It's a shrewd shift. But there are still some "ifs" for ProMetic: its technology has yet to receive the green light from the FDA. Next, it will have to get Health Canada's approval. If it doesn't, Hemosol will have no product to manufacture--at least for ProMetic. Still, Hartwell is scouting other opportunities to get his plant working. "I think this new strategy could become a pearl in the company," says George Mahmourides, a life sciences analyst at Channel Financial Group in Montreal. "And at the end of the day, you're keeping people employed and keeping them together." It might not be glamorous, but it sure could mean survival.