next edge bio-tech plus fund · next edge bio-tech plus fund ... probably astrology that ‘even’...

FOR EXISTING INVESTORS AND INVESTMENT PROFESSIONAL USE ONLY. PLEASE SEE ACCOMPANYING IMPORTANT DISCLOSURES. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

1 Toronto Street, Suite 200, Toronto, ON M5C 2V6 Client Service +1.844.656.2321 TF +1.877.860.1080 T +1.416.775.3600 E [email protected] W nextedgecapital.com

Investing in companies of the future.A unique, well defined process of investing in North American small and mid-capitalization Biotechnology companies.

NEXT EDGE BIO-TECH PLUS FUNDMonthly Report as of December 30th, 2016

Admittedly, over my 22 year career in Healthcare, I don’t recall entering a year with so many quality late-stage Biotech companies at bargain levels. While it may sound like hyperbole to suggest that, the reality from our vantage point is that we own companies that already have, or will submit, 18 BLA / NDA filings to the FDA for approval

this year. It suggests a high likelihood of commercialization this year and next for these 18 new Therapeutics. Even more remarkable, because of the 2016 selloff, most of these companies are available at prices below where they were a year ago – despite being one year further advanced, and de-risked having already reported successful pivotal trials.

This opportunity is coalescing with BioPharma’s pressing need to acquire growth, while aligning with a policy change to incentivize them to repatriate +USD $120 billion pool of capital. It’s an exceptional confluence of favourable factors coinciding with investors being under-invested in the sector. We experienced a prelude of this when five of our holdings were acquired for premiums averaging +100% during 2016. In other words, there is a mispricing between what the market is valuing these companies at, and what BioPharma is willing to acquire them for. At some point that gap will narrow.

For December, the Next Edge Bio-Tech Plus Fund (the ‘Fund’) Class A Units & Class F Units appreciated 6.71% and 6.65% respectively, while the Benchmark declined -2.62%. In a way we are grateful to bid adieu to 2016, much of which required making lemonade out of lemons. Despite the Benchmark indexes returning to near the lows for the year during December, the Fund recorded its 5th advance of the past six months, continuing its outperformance to the sector. Despite the headwinds of a difficult Healthcare environment throughout 2016, when Biotech opened with its 4th worst quarter in history, then hobbled to year-end, our investment process made the difference. Imagine when a tailwind emerges, value investors return and the sector is revalued?

FUND COMMENTARY



As usual, the year begins with the ‘Woodstock’ of Biotech events, the JPM Healthcare Conference when 30,000 investors, companies, scientists and bankers descend on San Francisco. It’s probably astrology that ‘Even’ numbered years have coincided with more sector Tops, while ‘Odd’ years, the beginning of rallies.

While having the biotech sector rise is an important support for future returns, it is company selection that is paramount to our approach. Out of a 1,000 mostly heterogeneous companies to choose from, we narrow our focus to 50 or so. When the sector fell sharply early in the year, ALL biotech companies were sold with equal impunity. Quality companies right along with early-stage under-funded companies for whom the capital markets were closed. That was unusual and didn’t make sense. But for us this mispricing represented an opportunity.

When the selling abated and the sector stabilized, the positioning of the Fund created separation from the benchmark indexes. This is reinforced by the correlation indicating company selection is the important component of our investment discipline.

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NEXTEDGEBIOTECHPLUSFUNDSCLA&CLFvsBENCHMARK2016

BENCHMARK(60%NBI40%TSXHealthcareIndex) NEBioTechClA NEBioTechCLF

JOIN US AT THE INAUGURAL‘BIOTECH ALLY’ AT THE CANTECH 2017 CONFERENCEWe have been enlisted to orchestrate a Biotech presence at the Annual Cantech Technology Investment Conference at the Metro Toronto Convention Center on January 18th, 2017. Free tickets, normally $65, are available to our Investment Advisor acquaintances interested in attending the event. We have invited a handful of innovative Canadian Healthcare companies.

The convention provides a forum, making company managements accessible to investors.The Next Edge Bio-Tech Plus Fund will have a booth. The Fund’s Portfolio Manager will also host a panel discussion and Q&A. The Prime Minister will send his greetings to the gathering of investors that risk their capital in pursuit of building better mousetraps or curing diseases. Additionally, a very special Keynote speaker is in the works. The day concludes with a mix-and-mingle at Ripley’s Aquarium.

NEXT EDGE BIO-TECH PLUS FUNDS CLASS A & CLASS F VS. BENCHMARK 2016

Source: Next Edge Capital Corp., RBC Investor Investor and Treasury Services



IN THE MEDIA

On January 5th, the Fund’s Portfolio Manager, Eden Rahim, appeared on BNN to chat with Amber Kanwar about the Investment Opportunity in Late-Stage Biotech companies.

Furthermore, Eden’s view on Alzheimer’s company Axovant is cited in the reputable US Journal STAT. STAT and other US Journals have reached out more frequently for my off-the-record views on US Biotech companies.

LOOKING AHEAD TO 2017

After 18 months of correction, the Nasdaq Biotech Index has retraced its three year out-performance from 2013-2015. Prior to that, it had modestly underperformed for 3 years. It is possible that given the considerable value and growth potential in the late-stage companies, a new cycle of leaders are about to emerge.

The year 2016 experienced the fewest number of FDA approvals in six years. Approvals declined from 45 to 22 from 2015 to 2016. The FDA’s explanation for this is that they have to have drugs to review to be approved. In other words, with a high number of clinical failures, fewer drugs made it to the review process. The Fund’s portfolio is populated by a number of Therapies that will make it to the FDA this year. That quantifies future growth.

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BIOTECH HAS CORRECTED 2013-2015 OUTPERFORMANCE(Nasdaq Biotech vs Nasdaq Composite 2009 - 2016)

RelativePerformance%BiotechvsComposite NasdaqBiotech NasdaqComposite

* Underperformed 1st 3 years of 2009 - 2015 Bull* Outperformed 2013 - 2015* Surrendered Outperformance past 18 Months* Back to even with Nasdaq

CDER NME NDAs/BLAst Filings and Approvals as of 12/9/16



THE FARM SYSTEM

With a focus on Phase 3 companies, the Fund’s holdings have or will file for approval on 18 Therapeutics, some of which have either been fast-tracked, given priority review, or deemed a breakthrough therapy by the FDA. Seven of those 18 filings address Central Nervous System (CNS) indications, with the largest unmet medical needs or no adequate available treatments.

M&A was a major contributor to returns last year, and we only see additional reasons why this should continue in 2017. BioPharma need to jumpstart slowing growth, for which the market is already pun-ishing them with lower PE multiples. Surveying recent conference calls of 15 large cap BioPharmas confirm their unequivocal commitment to make M&A a priority.

One of the most significant policy changes to emerge from the election outcome is the likelihood of only a 10% penalty to repatriate funds parked outside the US. This is especially beneficial to large cap Bio-Pharma companies, with the top 9 collectively sheltering +USD $120 billion domiciled outside the US.

Source: Bloomberg Data, Next Edge Capital - November 2016

Ex- US Cash ($Bn)Percent of Total Cash

Held Ex-US ($Bn)

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AMGN MRK BMY LLY PFE ABBV CELG GILD BIIB AMGN MRK BMY LLY PFE ABBV CELG GILD BIIB

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EX-US Cash (USD $ Bn)Percent of Total Cash

Held US Ex-US (USD $ Bn)



QUANTITATIVE TEA LEAVES

Biotech is a bargain. The Price-to-Earnings (PE) ratio of S&P Biotech Index relative to the S&P 500 PE has only been this low three other times in the past 25 years. Those periods always market major turning points of Biotech: 1994, 1998 and 2010.

NEGATIVELY SKEWED MONTHLY RETURNS FOR THE PAST 18 MONTHS:

Ordinarily, 1-in-6 months for the Nasdaq Biotech Index (NBI) is a double-digit return month, with twice as many Up months versus Down months. However, the past 18 months have been anything but normal. In fact, there have been five double-digit return months: three have been declines of -11% and a 4th last January of -21%; versus only one double-digit Up return month of +12% in July. Given the stabilization in Biotech, expect to see a frequency of double-digit Up months certainly greater than 1-in-18 months.

Underlying strength continues to build as measured by the percent of the 190 companies in the NBI that are trading above their 200-day Moving Average. The pattern has made higher lows and highs since February when it achieved a reading that matched the Bear market lows in 2002 and 2008. The recovery continues to track those seen for new Bull markets. A leg up in biotech would see this reading rise from 46% to 80% before a pause.

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S&P 500 BIOTECH INDEX P-E RELATIVE TO S&P 500 P-E (1992 - 2016)

@Edenrahim@Nextedgecapital

Source: Bloomberg Data, Concept : Next Edge Capital

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Biotech Index (BTK) vs S&P 500Distribution of Monthly Returns

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S&P 500 BIOTECH INDEX P-E RELATIVE TOS&P 500 P-E (1992-2016)



Another measure of Deviation-from-Trend also suggest the elastic band of oversold got stretched to a degree that has occurred only six other times over the past 28 years. The 3-month moving average would have to rise from below its 12-month moving average to over 20% above before the sector got extended. That is a long way away.

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AMEX BIOTECH INDEX (BTK) 1989-2016:SIGNALS: % DEVIATION OF 3-MONTH MINUS 12-MONTH MOVING AVERAGE

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Source: Bloomberg Data, Concept: Next Edge Capital

Since the inception of the Biotech industry in 1980, every market decline of -40% or more were followed by multi-year bull markets that appreciated between +100% and +1,000%.

AMEX BIOTECH INDEX(BTK) 189-2016:SIGNALS: % DEVIATION OF 3-MONTH MINUS 12-MONTH MOVING AVERAGE

Canadian Equities

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Source: Next Edge Capital



THE GENOMIC REVOLUTION

Every Biotech cycle has moved forward due to technological advances that has created tools that are essential to industrial Biotech. In the 1980’s it was PCR or Polymerase Chain Reaction that made it possible to amplify strands of DNA into millions of copies. In the 1990’s, it was DNA Chips and first generation sequencing machines. In the 2000’s, it was the next generation Sequencing Machines like Hyseq, that took sequencing costs down from $100 million to $10,000, and then to $1,000 this decade. This decade has seen the emergence of revolutionary Gene Editing technology that again represents a giant leap in advancement of tools available to Biotech. Each advancement is magnitudes of order superior to the prior. Biotech’s version of Moore’s Law, coupled with breakthroughs like CRISPR are about to send innovation into overdrive. Collectively, these advances will escalate ability to identify the genetic basis of diseases and more efficiently design therapeutics with desired properties. This will reduce the ‘shotgun’ approach to designing effective therapeutics before they are moved into clinical trials. That opens the possibility to achieve superior chances of success.Ultimately, lower failure rates means lower capital risk costs, and lower cost of therapeutics.

This is a summary of an article written for AdvisorAnalyst.com titled The Genomic Revolution and Coming Medical Breakthroughs

COMPOSITION OF HOLDINGS FOR DECEMBER 30th, 2016

At the end of December, the Fund held US and Foreign investments amounting to 57% assets, down from 58% due to liquidating the Conatus (CNAT) position which appreciated +165%. That cash was reallocated to Canadian holdings, resetting it at 34%, up from declined 29% in November. Despite the reallocation, Cash remained steady at 10%, but will be reduced over the coming weeks.

COMPOSITION OF FUND HOLDINGSDecember 30th, 2016

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1. Next Edge Bio-Tech Plus Fund returns are net of all fees and expenses associated with Class A Units charged from May 1st, 2015. Returns for 2016 are unaudited and subject to final confirmation. The historical annualized rates of return for Class A are 1 yr -9.11%, 3 yr - N/A, 5 yr - N/A, 10 yr - N/A; for Class A1 are 1 yr -8.01%, 3 yr - N/A, 5 yr - N/A, 10 yr - N/A; for Class F are 1 yr -8.30%, 3 yr - N/A, 5 yr - N/A, 10 yr - N/A; for Class F1 are 1 yr -7.12%, 3 yr - N/A, 5 yr - N/A, 10 yr - N/A. 2. The Benchmark for the Next Edge Bio-Tech Plus Fund is: (i) 40% of the percentage gain or loss of the S&P/TSX Capped Health Care Index; plus (ii) 60% of the percentage gain or loss of the NASDAQ Biotechnology IndexThe Benchmark returns are unaudited and subject to final confirmation. The historical annualized rates of retun for the Benchmark are 1 yr -30.94%, 3 yr - N/A, 5 yr - N/A, 10 yr - N/A3. Part Year* Part Month start date April 13th, 2015 to April 30th, 2015** Part Month start date: February 17th, 2015 to Feb 27th, 2015There are inherent limitations in any comparison between a managed portfolio and a passive index. Each index is unmanaged and does not incur management fees, transac-tion costs or other expenses associated with a private fund. There are risks inherent in hedge fund investing programs. Note to Investment Professionals: The information in the Monthly Report is being provided to current investors in the Fund and is being provided to their registered dealers for informational purposes only.This is not a sales literature and cannot be used as such. The Fund is not a trust company and does not carry on business as a trust company and, accordingly, the Fund is not registered under the trust company legislation of any jurisdiction. Units of the Fund are not ‘deposits’ within the meaning of the Canada Deposit Insurance Corporation Act (Canada) are not insured under provisions of that Act or any other legislation. No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. These securities have not been and will not be registered under the United States Securities Act of 1933, as amended, or any state securities laws and may not be offered or sold in the United States or to U.S. persons except pursuant to an exemption from the registration requirements of those laws. The information provided herein is for information purposes only and does not constitute a solicitation, public offering, advice or recommendations to buy or sell interests in the Fund, the Portfolio, Units or any other Next Edge Product. Please refer to the Fund’s prospectus for more information on the Fund as any information in this Report is qualified in its entirety by the disclosure therein. Opinions expressed are those of the author as of the date of their publication, are subject to change and may not reflect the opinion of all members of the Company. Some statements contained in this material concerning goals, strategies, outlook or other non-historical matters may be “forward-looking statements” and are based on current indicators and expectations at the date of their publication. We undertake no obligation to update or revise them. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those implied in the statements.

2015

2016

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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-- ---6.35% 2.23% 4.93% 0.73% -8.01% 14.00% 1.96% 5.06%

-6.01% 4.76% 3.25% 0.81% -2.52% -6.94% -1.44% 7.15% 0.57% -1.25%3

-9.11%

HISTORICAL PERFORMANCE1 Class A

AnnualDec

2015

2016


---19.27%

0.24%-6.24% 2.34% 5.04% 0.78% -7.92% 14.12% 2.09% 5.00%

-4.26% 4.88% 3.58% 1.33% -2.41% -6.76% -1.32% 7.27% 0.69% 4.44%3

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HISTORICAL PERFORMANCE1 Class A1

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2016


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HISTORICAL PERFORMANCE1 Class F

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0.34%-6.16% 2.43% 5.12% 0.88% -7.85% 14.21% 2.19% 5.09%

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HISTORICAL PERFORMANCE1 Class F1

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HISTORICAL PERFORMANCE2 Benchmark

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-9.56% 2.73% 6.71%

-9.31% 2.95% 6.69%

-9.33% 2.92% 6.65%

-9.23% 3.01% 6.72%

-10.37% 2.81% -2.62%

next edge bio-tech plus fund · next edge bio-tech plus fund ... probably astrology that ‘even’...

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