HealthLinx and Cryptome embark on a future together

The first merger of 2006 has created new opportunities in the hot field of theranostics. Ruth Beran talks with its architects about the merged company and its future plans.

Earlier this month, shareholders voted to approve a merger of Melbourne-based companies HealthLinx and Cryptome Pharmaceuticals (ASX:CRP).

When the merger was originally mooted late last year, many industry observers saw it as a bid by unlisted HealthLinx to use the ailing Cryptome as a vector for a backdoor listing on the ASX.

But talk with HealthLinx CEO Nick Gatsios and chief scientist Greg Rice, and the picture they draw of the new company created by the merger is exactly what biotech guru Steve Burrill had in mind when he spoke at BIO in Philadelphia last year: "If you want to get [a drug] to market, you had better have a diagnostic test attached to it. Theranostics is the only way you're going to get a drug on the market."

Merging the two companies has created a 'theranostics' company, say Gatsios and Rice -- one in which diagnostics are attached to therapeutics to identify responding patient populations. "If you really look at the Australian marketplace, we would be the only ones that are going to be specifically in this market space," says Gatsios.

Merger, not takeover

In late September 2005, investment banking groups Grange Securities and Melbourne Capital approached HealthLinx as one of a number of potential suitors for Cryptome.

"Three weeks into discussions we were given the all-clear to go out and visit management at the Cryptome lab," says Gatsios. "It became pretty evident to Greg and I, in a very short space of time, that this was a really synergistic transaction that was really going to be a merger -- not a takeover, not a backdoor listing, not anything of that ilk."

The two companies realised that Cryptome's scientific assets would be advantageous to HealthLinx, and vice versa. "Rather than a drug development company and a biomarker discovery company, we could actually merge into to a holistic enterprise that can co-develop intervention strategies and biomarkers to monitor efficacy," says Rice.

HealthLinx was formed in 2002, the product of a bid for a Victorian government grant by Gatsios' consulting company Teraform. For various reasons, the bid never got off the ground, but Gatsios decided six months later that the business plan presented a real opportunity. Over the next 12 to 18 months, HealthLinx was privatised and negotiations held with the Royal Women's Hospital and the University of Melbourne to "clean up" the companies' IP position, said Gatsios.

"We licensed two biomarkers in from the Royal Women's Hospital, which came out of the oncology laboratories," said Gatsios.

HealthLinx's lead product OvPlex is a bead-based assay for grades III and IV ovarian cancer, combining five blood-borne markers.

Cryptome, meanwhile, was formed to commercialise discoveries from Melbourne's Baker Institute. It developed a peptide discovery platform to screen naturally occurring proteins in human cells, and purify any that show promising activity. These proteins are then cleaved into peptide fragments using Cryptome's proprietary protease enzymes, to dissect out the active peptide elements, or 'crypteins', hidden within the parent proteins.

Cryptome was formed in late 2001 and was based at Melbourne's Baker Heart Research Institute in 2002. It listed on the ASX in late 2003 with a starting price of $0.25 and a market capitalisation of $12.6 million, after raising $6.6 million in its IPO. It share price has fallen ever since, reaching a low of $0.045 at the end of January.

In November 2005, chairman Graham Kelly told shareholders that Cryptome was looking for a white knight. "The capital markets for the biotech industry, particularly relatively fledgling businesses without existing revenue streams, have proven to be extremely tight," Kelly said. "Despite Cryptome's many successes, we have not been able to access new sources of capital in sufficient quantity to allow the company to continue its development plans as a stand-alone entity."

HealthLinx had been chosen as "a good strategic fit" for an entity to merge with Cryptome, Kelly said -- its products were likely to generate revenues by early 2007, and importantly, it had a proven track record of being able to raise "critically needed capital".

'Like a semi-trailer'

HealthLinx's Rice says that while the company's biomarker product pipeline targeted the short to medium-term, Cryptome was looking at longer-term development. "Bringing those two together reduces the average product to market time, and therefore potentially increases opportunities for global licensing or global partnering," he says.

Gatsios says the FDA is on the side of the merged entity, too. "Last year, the FDA made it quite clear that within the next 10 years any therapeutic going through the FDA would need biomarkers and molecular diagnostics," he says. "That was HealthLinx's market space, while therapeutics was Cryptome's. It really did make good sense to undertake a merger and link the technologies together and progress it forward through this new vehicle. It struck us like a semi-trailer."

For example, the merged company could potentially humanise monoclonal antibodies against peptides in HealthLinx's ovarian cancer diagnostic biomarkers.

"Where most companies working with biomarkers move down the path of a monoclonal antibody based potential therapeutic, we can move down both [monoclonal antibodies and peptides], with a global partner," says Gatsios. "That gives us an expanded IP position, strengthens our IP, product potential, licensing potential, across not only one indication but a number of indications to what this particular cryptein and/or antibody has application in, expands our opportunity licensing potential."

Tech on trial

HealthLinx is looking to start a phase II trial of OvPlex in March, subject to gaining ethics approval, and is hoping the results will prove that the product has better sensitivity and specificity than the diagnostic currently used for ovarian cancer, which has a market space of US$200 million.

While HealthLinx's first product targets late-stage ovarian cancer, the company claims to have promising data which indicates that its biomarkers are useful for detecting early stage ovarian cancer and is looking to develop a screening test, OvScreen.

"The first product of OvPlex targets late stage, but the company's ultimate objective is to develop a MultiPlex assay that will be useful in the detection of early stage," says Rice. "It will be like the Pap smear, which is recommended every second year. But given what we know about ovarian cancer, if we can put in place a community based screening test, it would be once a year."

OvScreen and OvPlex are being built on what HealthLinx says is a new-generation diagnostic platform, called BioPlex. Both are bead-based assays, similar to the Elisa assay, but theoretically allowing up to 100 different analytes in a single sample simultaneously.

HealthLinx is also developing a diagnostic to pick up complications in pregnancy, built around Bruker Daltonics' ClinProt mass spectrometry protein profiling platform. HealthLinx signed a collaboration agreement with the Massachusetts-based company in June 2005. "What we're looking at there is changes in the pattern of peptides present in depleted plasma," says Rice.

Based on a phase I biomarker trial, HealthLinx identified women who subsequently had normal or complicated pregnancies, including preterm labour, pregnancy induced high blood pressure (pre-eclampsia), foetal intrauterine growth restriction and gestational diabetes. Random blind samples were taken and subsequently stratified to find discrimination between the two groups.

"Based on the data that we have at present, we also believe that not only will we be able to identify those that are at risk from those who are going to have a normal pregnancy, but we can start to actually deliver information about which complication of pregnancy they're more likely to have. We've also shown efficacy prospectively identifying those who will miscarry. These are samples taken at six to 14 weeks of pregnancy, miscarriage being delivery less than 20 weeks," says Rice. "What we need to now to do is to take that to the phase II biomarker trial, where we can get realistic estimates of sensitivity and specificity."

The envisaged final product would be a fingerprick blood sample assay taken by every woman at their first doctors' visit. Another HealthLinx product is a one-use, throwaway consumable device for depleting serum used in diagnostic pathology and could be used with the complications in pregnancy test, which requires serum to be depleted prior to processing. The first generation products are expected to be available and packaged around May or June, with a family of products that will follow. "It's a device you need to clean up blood samples before you analyse them on any proteomic platform," says Rice.

Board changes

At a board meeting of the new merged company -- fittingly held on St Valentine's Day -- Cryptome's name became HealthLinx, Gatsios replaced Cryptome acting CEO Prof Matthew Vadas at the helm of the company, and former AusBiotech president Dr Peter Riddles was named chairman.

Former Cryptome chief scientist Vic Ilag is to remain in that position, Graham Watman will remain as a director, and Rice will remain as a consultant for the company's molecular diagnostic activity. Mario Pennisi, formerly of Mayne Pathology, and international business development manager for Mayne's Dorevitch Pathology division, will join the company's board as a director.

"[It's] a well-balanced board that a company like this needs, rather than one that is too heavily weighted towards academia or science or business," says Gatsios. "It's a national board, where they've got one board member and company secretary who reside in Sydney, two who reside in Melbourne and two who reside in Brisbane."

As part of the terms of the merger, Cryptome acquired HealthLinx for scrip consideration of AUD$6 million at a deemed issues price of $0.05 per Cryptome share. The accompanying capital raising, previously set at $3.2 million was revised to $2 million.

"We initially went out to the market at $3.25 million on the wrong side of Christmas, and we reduced it down to $2 million which we closed off fairly quickly, with an attaching option at an issue price of $0.05, by 31 March '07," says Gatsios.

Gatsios says the capital coming in would be enough to last the company for about two and a half years at its current burn rate, without the options being exercised. The company also has income of $900,000 from a deal struck by Cryptome with Dairy Australia in November 2005, whereby Dairy Australia will fund the researching of milk proteins to identify peptides with application for nutraceuticals and other health applications.

Physically, Cryptome's facilities will remain at the Baker, although, Gatsios says, the company will review that soon. "With a merger you've always got this cultural issue of complete reshuffle of life as one knows it," says Gatsios. "We're attempting to move forward in a seamless fashion."