A Path Back to Success: How Canadian Biotech can regain lost ground and access capital

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By Paul Karamanoukian

With domestic biotech companies capturing just two per cent of all global capital raised in 2010 – a drop of five per cent since 2006 – and private financing in Canada at its lowest point in 10 years, it’s clear the industry is losing ground on the global stage. The Canadian biotech industry must return to business fundamentals and reinvent itself to capitalize on the opportunities born from the changing health care system.

Few industries face increased demand quite like biotechnology. Medical, pharmaceutical and biotech are critical as demand for health care services continues to grow and expand, fuelled by an aging demographic and new entrants into the healthcare system (China, India). Last year, the industry experienced record-breaking profitability in multiple markets, and in general, funding appears to be rebounding on the international stage.

And yet no one would mistake the current climate as golden days for the life sciences sector. Although funding grew last year, with companies in Canada, Europe and the U.S. raising $25 billion in 2010 and marking a return to pre-financial-crisis averages – that funding is increasingly skewed to a small number of firms, and in particular, is going to mature, profitable firms, meaning funding for ‘innovation’ continues its downward trend.

Meanwhile, biotech firms seeking operating efficiency have sharply reduced research and development spending. This is particularly true in Canada, where R&D expenses were slashed by 44 per cent in 2009, followed by a 7 per cent decline in 2010. Clearly this is not a sustainable long-term model for success; innovation in the sector is required.

And while the industry enjoys steady demand, with it has come greater expectations of efficiency and effectiveness, especially from governments straining under ever-increasing health budgets. An outcome-based health care system is the new reality; firms will need to operate more efficiently even as they dedicate more resources to demonstrating value.

Ernst & Young’s annual global biotech industry report, Beyond Borders, noted that as in resource development, the early high return opportunities in biotech have been found and now R&D will become even more vital in finding strategic opportunities. This ‘resource’ metaphor should not be lost on Canada, a country long associated with a blessing of rich resources that has not met its full potential in the refinement of finished products. Once again we run the risk of failing to invest adequately where we could realize the most value.

The risk for Canada of reduced funding and strained resources for innovation trends is that we’ll be left behind on the global scene, consigned to become a net importer of the most valuable knowledge, products and services–a model that does not serve well the domestic biotech industry nor the public payers well.

But there is a path back to success. And although the solutions for Canada are not especially different than those for the rest of the world, Canada must act with greater urgency if it hopes to regain lost ground and harness its full potential.

What are those solutions? Firstly, by refocusing on business fundamentals, Canadian industry can reverse its downward trend and establish a more stable footing. Secondly, a resolute willingness to embrace innovation will enable Canadian firms to capitalize on the opportunities born of the changing health care ecosystem.

Four complementary approaches can sustain the innovation needed to succeed:

Prove it or lose it. In an outcomes-driven ecosystem, companies will be under more pressure to prove that their products are differentiated. In an environment where health care needs to become more sustainable and where new technologies are creating opportunities to realize that goal, both health care providers and patients will change their behaviours and expect the same of others.

Biotech firms will have to prove they can do more than sell doses; they need to be a part of the improvement of health outcomes, and they need to demonstrate it to regulators, to payers and to investors.

Do more with less. Companies will need to find new ways to manage capital and conduct R&D more efficiently. While raising capital is itself a challenge in the current climate, there are actually four pieces to the capital puzzle: raising, optimizing, preserving and investing. On the capital side, companies will need to be creative in raising, optimizing, preserving and investing scarce capital – from new ways of monetizing existing intellectual property to pursuing “virtual” company models to reduce fixed infrastructure. On the R&D side, targeted products for smaller populations can be more efficient, requiring smaller trials, less generic competition and fewer safety issues.

Build new competencies. To support the first two imperatives, managers will need different competencies: awareness of changing market dynamics, management discipline, effective performance management, the ability to measure and communicate value, and the creativity to develop new models and approaches.

Collaborate for co-ordinated action. As with their leaders, biotech companies themselves must adapt to exist in a broad interdependent business culture. Sustaining innovation in an outcomes-based system requires changes that biotech companies cannot make alone, necessitating co-ordinated action with everyone from investors and policy makers to payers and regulators.

Can the Canadian biotech industry adopt these approaches and grow and sustain innovation? It’s certainly not for a lack of potential. We have intellectual assets, infrastructure and a global reputation; these form a strong foundation that means these four fundamentals are all within reach. But growth, perhaps even survival, depends on adaptation; sticking with historical business approaches and attempting to compete by shaving spending on research is neither strategic nor sustainable. Instead, demonstrating a home-grown capacity for both innovation and value can be the hallmark of a reinvigorated Canadian biotech sector.

Above all, it’s the intangible factor of the industry’s willingness to embrace new values that will form that path back to success.

Paul Karamanoukian is Ernst & Young’s Canadian life sciences industry leader.
Read more in Beyond Borders: Global Biotechnology Report 2011 at www.ey.com/GL/en/
Industries/Life-Sciences/Beyond-borders--global-biotechnology-report-2011