BIG BIOTECHS AND SMALL STARTUPS

ERNST & YOUNG’S ANNUAL BIOTECH REPORT SHOWS A GULF BETWEEN PROSPEROUS AND PRECARIOUS COMPANIES IN CANADA

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By Patricia Nicholson

When Ernst & Young (New York, NY) released its annual review of the biotechnology sector in May, it revealed a Canadian biotech industry that is becoming divided into a few big players and a host of small startups: what the report describes as haves and have-nots.

“For a lot of companies in Canada it has been a really great year,” says Rod Budd, leader of Life Sciences for Ernst & Young. “They’ve been out there and they’ve gone and raised money, and when you look at the list, we have some of the Canadian companies that are raising money on exactly the same scale as the big U.S. companies, and they really are doing well. And those are the ones that are maturing and moving along.”

At the same time, he adds, there is a large group of Canadian companies that remain in a precarious situation.

“We’ve had a good increase in the number of private companies, but boy, a lot of them are really small,” Budd says. There are now 389 private companies in Canada, up from 332 in 2002. “But over 150 of them have less than five employees,” Budd adds. The number of public companies slipped slightly, dropping from 85 to 81.

Dichotomy
In terms of funding, Budd says the value per round of VC financings went up by about 50 per cent in 2003. While the dollar value of total investments remained the same, there were far fewer financings.

“We did a little over 100 venture capital rounds in Canada in 2002, and we did a little over 60 per cent of that in 2003,” Budd says. “So, same dollars, less rounds. Each of the companies was getting more money, which is something that I think is very important . . . The guys that are getting the real venture funding are getting enough money to hopefully get them to a critical mass.”

Those would be the “haves.”

To highlight the growing gulf between prosperous and precarious biotechs, Budd points out the dramatic drop in the number of Canadian public companies with between two and three years of cash available. In contrast, the number of companies with less than two years of cash has swelled, as has the number of companies with more than three years of cash. (Fig. 1, pg. 24)

“You’ve got a whole lot more companies that seem to have a lot of money to last them for a long time, and you have a whole lot more companies that don’t have very much money,” Budd says. “You really are starting to see a dichotomy between those companies that have and those companies that don’t have.”

Rising Star
Geographically, Quebec still boasts the most biotech companies, followed by Ontario and British Columbia. Manitoba, Budd says, is a rising star. The seven new companies in that province represent an 80 per cent increase.

“Ontario grew by the most number of companies, but Manitoba grew — in percentage terms — by the most,” he says. “I think what’s happening in Manitoba is they’re doing a lot of work. They’re not throwing a lot of money at it, but they have a good university, they have a couple of very good hospitals, and I think what the government is really helping them do — and working with them — is trying to put business together with scientists and get them to grow companies.”

Doug McCartney, director of the Life Sciences branch of the provincial government’s Manitoba Research, Innovation and Technology program, says the province has made biotech one of the key priorities of its Innovation Framework.

“As a result of some of the successes that we’ve achieved — in terms of the number of startup companies, but also in terms of the growth of our existing companies — it has started to attract more and more resources,” McCartney says of biotech.

Manitoba has had a strong, focused presence at the BIO conference for several years now, with a large delegation and a memorable booth — highlighted by a stuffed polar bear — in the Canadian pavilion.

“There’s a real recognition now with respect to the fact that Manitoba is a player in the international arena. And I think it’s largely because of the effort we’ve put into BIO,” McCartney says. “It’s seen by the government as one of its key activities throughout the year on an international stage.”

On a national level, Manitoba hosts the annual Business of Science Symposium every October.

“It is very strongly supported by the industry, the business community, the financial community and the academic community in the province,” McCartney says of the conference. “We get strong representation from each of those various stakeholder groups, which, in terms of moving the sector forward . . . is critical: that you have all of those interests singing off the same song sheet.”

The IPO Window
One major difference between the Canadian and U.S. markets in 2003 was that the IPO market opened up in the U.S. “They had a number of IPOs and raised almost half a billion dollars,” Budd says. “We had no real IPOs in Canada.”

In the time since the report’s release, there has been some movement on the Canadian IPO front, with MethylGene Inc. (Montreal, QC) going public in June. Kirk Falconer, director of research for Macdonald & Associates Ltd. (Toronto, ON), says the IPO window now appears to be opening in Canada as well, according to data that Macdonald & Associates has been collecting on major acquisitions and IPOs that have taken place since the late ’90s.

“Of the available data that we have, it’s really clear that when the market began to slow down at the beginning of 2001, that IPOs as an exit avenue for venture professionals began to really close off,” Falconer says. “And just since the end of 2003, we began to see indications that it was opening back up again. So there’s been a bit of a two-year gap since we had really just a long spate of IPOs over the course of ’99 and 2000, and the first part of 2001.”

The Ernst & Young report does show an increase in public company financings in 2003.

“They’re about two-and-a-half times larger in 2003 than they were in 2002,” Budd says. “The companies that can access those kinds of funds are the more mature companies that are either generating revenue or have products in Phase III — hence the haves, versus the have-nots.”

One outcome that failed to materialize last year was the anticipated boom in mergers and acquisitions.

“We expected last year there to be a heck of a lot more mergers and acquisitions because companies were running out of money,” Budd says. M&A activity is something that he says he still expects to see. “We have to start to see some mergers and acquisitions, if almost half the companies have less than a year of cash.”

Pharma Deals
The area that did see a lot of activity was collaboration, Budd says. The number of collaborations between biotech companies, or between biotechs and pharma companies, nearly doubled from 2002.

“You have a company — a small company that’s almost running out of money with a Phase I drug or whatever — and they will be very much tempted to sign a collaboration agreement with big pharma so that they can keep going for a while. So we have seen a good increase in collaborations of that sort,” Budd says.

“I think the other thing, too, that’s made it interesting is there haven’t been any big pharma mergers . . . I think one of the reasons why there wasn’t so much (collaboration) in 2001 and 2002 is because (big pharma companies) were doing mergers, and they were trying to figure out what their merged entities had, and what they didn’t have, and where they were in the research lab. And now that they have consolidated their enterprises they’re out again looking for targets,” he explains. “That’s certainly a good way for some of these companies that haven’t progressed as well and can’t access the capital markets to raise the money to keep going.”

One surprise in 2003 was the substantial increase from the previous year in losses generated by public companies, Budd says. He adds that this increase in losses can be partially attributed to Biovail Corp.’s (Mississauga, ON) decrease in earnings (Biovail lost $1.5 billion in market cap in 2003), but may also reflect the continued R&D spending of companies that have not been able to recapitalize, in addition to the high costs of late stage drug development. Canadian biotechs now have more than 30 drug candidates in Phase III trials, and more than 60 in Phase II. Therapeutics, which accounted for 59 per cent of Canadian biotechs in 2003, continue to make up the largest biotech sector.

“I guess our companies are finally getting into the more expensive Phase II and really more expensive Phase III clinical trials, which is increasing the losses,” he says.

In the U.S., where Budd estimates the biotech industry to be about a decade more mature, the revenue and loss scenario is moving toward profit — something that is not yet on the horizon in Canada.

“They’re 20 times bigger than us in revenue; they’re 20 times bigger than us in number of employees; they’re 20 times bigger than us in R&D spending. But the loss in the industry — they’re only losing five times what we’re losing,” Budd says of the U.S. market. “So they really are on a road to becoming profitable in the industry in the United States. That is interesting to see: we compare nicely except for the income, or the loss that we’re generating.”