Biotechnology in Canada: Opportunities and Challenges

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By Michael Herman, Robert Ford, Paul Fortin and Alain Morin

The biotechnology industry in Canada had an eventful year in 2007. Stories that made headlines included:

•     QLT Inc., which produces the eye drug Visudyne®, appointed a committee of directors to “review the company’s strategic alternatives,” and is up for sale. The former high-flyer among Canadian publicly-traded biotechnology companies has suffered numerous setbacks and lost the confidence of the Canadian investment community as its share price has tumbled.
•     Axcan Pharma Inc., which specializes in gastrointestinal treatments, agreed to be sold to a U.S. private equity fund for US$1.3 billion.
•     BioMS Medical Corp. granted Eli Lilly and Company exclusive worldwide licensing and development rights to BioMS Medical’s lead multiple sclerosis compound. BioMS Medical receives an upfront payment of US$87 million, with the potential for much more on successful commercialization.
•     Biomira Inc. moved to the U.S. and established new headquarters in Seattle to, according to its CEO, raise Biomira’s profile in the U.S., gain access to a larger pool of investment capital, and provide greater opportunity to attract and retain key personnel.

These stories exemplify certain trends within Canada’s biotechnology sector: access to funding is a fundamental challenge; companies need experienced and skilled management particularly for successful commercialization; mergers and acquisitions activity has increased; and big pharmaceutical companies are increasingly looking to biotechnology companies to help fill their dwindling product pipelines.

In 1998, the National Biotechnology Advisory Committee identified financing, availability of qualified human resources, and the regulatory climate as the principal obstacles to improving commercialization by the Canadian biopharmaceutical industry [Source: “Leading in the Next Millennium”, Sixth Report, (1998)].

Canada’s biotechnology researchers have remained global leaders over the past decade. Discoveries in genomics, proteomics and therapeutics, to name a few, have contributed greatly to that success. Canada’s performance is evidenced by statistics which show that the country’s biotechnology industry ranks third behind the U.S. and the U.K. in generating revenues; second to the U.S. in number of biotechnology companies; and first in research and development expenditures per employee [Source: BIOTECanada].

However, Canadian biotechnology companies are generally quite small in size; almost 50% have fewer than 10 employees and almost 75% have fewer than 50 employees [Source: BIOTECanada]. Research and development spending by the Canadian business community compares poorly internationally, ranking 14th in the OECD and sixth in the G7 as a percentage of GDP, although the Canadian biotechnology industry fares somewhat better than the private sector generally [Source: OECD, Main Science and Technology Indicators 2006/2 (December 2006)].

Notwithstanding significant changes, the principal challenges in 2008 remain much the same as they were in 1998. In the BIOTECanada/PricewaterhouseCoopers Canadian Life Sciences Forecast 2007, industry participants identified access to capital and attracting and retaining key employees as the two most challenging issues faced by their organizations.1

Access to Funding

Total investment in Canada’s biotechnology industry in 2006 was approximately US$900 million, far less than the estimated US$2 billion a sustainable Canadian industry requires [Source: Burrill & Company, BIOTECH 2006 – Life Sciences: A Changing Prescription, page 392].

The venture capital market is seen as the primary source of funding for emerging biotechnology companies, but other important funding sources include government grants, loans and tax programs, angel investors, public markets and third-party alliances.

In particular, angel investors are critical to biotechnology start-ups, providing not just funding, but also strategic, network building and operational management expertise. While there is little available data, it is estimated that there are roughly 50% more angel investors per capita in the U.S. than in Canada. Increasing angel investor involvement should be a priority for emerging biotechnology companies.

Venture capital fundraising has dropped from a high of $4.2 billion in 2001 to $1.6 billion in 2006 [Source: Statistical information regarding the venture capital sector is provided by Thompson Financial]. In the first nine months of 2007, fundraising dropped by 37% compared to the same period in 2006.

Explanations for fundraising problems remain elusive. An Expert Panel on Commercialization appointed by the Ministry of Industry was unable to make any specific recommendations on how to improve the domestic venture capital market. It proposed only that the government launch a comprehensive review of the problem [Source: People and Excellence: The Heart of Successful Commercialization, Volume I: Final Report of the Expert Panel on Commercialization, 2006].

Canadian institutional investors, such as pension funds and insurance companies, particularly small to mid-sized ones, invest a much lower amount on a percentage basis compared to U.S. institutions. However, venture capital performance, since the tech bubble burst, has been pretty dismal, making it difficult to attract significant institutional interest.

Venture capital investment in Canadian companies generally has remained fairly steady at about $1.7 billion to $1.8 billion over the past few years, well below investment levels in 2000/2001. Life sciences sector investment has remained steady at around $500 million per year over the past few years. Biopharmaceutical companies represent over 70% of the life sciences total.

An important recent trend is the increased role of foreign (principally U.S.) funds, which provided 32% of all venture capital investment in 2006, a significant increase over their historical market share of about 25%. In the first nine months of 2007, foreign investment increased to 41% of the total.

Another important trend has been increased deal sizes. Fewer companies are receiving funding, but the average amount invested per company is increasing. The average venture capital investment in 2006 was $4.2 million, 40% greater than in 2005. Nonetheless, the average Canadian investment remains less than 50% of the average U.S. deal size.

While there are no simple solutions to improving venture capital investment, continuing focus on increasing institutional participation, especially among smaller to mid-sized institutions, larger deal sizes, particularly for biotechnology companies and increased foreign participation, are required. Recent amendments to the Canada-U.S. Income Tax Treaty, once implemented, should stimulate additional investment by U.S. investors.

The Ontario provincial government and leading Canadian institutional investors have formed a new market-driven $165 million Ontario Venture Capital Fund. The government is committing $90 million to the fund. Similarly, the British Columbia provincial government has recently launched, and committed $90 million to, a new potential $450 million Renaissance Capital Fund targeting investments in the biotechnology sector, among others. These initiatives are designed to promote, through government sponsorship, greater participation by institutions in the venture capital market.

In the early 2000’s, unable to attract venture capital, many Canadian biotechnology companies raised required financing by going public too early in their development. The result has been little liquidity in their shares, increased costs related to being a public company and difficulty in building investor confidence. Commercializing bioscience is inherently risky with enormous technical and commercial uncertainty. Public biotechnology companies must disclose their all too normal early stage trials and tribulations. Investor reaction to negative news is often swift and punishing. Most U.S. biotechnology companies go public at a later stage in development, having obtained substantial earlier stage venture capital.

Consequently, they generate more research coverage, institutional support and greater liquidity in their shares. In 2007, the aggregate market capitalization of Canadian public biotechnology companies dropped considerably, while their U.S. counterparts experienced significant growth.

The public markets are important. Positive venture capital returns are realized when a company goes public or is acquired. Successful public offerings attract additional venture capital to fund early stage biotechnology companies. Canada has a strong stock exchange system in the Toronto Stock Exchange and TSX Venture Exchange. The biotechnology sector should learn from history that accessing public markets prematurely has long-term negative effects, compared to doing so at a more mature development stage.

The life sciences sector has also joined the recent mergers and acquisitions frenzy. Principal buyers of biotechnology and other life sciences companies are strategic investors, particularly, big pharmaceutical companies shifting strategic direction and seeking to fill their product pipelines by acquiring biotechnology assets. Biotechnology companies have become more willing to sell, principally because of their difficulties accessing funding to complete new product development. Mergers and acquisitions activity in the life sciences sector will likely continue its upward trend.

Management and Scientific Skills
and Experience

Biotechnology businesses struggle to find “job-ready” biotechnology savvy individuals who possess the required mix of technical, scientific, business and managerial skills. Compared to the G7 generally, Canada has a relatively small biotechnology labour force. As already noted, most Canadian biotechnology companies are also small in size. Consequently, it is critical that the industry be able to draw on a pool of skilled and experienced talent to work in the lab and the boardroom.

Start-up companies are typically founded by scientists with extraordinary research and development skills. However, they often do not have the education or background to effectively manage a business, particularly the product development and growth challenges confronted in the transition from research to commercialization.

The challenge remains developing, attracting and retaining senior management with strong biotechnology backgrounds and experience in finance, manufacturing, strategic product development, marketing and regulatory affairs.

Historically, there has been significant government support to develop scientific skills at the university level, but less support for Canadian businesses to hire graduates with relevant commercialization education. At the most basic level, government, academia and the private sector need to work cooperatively on programs designed to equip students with the necessary business skills, increase companies’ capacity for commercialization, and improve communication between business and academia on market requirements.

Another option in sourcing skilled labour is to recruit from abroad. While recognizing the challenges this presents, industry organizations and the federal government seem committed to addressing this problem by, for example, improving foreign credential recognition and finding means to better align immigration programs with labour market requirements.

In 2004, the Biotechnology Human Resource Council identified the human resource gap in the biotechnology sector. In 2007, the federal government acknowledged that talented, skilled and creative people are the most critical element of a successful national economy, requiring Canada to grow its base of knowledge workers in order to build a sustainable competitive advantage based on science and technology [Sources: “Conveying Science and Leadership: The Key to the Future” (2004) and “Mobilizing Science and Technology to Canada’s Advantage” (2007)]. Recognition and concerted effort by industry, academia and government to address biotechnology related human resources challenges is the first crucial step to their resolution.

Conclusion

A recent report, “The Canadian Biopharmaceutical Industry Technology Road Map: Challenges and Innovative Solutions”, identifies key barriers to commercial success for Canadian biotechnology companies:
•     insufficient experienced senior management with skills in product development and commercialization;
•     a lack of capital at the early seed phase to strengthen intellectual property and complete proof-of-principle; and
•     the premature spin-off of start-up companies by universities, resulting in weaker patent and product portfolios.

These barriers highlight the inter-dependence of the many factors that contribute to a successful, sustainable and profitable biotechnology industry. The issues involving private sector investment, human talent, targeted government programs and academic commitment are very much linked.

Canada has built the foundation for, and has the ingredients to be, a global leader in important advances in biotechnology and other life sciences disciplines. The identified challenges must be solved, not in isolation, but within a comprehensive, coordinated framework and action plan embracing contributions from, and the participation of, all relevant stakeholders.

References

While this article focuses on funding and human resources, it is recognized that other issues including intellectual property protection, managing the often burdensome regulatory process and improving government tax and other programs remain important challenges within the biotechnology sector.

Michael Herman, partner, Gowlings, Toronto office.
Robert Ford, partner, Gowlings, Kanata office.
Paul Fortin, marketing/business development, Gowlings, Ottawa office.
Alain Morin, partner, Gowlings, Montreal office.