Bitter Pill?

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BY PATRICIA NICHOLSON

The current state of Canadian biotechnology represents both a triumph and a challenge. With excellent science and a growing number of start-
ups, Canada has become a serious contender on the world’s biotech stage. But it remains difficult — if not impossible — for startups with promising drug compounds to navigate the long, complex and expensive development process.

“We have a large number of small biotechnology companies with maybe one or two products in the pipeline — and some of these are very promising,” says John Evans, chairman of Torstar Corp. Evans has spent more than three decades in the medical, research and innovation sectors, and is currently chair of the Canada Foundation for Innovation (CFI). He says bringing biopharmaceutical products to market depends on two resources that are scarce in Canada: people who are skilled in drug development; and the financial capital necessary to take a product through clinical trials.

The Challenge

“Although we have a large number of companies, they are small and they are undercapitalized. And I think we — we being Canada — have to be worried about that,” says Alan Bernstein, president and CEO of Canadian Institutes of Health Research (CIHR).

The cash shortage means that biotechs must typically make all-or-nothing bets on a single compound, chosen early, instead of building a technology platform. And that compound is often sold or licensed early in development because of the high cost of clinical trials. Often the royalty rates on these licences are very low because of the high risk and long, expensive trial process before the compound becomes a drug.

“So what happens is many of these small companies have to license out the intellectual property at a very early stage when it has very modest value, in order to get funds in order to continue the development,” Evans explains. “Particularly now that the venture capital markets have retreated substantially, it’s very hard for them to get the money from anybody other than pharmaceutical companies — multinationals who would take the product at a very low royalty rate because of the high risk.”

While selling a compound to big pharma is often good for a small biotech company in the short term, the long-term outlook for Canadian drug development capability gets gloomier. The Canadian biotech industry runs the risk of becoming an R&D lab for big pharma. Eventually, Canada’s biotechs could derive their income from low-percentage royalties on blockbuster drugs that they discovered, but couldn’t afford to develop. Meanwhile, these Canadian discoveries will be manufactured elsewhere and imported.

“Typically what happens is a company will form an alliance with a big pharma to do either the marketing or the clinical drug testing. Or it will sell the drug itself in exchange for a percentage of sales to big pharma, because they have the deeper pockets and the know-how to take it to the next stage,” Bernstein says. Adding more value before selling or licensing would offer a better outlook for Canadian biotechs, “because the earlier you go, the cheaper the price you get for it.”

Promising compounds become more valuable as they move through the clinical trials process. A compound that might sell for $15 million at the preclinical stage might be worth $175 million after Phase II, because it has already jumped through some of the riskiest hoops. But it costs millions to move through those hoops, and requires the guidance of experienced people.

A Strong Foundation

Canada has seen a surge in research in recent years, which has contributed to its pool of intellectual property and its growing array of promising startups. Investing in research has provided a firm foundation on which to build an industry, and has made Canadian research a real contender on the world stage.

“Per research dollar, we produce the same number of U.S. patents as the U.S. universities. Per research dollar, we produce twice as many spinoffs as the U.S. universities do, and per research dollar — at the institutional level, at the university and hospital level — we produce about two thirds as much in the form of licensing income,” says David Strangway, president of CFI. “If you compare us without dividing by the amount of research dollars or the size of the country, of course you get a different answer. But on a proportionate basis, we’re actually more than competitive with the U.S.”

Strangway says that spinning Canadian research into startup companies is not the problem. “It’s once it gets out of the universities and the teaching hospitals, where does it go? We don’t have a lot of big receptors in Canada,” Strangway says. “We have a lot of smaller companies doing very well indeed, but the big problem is how does somebody who’s got a real winner evolve to take advantage of that and become big?”

The early-stage research that fuels the crea-tion of small biotech companies has seen a renaissance recently. Bernstein says that the influx of research funding over the last several years through agencies such as CFI, CIHR, Genome Canada and the Canada Research Chairs has been transformational.

“It’s really been a stunning sea change,” he says. But Bernstein also recognizes that start-ups have to start growing. “We should start to see — and I think the Canadian taxpayer expects to see — a return on that investment over the next few years. And I think that will happen. But it won’t happen unless we are consciously going about it and encouraging it and supporting it and putting programs in place.”

Building Solutions

The biotech industry appears to be taking up that challenge, with several industry initiatives and ideas for building critical mass. Now that the research investments have built some momentum, it’s time for some follow-through.

BioConnect is a group of about 20 Canadian biotech and life sciences CEOs that was formed to address some of the issues that contribute to the early sell-off of Canadian intellectual property. Founded by SYN X Pharma Inc. chairman and chief scientific officer George Jackowski, BioConnect’s inaugural meeting took place in October, with Industry Minister Allan Rock in attendance.

“What we want to do is create a network to connect CEOs of Canadian biotech companies. In Ontario alone we have about a hundred biotech companies and I think we should be talking. We have a lot of commonality even though we may compete in certain areas: FDA/regulatory, keeping talent, raising funds, etcetera,” Jackowski says. “I believe that there is a position for the CEOs to get together once a quarter to talk. Minister Rock has committed to attending at least two of the quarterly BioConnect meetings. He wants input and feedback directly from the men and women who are making the decisions in Canadian biotech companies.”

Industry Canada, as well as Health Canada and Human Resources Development Canada, seem to be aware that biotech may be one of Canada’s best bets in terms of building a knowledge-based economy. When the federal government invited proposals for its Innovation Strategy, the biotech industry replied at high volume. Organizations interested in drug development, such as CIHR and Rx&D (Canada’s Research-Based Pharmaceutical Companies), submitted recommendations.

“We do have some very solid expectations that the Innovation Strategy really will serve as a catalyst to make some changes to Canada’s environment, to bring about some more investment in broad economic activities surrounding both the biopharmaceutical and pharmaceutical sectors,” says John Stewart, executive vice-president and general manager of Purdue Pharma and chair of Rx&D. “One of the issues that we’ve got some really positive feedback on is the drug review and approval timeframes issue.”

The slow turnaround in drug approvals is one area in which the industry hopes to see improvement soon.

“Canada is recognized as taking longer to complete that process than many other developed countries,” Stewart says. “In the government Innovation Agenda papers, we’ve seen them making a commitment towards smart regulation on one hand, and more specifically to take action to expedite the overall review and approval system to bring it into alignment on a timeframe basis with the other developed countries.”

Stewart points out that the heads of Canadian subsidiaries of multinational pharma companies are competing with their counterparts in other countries for their parent company’s global pot of R&D money. Part of the logic behind Rx&D’s Innovation Strategy paper is that improving the Canadian pharma environment will help bring more of that global pot of money to Canada.

Among Rx&D’s other recommendations, some of the issues that reflect the interests of biotech startups concern drug pricing policy and R&D tax credits. The recommendation that drug pricing policies should encourage, rather than deter, R&D is of particular interest for biotech companies developing drugs that will be expensive to manufacture or administer. Tax credits, meanwhile, aren’t much use to companies that have yet to generate sales.

“Currently, they expire,” Stewart says of R&D tax credits. “They can only be carried forward for a certain period of time, following which if they’re not used, they’re lost. And many of the biotech companies are not selling product, so they have no income against which to offset an R&D tax credit. And therefore if the R&D tax credit expires before the biotech startup becomes profit-able, then the tax credit is lost.”

CIHR’s recommendations began with the suggestion that the federal government make health innovation and health research the cornerstone of its Innovation Strategy. One of the broad goals addressed by CIHR’s submission is the need for new approaches to education and training in order to produce the skilled people necessary to develop such an innovative industry.

Bernstein says health care is not just an expense in Canada, but an industry — our largest knowledge-based industry. He sees huge opportunities in health innovations such as drug development, management and telemedicine, and advocates an ambitious vision: striving to make Canada a net exporter of medical technology and drugs.

Hitting the Accelerator

Ambitious visions require plans, and that’s just what some biotech industry leaders have cooked up. One of the major industry proposals submitted to the Innovation Strategy was the Biotechnology Drug Development Accelerator (BDDA).

The BDDA is a plan to build the biotech drug development industry in Canada. The BDDA would assess candidates from the estimated 650 to 1,000 Canadian compounds that are not currently in development because most companies can only afford to develop one or two compounds. It would then select drug candidates with the highest potential.

Evans says the impetus behind the BDDA was to try to put together an entity, “that would have that capability and would take in potential new products at an early stage, assess them, and then mobilize the type of financial resources that would be necessary to take promising prospects through the process.”

Evans is chairman of the BDDA’s steering committee, which includes representatives from funding groups, industry groups, and the biotech and pharma industries.

Bernstein, who is also a member of the BDDA’s steering committee, says the BDDA recognizes the problems of high burn rates, high risks and long development times, and provides both the resources to address those problems and the opportunity to build critical mass.

“One way to look at the accelerator program is, it’s saying we have a whole lot of little companies. If we were to create a pool of capital for those companies, in a sense we’re creating one large company. It’s not usually presented that way, but that’s how I tend to think of the accelerator,” Bernstein says. “And that large company has got deep pockets. It has a very large science platform — in a sense it’s the summation of all the science platforms of the whole biotech industry in this country. And it brings managerial know-how that isn’t necessarily available to any one small biotech company, by pooling resources this way. So it’s kind of a Canadian solution, and that’s what appealed to me about it.”

The BDDA also addresses the issues surrounding control of intellectual property.

“We would do it in such a way that the people didn’t lose total control of the product they were bringing in,” Evans adds. “That they had an opportunity to participate in the later development of this product after it had been through this process.”

The program intends to put 20 to 30 of these compounds into active development per year, bringing them through Phase II trials and thereby greatly enhancing their sale or licensing value. The original intellectual property holder would remain involved, and would have the opportunity to buy back the compound at prearranged milestone points.

“The additional investment would have to be recognized, but they have the opportunity to take it back and find other means of investment to move it forward,” Evans says.

However, he suggests the more likely scenario is that in most cases, the inventor will be a partner in the financial interest of the drug as it goes forward, but not play an active role because they lack the personnel and regulatory capability to add value at the later stages.

“That’s what we’re so short of in Canada,” he says. “Without a domestic pharmaceutical industry we just don’t have the people, so we have to bring them in. They’re expensive, they’re hard to find, and the BDDA offers a mechanism that might make it cost-effective to have this in Canada.”

Not only would such a program vastly increase the number of promising compounds in clinical trials, it would offer a lower-risk investment than most biotech startups. The BDDA would have a couple of dozen products in development instead of just one make-or-break compound. That may make it attractive to a different type of investor — such as pension funds — than is usually interested in biotech ventures.

Evans agrees that in order to build drug development capability in Canada, resources need to be pooled. The BDDA would provide such a pool of financial and technical resources, and the expertise to implement such a platform. Not only would those pooled resources serve the needs of a variety of different companies, they would also help to attract capital.

A Capital Idea

Which leads to the inevitable question: If it’s difficult to find enough capital to put one compound into development, where will the BDDA get enough cash to develop a couple of dozen per year?

The BDDA’s proposal relies on funding of some variety from the federal government.

“There are a number of different possibilities,” Evans says. “One is that there would be private sector investment of funds, and seeking government matching. The other would be that one generates a flow-through share type of concept.”

Flow-through shares are a capital-raising mechanism used by R&D-intensive industries that are not yet making enough income to benefit from the R&D tax deductions to which they are entitled. By offering flow-through shares, they can raise capital by “flowing out” their R&D tax deductions to investors, who receive a tax deferral. This system has been used extensively in the oil, gas and mining industries.

“That really means that the investor shares the risk by having a discounted cost because of the tax rebate or tax credit,” Evans says. He believes a flow-through share model is the more likely funding approach.

“I just have the sense that trying to get matching funds out of the budgetary process would be more difficult than getting the acceptance of a tax arrangement such as flow-through shares,” he says.

The BDDA would function as a business — not a funding agency — and the projects it chooses would be selected solely on the basis of commercial potential and merit. Eventually the BDDA would function without funding.

“I think the model would be the same as with oil and gas developments,” Evans says. “There’s a risk that they fail. But if they’re successful, they should become self-supporting companies.”

Evans says he expects that a strong pipeline would take at least four or five years to build.

“But once you can get a reasonable pipeline of products, then even a single blockbuster product would make the pipeline self-supporting,” he says.

A strong pipeline also attracts other opportunities, such as production facilities.

“No companies really can justify maintaining a production facility if they only have one or two products,” Evans says. “This again gets you to critical mass: you can actually have protein production, protein engineering production, and you could actually have sufficient pipeline that you could justify your production facilities here.”

Evans adds that the BDDA may also be of interest to big pharma companies that would like to play a more comprehensive role in Canada.

“There are a number of the pharmaceutical companies where the people based in Canada would really love to be able to see early-stage development of compounds that are promising, that originate in Canada,” he says.

Evans points out that Canada is a very cost-effective place to develop these compounds, and the BDDA could provide a vehicle for Canadian subsidiaries of multinationals to be more involved here without duplicating what those companies are doing elsewhere.

“So I think one of the groups that would be very active in this and probably one of the financial supporters would be several of the established pharmaceutical companies in Canada,” he says.

Big pharma is represented on the BDDA’s steering committee. The heads of GlaxoSmithKline Canada Inc. and AstraZeneca Canada Inc. are on the committee, which also includes leaders from Medicago Inc, Biomira Inc., MDS Inc., QLT Inc., as well as BIOTECanada, the Canadian Medical Discoveries Fund, the Ontario Genomics Institute, CIHR and CFI.

Aiming High

Now that the submissions and proposals have been made, biotech stakeholders must wait to see if the government’s Innovation Strategy will reflect their concerns and follow their suggestions.

“I know that Industry Canada is quite interested in the proposal,” Bernstein says of the BDDA. “I think they have recognized the importance of biotech to the new economy, and more broadly health — the whole health sector — to the Innovation Agenda.”

At the Innovation Summit in Toronto last November, Bernstein spoke at the session on life sciences, biotechnology and health.

“My opening remark was I thought the most important thing about that session was that it actually was there,” he says. “It was explicit recognition by Industry Canada just how important those three things are for innovation, and for the economy of Canada in the 21st century.”

For Evans, one of the important aspects of the summit was getting the issue of receptor capability onto the government’s radar screen.

“I think one of the elements that they had not anticipated was the strength of feeling about developing better receptor capability in Canada to take the intellectual property that’s coming out of the universities’ research and so on and to move it commerically toward products and services in the markets,” Evans says.

Receptor capability received such strong support from summit delegates that a special recommendation was added to the priority list.

“When they did the final polling at the end of the day, the first element of polling was to continue and expand the strong investment in research in the universities,” Evans says. “The second was one that hadn’t been on the list, but it was strengthening receptor capability to move the results of research — the intellectual property — to the market.”

And that, he says, is exactly what the BDDA is all about. Evans hopes to learn the fate of the BDDA’s proposal in the coming months.

“We would strongly welcome, as part of the series of announcements that come out about the Innovation Strategy, some recognition of the concept of the BDDA,” Evans says. “Failing that, we would hope very much that the means of financing — whether it was through some tax-related mechanism such as flow-through shares or through some matching financial commitment from the federal government — would be part of the budget process as an important element of the Innovation Agenda in Canada.

“It fits on so many scores,” he adds. “Public/private partnerships; exploiting the whole new area of life science research which relates to probably the largest industry sector going forward; building on the very strong research capability in the Canadian universities… and the fact that we’re a very cost-effective area of the world in order to do these high-tech processes.”

Bernstein is also optimistic about the federal government’s interest in this sector, and in the BDDA proposal. “I think Industry Canada is looking for a proper role for government in stimulating the biotech industry,” he says. “This would be one that they’re interested in exploring, amongst others.”

Biotechnology and drug development have major roles to play in Canada’s health-care system, which, as Bernstein points out, is a huge priority for Canadians.

“I think we should set a target that we want to be the best in the world on anything to do with health,” Bernstein says. “Whether it’s the science, whether it’s management of the health-care system, whether it’s drug discovery, marketing, developing new drugs, health promotion — you name it. And I think that’s an attainable goal.”

Biotech, he says, is an example of how much Canadians can achieve: “We have the second largest biotech industry in the world. And it’s quite remarkable when you think about it in terms of other countries.” he says. “As a country, I think we should aim high.”