Canada's Biotech Ecosystem

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by By Robert Ford, Michael Herman, Dan Polonenko and Marc Richard, Gowling Lafleur Henderson LLP

One does not often consider how all the intricate parts of our car, television or washing machine work together until something malfunctions. An ecosystem operates in much the same way.

By looking at three main components of Canada’s biotechnology ecosystem: protecting new intellectual property, transferring new technologies to industry, and financing new commercialization ventures, we will examine if Canada’s life sciences ecosystem is functioning in harmony and evolving to respond to new pressures to keep pace with the international biotechnology community.

Protecting innovation
The patent system is often described as a bargain between the public and inventors. In return for disclosure of an “invention”, a government through its Patent Office grants time-limited exclusive rights to inventors for exploitation of their inventions. Within this part of the ecosystem, the question of what is required of an inventor to meet the “disclosure” requirements has been the recent subject of considerable jurisprudential discussion.

In Canada, patent applications are prosecuted and issued according to the terms of the Patent Act. A primary requirement is the specification must describe the invention in sufficient detail to permit another skilled person to reproduce the invention.

Recent court decisions impose obligations that go beyond the statutorily defined requirements. In Eli Lilly v. Apotex (2009), the Federal Court of Appeal held there is a “heightened” disclosure requirement for sound prediction in patent specifications.

The claim at issue related to the use of a compound to treat osteoporosis. Actual data supporting human efficacy had been outlined in an abstract prior to the filing date, but the data itself was not included in the specification. The Court concluded that even though the specification met the first two elements required to establish a sound prediction (a factual basis and sound line of reasoning) since the data was not included in the specification, the patent lacked the third element of “disclosure of the basis for the sound prediction.”

Patents are often challenged on whether their specifications satisfy the Patent Act’s disclosure requirement for sound prediction. This, notwithstanding that the Court of Appeal in Pfizer v. Ranbaxy (2008) clearly held the disclosure requirement under the Patent Act is not concerned with whether sufficient data is provided to substantiate the claims. Nonetheless, in Eli Lilly v. Novopharm (2009), the Federal Court held the disclosure requirements for sound prediction and sufficiency of disclosure, in the case of a selection patent, were “co-extensive.” However, the recent appeal judgment firmly rejected this notion and confirmed that Pfizer v. Ranbaxy ought to be followed. In another recent decision, the Court declined to opine on a contentious issue relating to sufficiency (PfizerLimited v. ratiopharm Inc. 2010). In the Court below, the Judge had concluded one may look to evidence of what the inventor had contemplated as the invention in determining whether the disclosure was sufficient (ratiopharm Inc. v. Pfizer Limited 2009). This seemingly expanded on the statutory obligation to describe the invention and how it works.

There remains some uncertainty in Canada with respect to the disclosure requirements for a patent specification. Heightened disclosure requirements could also put Canada out of step with other jurisdictions and disadvantage Canadian entities. This is of particular concern in the Canadian biotech sector, which is primarily comprised of early-stage research companies.

Requirement to generate more data for disclosure in patent specifications imposes a burden on smaller entities that have less capacity to conduct capital-intensive work required for commercialization. Such entities may not have assets to monetize if their primary innovations cannot be protected. This trend will be monitored and innovators will be required to adapt to changes in this part of the ecosystem.

Taking the idea to the next level: The role of academia in the ecosystem
Universities are key producers of ideas, research and potential products, and it’s their Tech Transfer Offices (TTO), also known as University-Industry Liaison Offices or Industry Liaison Offices, that work to drive this success.

A primary source of research funding for Canadian university professors is the Natural Sciences and Engineering Research Council of Canada. Recent reviews by the Conference Board of Canada of Canada’s performance in creating, protecting and commercializing innovations suggest Canadian institutions are under-performing in reference to those in other G20 countries (http://www.conferenceboard.ca/HCP/default.aspx). NSERC has proactively taken steps to stimulate commercialization and dissemination of NSERC-sponsored university research through its recently concluded three-year “Intellectual Property Mobilization” program and by revising its IP Policy to allow for more flexible access to IP developed as a result of NSERC funding (http://www.nserc-crsng.gc.ca/NSERC-CRSNG/Policies-Politiques/ip-pi_eng.asp).

Traditionally, commercialization of university research is the responsibility of an administrative office within a university proper or alternatively, resides in a university-owned subsidiary company.

Regardless of where they reside within the university organization, TTOs are the primary point of contact for companies that wish to acquire universities’ patented or patent-pending technologies under various forms of license agreements and related business arrangements. TTOs are also the primary contact for university researchers who wish to know if their research results are patentable, or to seek guidance in responding to business inquiries regarding collaborative or sponsored research.

Additionally, TTOs have responsibilities for making patenting decisions and managing patenting processes for IP generated at universities.

While most universities expect TTOs will be self-funded by revenues generated through licensing-out their IP and/or negotiating sponsored research contracts and programs, the reality is almost all Canadian TTOs require significant subsidies for staff salaries and operating budgets. The consequence is these TTOs are typically under-funded, under- or inappropriately-staffed, and have inadequate funding available for properly protecting IP.

Are TTOs, therefore, viable players in a well-functioning biotech ecosystem? Despite dealing with issues such lack of internal expertise, limited ability to assess potential commercial value of inventions, working in a reactive mode to emergency requests for patent filings prior to public disclosures, a successful TTO can be a powerful force.

Because patenting costs represent a significant component of annual TTO costs, most focus on reducing and controlling expenditures on new patent filings by placing emphasis on filing U.S. provisional applications to protect new technologies, and then on using a U.S. provisional application as filed to secure an exclusive license agreement with a company within a year of filing. The license agreements typically require licensees to take over financial responsibility for subsequent prosecution and related patent filings. If a license has not been secured or if there is little commercial interest in the technology, then often no further steps are taken to protect the technology and it enters the public domain as a consequence of inventors’ disclosures at conferences and in technical publications.

In many cases, TTOs request their IP service providers to file U.S. provisionals based on minor revisions to draft manuscripts or technical summaries provided by the inventors, in attempts to reduce the patent filing costs. Some are now putting new invention disclosures out for bid to selected IP service providers to secure the lowest price for preparing and drafting their applications.

These “minimize IP cost” approaches, however, do not take into account what companies are looking for in technologies they license in. Companies use IP to protect and expand their current areas of business activities, and to capture new business opportunities. Therefore, focusing patent applications on identification and protection of the business opportunities created by the new IP and the related revenue-generating streams (e.g., devices, compounds, compositions, manufacturing or processing methods, use, etc.) will result in creation of licensable patent applications. The reality is patent drafting and prosecution require considerable interaction between inventors, IP service providers, and TTO staff to ensure creation of licensable patent applications. Fortunately, there is an emerging trend in some TTOs on focusing patenting decision processes and allocating their IP budgets to filing fewer, but much higher quality U.S. provisional patent applications that not only read similarly to regular applications, but satisfy business objectives.

Commercialization – Where is the money?
The interplay between various entities within a TTO is similar to those players in the next stage of development: commercialization. In the Conference Board of Canada report referenced earlier, Canada received a “D” for its innovation performance over the past three decades. In particular, Canada was criticized for not having taken the steps to ensure science can be successfully commercialized and used as a source of economic advantage.

The dilemma is particularly acute in the biotechnology sector where commercialization of innovative research requires a healthy ecosystem coordinated between industry, the financial community, government, academia, and research institutions. A healthy ecosystem reveals the mutual dependencies and collective responsibility of all involved constituencies to create conditions for successful commercialization.

However, the current environment reveals an overriding fundamental problem. Canadian companies do not have access to capital required to facilitate new commercialization. Estimates of the capital needed annually vary between $1 billion to $1.5 billion; the amount of capital actually available to the Canadian biotechnology sector falls woefully short. Unless funding solutions are found, it will be virtually impossible to strengthen the ecosystem as a whole.

Over the past few years, federal and provincial governments have introduced programs to improve the capital formation environment, with disappointing results.

Other competing countries including the U.S., the UK, Israel, Australia, Taiwan and Singapore, have actively enhanced their domestic biotechnology industries. While other parts of the ecosystem, including better development of entrepreneurial and senior management skills, can be improved, these issues pale in comparison to the broken biotechnology financing ecosystem.

We need to find ways to actively stimulate capital formation for the life sciences industry. We need a strong domestic venture capital industry with active participation by financial institutions. Without a stable and credible domestic base, the potential to attract U.S. and other foreign venture capital is very much limited. Our governments’ role must be to create the conditions for investment, instead of making direct investments.

Venture capital investment in Canada did improve slightly in the first half of 2010 compared to the same period in 2009, although it remains far below historical levels. In the life sciences sector, venture capital investment in the second quarter of 2010 increased year-over-year by 13 per cent to $91 million. However venture capital fundraising remains fairly anaemic and the overall outlook for significant growth and improvement in the VC sector is not positive.

It is time for bold action to improve access to capital for the industry before it is too late. Possible solutions such as enhanced tax credits for qualified investments (similar to those introduced by the B.C. provincial government in its Small Business Venture Capital Act), enhancements to the Scientific Research and Experimental Development tax credit program, including the removal of the “Canadian controlled private corporation” restriction on eligibility for refundable tax credits, capital gains tax exemptions for investments in biotechnology companies, and a modified flow-through share program for the biotechnology industry, integrating the venture capital sector into the program, should be carefully analysed and considered. The industry is too important to Canada’s economic future and the country has invested too much time and money developing a global leadership position in its research capabilities, to squander our potential and advantages by failing to provide optimum conditions for the commercialization of these essential products and technologies.

While an ecosystem is a complex machine, ensuring its parts are working effectively results in a successful innovation environment. Adapting to changing patent trends, working effectively with support organizations such as a TTO and improving Canada’s economic programs for effective commercialization are all ways to help Canada’s ecosystem function in harmony.

Robert Ford and Michael Herman are business law partners and co-chairs of Gowlings’ Venture Capital group. Dan Polonenko is a partner and patent agent in our Vancouver office. Marc Richard is an IP litigator based in Ottawa. www.gowlings.com