How can Canada's emerging biotechnology SMES increase their value?

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By Pierre Bourassa and Dr. John Lawson

1. Introduction

The Canadian biotechnology industry is a rich source of innovation. There were 417 core biotechnology companies involved in the sector with over 70% focusing on therapeutics and diagnostics product development according to The Canadian Biotechnology Industry Report 2004. One third of these companies are spin-offs.1 Indeed, Canada claims the second highest global concentration of biotech companies in the world. Canadian Biopharma companies have a strong product pipeline with an estimated 160 therapeutic compounds in Phase I-III trials.2 With statistics like these, biotechnology in Canada could be expected to have a great future.

Canadian scientific knowledge is recognized around the world. Its population is supportive of the industry. There is an effective regulatory system recognized by its most important counterparts (the FDA and EMEA). It has the highest number of CROs per capita of any G7 nation and it is geographically positioned next to the largest world pharmaceutical market. So why does it not have a high concentration of Big Pharma MNE's head offices, like Switzerland? This also poses a number of other questions.
-Why does Canada have a 3.2%% share of USPTO patents, and yet enjoys only 2.5% of the world pharmaceutical market?3
-Why is there an increasing Canadian trade deficit in pharmaceutical products?4
-Why, when there are appropriate skills and yet lower costs than in the US, are there not more pharmaceutical production facilities in Canada?

At the same time, compared to the US, Canadians created 2.5 times the number of spin-off companies, disclosed as many inventions and executed as many licences per dollar spent on research, yet only achieved half the number of patents.

This is the second of two articles where the authors have attempted to appraise critically the Canadian system to guide an improved understanding of how to leverage better its global opportunities. The first article looked at "Canada Inc.'s" dealings with Big Pharma, not one of which has decided to base its head office in this country. This section looks at the large numbers of SMEs who, if they decide not to deal with global MNEs as their marketing arm, may have to compete with them.

2. The Global Context
An estimated 25% of all new compounds in published pharmaceutical drug development pipelines are populated by biological compounds. Even amongst the list of small molecule drugs, most owe at least part of their discovery or development to techniques emerging from biotechnologies. At the same time, Big Pharma has been resorting to greater levels of out-sourcing, seeing their primary roles as portfolio investor, research programme manager and ultimate marketer.

3. The Canadian Context
In a recent article, Guy Stanley from McGill University suggested that Canada's piecemeal approach to coordinating its national innovation system has failed to serve adequately the national interest. His article confirms that Canada's performance has deteriorated, according to OECD reports in 2004 and 2006. Canada's business competitiveness has slipped to 16th position as ranked by the World Economic Forum. He asserts that the strong export position currently being enjoyed is as a direct result of surging resource prices rather than any gain in Canada's ability to produce high value-added, knowledge-based products.

Sources of funding for Canadian Biotechs is limited and thus aggressively sought. Venture capital banks, such as BDC, often provide the first port of call for any new spin-off. Sadly, because of the intense competition for funding, many projects are rejected and this acts as a negative factor when the spin-off approaches a second VC.

Canadian SMEs, having been well supported by Government money, find themselves in a harsh world with little infrastructure to help them. Organizations such as the NRC's IRAP program and limited regional funds, provide the only real help. Canadian inventors and innovators often find themselves, therefore, looking outside Canada for assistance and this inevitably leads to the migration of intellectual property, technology expertise and people.

4. Is there a solution?
In formulating a solution to the dilemma of the Canadian biopharmaceutical industry, it is important to learn some lessons from other Canadian companies. To suggest, however, that there is a panacea or, indeed, that the chosen examples are doing it the best way, would be to over-simplify the situation and the solution. Each case has a multiplicity of factors and Dr Bellini's assertion that it takes a little luck, is certainly one of those factors.

Stay Focused!
Theratechnologies emerged in 1993 from a number of technologies acquired from the University of Montreal. Like most companies that are spin-offs with several existing technologies, there was a reluctance to let any of them go. Dilution of effort has disastrous effects not only upon R&D burn rates but also it reduces management credibility with investors. They like to see results! It became critical, therefore, to focus their efforts upon a few promising product opportunities. The first product to emerge from this strategy was TH9507, which produced its first phase III positive results in December 2006 for a syndrome called HIV associated-lipodystrophy. The impact of this milestone on the company's value creation was outstanding. The stock increased by 565% in 2006 compared to 2005 while the Canadian healthcare index was down during the same period.

Have a contingency plan!
Ambrilia had 3 product candidates in its pipeline. These were Fibrostat (in phase II for the treatment of hypertrophic scars), ANsA, (a monoclonal antibody in pre-clinical for the treatment of cancers) and PCK3145 (a therapeutic peptide in phase I/II for advanced prostate cancer). Ambrilia had conceived a portfolio approach in order to mitigate their risks.

Pursue niche markets!
It has been stated that, in order to pursue competitively the large chronic disease markets such as arthritis, hypertension or hypercholesterolaemia, the strong marketing muscle of the top 20 Big Pharmas is almost obligatory. They have the sales infrastructure, the capital backing and the contacts with key prescribers to make it happen. They also have, however, other vested interests! They take a portfolio approach to their R&D in order to ameliorate risk and they will choose the most profitable solution to fulfill their requirements. Even though they may have purchased the rights to market a product, they may decide not to pursue it. This leaves the licensing company with the need to extract themselves from the agreement and to find a new partner.

Use enabling technologies!
Valuation and risk are inextricably linked. Clinical success drives valuation upwards and further along the development cycle towards the market that can be achieved, the more attractive the proposition for investors and eventual marketing partners. Time to market is also important. The larger the window of patent-protected sales that can be achieved, the higher the valuation. For the 'average' global pharmaceutical, sales are about $350 million per year. Every day that can be saved on bringing the product to market, therefore, results in another $1 million. With gross profit margins at 90-95%, most of this falls to the bottom line! So, what enabling technologies will assure success and reduce time to market?

Speed to market can, of course, be enhanced by requesting fast tracking, priority review or accelerated approval by the FDA. This is usually granted for potentially-ground-breaking new drugs for conditions where there is unmet clinical need. The risk with such an approach is that strict adherence to documented procedures and full openness of data is requested. Such compliance places considerable pressure upon regulatory managers. The use of process management software at an early stage in development makes the transfer of information easier and traceable.

Maximize biologics manufacturing expertise!
Around 25% of Big Pharma's R&D pipelines concern biologics. At the same time, sales of biologics are growing at around 20% CAGR whereas the total market is growing at only 7%. The patentability of naturally occurring substances is not as secure as that for small molecules but the industry has to embrace the fact that these highly specific molecules have a more predictable therapeutic action and relatively fewer side effects. They are highly complex molecules and biologics manufacturing has, to date, produced much lower yields than their small molecule chemical counterparts. Challenges still exist, therefore, in creating processes that give traditional industry margins of 90%+. What is interesting for SMEs is the fact that patenting a high yield biological process results in market exclusivity for much longer than the traditional model. It is important, therefore, for such development to be performed in tandem.

Move further along the value chain
The following chart assigns a value of around $15 million to the 'average' molecule that has reached successful completion of its preclinical phase. The costs associated with bringing the product to this stage might be anywhere between $2-4 million. Not a bad 2-year return for the smaller investor, perhaps, but since 94% of them fail, the risk is high. With relatively little additional investment, say $10-20 million to complete Phase II, the valuation has grown 10-fold and the failure rate has reduced to 57%! In addition, though Big Pharma may benefit greatly from picking up promising pre-clinical molecules very cheaply, the true value of the innovation is never realised by the SME. Neither, too, do the government and academic institutions, who fund most of the activity associated with this research, receive adequate recompense for their investment. The benefits of moving further along the value chain are, therefore, obvious. One molecule completing the early clinical phases is more valuable than ten molecules merely completing pre-clinical studies. Sadly, it is not that easy. The math may work, but the practical reality is somewhat different. It is important, therefore, to understand why products fail at these points and what it takes to generate a winner.

Failure can be attributed to a number of factors including: lack of business savvy, limited knowledge of regulations, limited experience in drug and medical device development, lack of experience in clinical studies, ignorance of converging technologies' potential, etc., but the bottom line finally comes down to the availability of cash.

Fortunately, new funds are emerging such as the Go Capital Fund. Under this initiative, BDC will act as the fund's manager. Go Capital invests in selected firms, matching dollar-for-dollar investments from BDC, bringing the available capital to $100 million. It specifically targets businesses in the seeding and start-up phases. Although starting in Quebec, BDC seeks to adopt the same model in other Canadian provinces. CTI Capital have also announced an initiative supported by the Caisse de dépôt et placement du Québec. This fund has also secured close to $100 million in commitments from Quebec based venture capital funds, institutional investors, the FIER initiative and the fund general partners. These initiatives, it is hoped, will help bring our SMEs further up the value chain.

The funding institutions will argue that not all innovations presented to them will succeed even if they are funded adequately. This is true, of course, but the sad reality is that many of the decisions to invest are made by people who really have no expertise in the subject matter. Failures may also be caused by having an unclear mode of action, multiple targets, inefficient research, insufficient testing, inter-species differences, insufficient product differentiation, lower than acceptable safety profile and a lack of true cost/economic benefit. Failure to achieve market penetration is usually more an indication of strong competition, inadequate recognition of unmet medical need or weak marketing.

Conclusions
The pharmaceutical industry's mass-screening programme paradigm of trying to scoop up every piece of intellectual property to create patent-protected sales is not working. The absolute complexity and diversity of disease targeting requires researcher dedication. Research creativity is not on-tap. This means that Big Pharma is actively seeking partnerships and is more often out-sourcing all but its core competencies. Their reluctance to embrace the emergence of personalized medicine may be their downfall and this is where Canadian SMEs can make headway. Following is a list of key factors that might help SMEs to succeed.

References
1 Brenders, P. (2006). Biotech Developments and Future Impact. Presentation, BIOTECanada

2 http://www.canadianbiotechnews.com/Industry_Report/industry_report.html

3 W. Glanzel et al, Domain Study: Biotechnology-An Analysis based on Publications and Patents, Steunpunt O&O Statistieken, November 2003.

4 Canadian Pharma - Falling Behind? Biotechnology focus April 2002, Vol.5, No. 3 by Bob Reichert

5 Stanley, Guy (2007) What's wrong with Canada's Innovation?, Policy Options, Dec. 2006 - Jan. 2007

6 For more info please refer to web site: http://irap-pari.nrc-cnrc.gc.ca/

Biographies
Pierre Bourassa is a former entrepreneur who created and owned close to 10 companies. After a career of more than 15 years in pharmaceutical and five years in corporate financing, Bourassa joined in 1999 the National Research Council - Industrial Research Assistance Program (NRC-IRAP) as an industrial technology advisor (ITA) specializing in the Biopharma sector. A biochemist by trade, he has an MBA in bio-industries management. Contact: pierre.bourassa@cnrc-nrc.gc.ca

Dr John Lawson has spent more than 30 years working in the pharmaceutical and biotechnology business, two thirds of this at local and global senior management team level. A UK-registered pharmacist, he has an MBA and doctorate in business administration majoring in marketing. He now provides strategic marketing and interim management support, mainly to emerging technology organizations. Contact: jlawson@sympatico.ca