Is The Canadian Biotechnology Industry Immune From Global Volatility?

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By Ulrich J. Krull

Our Canadian biotechnology industry is far from immune to the ongoing global volatility in the economy, and in fact may be reeling given that this sector has historically required long-term investment for generation of substantial gains.

The decision of the federal government to phase out the labour sponsored investment funds program, the absence of the availability of public market financing and the paucity of biotech venture capital funds has resulted in a significant decline in the number of companies that have the financial resources to continue to carry on business. Over the past couple of years a number of companies in the sector have already ceased to carry on business, others are in the process of shutting their doors, and others are faced with no option other than to cease operations in the coming months. A straw poll conducted by BIOTECanada gives 33% of companies with less than six months cash and 60% with less than one year of cash.

At the same time, a significant number of other viable companies in the biotech sector have been sold or have been moved to other jurisdictions. The cumulative impact of these events has been the loss of well paying high quality jobs and the related tax revenues, and a significant reduction of potential for Canada to become a global leader in the biotechnology industry.

Over the past number of years various provinces have made some important investments in the biotechnology sector.

These initiatives receive kudos. They are integral in any strategic plan to broaden innovation and manufacturing in Canada, and ultimately allow confrontation of the global economy as an opportunity rather than a threat. However, we are now at risk of losing the benefit of some of these investments because the capital required to sustain the industry is simply not available.

Many senior leaders of the biotech/pharma community have been making representations at various levels of government in recent months in efforts to propose an environment that would renew a progressive climate of investment in this country. For example, we have seen efforts by BIOTECanada to convince the Government of Canada to: (i) make changes in the federal income tax treatment of accumulated non-capital tax losses, (ii) create an exempt new investment from future capital gains, and (iii) change the processing of refundable SR&ED credits.

In another example where industry is attempting to identify paths for success, The Biotechnology Initiative (TBI) based in Ontario has assembled a thoughtful set of suggestions that both contribute to addressing the current critical situation, and that should help to create a more robust and sustainable bio-based economic base as the economy recovers.

These proposals include:
Innovation Tax Credits; Recognition that only private Canadian controlled private corporations (CCPCs) receive Innovation Tax Credits in the form of a refund. The proposal is that the tax program be adjusted so that the full credit would be refundable to all emerging biotech companies (public, private or non CCPC), that have qualifying expenditures. This provides a critical cash flow at a time when cash is scarce for further investment by refunding at the top rate all earned credits, to all qualifying companies, including public companies and non-CCPCs.

The private sector would necessarily invest capital and incur qualifying R&D before government funds were advanced, ensuring leverage of funding.

Access to Capital: Rethinking of how to manage current venture capital funds that are vastly undersubscribed to refocus on development of a Life Sciences Rescue Fund. The mandate of the Fund would be to co-invest as an equity investor with private sector parties in viable biotech businesses.

Other Canadian jurisdictions such as Quebec are using various schemes to promote their bio-based economies, and there are examples of innovative thinking being applied in other jurisdictions both within and beyond Canada. We all recognize that the Canadian government and the provinces face severe limitations with their ability to incur additional expenditures at this time. With the judicious redirection of existing resources, and further attraction of leveraged partnering with industry, a climate of investment and growth can be carved within a depressed economy. The challenge – innovative strategic ideas, and the willingness to move at the speed of business rather than the traditional speed of bureaucracy.