Looking back at the decade that was for Biotech

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By Robert Foldes

I am privileged to be able to communicate my thoughts on the state of the biotechnology sector as we close out the decade. I decided to focus my comments on the area I know best – the human health segment of this sector in Ontario. Also, these comments don’t really include companies essentially operating as pharmaceutical companies but without R&D activities encompassing biotechnology. My inspiration for this column is derived from a Government of Ontario 2007 publication stating: “Looking for a profitable place to grow your life science company?...We provide all the ingredients needed to grow strong, healthy life science companies.” I thought it was time to introduce some real introspection.

As you may remember (it seems so long ago), we started this decade with the euphoric rise of companies exploiting human genomics followed by the short-lived glory days of companies focusing on bioinformatics and/or proteomics.

Interestingly, we conclude this decade with a pretty well established success of biotherapeutics in the pharmaceutical armoratorium, and the early days of convergence of drugs and diagnostics to build the platform for personalized medicine.

In many ways, the last 10 years in Canada have seen a further decline in its already fragile biotechnology industry. This was highlighted by the acquisition of the flagship company, Allelix Biopharmaceuticals in late 1999. More recently, Allelix has now completely abandoned its footprint in Ontario. At its, peak with some 200 or so employees, Allelix was likened to Genentech, serving as a training ground for hard-core biotech players. As a proud alumnus, I can say that Allelix provided the most stimulating and enjoyable work environment of my 20-year career. Other losses of our home-grown biotech companies to foreign acquirers or other factors during this decade include Arius Research, Diabetogen, GlycoDesign, Go Bang, LymphoSign, MDS Proteomics, Millennium Biologix, Molecular Mining, Molecular Templates, Nanodesign, Neurochem, Prescient, SynX, Tm Bioscience and Vasogen. Several additional companies have opened offices in the U.S. to attract investors/and or management while maintaining R&D operations (at least for now) in Ontario. Several others are facing serious challenges.

One might argue that the biotechnology industry in Ontario is larger than ever. According to my count, some 58 (real) biotechnology companies are still headquartered in Ontario. (I am happy to share notes with those that have more inflated numbers). However, it is clear, that this industry is fragmented, lacking critical mass, and highly vulnerable. Of these companies, 19 (33%) are floated in the public markets with a cumulative market capitalization below $1.1 billion, and another 19 (33%) are still seeking their first institutional investments. Amazingly, 32 (55%) of these biotechnology companies were founded since the year 2000. Only 9 (23%) of the private companies have venture capital (VC) investors. In Ontario, at least, VC does not play a major role in this sector.

This lack of critical mass is a concern mostly because no-one notices when small companies fail. Since the entire sector is represented by small companies, Ontario could easily lose most of this sector in the not so distant future. Based on their most recent burn rates, 10 (53%) of Ontario’s public companies are projected to have less than one year of cash at the end of 2009 (5 will be out of cash).

Few of the current biotechnology companies possess robust discovery platforms coupled to product development capabilities. Pipeline seems to be a dirty word these days. However, “one product” companies have essentially no way to recover from clinical failures or setbacks. Even if they do succeed, they rapidly become acquisition targets rather than being able to move to sustainable business models.

This strategy, essentially entrenches suboptimal investor returns. Perhaps we should assess why no Canadian companies are represented in the top 50 companies by global pharmaceutical sales in 2008. Whereas countries with smaller populations such as Australia, Belgium, Denmark, Ireland, Switzerland and even Iceland, are represented. Is there such a thing as being too xenophilic? At least without significantly supporting our own industry? It is well known that large, well-established companies lay the foundation for a sustainable biotechnology cluster.

On the other hand, it is probably not a surprise to many of us that Canada now leads the G7 in higher education research and development (as a percentage of GDP).

As in other Canadian provinces, Ontario has built an infrastructure and environment that generates world-leading research, yet we have been largely unable to commercially exploit our own discoveries. I have certainly felt for some time that the impressive increases in contribution to academic research from our federal and provincial governments, without parallel support for the biotech industry would most likely result in Canadian taxpayers subsidizing the R&D efforts of foreign corporations. This seems to be borne out by a cursory analysis I conducted.

I compared U.S. patents with human health applications of biotechnology issued to Ontario-based inventors and organizations (industry and academia) over 1 year periods: September 15, 2008-September 15, 2009 versus September 15, 1998-September 15, 1999. It is mildly gratifying to see that 56 such patents were issued in 1998/99 while 76 were issued in 2008/2009 (a 36% increase over 10 years).

However, this still begs the question of productivity associated with our investment in basic research. According to the provincial government, more than $750 million is spent on health research every year in Ontario. That means each issued U.S. patent is a result of an almost $10 million investment. This analysis is only a rough ballpark approach but likely still indicates that a lot can be done to improve the productivity of health research in contributing to health and economic benefits. Note also that at least 23% of the patents issued in 1998/99 and 33% of the patents issued in 2008/09 were controlled by foreign entities.

These numbers are likely to be larger considering licensees and sub licensees, who are not as easily determined. As an example, Trillium Therapeutics license to Genentech would not be captured in the aforementioned figures. In other notable examples, Arius Research’s 13 patents issued in 2008/09 (17% of the Ontario total) are now controlled by Hoffman La Roche. Similarly, Connaught Laboratories 8 patents issued in 1998/99 are controlled by Sanofi Aventis. Note that Sanofi Pasteur had only 3 issued patents in 2008/09 with Ontario inventors, reflecting a larger role of their U.S.-based R&D operation.

The current Liberal government in Ontario was elected just over 6 years ago and has thus governed for the majority of this past decade. This government’s economic development strategy towards the biotechnology sector has mostly been directed to investment in academic research and the creation of infrastructure to support basic research and industry partnerships. Since 2003, the provincial government has invested heavily in the MaRS Discovery District, MaRS Innovation, Ontario Cancer Biomarker Network (OCBN), Ontario Institute for Cancer Research (OICR), and Toronto Region Research Alliance, creating collectively 38 staff positions earning in excess of $100K. In the meantime, the creation of the Ministry of Research and Innovation has also resulted in a net growth of 25 additional government positions earning in excess of $100K. MaRS which originally stood for Medical and Related Sciences, now works with numerous sectors beyond biotechnology.

So how has the biotech sector fared under this government and has there been any net job growth in this sector? Unfortunately, we all know the answer. We probably shouldn’t be looking to the government for leadership in this area. Governments tend to be motivated by short-term PR opportunities rather than long-term value creation. (I admit that occasionally these overlap). We definitely shouldn’t be looking to VCs for leadership here. Again their perspectives tend to be short term. Under free-market principles, VCs will go wherever they can make money, generally over 5-7 years (or less). And of course, beware of professors who always seem to have an answer – remember, they have “no skin in the game”.

So which groups should really be influencing government policy? My vote goes to entrepreneurs (the real creators of jobs) and industry (homegrown please – certainly not foreign controlled). Based on the results I have seen over the last 6 years, I know Dalton McGuinty and his colleagues have been listening to way too many professors, VCs, and foreign companies.