Reason For Hope

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By Kristine Archer

Two new reports highlight what's right and what's wrong with Canada's biotech sector

Raising capital, attracting experienced management and having a successful exit strategy.
In discussions about the state and future of Canada’s biotechnology industry, the same key issues often come up — but what can be done to address them?
This vital question was recently addressed by two reports documenting these common challenges and suggesting possible solutions.
Ernst & Young (EY) (Toronto, ON) released the 20th anniversary edition of its Beyond Borders Global Biotechnology Report featuring a year-in-review chapter on Canada’s biotech sector in 2005.
Written by Rod Budd, EY’s leader of life sciences, and entitled Mixed Reviews and Signs of Hope, the report acknowledges that while industry observers may be discouraged by the Canadian biotech sector’s performance in 2005, there is cause for optimism.
BIOTECanada (Ottawa, ON) and PriceWaterhouseCoopers (PwC) (New York, NY) teamed up to take a different approach, producing the Canadian Life Sciences Industry Forecast 2006: A Vision of the Future. The report highlights results from an online survey that polled 86 respondents — from executives to academics to venture capitalists — on the key issues facing the Canadian biotech industry.

By The Numbers
Beyond Borders highlights funding statistics that carry both positive and negative undertones.
On one hand, funding increased from $791 million in 2004 to more than $1 billion in 2005, an increase of 24 per cent — but these numbers were weighted heavily in the first quarter of the year. As always, finding consistent funding is a major issue, Budd says.
“I think the most important factor to a company is having the necessary resources to carry out their R&D program and carry it out efficiently and effectively,” he explains. “As long as they have the money and are carrying out an efficient effective R&D program, (more) money will come along.”
The EY report also notes that Canadian companies broke records by raising more than $160 million through initial public offerings (IPOs), which have been traditionally regarded as the ultimate exit strategy for a company. This attitude, however, is changing.
“An IPO is often looked (upon) now as a financing round as opposed to a liquidity event, and one of the preferred liquidity events in many of these of companies is a sale to a major pharma or a major biotech company,” Budd says.
“We have (the) capability in Canada to grow our companies and have them become quite successful, but there’s still going to be a lot of them that are going to be purchased by a large multi-national,” he continues. “That’s probably one of the fastest and best ways for shareholders to increase value.
“That will be a fact of life in the industry globally,” Budd continues.
While Budd does note that Canada lacks a major, $100-billion player on the global stage, he says that geography is a secondary consideration in terms of the global economy.
“Even if we did have a big multi-national player like a Johnson & Johnson headquartered in Canada, the multi-nationals are truly multi-nationals and they look around the globe at companies and technologies that they want to acquire,” Budd says.
According to the BIOTECanada survey, 94 per cent of respondents list mergers and acquisitions (M&As) among their top three preferred exit strategies. Unfortunately, M&As are often approached as a last resort, according to Gord Jans of PwC.
“Some people might have been in a scenario where they felt they needed to do an M&A just to survive,” he says. “The ones that are good at it use M&A as a tool to become bigger and better and more competitive.”

Government’s Role
Both reports are clear that government support goes a long way toward sustaining and improving Canada’s biotech landscape.
“Companies do see that there is a role for government, and we have been taking that forward in terms of financing — how do we make it easier for foreign direct investment and for capitalists to come to this market,” explains Peter Brenders, president and CEO of BIOTECanada.
In fact, 38 per cent of commercial business respondents think the federal government has a positive influence on their success — but they also point to areas where government support can improve.
“We look at it in two areas,” Brenders explains. “One is capital formation support — where can the government play a role in that?” Brenders suggests that recognizing LLCs — limited liability corporations — in Canadian tax laws would facilitate foreign VC investment. The second area that needs attention, according to Brenders, is the modern regulatory environment.
“Let’s make sure that we don’t have Canadian standards that are out of sync with the rest of the world — how do we make sure that we encourage the adoption of the technology, that this is an open and welcoming environment? These are (things that) governments can control.”
Such policies, Brenders says, would go a long way to answering a pivotal question: why should VCs invest in Canada?
“If a company can succeed here and has long-standing, favourable government policies, then it’s that much more encouraging, (there’s) that much greater chance of success.”

Taking a Cue from the U.S.
According to Budd, attracting capital from beyond Canada’s borders is a growing trend.
“I notice a lot of things in the big rounds being done in Canada,” Budd says. “They’re being funded by a consortium of venture capitalists — some American, some European and some Canadian — all of them coming together to support a really good company that has a really good idea.”
Protecting those ideas maybe an arena in which Canada can learn from the U.S. Budd says that a standard criticism of Canada’s biotech sector — that it contains too many small, early-stage companies — can be addressed by improving incubator and technology transfer infrastructures.
“Often a university in the U.S. that has a really good technology has a business development office that has . . . hundreds of millions of dollars in endowment funds that they can use for technology transfer,” Budd explains.
“We have to somehow — whether it’s a combination of governments and universities — find a way to take technologies, and bring them along and let them mature in a research institute or a university, to a point where they can raise a significant amount of financing when they’re taken out of the university.”
Another trend that’s worth paying attention to — the tendency of U.S. VCs to fund companies with larger initial rounds, eliminating the need for the company in question to seek stop-gap funding between clinical milestones.
“If you have a private company that’s well capitalized with $30 or $40 million (in) capital, the company can concentrate on advancing its technology through the clinics before it has to run out and try and find other sources of financing,” Budd says.
“The bigger rounds of financing that we’re seeing on average in Canada . . . are financing good and strong companies and giving them a chance to excel,” he continues. “That’s going to make a very big difference, because you’re not going to find as many tiny companies scratching around for a few hundred thousand dollars or one million dollars here and there.”

The Human Element
A steady cash flow can address another seemingly constant concern in Canada’s biotechnology industry — human resources.
When asked about the most challenging issue facing them over the next two years, respondents to the BIOTECanada survey listed building a senior management team and attracting key employees as their second and third most pressing concerns, respectively. Respondents also pointed to a lack of availability of experienced management as the second most important barrier to successful commercialization.
At the same time, however, only 28 per cent of respondents listed human resource costs among their top three spending priorities for their next round of financing, with only two per cent listing it as their top priority.
“I think they all recognize that they need the money and I think HR is very much recognized as an important thing for any business, especially in this sector,” says Jans. “It’s sort of choosing between (whether) you keep the lab open to move it to the next stage, or do you hire a crackerjack CEO. It’s tough to do everything.”
Budd, on the other hand, argues that the human resources problem may not be as bad as it appears.
“I don’t think experienced management is as big a problem as it used to be,” Budd says.
“We have had our share of success stories now,” he says. “We are able to attract people from around the world. I think if a company of founders is willing to bring in professional management, it’s available quite easily.”
Budd adds that placing priority on human resources is an excellent way to ensure future funding.
“Even if you have the best science in the world and you don’t have any good, professional managers, people will think twice about investing,” he says. “Whereas if you have good, professional managers that have made money for venture capitalists in the past, they know that they’ll bring the science along.”
That being said, Brenders is optimistic about the industry’s future, saying that reports like the Life Sciences Forecast provide companies with a crystallized view of the industry’s issues, and ultimately, a working blueprint for how to address them.
“It’s getting to that stage where (companies are) starting to know what they don’t know,” Brenders says.
He continues, “(The report has) been generally very positive in terms of the usefulness and the validity of the data that we got. I don’t think there’s anything that’s really rocket science in here, but I think it’s very useful in the sense that we now have actual data that we can use to use as a tool to try and make our case.”

For more information of the Beyond Borders report, visit www.ey.com/global/
content.nsf/International/
BiotechnologyReport_2006_Beyond
Borders. For details of the Canadian
Industry Life Sciences Forecast 2006, visit http://bitotech.ca/PDFs/
LifeScienceForecast2006.pdf.