By Nancy Volkers
Special To BioWorld Financial Watch
Think canola. Think lamivudine. Think Canada.
Though the country may be better known for its agricultural biotechnology, Canada also makes noise when it comes to drugs and biologics. And the noise is only getting louder. Five years ago, the Industrial Biotechnology Association of Canada estimated that about 120 biotech companies called Canada home, and those companies had sales of C$550 million (US$373 million). By 1997, the number of companies and the sales had doubled, to 224 and $1.1 billion. Even more optimistic results came from the 1998 Canadian Biotechnology Directory, published by Contact Canada; in 1998, it identified more than 550 biotech companies (112 of them public) and biotechnology-based sales of more than $4 billion.
But Canada's biotech industry faces obstacles. Some, like those in the U.S., are indicative of a maturing industry, while others are unique to Canada.
According to KPMG LLP, the Canadian member firm of KPMG International, in 1998 U.S. biotech market caps dropped an average of 13 percent, with small companies (less than US$100 million) dropping an average of 50 percent. Looking north, the picture doesn't improve. Canada is faced with an explosion of biotech start-ups and a wealth of scientific resources, but also a dearth of management experience, a smaller investor base, fewer developed companies with strong pipelines and a tight regulatory environment.
Money is always an issue. The Canadian coin, so to speak, has two sides, said Jacques Lapointe, president and chief operating officer of BioChem Pharma Inc., of Laval, Quebec.
"[Biotech here is] very cost-effective, and that is coupled with strong financial incentives," such as the research and development tax credits provided by Canada's government and by each province, Lapointe said.
However, the Canadian dollar puts companies at a disadvantage when partnering with U.S. firms, or when attempting to woo employees over the border, he said.
And wooing is becoming a necessity, as a growing number of companies fight for a limited supply of qualified employees.
"Canada has suddenly come onto a lot of radar screens as a place to get research done effectively," Lapointe said. "But there is a minimal number of [qualified] people, particularly senior people to lead divisions."
The country overflows with scientific talent in centers like Toronto, Montreal, Vancouver and Saskatoon. Ontario alone has 17 universities, 18 research-based hospitals and 18 government-sponsored research centers. Getting the science done is not the problem; taking the science to market is the problem.
The Canadian Biotechnology Human Resources Study, initiated and directed by the Canadian biotech sector, found that the present experience base in Canada is insufficient to foster the growth and development of biotech. The 1996 study concentrated on about 120 "core biotech" companies and their human resource requirements at each stage of development (start-up, pre-clinical trials, clinical trials, and commercialization/marketing).
The study found that Canadian biotech will create about 4,000 new jobs by the year 2000, with nearly 70 percent of those in management and commercialization functions. A "capability gap" will occur, with demand for people with multidisciplinary backgrounds (such as molecular biology and bioinformatics) exceeding supply.
"We have no problems hiring very good scientists, but people who are experienced in getting a drug to market are few, said Graham Strachan, president and CEO of Toronto-based Allelix Biopharmaceuticals Inc., and chair of Canada's Biotechnology Human Resources Council. "Getting them from the U.S. is impossible. Just look at the state of the Canadian dollar. Plus there's a tremendous demand for these people they can find a job almost anywhere. Why go to Toronto?"
Part of the shortage stems from a lack of pharmaceutical industry in Canada, said Strachan, which also put the country at a disadvantage during the salad days of biotech.
"We don't really have the indigenous pharmaceutical industry in this country that has helped grow and catalyze the U.S. biotech industry," he said. "Clearly, this is a global sector, and the U.S. is probably five to seven years ahead of the Canadian sector, partly because it got started earlier. Financing fashions have moved on to keep in tune with the U.S., and Canada is sort of out of sync."
In the U.S., funding is hard to come by. In Canada, the picture is more complicated. Thanks to a 1992 government policy decision, Canada is experiencing unprecedented numbers of biotech start-ups. The government established several venture capital funds to increase money for risk investments. Strachan estimates the worth of the largest Working Ventures at more than $800 million.
"It's a sort of coming together of labor unions and the banks to provide money for risk investments," Strachan said. "Investors in these funds get a tax break at the individual level."
The program worked; investors bought into biotech. Canadian venture capital investments in the life sciences increased fivefold between 1993 and 1996. This seemed to translate into increased research and development spending in 1994 and 1995, when Canada's expenditures in that area increased 24 percent, compared to 10 percent in the U.S., and Canadian biotech revenue grew 46 percent, compared with 29 percent in the U.S.
At least one U.S. company was lured to Canada during that time; AnorMED Inc., now based in Langley, British Columbia, received US$15 million in 1995 from a group of investors and made the move from West Chester, Pa.
AnorMED was splitting from parent Johnson Matthey plc, of London, and Canada offered a better deal than the U.S., said president and CEO Michael Abrams.
Abrams worked for Johnson Matthey for 12 years, and has found the move to Canada mostly positive.
"Vancouver is a great place to be, from the standpoint of quality of living," he said. "We've had excellent success in hiring scientific staff, and we've found it's easier within the Canadian marketplace to get noticed."
AnorMED has five products in clinical trials, two of those in late-stage trials. Because of that, said Abrams, "we're a relatively interesting story from a Canadian perspective," where few companies have an established pipeline. "In the United States, there are a lot of companies at or beyond that stage."
In March, AnorMED went public, raising C$30.5 million, which gave the company a market capitalization of C$120 million at the close of the deal.
"I think for a company of our size, [completing an initial public offering] would have been below the radar screen in the United States," Abrams said.
Because AnorMED began with a product line, the company doesn't face the growing pains of most new Canadian firms: how to make the jump from start-up to established company. The employee shortage hits hard here, Strachan said.
"Where are we going to find all the management to grow the [new] companies to the point where they have a market cap large enough to access public markets and bring products to the market?" he said. "The public equity markets in the United States are not hospitable to biotech, and that's even more accentuated in Canada. It's a stage of the industry." For firms such as BioChem Pharma and Amgen Inc., of Thousand Oaks, Calif., he said, "market caps are such that they have no problem. But there are very few Canadian companies with a market cap above C$250 million."
In fact, there are eight, according to a 1997 report by Ernst & Young Canada. BioChem Pharma topped the list at close to C$3 billion, followed by Biovail Corporation International at C$1.2 billion. QLT Phototherapeutics Inc., Biomira Inc., Les Laboratories Aeterna Inc., Allelix, Nymox Pharmaceuticals Inc. and Phoenix International Life Sciences rounded out the list. In contrast, the top two U.S. biotechs, Amgen Inc. and Genentech Inc., have market caps of C$26.2 billion and C$12.1 billion, respectively, according to a 1999 Ernst & Young report.
Strachan predicted consolidation as a consequence of so many start-ups, and not enough people and money to keep them all afloat. The latest issue of KPMG Canada's Biotechnology Report leans the same way; its lead article headline reads, "Canada's biotechnology industry: Is there a need to consolidate?"
KPMG cites the safety of investing in established biotech stocks and the growth of investment funds as two reasons why small companies may find it necessary to consolidate.
The regulatory process in Canada isn't easy, but it's improving. The Health Protection Branch (HPB), Canada's counterpart to the FDA, has reduced approval times and increased its workload. According to a 1996 performance report, HPB cleared 139 new drugs that year, compared with 115 in 1995, while median approval time fell from 23.2 months to 21.2 months. (In 1994, median approval time was 37.5 months.)
In 1995, HPB introduced the Submission Evaluation Fee, which compares with the FDA's Prescription Drug User Fee Act of 1992. Companies pay an evaluation fee as part of the approval process; the fee can be more than $100,000. Revenues augment resources and streamline HPB operations.
Still, said Strachan, Canada's regulatory environment is "time-consuming, laborious, and difficult to work one's way through. There are changes [ahead]. There is a move afoot to let companies conduct a Phase I study without filing with HPB. They say they'll accept the [institutional review board] approval in the original clinical setting."
But the lack of experienced manpower rears its head again.
"Some of [the problems] come back to the point that we don't have a lot of people very skilled in the drug development process," Strachan said. "I'm sure some of the submissions are not as professional as they might be if you'd been doing it for 25 years."