Brian Harling

Rethinking government’s role in commercialization

By Brian Harling

In Canada, we do a reasonable job of creating new companies and take great pride in the number we have started. However, our governments at all levels seem to feel at once a company has been formed, their job is over and the companies and the private sector markets should take it from there. We have a number of examples where this attitude has cost Canada great opportunities and and damaged the potential of the biotechnology sector. Although there are many that follow this pattern, let me focus on three.

ALLELIX PHARMACEUTICALS

A few years back, Allelix Pharmaceuticals was one of Canada’s premier biotech companies. It was one of the first to be formed and received a lot of early attention. The firm was vibrant, had a solid product pipeline and a very promising lead product for osteoporosis. This drug emerged from research emanating from one of Toronto’s research hospitals and was based on research funded by Canadian taxpayers.

The company was privatized, venture capital raised and an IPO was completed. There were subsequent financing initiatives and partnerships and development continued. Allelix had commercial partners. But at the phase two stage the major partner decided this was not a priority drug and withdrew. Concerns were raised that perhaps this drug was not that good. It wasn’t true, but even if it was the company had a solid pipeline with lots of potential on many disease fronts.

Allelix attempted to press on but it needed a significant amount of funding to complete a phase three trial that would last about three years. Over $300 million was spent in Canada by Allelix but it hit a financial wall and no additional funding could be raised in Canada. An attempt was even made to involve the federal government but it did not understand nor have the mechanisms to help. The government response basically was, this is a problem for the market.

The only recourse left was taken and Allelix was acquired by US-based NPS Pharmaceuticals. Today, that long phase III trial has been completed with outstanding results. The drug is on a list of 10 new compounds that will be blockbusters — a drug that generates annual global sales in excess of US$1 billion. FDA and approval is imminent.

Eventually we will be using that drug to treat osteoporosis patients in Canada but we will be importing it from the US, adding more to our trade deficit in this sector and with no significant economic return for the investments made to develop this drug. The big economic impact that this drug would have had for Canada and our health sector balance of trade deficit has been lost.

SYN X PHARMA

Syn X was another spin off from the University of Toronto and hospital research in Toronto. In 2005, it was acquired by Nanogen of San Diego CA for $7 million. The acquisition will provide Nanogen with a pipeline of complementary products to expand its market share in the in vitro diagnostics market and augment its technology platform for developing advanced diagnostic products. This year, Nanogen will start generating revenues from the products that Syn X developed little more than one year after it bought the company at bargain basement prices. All Syn X needed was enough cash to run for another two years but it could not raise it in Canada. When investor fatigue sets in, Canadian-based companies are doomed.

NEXIA BIOTECHNOLOGIES

Nexia was a world leader in the new field of transgenics. It developed a technique of using genetically modified goats to produce key proteins in the goat milk that could then be harvested and processed. It built up the herd and established the process and the techniques, again built on Canadian university research funded with tax dollars. The company was formed and venture capital was heavily involved. Promise was high and the IPO was done. Overall, about $80 million was spent developing Nexia and its products. One of the products was taking much longer to develop than originally anticipated. But they had another product that was doing extremely well. Nexia was receiving significant funding from the US government for Protexia, a protein that acts like an antidote to nerve gas. Alas, the company does not have a product that is developing revenues and the costs of maintaining the goat herds and development support systems were mounting. It hit the financial wall in Canada and was put up for sale. The Protexia technology and the goats have been sold to a US firm for $14 million, a fraction of what has been invested to date. The rest of the business is also on the block. There is a pattern here that is quite disconcerting. None of these companies’ products failed. The products were good and being developed effectively.

Canada is prepared to fund the research and collectively we get really excited about the early prospects of new companies. We even use government money in these early stages through IRAP and tax subsidies for labour sponsored venture capital but government is noticeably absent in later stages of a company’s development.

There is another group of companies that are on the verge of being added to this list because their development cycles are taking longer than investors had anticipated and the fatigue factor is setting in.

If you produce two lists of biotech companies — one of companies that failed because of product failure and the second of firms that disappeared as a result of investor fatigue — the latter would be much longer. The sad thing is that these companies go quietly with no fanfare. Then we collectively complain that we are not getting a very good return on the research dollars we spend. I remain hopeful that our new thrust on commercialization will strive to reverse the position and the length of those lists. If that objective is to be achieved, we must find a better way for government and the private markets to work together to build these companies.

In Canada we have produced great research which has led to the creation of great companies. Very few of those companies make it to become large and profitable corporations. The perception is that we are not creating enough companies and that those wealthy Americans are buying up our promising companies as they develop. Neither of these perceptions is correct. We do a good job of creating companies but we do not support them adequately and then we are perplexed when they are lost. We need to find better ways to ensure that these gems and our companies with global leadership do not evaporate for lack of financial resources.

Brian Harling is VP corporate affairs and government relations of MDS Inc.