Dr Graeme Macaloney

Life science strategy needs wider focus

By Dr Graeme Macaloney

Canada has made world leading progress in life science R&D, but faces critical issues with respect to commercialization. With over 540 products, our biopharma pipeline is one of the fullest internationally. Many of these could lead to worldwide annual sales of $50 million to $1 billion or more, and create hundreds of high-quality jobs. Yet, we are seriously at risk of squandering our $18-billion investment in R&D and losing the race to international competitors unless we address key issues of financing and manufacturing infrastructure.

The Irish have demonstrated the huge potential from building a manufacturing-based industry. They have successfully built a pharmaceutical sector encompassing about 75 manufacturing firms, $5 billion in capital invested, and $22 billion in exports. But Canada, unlike Ireland, the US and India, lacks extensive manufacturing capacity. With little commercialization experience, we lack awareness or focus that commercialization of Canadian R&D requires both infrastructure and financing. This has led to out-licensing of our life science products to foreign pharma/biotech firms that can provide these key commercialization enablers.

Manufacturing undoubtedly adds value. Drugs licensed at the research stage command a paltry 3-5% royalty, with a return to our economy of a few million dollars. But with sufficient financing and manufacturing infrastructure, a biotech firm can build value by moving the product through clinical trials. By retaining control of manufacturing, it can limit corporate alliances to marketing and co-development, leading to major returns.

Biotech products and services offer an unparalleled opportunity to diversify our economy and increase exports. Domestic biopharma is only 2% of the international market, with the EU and Japan together representing 39%, and the US accounting for 46%. However, if Canada does not focus its commercialization strategy on moving biotech products through to manufacture here in Canada, we will simply become high tech 'hewers of wood and drawers of water'. Our R&D-based industry will continue to be forced to out-license or sell its discoveries to better financed and equipped foreign firms.

Manufacturing infrastructure and financing are the two key aspects that must be addressed in a focused commercialization strategy. They are critical if we want to develop a major industry that will re-invest in R&D, act as a receptor for university/ research institute discoveries, create high-tech jobs and help reverse our multi-billion dollar medicines trade imbalance.

Manufacturing is a critical issue. To establish a cGMP pilot plant for clinical material supply is not feasible for individual biotech firms as it costs $20-40 million and takes up to four years. Therefore, most biotech CEOs deploy limited shareholder capital toward clinical research and utilize contract manufacturing organizations (CMOs) for cost- and time-effective pilot manufacturing.

Commercial capacity issues resulted in Immunex scrambling to meet demand for Enbrel when it was launched in 1999. It has been reported that initial sales of Enbrel far exceeded projections of $500 million (today Enbrel sales will be $2.5 billion) and that each $100 million of unfulfilled demand would destroy $1 billion in company market value. Immunex overcame the supply issue, but only after commandeering major capacity through arrangements with a German CMO, as well as alliances with Genentech and Wyeth.

Financing is an issue because of the capital-intensive nature and long lead times associated with both drug clinical development and manufacturing. The venture capital (VC) industry is typically involved in providing risk capital, but the average Canadian VC financings have been just $2-3 million, compared to $13-21million in the US. After the dot-com crash, Canadian VC was slower to recover than the US, whereby Canada saw a drop of 41% in total financing with only nine financings in excess of US$7.5 million in 2004. The net effect of this is that 56% of Canadian public firms have less than two years of cash. The irony of this is that Canada's basic R&D investments and entrepreneurial drive are exceeding the commercialization capacity to deal with them.

We are facing a huge opportunity loss.

It's clear Canadian governments need to improve the financing environment if we are to compete with the US, which has better developed VC financing capacity. Roger Martin & Michael Porter, note that cluster development requires proactive government participation in establishing specialized infrastructure and incentives for related industries to co-locate. Federally, we have a number of existing institutions, including NRC-IRAP, TPC, SR&ED and BDC,that need to provide entrepreneurial leadership via a greater focus on economic development, larger funding size, and increased responsiveness.

An example of leadership is the need to support service-company deals that are typically avoided by VCs due to the lack of intellectual property. Yet service firms such as contract research organizations (CROs) and CMOs represent a substantial source of employment and provide a critical infrastructure component central to building clusters and providing a supply chain to move products to commercialization. CMOs also provide a valuable "anchor effect" whereby they help retain Canadian manufacture here in Canada and attract foreign manufacture.

Today's embattled CEO struggles to cope with money and infrastructure issues that may push them to relocate across the border, or risk being out-competed by better financed US firms. Canada cannot continue the current trend of supporting R&D without a substantive follow-through strategy to build the infrastructure (encompassing capacity, HQP, and technology) and economic conditions that will secure the socio-economic returns that we deserve.

Martin & Porter report that Canada's economic competitiveness is still 44% driven by resource-based goods. To be economically competitive and robust, and reverse the downward trend in living standards, Canadian firms must seek advantage through unique products and processes to increase exports and diversify them away from a growing dependency on the US (84% and increasing). A focus on life science financing and manufacturing infrastructure can help accomplish this and while helping bring many more treatments for cancer, infectious, and inflammatory diseases to our fellow Canadians, friends and family.

Dr Graeme Macaloney (gmacaloney@ qsvbiologics.com) is founder and CEO, QSV Biologics Ltd, a Canadian CMO.