Graeme McRae

Strategic investment in Canadian biotechnology will bring greatest return

By Graeme McRae

Canada has become a world leader in establishing a solid biotechnology research base, but it is not taking the next step— commercialization. In the Canadian biopharmaceutical sector, where Bioniche Life Sciences has been an active player for several years, commercialization is very difficult. Seven of eight pharmaceutical product candidates will fail. Development and testing of a new pharmaceutical product takes an average of 10 to 12 years, costing an average of $1.3 billion to bring one new medicine to the pharmacy shelf.

The cost is particularly pronounced for a company like Bioniche, where our business strategy is to develop proprietary technologies to the latest possible stage, thus bearing the bulk of the development costs, before entering into partnerships with a larger pharmaceutical company. Beyond up-front expenses, there is a cost incurred such as loss of confidence by the investment community when technologies are delayed in development due to regulatory or other hurdles. This, in turn, results in a drop in enterprise value (market cap), leaving the company vulnerable to a foreign takeover.

The Canadian pharmaceutical industry comprises brand-name, Rx&D companies, most of which are foreign-owned multinationals or foreign- and Canadian-owned generic manufacturers. Canadian-owned, late stage firms, like Bioniche, represent only a small percentage of the country’s 496 biotechnology companies (2003 - StatsCan). The majority of the total are private companies — 59% are involved in therapeutics and have 540 products under development, mostly at pre-clinical, Phase I, with a very few at Phase II.

Few Canadian biotechnology companies have the ability or resources to manufacture or market their own products. Therefore, they must sell off their technologies to a larger pharma company for modest milestones and a royalty. Because most deals are signed at a very early stage, most of the commercial benefits (profits) flow to big pharma. The partnerships that Bioniche pursues are marketing- and distribution-oriented in a given geographic area, as opposed to out-licensing a technology in its entirety. At the same time, Bioniche conducts all of the pre-clinical research, clinical testing, regulatory submissions, and manufacturing of its proprietary technologies.

The federal government has supported biotechnology R&D to the tune of approximately $18 billion since 1995. The investment community has contributed far in excess of this. Canadian companies have not, however, had a good track record of developing successful, commercialized products. For this level of investment, 15 to 20 products should have been developed and commercialized as a result of Canadian research.

To date, only a few significant products have been developed in Canada. Government funding is supporting a huge research platform, but not late-stage development and commercialization. There is an immediate requirement for development of late stage clinical testing and commercial infrastructure, such as manufacturing. We believe the returns to Canada could be significant.

The federal government’s main vehicle for investing in innovation is the Scientific Research and Experimental Development (SR&ED) tax incentive. For late-stage development companies like Bioniche, SR&ED falls short due to its lack of liquidity. The credit for public companies is only 20% and is non-refundable so companies can only take advantage of the credit if they are profitable. Biotechnology requires a large investment over many years and, during this period of time, these companies are not expected to be profitable. Therefore, the tax credits are not regarded as a major asset. Given the history of Canadian companies not generally commercializing their technologies, the SR&ED tax credits are rarely applied against profits.

One option would be to allow biotechnology companies to sell their SR&ED tax credits. Cash received from selling these credits would allow late stage biotechnology companies to fund Phase III clinical development and/or build the manufacturing capacity. It would also create some consolidation in the industry, whereby early stage companies could be acquired by later stage ones that would utilize the cash generated by the sale of tax credits to expedite commercial activities.

In addition to SR&ED tax credits, financial support is available through Technology Partnerships Canada (TPC) and the National Research Council’s Industrial Research Assistance Program (IRAP). But the number and size of biotechnology applications far exceed their resources. Bioniche was fortunate to get two TPC loans to develop two key technologies. But our experience is that an excessive amount of management time is spent on the related paperwork, and the investment must be used for pre-commercial activity only.

The bottom line is that, as an industry in Canada, we need to deliver late stage distribution affiliations and commercialization successes to generate premium returns to shareholders and a secure future for employees. We must work to reduce or reverse the Canadian pharmaceutical trade deficit (at $5.6 billion in 2003; closer to $10 billion today; and forecast to grow rapidly in the future). This will take a creative and co-operative approach by government and companies within the sector. Other countries have workable models that could be replicated in Canada.

The Republic of Ireland is a good example of successful commercialization. That country (population 4 million) has no research-based biotechnology industry, yet 13 of the top 15 multinational pharmaceutical companies have manufacturing operations there. Ireland runs a trade surplus in pharmaceuticals of $15 billion. Its success has come from substantial investments in education and training (free post-secondary education), low corporate tax rates for Irish manufacturing companies and a granting incentive program.

Ireland is now focusing on enhancing its flourishing pharma industry by seeking increased R&D investment. They are looking at the Canadian model to establish an active R&D industry to feed new technologies to their pharma strength.

Building on the flourishing and well-established research base in Canada, 30 to 40 companies generating late stage technologies could make this country a net exporter, generating positive balance of trade in pharmaceuticals, and a leader in the health care industry globally. Let’s make it happen.

Graeme McRae is president & CEO of Bioniche Life Sciences Inc, Belleville ON.