Success of biotech sector hangs in balance

The success or failure of a handful of late-stage clinical trials or product approvals could determine the future financing success of early-stage and public Canadian biotechnology companies, according to a new report.

Ernst & Young's Beyond Borders: Global Biotechnology Report 2007 says recent positive trends in the Canadian biotech industry have not extended to companies requiring seed or early-stage start-up funding — a situation that may further deteriorate if pending clinical trials slated or bids for regulatory approval are unsuccessful.

The report provides a snapshot of the biotech industry following one of its most successful years gauged by R&D spending, money raised, public company revenue and the number of firms in a precarious financial situation. In 2006, total R&D expenditures increased 4% to nearly $900 million and public company revenues increased by 22% to $3.2 billion. Financings also set a new record reaching US$1.8 billion, up 79% from 2005 and topping the previous high of $1.3 billion in 2003. At the same time, however, venture capital financing for private firms has declined.

Net losses for publicly traded firms fell 43% last year, raising the prospect of aggregate profitability in the near future. But early-stage firms still find the door to IPOs effectively closed. The report suggests that companies should instead consider positioning themselves strategically for mergers or acquisitions (M&A).

Allowing firms to gain access to R&D tax credits before achieving profitability is considered a key factor in ensuring the survival of biotech start-ups. The federal government has committed to examine the scientific research and experimental development (SR&ED) tax credit program and will consider changes within the year. Alternately, companies that add further value and maintain control over products in the pipeline will result in better prices whether their exit is through an IPO or M&A.

The report also notes that the strong Canadian dollar helped increase the number of foreign acquisitions made by Canadian biotech companies.

FMI: www.ey.com.

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