Why B.C.'s biotech industry is falling behind

British Columbia's biotechnology sector is no stranger to the downside of a cycle. But this time, there are concerns that the road to recovery may be harder and more complex than in previous downturns. The problems are deep-rooted, systemic and persistent.

In the past, financing droughts were localized and industry-specific. But the current crisis crosses national boundaries and impacts industries across the economy. Without new approaches and funding sources, our province's biotech industry could be crippled in just a few years.

The business model that has evolved in the global biotech industry is much like a relay race. Biotech companies work with a series of investors and partners to raise capital and share risk. The objective is often to survive long enough to reach the next value-creating milestone, where existing investors can "pass the baton" and companies can raise more capital.

The question for B.C. is this: Will investors, partners and buyers still enter the race if they can't be sure the next runner will be there to take the baton? Will the race be run at all?

As the sixth annual National Biotechnology Week begins today, it's important for British Columbians to realize what's at stake -- and what could be done to improve the odds of success.

How bad is it?

In 2008, the Canadian biotech industry underperformed the market. Collectively, companies raised a little more than $475 million US, the lowest since 1995.

Canadian public biotech companies raised only $271 million US in aggregate -- significantly below the industry's burn rate and representing about one-third its R&D expenditures. The public markets have been essentially closed to Canadian biotech companies since mid-2007, with a complete lack of initial public offerings in 2008. Without renewed funding, significant consolidation will be the most likely outcome.

In fact, this trend is already becoming evident. The number of Canadian public companies decreased by 14 per cent in just one year, from 84 in 2007 to 72 in 2008. This was driven in part by the acquisition of successful companies, but was mostly due to insolvencies, clinical-trial failures and firms turning into service or resource companies. For many years, Canada was second only to the U.S. in the number of biotech companies. Today, we rank third, well behind Germany.

Our province has effectively created an infrastructure and environment that produces world-class research, yet we've not been able to retain and fully exploit the benefits of our discoveries.

Like the rest of the Canadian biotech sector, B.C. will continue to experience significant financial challenges in the near term. Although the industry normally operates with low-cash balances, now that traditional funding options have dried up, B.C. biotech companies are left with fewer options for survival.

To sustain an adequate supply of funding to support the existing business model, the industry needs a constant supply of investors. However, the parties that biotech companies have come to rely on -- venture capitalists, public investors and big pharma -- are facing constraints that limit their participation.

With companies and consumers cutting spending, investors and bankers have become increasingly conservative. Many of the investment banks that have traditionally backed the biotech industry are now focused elsewhere, including shoring up their own balance sheets.

Similarly, venture capitalists have become less able to pursue new investment opportunities. Because of the closure of public markets, venture capitalists have to retain funds to support companies for longer, meaning their funds are mostly, if not entirely, reserved to support existing investments. While Vancouver led the country in venture capital financing in 2007, in 2008, we finished third behind Montreal and Toronto respectively.

This lack of funding will inevitably lead to reduced R&D spending, job losses and slowed innovation in our province. This is a major source of concern, as the industry needs sustained R&D investment to attract investors and grow. Already, R&D expenses in publicly traded companies decreased Canada-wide last year, from $743 million US to $703 million US.

Unless the industry supports funding for new startups, B.C. risks becoming a much smaller player in the global industry. If our biotech sector is to survive in any meaningful, sustainable way, we need to look for new approaches and set goals to track achievement.

One approach would be for governments to play a more constructive role in aligning incentives and filling funding gaps. Data from Statistics Canada show that, while the federal government spent $920 million US on scientific activities in the biotech sector in the year ending March 31, 2008, only $15 million US of that total related to business enterprises. And the vast majority of those funds were for pure research. While this is important to advance science and contribute to innovation, without robust funding, these inventions are likely to be commercialized by foreign companies with little economic benefit to our economy.

A government mechanism used to boost biotech is the scientific research and experimental development tax credit (SR&ED) program, which returns cash to private companies based on R&D spending, and is augmented by similar programs in many provinces, including B.C.

While these programs greatly benefit private firms, they may be less useful to many companies in the current environment simply because they lack the funds to invest in R&D. Further, the SR&ED tax credits are of little value to public companies, since they can only be offset against taxable income, which few public Canadian biotech companies have.

Making a portion of the SR&ED credits and unused expenditures refundable would provide immediate relief for public companies.

Programs to reduce the perceived risk associated with startup investments could also help attract investors. These could include matching government funds and grants based on employment creation.

Over the short term, these measures could help the industry survive the drought. But over the longer term, the industry will need to become more self-sustaining and behave more like the U.S. industry, which focuses on the commercial potential of products and less on pure research and very early stage products. A more commercial focus would help reduce risks and attract investors.

Can we stay in the race?

The biotech industry has made impressive strides in treating scores of diseases in recent decades. But there are still miles to go in addressing unmet medical needs from curing cancers to fighting new strains of drug treatment-resistant infections and tackling neurodegenerative diseases. The answers will principally be found through biotechnology.

The good news is that approximately one-third of public companies with approved products are generating revenue, and their revenue growth has been substantial in recent years. These companies will provide a basis for the industry's long-term survival. But companies that do not have approved products need a chance to start generating revenue.

For B.C.'s biotech industry to keep pace with the rest of the world, it needs to create the conditions necessary to encourage every participant in the relay not only to enter the race, but to compete to their full potential.

Challenging times have always inspired biotech's creativity. Now is the time to search for creative models and solutions to alleviate the operational roadblocks in this critical industry for our province.

By Nicole Poirier, The Vancouver Sun.