BC Business
For years, B.C.’s biotech sector has rested on the claim that it has spawned two local giants. But the boast is wearing thin. Does B.C. have what it takes to become the next Bay Area, or will we forever be the farm team for big pharmaceuticals eager to pluck the next great drug discovery and stay stuck in an incubation period? BCBusiness sat down with a round table to discuss.
For years, B.C.’s biotechnology sector has rested on the claim that it has spawned two local giants. But the boast is wearing thin. Does B.C. have what it takes to become the next Bay Area, or will we forever be the farm team for big pharmaceuticals eager to pluck the next great drug discovery? The biotech industry in B.C. is at a crossroads. With successes like QLT and Angiotech, the sector has taken its first baby steps but has yet to prove it can run with the champions in the global marketplace. Our top-notch research facilities have garnered global headlines and spawned an impressive string of biotech start-ups. And as industry promoters never tire of telling us, there are only five profitable biotechs in Canada, and three of them are in B.C. But look a little closer and the shine begins to fade. QLT, the local industry’s poster child, is floundering as it struggles to expand its product portfolio beyond the one drug it successfully developed. And as for the much-touted profitability factor, both QLT and Angiotech lost money in 2005. These may be one-time losses due to unusual circumstances, but nevertheless only one biotech, Aspreva, can lay claim to profitability today. To tackle these tough questions about the industry’s coming of age, BCBusiness convened a panel of industry veterans. Natalie Dakers has deep roots in local biotech. As the former president of Neuromed Pharmaceuticals, she oversaw the growth of one of B.C.’s first-generation pioneers. Drawing on that experience, she is now CEO of the Centre for Drug Research and Development, an organization aimed at helping guide early-stage research companies down the path to commercialization. David Hall has been involved with local biotech giant Angiotech since its formative years. In addition to serving as chief compliance officer and VP of government and community relations for Angiotech, he is chair of BC Biotech. Hector MacKay-Dunn is a partner at the Vancouver office of law firm Farris, Vaughan, Wills & Murphy LLP, and has represented dozens of local biotechs, including QLT, since the sector’s early days. BCBusiness: Is it safe to say that B.C. can now claim it has a successful biotech industry? David Hall: I would argue that it’s not a sustainable industry yet. When you get to the point where some of our successful companies have so much on their plate that they’re spinning companies out, and each of these companies is into the second and third generation of successful products, then you may have what could be defined as a sustainable industry. Angiotech is trying to get to that point where we have enough commercial products, and enough intellectual property being developed, that we can’t actually do it all and we end up in a situation where we’re spinning out companies. Hector MacKay-Dunn: I think we can say we’ve demonstrated the community’s ability to start biotech companies. What we’ve not demonstrated, and where it’s critical for us to determine whether we have a sustainable industry, is whether or not those companies that grow are sustainable. The risk we face is that as our companies demonstrate clinical success and are recognized – which is a good thing – they are purchased by larger companies from other jurisdictions. That’s great for investors, and a tip of the hat to the scientists. But it is quite a different thing to say that that success is actually breeding a life-science cluster. DH: If you follow Hector’s chronology of the development of companies, when the firms are acquired and taken away, the technology usually goes south. Canadians and British Columbians are going to be paying for the innovative medicines that come out of those discoveries in the form of importing the products, the drugs and the devices. Natalie Dakers: It’s one thing to be an exporter of products versus an exporter of ideas. The technology bust that we faced in 2000 has had an enormous impact on our ability to access the capital pool. In the past, universities have been the largest generator of the ideas that have created smaller companies that become larger companies. But how do we continue to evaluate these ideas and turn them into companies if we don’t have an appetite for early-stage companies? BCB: You mentioned a change in capital markets. Could a Neuromed or an Angiotech have emerged in today’s investment climate? ND: I’ve often asked myself that. Neuromed in 1998 raised $5 million in seed funding. Could I do that today? That was based on some excellent background science. We had a couple of chemical structures and we had some data, but very little. Could you take that to a venture capital company today and say: “This is a great idea and I think you should do it?” I don’t think you could. HM-D: Well, let me just disagree with you. I think it’s harder – I agree with you in that respect. And the sources of money are different. But I have, right now, in my practice, five start-up companies. DH: But the science is probably more advanced. In ’98, ’99, 2000, if two scientists cured a rat and were not sure how they did it, they could have funded that. The meter has moved. Today, you’ve still got an increasing amount of government money going into funding research. What we need to do in order to get some value for that – to make this industry sustainable – is get a Neuromed to come along, to have their science matured further than it used to be in order to attract the right kind of financing that can go deeper into the pool of development. If you have good science, you will get it funded. The point is getting the funding so you can get to that point of good science. BCB: Is it that this risk capital is out there for, say, Vancouver’s competitors in the U.S., but the money just can’t get into Vancouver? HM-D: Yes. DH: There are pools of risk capital. They’ll go wherever the opportunity is. HM-D: There are enormous pools of capital sitting in the Bay Area right now. DH: In the U.S. in general. HM-D: And the East Coast. The folks in the Bay Area, who’ve really discovered B.C. in the last two and a half years, love the ideas they see happening and they want to invest. But there is no obvious investor partner in Canada or B.C. for many of the U.S. VCs. DH: If you can remove the barriers so it’s fluid for these risk-capital pools to come in and invest in Canada, our industry can compete with anybody in the Bay Area, Boston, wherever. And, interestingly enough, those companies or those pools of capital come to understand that it’s actually very advantageous to leave the company in the jurisdiction in Canada and in B.C. There are tax reasons why it’s good to be here. BCB: Why is it so hard to find local money? ND: Look at our venture capital community now and where we were even five years ago: Royal Bank is no longer in the venture capital business. Scotia Capital, which was the largest life-sciences fund across Canada, has closed the Western office and they’re shutting things down. DH: You don’t have to get into the individual pools that exist within Canada. They are a fraction of what there is in Seattle, for example. Seattle would have more capital than all of Canada for ventures. [pagebreak] BCB: Let’s move from venture capital to the other end of the spectrum, to exit strategies for investors. The sale of ID Biomedical last year to GlaxoSmithKline was a huge win for investors. Is that necessarily the exit goal, selling to a huge multinational? DH: No, that’s not the end goal but it does happen. ND: It’s one of them. But the bottom line is that as we build companies that develop products that are of value to somebody else, we’re going to see acquisitions. And that’s not necessarily a bad thing. I think it comes back to the question: when did that acquisition happen? And from B.C.’s point of view, or Canada’s point of view, how much of the operations can we keep here? Can we continue to build R&D? DH: Or you shoot higher. We’re the only G7 country that has never actually built a world-class international health-sciences company. Italy’s done it. Some Scandinavian countries have even done it. It would be nice to think we can do that. Maybe we can’t because of our small population, but we should acknowledge that it’s part of our culture to put enormous sums of money into academic research and dedicated research facilities. Right now, if you follow the money trail, we’re really providing off-balance-sheet research and development for big pharma and the rest of the world. HM-D: David, can you explain that? It’s a critical point for us from a government policy point of view and from a taxpayer’s funding point of view. DH: The fact is that there’s a lot of money that goes into the research facilities, whether it’s the BC Cancer Research Centre or Genome BC or the universities. And we develop technologies that get commercialized and/or licensed out somewhere else. HM-D: And it’s a lot of money. We’re talking hundreds and hundreds of millions of dollars. DH: Billions! It’s really part of Canadian culture. Everybody thinks that it’s the right thing to do and I agree with them. It’s the right thing to do to develop innovative medicines to deal with the issues of health care. The problem, on a policy point of view, is that it’s only one half of the equation. We need a commercial industry to capture some of that economic value. HM-D: To create products which, as Natalie says, we can export, instead of exporting ideas. DH: And jobs. But that’s just one part of the equation. The other part is that the expenditure side of health care for consumables is a stunningly big number and it’s going to grow because of our population. We are presently spending all that money on drugs and devices that are owned by international companies. We either import the products and consume them, or they’re purchased from subsidiaries here, usually based in Eastern Canada. So right now, health-care dollars are one of the biggest exports Canada has. HM-D: You look at the billions of dollars that are spent on basic research on the health-care requirements for our society. If we could recycle a decent percentage of that money, it would help foster further growth, economic development and re-plumb the system that’s been investing the money in basic research and health care in the first place. BCB: You’re saying the government is sinking all this money into research, which is essentially funding the R&D budget for multinationals. ND: But you have to remember that we don’t want to start to think about universities as the only way in which you commercialize products. HM-D: They’re a source of ideas. ND: They are, but you have to remember that “spin-off” is the key word. If you try to turn universities into commercial engines alone, you defeat your purpose. DH: No. One of the outputs of this money, this dedicated research money, is intellectual property that is usually taken into commercial ideas. ND: Yes, because it’s a spin-off. DH: It’s a spin-off, but I’m pointing to the fact that where you do have products, we’re simply exporting. In fact, we’re exporting ideas and, actually, exporting products because when you have companies that are getting as mature as they are, and they’ve had a lot of government funding, and they’re getting plucked by international companies…
ND: You also have to ask whether we are doing as much as we possibly can to foster innovation. In B.C., we’ve been trying for years to attract large pharmaceutical companies to the province because, when you look at large clusters all over the globe, you see a concentrated existence of universities with stellar science. You see small biotech, larger biotech and pharmaceutical companies. We’re missing the pharmaceutical companies, and that piece contributes in many different ways – one of which is, of course, critical mass of people. DH: International pharmaceutical companies spend $1.3 billion in Canada on research and development activities. Ontario and Quebec each get 40-some per cent. B.C. gets three per cent. BCB: Why? If there was value here, they would certainly come. ND: It comes back to the connection between regulatory environments and innovation, and the perception is that B.C. is not conducive to innovation. BCB: Explain what you mean by regulatory environment. ND: From a pharmaceutical company’s point of view, obviously, it’s about approval of their drugs, and you have to look at the regulatory system, the method of approval here. BCB: So it’s easier to get their drug approved in Ontario and Quebec? ND: Certainly in Quebec. Each province has its own regulatory environment in which to approve drugs that are found on their formulary [that are covered by the provincial insurance plan]. And it is perceived by the pharmaceutical environment that B.C. is less interested in approving innovative drugs. BCB: So that’s something that you have to lobby the province to change. DH: I think that the perception is that they’re not only less interested but they’re not interested in an open dialogue about the process. That’s the thing that we believe needs to happen in terms of dealing with innovative medicine in B.C. The approval process has to be more open and transparent so we can understand, at the very least, what the decisions are based on. Today, you don’t find that. BCB: That complaint has been around for a long time – that pharmaceutical companies think that B.C. is not conducive to their operations. Obviously you’ve been lobbying them for a long time. What response have you been getting? DH: I’d say BC Biotech, for the first time this year, with its public policy paper, has begun to address that issue. BCB: Why has it taken so long for the industry to bring its concerns to government? ND: It’s been done in different ways. There were initiatives back in the ’90s. One was called Spark, and it was through the Science Council of B.C. It addressed the climate for pharmaceutical companies but, frankly, it just never went anywhere. It’s continued to be a challenge to get the two parties together and there are a lot of reasons why things don’t work. From our point of view, we really see a connection between innovation and health-care costs. We need to bring more of those silos together, because [government] looks at the cost of pharmaceutical drugs – new drugs – and they’re expensive as a line item. They see that as an ability to control costs by limiting the amount of drugs, and when you’re trying to control an enormous budget, you have to do these kinds of things. But we argue: have you really connected all the dots? You look at innovative drugs; yes, the upfront costs may be expensive, but what have you saved downstream? Have you prevented surgery? Have you improved treatment care? Has chronic care been reduced and therefore have you reduced your health-care costs? HM-D: Have you limited hospital stays? Hospital stays and the attendant personnel costs associated with hospital stays represent an enormous percentage of health-care budgets. [pagebreak] BCB: So the government is too short-sighted? ND: It’s a very complicated process and it takes an enormous amount of work to understand how innovation and health-care costs are connected. We also have this conundrum that if you look at the innovation chain in a typical product cycle, your customer wants better products all the time. But when your customer is also the payee for a lot of other people, then they ask the question, “Well, do we want the best today? Because we can’t really afford it today.” So you’ve got this disconnect. HM-D: I think this provincial government has shown, unlike any provincial government before, an interest in the life-sciences industry and appreciates the strategic role that a growing, healthy life-sciences industry will have for diversifying the economy. We came up with a policy initiative, which we refer to as our intellectual property initiative, which the government passed in this last budget and implemented. It allows life-sciences companies and others that are based in B.C., that export products – not just ideas, but products – to receive exemptive relief and a credit for provincial income taxes. So the government has awakened to the industry. They are listening. We’re taking this opportunity to work with government, and to hopefully demonstrate the connection with their investment in the health care of the province and the regulatory environment. DH: First of all, we think it’s the right thing to do for the overall costs of delivering health care. Looking at innovative medicines in terms of outcomes versus line items, as costs will change the financial outcome in the long run. Secondly, it is important to understand that pharmaceutical companies and biotech companies and device companies – the international powerhouses – are also the source of the biggest pool of dedicated venture capital to this industry and they’re not coming here. It’s not just because of the formulary rules, how hard it is to get something approved and how the decisions are made about drugs and devices in this province. They’re not coming here because there isn’t an open dialogue about it. What we’re trying to do at BC Biotech is open up that dialogue so we can have a fair discussion about these important issues, which are very important in terms of the magnitude of provincial budget. And I think the government is probably going to start listening to us, and allow us to discuss this. Because they’ve had to be so focused on costs for so long, that’s where they were. And now we’re saying we need to open this up. BCB: Is the theory that once it’s seen to be transparent, the larger pharmaceutical companies will have an interest in being present here? HM-D: It certainly will open the door to the opportunity. DH: As an industry, we need to push and try to open dialogue where we see changes that are in the interest of this innovative agenda. If you believe, as a public policy, that you should be developing these innovative medicines, we certainly can’t have an equation over here where the actual customers, as Natalie put it, are not actually looking at the proper methodologies for determining how to purchase these various medicines. ND: I think about Neuromed, which is developing drugs for chronic pain. It would seem an awful shame if we had something that was truly novel that our citizens couldn’t benefit from. HM-D: Not only that, but QLT – the pioneer in the industry, based on homegrown UBC science – had a product that was selling up to US$400 million globally. For years after it was approved for reimbursement in other provincial formularies, and all over the U.S. and in Europe, QLT was not able to get Visudyne posted on the formulary in its own home province. BCB: Are you seeing any movements at the provincial government level to have a dialogue? Anything hard and fast to actually start change? DH: I think that there is starting to be some interest in opening the dialogue, but it’s not like you can just go and open this up and fix things overnight. What we’re trying to do is open a dialogue and in a period of time we’ll start to see changes made to how things are decided and the process for looking at innovative medicines. HM-D: The pharmaceutical industry is prepared to participate. Provided it’s a transparent process, I think it’s important that the pharmaceutical industry is held to account, as well. They must be able to demonstrate that, if they have an innovative drug, it truly provides better patient treatment and better outcomes, as opposed to copycat drugs which are just more or less comparable to drugs that are already approved and posted. DH: We don’t look to having our products approved on a provincial formulary just because we’re homegrown. But when you look at QLT or Angiotech… HM-D: You face the same reluctance. DH: Yes. I suppose the reluctance is initially driven by costs. I mean, you take a bare metal stent that costs X, and a coated stent that costs two and a half X, all of a sudden they’re looking at this single line item going right through the roof. In their budget, they’ve only allocated so much for that category. What we’ve had to do, and I think we’ve successfully done it for the most part, is get them to understand that when you take the failure rate of a device from 40 per cent down to three per cent, the outcome is better. They fail less, they don’t go back into surgery for ballooning or re-stenting, or even bypass, and you save money. ND: That’s the connection we’re talking about, and it takes a lot of education and understanding. HM-D: David, using the example of Angiotech, and also of QLT, they ultimately got their drugs listed. Therefore there must be some openness with the formulary to list new, innovative drugs. So what’s the real story here? DH: If you look at the statistics, they’re quite stark compared to other jurisdictions in Canada. At BC Biotech, we’re trying to get an open dialogue about the methodology for approval. Today, we really don’t know why things are approved or not. It’s important that there’s an open process, like everywhere else. If you go to the FDA for approval, you have to have a well-proven methodology. The same thing if you go for approval for reimbursement in the U.S.: you have to provide that data and they’ll tell you what the problems are – yes or no, or you’ve got to go back and do this. HM-D: So in effect, the hearings are public in the U.S. and here they’re behind closed doors. You don’t even know who’s in the room. ND: There’s no process for appeal and it’s very difficult to get a decision with no ability to a) understand why, and b) to have any rebuttal. BCB: Let’s wrap it up by getting your thoughts on the biggest challenge facing the industry. ND: I think it’s the sustainability, maintaining the growth. We have to be far more diligent about how we spend the money that we raise and put into our companies. If you look at the odds, they’re 10,000-to-one of drugs that start as original ideas and make it to drugs that are ultimately approved on the market. If we can do a better job of ferreting out the failures up front, focus on better successes, be smarter about how we spend our money, I think that’s one way we can meet some of this new criteria. HM-D: There are a number of factors that can pull us either toward sustainability and growing the industry, or else slipping back and becoming simply a farm team for other jurisdictions. There are many factors that are beyond our control, like the global market economy, the global pharmaceutical industry and so on. What we can do is remove the barriers and provide some incentives. For example, the government’s intellectual property initiative, which is now under the International Finance Centre, is a great reason for a company to decide to stay here and grow. It may encourage other companies to come and set up here. I’ve used that one initiative on a number of potential companies that are considering moving here – some that have. It’s not going to be the single factor. Other factors that would encourage companies to stay here include that this is a wonderful province to live in and grow old in, and we have a good business environment in this province. You throw those factors together, and perhaps we tip in favour of sustainability. DH: The health-sciences industry is one of the biggest industries in the world and we have a big investment in this country in trying to develop that. It’s quite simple: if you have this agenda of trying to develop intellectual property-based industries, you need to do whatever is necessary in a public policy sense to balance that equation. That goes to all the points we’ve mentioned, which range from immigration, risk capital, the access to the risk capital of international pharma, and the way we deliver health care or fund health care and innovative medicines in Canada. If you can start to open up those doors, I’m very confident in the ability of this province to use the people that are here and actually attract – by removing some of the barriers to attracting people – and develop a world-class industry and cluster. There’s no reason we can’t do that. We have all the brain power.