Prescription for a Healthy Canadian Biopharma Industry - Part One and Two

---

By Dr. John Lawson and Pierre Bourassa

How can Canada survive in a globally-driven pharmaceutical market?

1.     Introduction

Canada is a big, big country. Its neighbour, the USA, is 5% smaller (even including Alaska) and yet holds 10 times the population. Eighty percent of Canadians live within 200 km of the US border, which, perhaps, says a lot about the attitude of Canadian economic dependence that exists. US GDP per capita in 2005 was $43,555 compared to Canada’s $34,273, which is indicative of the comparative value of the Loonie. The US is the most voracious consumer of not only fossil fuels in the world, but also healthcare products. One would think, therefore, that this is a huge prospective export market for Canadian biotechnology, pharmaceuticals and medical devices. This is especially because the two countries have well-aligned regulatory systems and Canada has more than its fair share of healthcare patents. Despite this, Canada has a negative balance of payments from these products even though it boasts plentiful R&D activity and investment in this area (1).

In a series of two articles, the authors intend to unearth the problems and opportunities that exist within the Canadian system. This first part will look at the relationship between Canadian R&D and large multinationals, often called Big Pharma. What does Canada have to attract Big Pharma and how can this relationship be enhanced?

The second part will examine the proliferation of biotechnology companies, many created as a result of Government-funded research emanating from the universities. Is Canada achieving the best value for its investment or is it being sold short because of infrastructural deficiencies, misdirected funding or just plain poor negotiation? If so, what can be done about it?

2.     The Global Context

Less than 20 Big Pharma companies control now over 70% of the revenues generated by the pharmaceutical industry. Generic products, however, account for around 60% of the volume. The ability to achieve premium prices that warp these figures so significantly is a testament to the perceived value of the contributions of this sector to healthcare. It could be argued that this is helped, however, by the fact that almost 50% of all global cash sales are generated in the USA, a non-Government-price-regulated market. For how long this will continue, however, is open to speculation. Since the democrats gained a majority in the American Congress in November 2006, they have been pushing for reforms in the Medicare system. Such reforms suggested include the end of authorized generics, direct Medicare price negotiation and the facilitation of drug re-importation. The last-mentioned could drag Canada back into supply disputes with the drug industry. The next presidential election could well include all these issues as debating points and, since they are firmly in the minds of the growing numbers of US seniors, they may be forced to the forefront of election policies. Over the last 10 years, this freedom of US market access has been a driver of Big

Pharma policy towards establishing its primary research in the US. The switch, mainly from European centres, has contributed to the decline in the number of NCEs coming into the R&D pipeline. The added investment in US research has nowhere near made up for the lack of European innovation. Sadly, for the US economy, after just a few years of initiating this policy, Big Pharma has also reduced its R&D commitment in that country too, favouring in-licensing instead of in-house research. Merck alone, for instance, shed some 4,200 scientists’ jobs in 2005/2006. Big Pharma loyalty to this deal has been short-lived.

Although the R&D route to market for a new pharmaceutical or biotechnology molecule has changed significantly over the last 20-30 years, the final marketing solution for any mass-market molecule or potential blockbuster is the same. Big Pharma dominates the market and, indeed, is arguably the ONLY way to get a mass market product commercialized globally. Big Pharma has access to all the key opinion-leaders (KOLs), coverage of all high-prescribing general practitioners and global negotiating expertise to gain market access to Government and private insurance approved drug plans and prescribing lists. Big Pharma has changed its role from being a full vertically integrated drug innovator that spends consistently at all points along the 10+ year’s drug development cycle, to selective players at certain hot spots in the cycle. These are generally at Phase III and patent-protected sales and marketing. This is the point when clinical trial expenses are high, few VCs have the capital or expertise to fund the research, the risks of failure to Big Pharma are more quantifiable, and they can start to mobilize their marketing muscle with KOLs to prepare their route to market.

Market access - pharmacoeconomic arguments

Big Pharma has tried many ways to secure their profitability in the light of increasing attempts by Governments and other payers to reduce prices or patient access to control their budgets. The launch of a new drug in a market with a hitherto unmet clinical need can be very costly to the drug system. The drug industry’s trade associations have been quick to point out that the availability of these drugs has resulted in lower costs of hospitalization and reduced morbidity. In fact, their argument suggests that there should be a redistribution of funds to facilitate superior pharmaco-economic benefit. The consequence of reduced morbidity is, however, an increase in the numbers of consumers of drugs for chronic conditions and so ‘real’ savings may never materialize. Demand for pharmaceuticals appears to be insatiable in an environment of ageing populations and growing prosperity. Forecasters have suggested that this bubble will eventually burst because the wealth-generating younger population will be unable, even unwilling, to contribute to the welfare of the older, wealth-consuming group. The era of early retirement that was experienced in the 80s and 90s, when the post WW2 baby-boomers were at their wealth-generating peak, has now been replaced by the prospect of extended retirement age to retain these boomers in work.

Market access - vertical integration

Vertical integration, such as Merck’s foray into the world of managed care with Medco, was designed to secure market access for its drugs. Apart from criticism regarding the political incorrectness of this policy, Merck found that their core competence did not fit this activity and the return on their investment was inadequate. Governments and drug companies have wrestled with various formulae designed to balance healthcare expenditures against other economic gains that could be made. Securing R&D contracts, investment in jobs for manufacturing and ability to generate export revenues have all been included in deals to establish attractive local drug prices. The ‘winner’ in these negotiations is difficult to judge but it is clear that consolidation and redirection of the pharmaceutical industry has led to significant direct cost-cutting and a massive increase in their marketing muscle.

No more job security

Recognition that the ‘jobs-for-life’ syndrome no longer exists within the pharmaceutical industry is exemplified by the recent announcement from Pfizer, the world’s largest drug company, who stated that they will be cutting 10,000 jobs (or 10% of their global workforce) in order to save $2 billion (2). Pfizer’s sales were almost $50 billion in 2006, but face the prospect of losing $14 billion p.a. in revenues to generic competition by 2011/2012. We could, of course, blame the generic companies for this decline but, if Pfizer has chosen as its business model to operate in the innovative Rx&D sector, then it is clearly its failure to innovate that is behind Pfizer’s demise. Governments and other healthcare payers are willing to pay a premium for access to new developments and high-risk ventures but not to maintain the status quo. One will not hear the generic companies complaining about the lack of profitability! Indeed, lower drug prices often mean increased market access and higher volumes i.e. from a government stand-point, more patients are treated at a lower cost per capita. Pfizer’s proposed cuts, as one might expect, include the closure of manufacturing plants in USA and Germany. They gained almost 100 plants as a result of their acquisitions and it was already scheduled to reduce to half that number. Perhaps there is finally the acceptance that it is not possible to ‘dial-up’ the next blockbuster from their research laboratories that is driving the parallel decision to close down some of these activities in USA, Japan and France. Interestingly, Pfizer has not had a single blockbuster from its own research since Viagra was launched in 1998 and all current cash-cows emanate from the acquisitions of Warner Lambert and Pharmacia. Pfizer’s product pipeline is expected to provide no more than $7 billion p.a. from new products by 2011/2012 (3).

Has Canada already missed the boat?

Big Pharma operates as a truly global business. It is interesting to note that Canada has attracted not a single multinational to establish its head office in the country but, conversely, acquisitions usually result in the movement of intellectual property and innovation southward. The major cash generators are still the USA, Europe and Japan although in recent years there has been a massive growth in South America, India and China. Attempts by these countries to gain acceptance in the international community by respecting patent law have, however, been viewed with some scepticism. Piracy and counterfeiting, in these areas, is still rife! Big Pharma has accepted, in response, that the only way to win in these markets is to enter them as a full partner hoping that true respect for IP will be gained in time. India is, perhaps, the country most anxious to join the international ‘club’ since, like they have done in the computer industry, they are now generating their own IP and they need to have it accepted in western markets. Additionally, the attractiveness of tax havens, or the availability of Government-supported initiatives, has prompted Big Pharma to invest in manufacturing in Ireland, Puerto Rico and Singapore and early clinical research is also now being done in Asia at a much lower cost per patient. Considering Canada’s extremely generous system of R&D credits it is surprising, perhaps frustrating, that Big Pharma has not invested more heavily. Why should this be?

3.     The Canadian Context

Canada, federally, has enjoyed a chequered history of interaction with Big Pharma and differences in Provincial politics have contributed to a general lack of security that pharmaceutical companies have felt in investing in the country. Companies have long memories, for instance, of the 1970’s mass exodus of companies from Quebec to the US.

Bills C-22 and C-91: Canada comes into line with the world.

Compulsory licensing of pharmaceuticals was introduced in Canada in 1923 and expanded in 1969 as a measure designed to control increasing drug costs. In 1987, (following the efforts of leaders such as recently retired President of Merck-Frosst, André Marcheterre, and the former Sandoz Canada president, Colin Mallet) the C-22 amendments to the Patent Act limited compulsory licensing and created the Patented Medicine Prices Review Board (PMPRB). This was introduced to ensure that prices of patented medicines were not excessive. In 1993, the C-91 amendments eliminated compulsory licensing, thereby restoring full patent protection of pharmaceuticals in Canada. The C-91 amendments also enhanced the enforcement powers of the PMPRB (4). In October 2006, new amendments to the Food and Drug Regulations ensured that new, innovative drugs should receive an internationally competitive, guaranteed minimum period of market exclusivity of eight years. This was increased from the former five years and recognised the increased development time to achieve marketing approval. These regulations also provided a further six months of market exclusivity to innovative drugs that are the subject of paediatrics studies, in order to encourage companies to provide more information about the effects these products have on children.

Cross Border pharmacies

Price comparison of patented prescription medicines between Canada and USA reveal some massive differences. The list price of many US drugs is double that in Canada and some have four or five fold differences. The exchange rate in no way explains such variance. In Canada, there is only one price for a drug whereas in the US there is a catalogue price that can be negotiated according to each HMO (or group thereof). This inequity prompts the migration of US patients to Canada to get their prescriptions filled and, although it is not just a simple matter of a Canadian pharmacist filling a US-generated prescription, the savings are worth the extra effort. This is particularly true of elderly American patients on multiple medications that are not completely covered by Medicare. This situation adds to the friction between Big Pharma, Federal and Provincial Governments who allow market access only based upon successful price and selective disease indication agreements. Attempts by Big Pharma to reduce this traffic have, generally failed even though the companies carefully watch, and try to control, supplies of their drugs to border pharmacies.

Canadian generics: an economic answer?

At the other end of the spectrum are the generic companies. Apotex and Novopharm enjoy a virtual oligopoly in Canada currently since they have the mass-market product distribution tightly controlled between them. Prices tend to be higher than in the US (5). Drug companies attempted to get around generic equivalence by changing their pharmaceutical form but Ontario’s Bill 102 closed that loophole. The acquisition of Novopharm by Teva and the influx of Indian generics (e.g. Ranbaxy) will surely bring prices closer to international norms and global equalization. India has done a lot in recent years to strengthen its position in global pharmaceutical markets. In addition, these companies are extremely innovative at fast-tracking marketing submissions for newly expired patented drugs. Being first to market is as important to the generic companies in establishing a market share as it is for branded products. Big Pharma has, in part, responded to the massive shift towards generics by establishing businesses in specialist areas of high added value, such as injectables and metered-dose aerosols. Sandoz and E Merck (i.e. the German, not the American drug company) are two examples of such companies targeting ‘speciality generics’. Other generic Canadian companies include Cangene, Cobalt Pharma, Nu-Pharm, Orbus, PharmaScience, Pro Doc, Ratiopharm and Taro.

The advent of biologics: a production opportunity for Canada?

Around 25% of Big Pharma pipelines are now populated with biological compounds. This is despite the fact that it is more difficult to achieve the same level of intellectual property protection as with traditional small molecules and manufacturing is more complex and expensive. This second factor is often, however, a new source of IP generation and this feeds Big Pharma’s fixation with patent protection. The higher manufacturing price, however, also has some consequences for the final product price. Being significantly higher priced than small molecules, especially generics, biologics have to be able to demonstrate even bigger cost benefits in order to gain positive listings on drug formularies. When Bio-Intermediair (Now DSM Biologics) decided to invest in Montreal, it was to capture a significant share of this emerging high value market as a Contract Manufacturing Organization (CMO). The subsequent creation of QSV biologics in Edmonton helped the Canadian Biopharma community perceive this creation as a positive turning point in the establishment of manufacturing facilities in the country. The subsequent withdrawal of DSM, not only handicapped Montreal’s hopes to create a new cluster in biologics but it also scotched the establishment of Laborium BioPharma, a proposed player in the manufacture of GMP clinical trial biologics. Having the BRI (the NRC’s Biological Research Institute) producing small volume GLP-like material for pre-clinical, Laborium for clinical phase I-II and DSM producing large volumes of post-launch material was an interesting strategic move for Canadian biotechs. Perhaps the timing of the investment was a little premature. At the time, the major volume biologics were still erythropoietin and insulin and the myriad of emerging monoclonals had not yet promised to provide the volumes. According to recent studies there is still room for new production facilities worldwide so why not take a share of it?

Clinical Research Organizations (CROs) - a competitive strength for Canada

Canada boasts a larger number of CROs per head of population than other G7 Nations. This number includes the national operations of multinationals such as, Covance, sfbc Anapharm, and Quintiles, as well as local operators such as MDS Pharma. Having a similar legislative and regulatory framework to America’s FDA, Canada’s CROs offer a more cost-effective and lower risk alternative to US-based clinical trials. These CROs cover a wide range of services from Pre-clinical to Phase IV with some specialist companies emerging from more recent tightening of regulatory controls (eg. Algorithme Pharma and Q&T research in Québec). Access to patients from a truly all-inclusive healthcare system is preferable to the direct payment-for-service fragmented structure that exists south of the border. Patient promiscuity (i.e. the tendency of patients to flit from doctor to doctor according to the type of ailment or receipt of the diagnosis they want to hear) makes the viewing of patients holistically as virtually impossible. Patient screening, in the US system, has more innate difficulties.

Small Medium Enterprises (SMEs) - another competitive strength for Canada

Canada’s biggest advantage appears to be the presence of innovative SMEs emanating from the Universities and the prospect of the CRO infrastructure that supports their development. Having funding to get a molecule into Phase III studies has always been a big issue in Canada. Only one Canadian molecule, to our knowledge, has seen its way totally from bench to patients and that is from Dr Fernand Labrie at the University of Laval in Quebec. The recent success of Theratechnolgies is another member of that exclusive club. The demise of the Technolgy Partnership Program (TPC) and Bio-levier (in Québec) has left the companies with two very helpful alternatives gone. Without Government support, whether federal, provincial or municipal, SMEs have to look towards VCs or Big Pharma for funding. Canadian VCs, however, run shy of investing in phase III clinical studies even though there is a considerable lowering of risk. With the cost of a typical multi-centre clinical trial running at around $70 million for a block buster indication, few can aspire to securing such funding. Big Pharma has found a niche, therefore, as capital provider and ultimate product marketer. Many drug and CRO companies, e.g. Medimmune, Novartis and GSK (on the Pharma side) and Cato and Quintiles (on the CRO side) actually operate venture funds. The negotiating power in the hands of the SME, at this stage in the process, is still limited since they do not have the funding to continue, investors are hungry to cash-out and the value diminishes daily with every delay as the patent protection runs out. If we assume that the ‘average’ global revenue of a successful patented pharmaceutical is $350 million (N.B. That is just one third of the defined size of a blockbuster) then every day of delay is work $1 million. With gross profit margins of over 90%, most of this would have gone to the bottom line.

Canadian ‘Big’ Pharmas

As it has been stated, Canada is not the home of any of the top-20 Big Pharma companies. Some have ‘regional’ offices, with the majority being in Montreal or Toronto. Merck, perhaps, has the strongest history of Canadian commitment (and success!) because of their acquisition of Charles E Frosst & Co., which was founded in 1899. In 1966, Dr. "B.K." Wasson, a legendary researcher at Frosst, discovered timolol - the first beta-blocker discovered in Canada. It is claimed that Frosst was sold to Merck in part due to market conditions but also because compulsory licensing restrictions that prevented them from creating sufficient income to cover their development costs. Merck decided to keep the research centre in Montréal and to link it to their world research effort. Several years later, Merck in Europe discovered that an optical application of timolol relieved elevated intraocular pressure, and Timoptic was launched for glaucoma. Also developed in Canada was Flexeril (cyclobenzaprine), a muscle relaxant, Singulair (Montelukast) for asthma, Arcoxia (etoricoxib) and the lately ill-fated Vioxx (rofecoxib) (6). These later innovations were part of a global initiative with Canada at the centre of development.

4.     Is there a solution?

Clearly, Canada has had difficulties not only in attracting Big Pharma but also in keeping them! Biochem pharma was an attempt to do so but the business model did not permit to retain the full business here and it was sold to Shire. There have been tax concessions, Government grants, realignment to international patent norms, and a history of innovation, low development costs and competitive manufacturing prices. None has been sufficient to secure their commitment. Levels of trust between Big Pharma and Canada appear to have gone through cycles just as they have with almost every other westernised country, even the USA! Being an attractive place for investment is a matter of creating the right political environment. Job creation, skills availability, social infrastructure, unionisation and taxation are most often cited but instability (or the appearance thereof) has worked against Canada in the past. The struggles of Quebec trying to find its identity in a ‘visibly-not-so-united’ Canada has caused companies like Hofmann-la-Roche, who invested in a new state-of-the-art facility in Vaudreuil, to close shop and migrate to Mississauga in the late 70’s. Conversely, as already mentioned, Government has supported heavily ventures such as DSM Biologics’ new facility in Montréal just to have them vacate after less than 10 years.

As stated earlier, even with lower branded drug prices than in the USA, there is an increasing trade deficit in pharmaceutical products (7). Canadians are, however, drug innovators having a 3.2%% share of USPTO patents and yet account for only 2.5% of the world pharmaceutical market (8). Drug companies are clearly taking out more from the Canadian economy than they are putting in, despite the contribution of Canadian scientists to their incomes! So, how can “Canada Inc. ” secure a larger share of income from the Big Pharma machine than they are currently getting and how can Big Pharma gain benefit from their relationship with Canadian companies and its healthcare infrastructure? Clearly, with so much Government money being spent on drug research, Canada Inc. has a vested interest in dealing profitably with Big Pharma. At the same time, the country needs access to the industry’s products. The issue, therefore, cannot be ignored and it will not just ‘go away’. Any solution, too, must be a win:win if it is to be long-lasting and meaningful. Healthcare budget ‘fixes’, like the former patent legislation, have been found to hinder relationships and have achieved nothing.

Before suggesting ‘how’ Canada Inc. might get more benefit from Big Pharma, it should be considered what it is that the country wishes to gain from them. As mentioned earlier, the prospect of gaining a positive balance of payments from international trade is probably a most attractive end-point. To this nirvana might be added ‘employment’, ‘investment’, ‘education and training’ and ‘corporate tax revenue’. Since all of these activities also generate ‘personal tax revenue’ through earnings and subsequent spending, any corporate tax concession given to Big Pharma would not deny Canada Inc.’s gains. Having a readily available infrastructure for bringing Canadian scientists’ innovations to market is also a bonus although it would not be suggested that Big Pharma should compromise its pipeline selection process just to satisfy Canadian industry. These are business decisions and, in considering how Canada Inc. should deal with Big Pharma, it should be remembered that ‘business is business!’ Companies can only be expected to behave as they always do - for the benefit of their shareholders, their management and their employees.

Stability

The first requirement of Big Pharma is stability. When you have a product planning cycle of twenty years, you cannot accept any suggestion where the rules of engagement can change every 5 or 10 years! During the patent life of a drug, 10+ years is spent in R&D and there is only 8-10 years to get a satisfactory return on the investment. Maverick or radically changing governments will not attract Big Pharma. Can we suggest, for instance, that this is why Switzerland has performed so well in this sector? The industry is like a juggernaut or oil tanker. Its ability to change direction in the short term is limited. For this reason, Canada Inc. may have already missed the boat or, any investment made now, will not be recognised for 10-15 years! With only 20 Big Pharma companies controlling 70% of total global drug market cash, their decisions have already been made! It would take an extremely negative Government action to make them change now. Having said that, we have seen business cycles of merger and de-merger in other industries – why not in this one? Since there has been a radical change in the way they feed their drug development pipelines over the last few years, the stated reason for merger (i.e. consolidation of research effort and costs) is no longer relevant. The only drivers of the residual ‘big is beautiful’ concept is the industry’s access to capital, its portfolio approach to handling risk, and its global mass-marketing muscle. Should we anticipate a de-merger of Pfizer or GSK, for instance, to ‘release shareholder value’? Is it feasible that a single CEO can truly be in control of organisations of such complexity? Beer (9) (1979) and Espejo (10) (1998) would argue that it is impossible to handle such complexity from the top and that decision-making should be moved closer to where the action is taking place. The use of the technique of what Simon (11) (1979) called ‘bounded rationality’ to fill in the gaps in their knowledge is dangerous when the consequences for making a poor decision can be so expensive.

In conclusion, therefore, apart from nurturing its intellectual property generators (i.e. the spin-off SMEs from Canadian Universities and Institutes, which is a subject tackled in our follow-up article) Canada Inc. should concentrate its efforts on a few key issues to facilitate better negotiation between Canadian companies and the Big Pharma MNEs.

What Big Pharma seeks . . . ? Specifically . . . ?

Retain a good investment infrastructure:
- Agreements on market access & price
- Flexible competitive worker costs
- International respect for patents
- Growth in healthcare spending

Regulatory alignment with FDA:
- Parallel approval systems
- Acceptability of Canadian data
- Similar ethnic/genetic profile to USA

Maintain integrated healthcare system:
- Strong primary/secondary care links
- Access for strong Canadian CROs
- Low propensity towards litigation

Encouragement to do large clinical trials:
- They generate income
- They reduce drug costs
- They give access to newer therapies

Economic production facilities for biologics:
- 25% of drug pipelines involve biologics
- Grow expertise in adding IP to processes
- Provide facilities for bio-manufacturing

Encourage research to replenish pipelines:
- Fund basic & pre-clinical research
- Expand enabling technologies (genomics)
     - Stimulate convergence of expertise

Move core activities along drug cycle:
- Foster clinical expertise
- Incentivize professionals not to migrate
- Share in global sales successes

Nurture SME spin-offs:
- Provide core university/institute funding
- Support a stable Canadian VC structure
- Provide attractive R&D credits

Clearly, Canada Inc. could claim to be doing ‘some’ of this but the problem is mainly one of lack of integration and coordination. The silo effect is alive and well in most of Canada’s Government departments, federally, provincially and even municipally.

In part II of this article, the authors will examine the proliferation of biotechnology companies and how they might maximise the value of their investment. A number of strategies will be outlined as to how such entrepreneurs might survive in this global competitive context. In particular, the support of Government can affect the future of these biotechnology enterprises and debate will be provided as to how this might be achieved.

References in Part One

Prescription for a Healthy Canadian Biopharma Industry – Part Two

How can Canada’s emerging biotechnology SMEs increase their value?

Introduction

The Canadian biotechnology industry is a rich source of innovation. There were 417 core biotechnology companies involved in the sector with over 70% focusing on therapeutics and diagnostics product development according to The Canadian Biotechnology Industry Report 2004. One third of these companies are spin-offs (1). Indeed, Canada claims the second highest global concentration of biotech companies in the world. Canadian Biopharma companies have a strong product pipeline with an estimated 160 therapeutic compounds in Phase I-III trials (2). With statistics like these, biotechnology in Canada could be expected to have a great future.

Canadian scientific knowledge is recognized around the world. Its population is supportive of the industry. There is an effective regulatory system recognized by its most important counterparts (the FDA and EMEA). It has the highest number of CROs per capita of any G7 nation and it is geographically positioned next to the largest world pharmaceutical market. So why does it not have a high concentration of Big Pharma MNE’s head offices, like Switzerland? This also poses a number of other questions.

Why does Canada have a 3.2%% share of USPTO patents, and yet enjoys only 2.5% of the world pharmaceutical market (3)?
Why is there an increasing Canadian trade deficit in pharmaceutical product (4)?
Why, when there are appropriate skills and yet lower costs than in the US, are there not more pharmaceutical production facilities in Canada?

At the same time, compared to the US, Canadians created 2.5 times the number of spin-off companies, disclosed as many inventions and executed as many licences per dollar spent on research, yet only achieved half the number of patents.

This is the second of two articles where the authors have attempted to appraise critically the Canadian system to guide an improved understanding of how to leverage better its global opportunities. The first article looked at “Canada Inc.’s” dealings with Big Pharma, not one of which has decided to base its head office in this country. This section looks at the large numbers of SMEs who, if they decide not to deal with global MNEs as their marketing arm, may have to compete with them.

The Global Context

An estimated 25% of all new compounds in published pharmaceutical drug development pipelines are populated by biological compounds. Even amongst the list of small molecule drugs, most owe at least part of their discovery or development to techniques emerging from biotechnologies. At the same time, Big Pharma has been resorting to greater levels of out-sourcing, seeing their primary roles as portfolio investor, research programme manager and ultimate marketer. It is well-recognized that there are little more than 20 companies capable of marketing high-disease-incidence treatments globally. These markets are most often the source of the so-called ‘block-busters’ which, by definition, achieve sales of more than $1 billion per year. There are currently around 100 drugs classed as blockbusters with the largest being Lipitor with sales over $12 billion. Considering that sales in the developed world in 2006 were $386 billion (5), it can be conjectured that approaching 40% of total branded product sales emanate from blockbusters. Big Pharma relies upon a steady supply of such potential products to fuel their pipelines since few products achieve patent-protected sales for more than eight years. It is an easy conclusion to reach, therefore, that Big Pharma is the only channel that emerging biotechnology companies can use to commercialize their innovations.

The change in Big Pharma’s business model towards out-sourcing all but its core competencies provides a great opportunity for SMEs, especially the emerging Biotechs. The tendency, however, has been for Big Pharma to scoop-up promising projects at well below their potential market value and to move the technology from its native home to their corporate sites. The gainers from this exercise, sadly, have rarely been the inventors. The difficulty in gaining continuous funding, the tendency of investors to seek short term rather than long term gain and the general lack of management expertise and vision are most often cited as reasons for early and sub-maximized sell-outs. Indeed, it is probably fair to say that it is the constant search for funding that is the biggest drain on biotechnology industry resources that diverts them from their mission.

Although there are now biotechnology enterprises all across the world, there are a number of clusters or hotspots of activity. The most visible of these clusters include California and New Jersey in the USA, UK, Germany, France and Canada. The source of the venture capital investor has a profound effect on the amount invested per firm and a major reason for clustering is the relative experience of the investors in this type of business (6). Sweden and Switzerland rank as the world’s leaders in terms of number of dedicated biotechnology firms per head of population with Canada as number three (7). By the end of 2005, out of the total 523 European biotech products in development pipelines, 109 came from Switzerland. With 138 biotechnology companies, and 91 biotech suppliers, Switzerland boasts the highest biotech density worldwide (8). Its access to global markets through its local multinational organizations (i.e. Roche and Novartis) is a strong factor stimulating this activity.

The Canadian Context

In a recent article (9), Guy Stanley from McGill University suggested that Canada’s piecemeal approach to coordinating its national innovation system has failed to serve adequately the national interest. His article confirms that Canada’s performance has deteriorated, according to OECD reports in 2004 and 2006. Canada’s business competitiveness has slipped to 16th position as ranked by the World Economic Forum. He asserts that the strong export position currently being enjoyed is as a direct result of surging resources prices rather than any gain in Canada’s ability to produce high value-added, knowledge-based products. In part one of these articles, it was also suggested that Canada has done little to attract the serious attention of Big Pharma to enhance its negotiating position. Conversely, it continues to perform sub-optimally despite its strengths in clinical research, having a strong healthcare infrastructure and providing generous tax credits. Canada’s business model continues to operate in the high risk, low added value sectors of the business and has difficulty in moving along the value chain. Government continues to support it heavily. Indeed, 10.6% of all publicly funded research in Canada went to biotechnology, almost four times the level of the UK. This certainly appears to have stimulated innovation but it has done little to enhance commercialization.

Although Canada boasts around 290 biotechnology companies engaged in the development of therapeutics and diagnostics, few of these could be regarded as having global significance or long-term viability. The Canadian biotechnology industry has been described as just leaving infancy and entering adolescence. It is facing the typical problems associated with that phase. Like teenagers, they are moody and impulsive, make contradictory decisions and are still trying to figure out what they want from life. They look towards visionaries like Dr. Francesco Bellini who created Biochem Pharma and the late Dr. Bernard Belleau who discovered 3TC (Epivir) but, as these people openly admit, they were assisted greatly by luck. Sadly, Canadian BioPharma cannot rely upon luck and, as Louis Pasteur so aptly put it, “chance favours a prepared mind”.

As stated, Canada has more CRO activity per head of population than any other G7 country. Canada’s integrated healthcare system allows for easier patient targeting and selection than the US, making recruitment cheaper. At the same time, Canada enjoys a lower tendency towards litigation if no-fault mishaps occur. The data generated on Canadian subjects is more likely to be accepted by the FDA and EMEA mainly because of the genetic profile of its population but also because of the conformity to common GCP (Good Clinical Practice) standards.

The generics industry in Canada is dominated by two companies – Apotex and Novopharm. Both have large manufacturing plants in Ontario. Smaller niche players such as PharmaScience exist in Quebec. The Canadian generic market appears to be particularly attractive because prices are higher than the international median (10). At the same time, branded products are cheaper making it easier to establish pharmaco-economic arguments for new products than in the US or Europe. Although a two tier system of negotiation at Federal and Provincial level exists, it could be assumed that market access in Canada might be easier to achieve than in Europe. Few multinationals appear to have made benefit of this opportunity. Instead, they regard cross-border pharmacy as a major threat.

Although a number of contract manufacturing organisations, such as Confab, provide sub-contract manufacturing services for pharmaceutical and biotechnology partners, comment was made in part one of this article that little has been done to attract such activity to Canada. Big Pharma has chosen, instead, to favour the Republic of Ireland, Singapore and Puerto Rico for their main Pharma/biologics production and the relatively low cost, highly trained workforce in Canada has been overlooked. Although some of this deficit is now being addressed by the creation of QSV Biologics in Edmonton, the DSM withdrawal from Montreal is still remembered.

Sources of funding for Canadian Biotechs is limited and thus aggressively sought. Venture capital banks, such as BDC, often provide the first port of call for any new spin-off. Sadly, because of the intense competition for funding, many projects are rejected and this acts as a negative factor when the spin-off approaches a second VC. The bush telegraph works extremely effectively in Canada! Projects that would perform well in global markets often find themselves shelved because of lack of early funds. Not only does this waste extremely valuable R&D time, but it also demotivates the scientists. Indeed, only the most tenacious and insistent pass through this gate. At the same time, these spin-off companies cannot usually afford to pay a consultant to write a compelling business plan and VC rejection becomes easier if the scientist is ill prepared. VCs created specifically to assist spin-off technologies (e.g. MSBi for technologies from the Universities McGill, Sherbrooke and Bishop) often widen their approach to maximize their profitability rather than remain within their original mandate.

Canadian SMEs, having been well supported by Government money, find themselves in a harsh world with little infrastructure to help them. Organizations such as the NRC, and limited regional funds, provide the only real help. Canadian inventors and innovators often find themselves, therefore, looking outside Canada for assistance and this inevitably leads to the migration of intellectual property, technology expertise and people.

Is there a solution?

In formulating a solution to the dilemma of the Canadian biopharmaceutical industry, it is important to learn some lessons from other Canadian companies. To suggest, however, that there is a panacea or, indeed, that the chosen examples are doing it the best way, would be to over-simplify the situation and the solution. Each case has a multiplicity of factors and Dr Bellini’s assertion that it takes a little luck, is certainly one of those factors.

Stay Focused!

Theratechnologies emerged in 1993 from a number of technologies acquired from the University of Montreal. Like most companies that are spin-offs with several existing technologies, there was a reluctance to let any of them go, Dilution of effort has disastrous effects not only upon R&D burn rates but also it reduces management credibility with investors. They like to see results! It became critical, therefore, to focus their efforts upon a few promising product opportunities. In November 2004, this became the top priority of incoming CEO, Yves Rosconi. “Value creation is far greater if you can keep the commercial rights of your drugs”, he asserted. The first product to emerge from this strategy was TH9507, which produced its first Phase III positive results in December 2006 for a syndrome called HIV associated-lipodystrophy. The impact of this milestone on the company’s value creation was outstanding. The stock increased by 565% in 2006 compared to 2005 while the Canadian healthcare index was down during the same period. Throughout those years, Theratechnologies has maintained an excellent cash position, allowing it to execute its plan and be in a strong position to finish the clinical development plan of TH9507 and face the upcoming commercialization milestones for further value creation. The company intends to become a fully integrated specialty Pharma company where it can market globally because of the relatively small number of key opinion-leaders and prescribers.

Of course, TH9507 has continued to hit its therapeutic milestones but, for management to continue to focus almost exclusively upon the success of one product, they have adopted what could be seen as a risky strategy. Confidence comes, however, from not only the dedication and tenacity of the researchers but by performing a thorough analysis of the market situation. Theratechnologies had chosen a niche indication with a high degree of unmet medical need. Their closeness to the market place and their internal appraisal of the ongoing research results provided them with sufficient encouragement to continue. As products move along the drug development cycle, the level of inherent risk declines. Statistically, according to the old mass-market-screening drug development model, less than 20% of products fail in Phase III whereas 70% fail at Phase II. In the period between 2004 and 2006, therefore, Theratechnologies managed to reduce risks by this amount through proper diligence. No doubt, however, they had a contingency plan.

Have a contingency plan!

Ambrilia had three product candidates in its pipeline. These were Fibrostat (in Phase II for the treatment of hypertrophic scars), ANsA, (a monoclonal antibody in pre-clinical for the treatment of cancers) and PCK3145 (a therapeutic peptide in phase I/II for advanced prostate cancer). Ambrilia had conceived a portfolio approach in order to mitigate their risks.

In 2003, the development programme of ANsA was precarious. The manufacturing process was much more costly than anticipated and the development would take much longer than expected. Ambrilia’s contingency plan was to add a replacement product candidate to obviate the risk of terminating the ANsA project. Ambrilia acquired Pharmacor, a private company in the field of HIV/AIDS. A share exchange transaction allowed Ambrilia to keep its cash for the development of PL-100, the main product candidate of Pharmacor. In addition, shareholders of the newly-acquired company invested $3.25 million in Ambrilia to finance the development of PL-100 from the preclinical to the clinical stage. Ambrilia developed this compound further to a pro-drug, PPL-100, and additional preclinical studies were completed. The NRC-IRAP TPC programme (11) collaborated in the project by contributing to the financing of the first two clinical studies. In October 2006, the product was out-licensed to Merck & Co., Inc. in exchange for an upfront licensing fee of $US 17 million, with potential milestones payments that could reach a total of US$ 212 million, plus royalties. This was the largest early-stage product out-licensing transaction concluded by a Canadian biotechnology company in 2006.

In 2005, Fibrostat’s Phase IIb results were found lacking, so the project was terminated. Their contingency plan was to cut drastically their expenses, to decrease the risk of a lack of cash in the coming year, and to replace the development program with a new one. This replacement transaction served as a trigger to obtain new financing. This strategy had clearly worked for them before with Pharmacor and ANsA. Ambrilia, consequently, acquired an oncology company, Bioxalis Medica on a similar share exchange basis. The acquisition gave them access to the Tumour Vasculature Targeting (TVT) delivery technology. Ambrilia is now moving the technology forward by setting up a preclinical program for anti-cancer agents to be integrated into the TVT delivery system. In addition, a concurrent financing of $3.5 million provided Ambrilia with breathing space until its next major financing round.

Finally, in 2006, financial markets were depressed and no financing was possible without a ‘triggering event’. The status quo would have killed the company in the longer term. The contingency plan was to use the acquisition of Cellpep S.A, a French private company in the fields of cancer and infectious diseases, as a triggering event to obtain further substantial financing. At the same time, this acquisition decreased the inherent portfolio risk of the company by adding new late-stage product candidates that were closer to commercialization. In this way, Ambrilia could potentially reach profitability more rapidly. Cellpep, now Ambrilia France, added two new formulations of existing drugs, Octreotide and Goserelin, developed with a patented technology, to their portfolio. Licensing partners for worldwide sales and marketing of Octreotide include leading pharmaceutical companies such as Mallinkcrodt and TEVA. An $18.1 million concurrent financing was completed with French, US and Canadian investors.

Pursue niche markets!

It has been stated that, in order to pursue competitively the large chronic disease markets such as arthritis, hypertension or hypercholesterolaemia, the strong marketing muscle of the top 20 Big Pharmas is almost obligatory. They have the sales infrastructure, the capital backing and the contacts with key prescribers to make it happen. They also have, however, other vested interests! They take a portfolio approach to their R&D in order to ameliorate risk and they will choose the most profitable solution to fulfill their requirements. Even though they may have purchased the rights to market a product, they may decide not to pursue it. This leaves the licensing company with the need to extract themselves from the agreement and to find a new partner.

Alternatively, it is suggested that niche markets can be just as profitable to the SME as large markets. The major driving factors are the level of uniqueness and the prevailing level of unmet medical need. Take for instance the development of Gleevec. This product was developed for a small indication, chronic myeloid leukaemia (CML). In the USA, the annual incidence is around 4,400 new patients with approximately 2,000 deaths. Although the market appears to be small, the level of unmet medical need is high. Novartis reported sales of $674 million for Gleevec in the first quarter of 2007 and a healthy growth rate of 16%. In addition, Novartis enjoyed fast track “orphan drug” approval from the FDA to make Gleevec available quickly and the market has proven itself attractive enough to tempt Bristol-Myers Squibb to enter with Sprycel.

Use enabling technologies!

Valuation and risk are inextricably linked. Clinical success drives valuation upwards and the further along the development cycle towards the market that can be achieved, the more attractive the proposition for investors and eventual marketing partners. Time to market is also important. The larger the window of patent-protected sales that can be achieved, the higher the valuation. For the ‘average’ global pharmaceutical, sales are about $350 million per year. Every day that can be saved on bringing the product to market, therefore, results in another $1 million. With gross profit margins at 90-95%, most of this falls to the bottom line! So, what enabling technologies will assure success and reduce time to market?

The age of genomics has created some benefits for drug developers. Apart from assisting in the drug targeting process, it has also brought about the concept of ‘theranostics’. This concerns the use of diagnostic tools to determine appropriate treatments. Perhaps the best documented is Genentech’s product Herceptin. This monoclonal antibody targets the over-expression of gene HER2 in breast cancer. Since the drug is specific to HER2, a diagnostic test to check its over-expression is linked not only with potential treatment success, but also enhances the willingness of the payer to support the treatment. Gene expression profiling is a key enabler towards assuring success during product development as well as eventual clinical practice. The only difficulty is the analysis of data and, on this subject, it is best to refer the reader to Dr Michael J Korenberg’s recently-published book - Microarray Data Analysis: Methods and Applications (12). The emergence of personalized medicine will also be enhanced by this enabling technology and, although Big Pharma is unwilling to embrace anything that will not bring them a new block-buster, this probability poses a significant opportunity for Canadian SMEs.

The issue concerning the side effects of Cox2 selective NSAIDs resulted in the emergence in CROs to establish new safety models for cardiovascular side effects. Canadian scientists were not slow in developing these tests and at least one CRO has emerged to tackle specifically this issue. This is IPS Therapeutique of Sherbrooke. The strong CRO network that exists in Canada today was created as far ago as 1993 when agreements were made between the Canadian Government and Big Pharma to spend a certain percentage of their sales on research in Canada. Clinical research was their choice and this legacy remains. Whether Canadian SMEs derive best benefit from this strength is debatable but the situation should not be overlooked.

Speed to market can, of course, be enhanced by requesting fast tracking, priority review or accelerated approval by the FDA. This is usually granted for potentially-ground-breaking new drugs for conditions where there is unmet clinical need. The risk with such an approach is that strict adherence to documented procedures and full openness of data is requested. Such compliance places considerable pressure upon regulatory managers. The use of process management software at an early stage in development makes the transfer of information easier and traceable.

Maximize biologics manufacturing expertise!

Around 25% of Big Pharma’s R&D pipelines concern biologics. At the same time, sales of biologics are growing at around 20% CAGR whereas the total market is growing at only 7%. The patentability of naturally occurring substances is not as secure as that for small molecules but the industry has to embrace the fact that these highly specific molecules have a more predictable therapeutic action and relatively fewer side effects. They are highly complex molecules and biologics manufacturing has, to date, produced much lower yields than their small molecule chemical counterparts. Challenges still exist, therefore, in creating processes that give traditional industry margins of 90%+. What is interesting for SMEs is the fact that patenting a high yield biological process results in market exclusivity for much longer than the traditional model. It is important, therefore, for such development to be performed in tandem.

A number of Canadian companies are already engaged in this activity. Biologics can be produced in relatively small entities’ employing well-educated and well-paid personnel. QSV biologics and Biochem Vaccine division, a spin-off of the Armand Frappier Institute in Laval, are examples. The latter was acquired by ID biomedical and, in turn, to GSK who are now investing heavily in Quebec. The DSM biologics saga in Montréal may sound a rather sad one but it has lead to partnership creation with the NRC’S Biotechnology Research Institute (BRI) and created a wealth of knowledge that is still held in Montréal, Québec and Edmonton. Unfortunately, initiatives like the “Canadian Bioprocessing Institute” promoted by Ken Lawless in Ottawa and Luc Dubois’ (CEO of Validapro) “Laborium” project for clinical production on the NRC’s premises in Montréal were stillborns due to the DSM debacle. The bottom line is that the huge chemical company decided to go back to their core business. DSM has mothballed the facilities, not because there is no market for biologics production but because of technical difficulties related to an industry still in adolescence.

A recent report (13) suggested that Canada hosts three of the world’s leading New Protein Production System companies, (Medicago, Nexia Biotechnologies and SemBioSys Genetics) and more than 30 smaller companies and research groups are poised to expand activities if conditions for growth become more favorable. Medicago based in Québec City, has production based upon alfalfa plants grown in hi-tech greenhouses. The Proficia® technology offers the flexibility and high volume potential of plant-based technology together with the safety and control of confined environment production. This advanced bioprocess is a perfectly natural and renewable bioreactor. Supporting bioprocessing in Canada can also help lead to reduce the export deficit.

Move further along the value chain

The following chart assigns a value of around $15 million to the ‘average’ molecule that has reached successful completion of its preclinical phase. The costs associated with bringing the product to this stage might be anywhere between $2-4 million. Not a bad two-year return for the smaller investor, perhaps, but since 94% of them fail, the risk is high. With relatively little additional investment, say $10-20 million to complete Phase II, the valuation has grown 10-fold and the failure rate has reduced to 57%! In addition, though Big Pharma may benefit greatly from picking up promising pre-clinical molecules very cheaply, the true value of the innovation is never realized by the SME. Neither, too, do the government and academic institutions, who fund most of the activity associated with this research, receive adequate recompense for their investment. The benefits of moving further along the value chain are, therefore, obvious. One molecule completing the early clinical phases is more valuable than ten molecules merely completing pre-clinical studies. Sadly, it is not that easy. The math may work, but the practical reality is somewhat different. It is important, therefore, to understand why products fail at these points and what it takes to generate a winner.

Failure can be attributed to a number of factors including: lack of business savvy, limited knowledge of regulations, limited experience in drug and medical device development, lack of experience in clinical studies, ignorance of converging technologies’ potential, etc., but the bottom line finally comes down to the availability of cash. Canadian SMEs need adequate support from the onset of their business to much further along the value chain. With enough cash, they can acquire the talent to perform the other tasks. It is not only the science that needs to be developed, but the business and marketing. If SMEs are to be strong enough to resist integration into multinationals and create Canada’s own indigenous MNE network then it needs to be funded properly.

Fortunately, new funds are emerging such as the Go Capital Fund. Under this initiative, BDC will act as the fund's manager. Go Capital invests in selected firms, matching dollar-for-dollar investments from BDC, bringing the available capital to $100 million. It specifically targets businesses in the seeding and start-up phases. Although starting in Quebec, BDC seeks to adopt the same model in other Canadian provinces. CTI Capital have also announced an initiative supported by the Caisse de dépôt et placement du Québec. This fund has also secured $100 million in commitments from Quebec based venture capital funds, institutional investors, the FIER initiative and the fund general partners. These initiatives, it is hoped, will help bring our SMEs further up the value chain.

The funding institutions will argue that not all innovations presented to them will succeed even if they are funded adequately. This is true, of course, but the sad reality is that many of the decisions to invest are made by people who really have no expertise in the subject matter. Failures may also be caused by having an unclear mode of action, multiple targets, inefficient research, insufficient testing, inter-species differences, insufficient product differentiation, lower than acceptable safety profile and a lack of true cost/economic benefit. These ‘scientific factors’ can be managed by the inventor who is best disposed and has the subject matter expertise to handle them. The elements of commercial management and marketing are much more likely to confound the researcher with observed results of inexperience or incompetence. Handling factors such as competition for funding, the vested interests of Big Pharma, lack of access to the right influential key opinion leaders, failure to get access to prescribing lists, difficulties in dealing with regulators, identifying weak areas in intellectual property or gaps in its coverage, require quite different skills. The myth of products having a low or insufficient market potential has already been dispelled. Failure to achieve market penetration is usually more an indication of strong competition, inadequate recognition of unmet medical need or weak marketing.

Conclusions

The pharmaceutical industry’s mass-screening programme paradigm of trying to scoop up every piece of intellectual property to create patent-protected sales is not working. The absolute complexity and diversity of disease targeting requires researcher dedication. Research creativity is not on-tap. This means that Big Pharma is actively seeking partnerships and is more often out-sourcing all but its core competencies. Their reluctance to embrace the emergence of personalized medicine may be their downfall and this is where Canadian SMEs can make headway. Following is a list of key factors that might help SMEs to succeed.

What are the key success factors . . . ? Specifically . . . ?

Stay focused:
- Investors want to see steady linear progress
- Product valuation triples from Phase II to III
- Drug/market complexity increases competitive barriers

Understand your true worth:
- Market ‘need’ is more important than its current size
- Drug companies have declining pipelines
- Value increases in areas of unmet medical need

Assure the integrity of your IP:
- Look for, and cover, potential loopholes in patents
- Perform good searches of competitors/channels
- Consider bio-production to add/extend protection

Consider niche or limited applications:
- Orphan drugs may be fast tracked
- Move further along value chain in small segments
- Consider niche global markets with few KOLs

Time is of the essence:
- Every day is worth an average $1 million in sales
- Get adequate early funding, return visits waste time
- Quick results bring investor credibility

Speak to Big Pharma early:
- Adequately protect your conversations
- Use enabling technologies (eg. genomics) where possible
- Stimulate convergence of expertise (local clusters)

References for Part Two

1 Brenders, P. (2006). Biotech Developments and Future Impact. Presentation, BIOTECanada

2 http://www.canadianbiotechnews.com/Industry_Report/industry_report.html

3 W. Glanzel et al, Domain Study: Biotechnology—An Analysis based on Publications and Patents, Steunpunt O&O Statistieken, November 2003.

4 Canadian Pharma - Falling Behind? Biotechnology focus April 2002, Vol.5, No. 3 by Bob Reichert

5 IMS Health, November 2006, Sales in America, Europe, Japan & Australia.

6 Ang, Siah Hwee (2006) Journal of Commercial Biotechnology, Volume 13, Number 1, October 2006, pp. 12-19(8)

7 http://bioportal.gc.ca/StatusreportE/c3_e.html#s3_1

8 http://www.standortschweiz.ch/imperia/md/content/infosharing2004/infosharing2006/88.pdf

9 Stanley, Guy (2007) What’s wrong with Canada’s Innovation?, Policy Options, Dec. 2006 - Jan. 2007

10 Brett J Skinner (2004), Generic Drugopoly: Why Non-patented Prescription Drugs Cost More in Canada than in the United States and Europe

11 National Research Council Industrial Research Assistance Program Technology Partnership Canada.

12 Korenberg, M J, (2007), Microarray Data Analysis: Methods and Applications (Humana Press, Totowa, NJ)

13 Development of Novel Protein-Production Systems and Economic Opportunities & Regulatory Challenges for Canada. April 2004 François Arcand and Paul Arnison

Biographies

Pierre Bourassa is a former entrepreneur who created and owned close to ten companies. After a career of more than 15 years in pharmaceutical and 5 years in corporate financing, Pierre joined the National Research Council - Industrial Research Assistance Program (NRC-IRAP) as a industrial technology advisor (ITA) specializing in the Biopharma sector. A biochemist by trade, he has an MBA in bio-industries management. Contact: pierre.bourassa@cnrc-nrc.gc.ca

Dr John Lawson has spent more than 30 years working in the pharmaceutical and biotechnology business, two thirds of this at local and global senior management team level. A UK-registered pharmacist, he has an MBA and doctorate in business administration majoring in marketing. He now provides strategic marketing and interim management support, mainly to emerging technology organizations. Contact: jlawson@sympatico.ca