Q&A On the Canadian Life Sciences Industry Forecast 2009

PwC partner Gord Jans and President and CEO of BIOTECanada, Peter Brenders, discuss the recently released report “Canadian Life Sciences Industry Forecast 2009”

Canada's world-renowned life sciences and biotechnology companies are proven leaders in innovation, but they also face increasing global competition and challenging economic conditions. Tightening credit has further limited access to capital, while the volatility in the markets increases valuation risk, putting pressure on share prices and asset values.

Through an online survey conducted in October and November 2008, 167 stakeholders from corporate, academic, government and other organizations in the Canadian life sciences and biotechnology industry were asked a series of questions intended to capture their thoughts on a variety of issues impacting the industry today and in the future.

To provide further insight into the findings of the Forecast, we sat down for a Q&A with Gord Jans, national leader, Life Sciences Group at PwC and Peter Brenders, President and CEO of BIOTECanada.

Why did you feel the need to produce the Forecast?

Gord Jans: The Forecast is designed to help stakeholders in the Canadian life sciences and biotechnology industry understand the challenges and concerns of their peers, especially in light of recent economic conditions. The Forecast provides the data and a forum to help guide the dialogue to shape the future of the Canadian life sciences industry.

Peter Brenders: This is our third Forecast and our findings continue to build on the results from our 2006 and 2007 Forecast Reports. In our view, the data gathered provides important information on where efforts should be placed to improve Canadian success in the sector.

What does the report discuss?

PB: The focus of the Forecast is on the key challenges and issues facing organizations within the industry and the industry itself. The Forecast identifies some of the critical areas that must change or adapt to the market so that the Canadian life sciences industry can become a world leader.

Who were the respondents to the survey?

GJ: A total of 167 respondents contributed to this year's Forecast. The respondents were from across Canada both public and private life sciences and biotechnology businesses. They represent a total of approximately 5,000 employees across Canada and have revenues of approximately $2 billion.

Fifty percent of Forecast respondents consisted of Chief Executive Officers or Presidents of the organization, 13% were Chief Financial Officers, and the remainder was from various positions such as Chief Operating Officer, Business Development, Regulatory Affairs, etc.

The respondents surveyed offer a wide variety of solutions and products. The largest area of focus for survey respondents in 2009 are Therapeutics (22%), followed by Branded Pharmaceuticals (16%) and Agricultural (9%).

Given the current economy, are companies confident in their future survival?

PB: Two thirds of Forecast respondents say they are somewhat to not at all confident in theCanadian industry's short-term outlook, which is most likely attributed to the current economic crisis. The life sciences industry as a whole is one that is heavily dependent on cash to support research and commercialization of products, so it is not surprising that the industry is heavily impacted by current economic conditions.

Indeed, the biggest challenge for the Canadian life science and biotechnology industry continues to be the ability to access capital (78%). This response has consistently been the top choice in all Forecasts to date and continues to grow year over year.

GJ: Moreover, highlighting current economic conditions, 64% responded that unfavourable industry and market conditions are the top challenge to successfully raising capital for Canadian life science and biotechnology businesses. Accessing capital has always presented a challenge as the industry competes for risk capital with other sectors; however, this situation has been exacerbated by the current economic crisis and the overall decrease in available capital.

Where do respondents think they will be able to raise the capital they need and how much?

GJ: Forty-three percent of Forecast respondents are currently seeking funding with 39% seeking over $10 million in funding. These funding expectations reflect a weak capital raising environment and funding at this level is clearly insufficient for long-term growth.

One-third of respondents expect funding to come from strategic partners. Other major sources include private equity funds (20%), venture capitalists (19%), angel investors (18%) and government (16%). With the public markets being closed, we wonder where the industry will be able to attract the risk capital required to successfully commercialize existing programs if it does not come from venture capital sources. Clearly the expectation of respondents is that strategic partners and private equity funds will fill the gap.

PB: There is also a disturbing decline in the number of respondents expecting funding from venture capitalists from 48% in 2006, to 19% in 2009. While venture capital funding has always been limited in Canada, funding availability is even lower in the current economic climate. This highlights the need for immediate solutions: the industry has requested the federal government consider allowing for monetization of tax losses for struggling biotechs and we are releasing a national biotechnology blueprint for Canada to begin a dialogue on an industry strategy for our sector.

How is or can the government support the industry?

GJ: Three quarters of respondents believe that creating incentives for risk capital is the most important action government can take to improve Canada's ability to compete globally in the life science and biotechnology sector.

Federal or provincial governments can also contribute by creating more favorable tax incentives and providing research grants to companies. If government cannot provide support through these primary initiatives, it will likely present the industry with further challenges in competing successfully on the global stage.

PB: In this industry, 80% of firms in Canada have less than 100 employees and the majority are in the research phase of product development. Companies need access to cash to sustain jobs in the short term. Helping them monetize accumulated losses is an easy first step. Greater incentives for risk capital and tax incentives to do work in Canada follow. BIOTECanada has proposed a 3-point action plan to provide this assistance to firms during the economic downturn.

Given the need for more capital, do you think we'll see some of these companies join forces by way of a merger or acquisition?

GJ: Yes, nearly two-thirds of respondents indicate that being acquired or participating in a merger is the most likely scenario for a successful Canadian life sciences or biotechnology business. In addition, almost half believe that licensing or selling IP or co-development/partnerships is also a likely option. From a longer-term perspective, all of our PwC Canadian Life Science Forecasts to date suggests that the Canadian industry may never achieve the critical mass and scale required to effectively compete on the global stage without a significant change in operating environment.

So how can Canadian companies compete?

PB: Actually our Forecast respondents indicate the two most important actions industry should take to improve Canada's ability to compete is to recruit experienced senior management and continue to focus on success in their current business. If industry can do this, and find ways to raise the capital it needs, Canada will continue to be a leading jurisdiction in this important 21st century industry. But help is needed from the government to ensure we can successfully commercialize the world leading life sciences innovation occurring in Canada.