By Robert Price

Fill the Corridor with a billion dollars
The boldest idea to arrive in the last year is the Ontario-Quebec Corridor, an initiative that hopes to make the golden corridor along the St. Lawrence the focal point of international interest in Canada’s life sciences.

“Size matters,” says Frank Béraud, Project Director at Montreal InVivo, one of the associations promoting the Ontario-Quebec Corridor. “Many people outside of North America don’t even know where Canada is. They need an entry point for life sciences in Canada and I think the corridor is that landing spot for all the foreign investors and companies interested in doing business in North America.”

But no bold ideas have short shelf lives. To make the Corridor work, to help to make central Canada internationally competitive, it needs financial support, and lots of it over the long-term, not just talk. At a one-day conference to discuss the Corridor, Savino DiPasquale, Vice-President of Business Development and Corporate Planning at GSK, put it on the table: the Corridor, he says, needs $1 billion invested over 10 to 20 years. Now that’s bold. Will industry and government commit to the challenge?

Put cash into accelerators
What happens when a biotech grows too big for the incubator where it set up shop? If the business doesn’t have somewhere to go—a place with larger laboratories and the support services a growing biotech needs—it’ll either peter out or leave for a jurisdiction that has what it requires.

Canada’s investments in incubators and early-stage infrastructure have shown themselves successful at seeding start-ups. So here’s a bold idea: put the same level of thought and investment into second- and third-stage accelerators, business parks designed with the support structures needed to propel a successful start-up through to market.

Fire the administrative-minded
Or at least get them out of the executive office. Who are the administrative-minded? The people who prefer to never take a risk, who worry about branding and public relations before the product, who worry that what they say might upset those ever-present, easily scandalized “stakeholders.” They’re the people who insist that everything is just fine and if we don’t talk about what’s going wrong, everything will be just fine.

Attend a biotech tradeshow, ask what’s wrong with the industry, and inevitably somebody will say, “We don’t have a culture of innovation.” And what’s contaminating the culture, keeping it from sparking innovation? In part, a cautious, bureaucratic mindset that sees good management as keeping a smile firmly fixed to their faces.

Demand more from universities
How is it possible for business and commerce to be among the most popular and profitable programs in our universities and at the same time have innovation industries struggling to find management talent? If universities are going to steer so many resources into commerce, accounting and business programs, they need to produce results: not just a managerial class, but a new class of wild-minded entrepreneurs. Let’s make creative thinking a prerequisite to a Bachelor’s degree in commerce. PhDs rolling out of Canada’s illustrious science programs have brilliant ideas and technical chops, but they’re about as business-savvy as gravy. Let’s make entrepreneurial studies part of the PhD’s professional training.

Pull talent from traditional manufacturers
Canada is awash in talent. We’ve got great people with smart ideas but not everybody has jobs. Having talent on the sideline is a bad idea. A bold idea: bring out-of-work manufacturing talent into the bio business sector.

In a bold manoeuvre against the high displacement rate among traditional manufacturers in the southwestern Ontario region, BioTalent Canada is launching its Biomanufacturing Project to give unemployed workers from the traditional manufacturing workforce a transitional advantage toward employment with biomanufacturers.

Ontario’s Kitchener-Waterloo-Dufferin area was chosen as a launch pad for the project because it is a tech hub and the scene of major layoffs from traditional manufacturing plants such as Maple Leaf Foods, which announced it was displacing 1,554 workers last fall. BioTalent Canada’s goal is to place 100 job seekers in 100 jobs in biomanufacturing by the end of 2012.

“I believe our resources can truly make a difference to manufacturing workers who have never considered a career in the biotechnology field,” says BioTalent Canada’s Executive Director Rob Henderson. “We are extremely excited about this project because it is borne out of labour-market insight that shows a high demand for key skills in biomanufacturing companies. Our project helps job seekers develop these skills.”

The Biomanufacturing Project is set to launch in early February, but a key challenge will be buy-in from the SME bio-manufacturers. “We expect to be faced with some natural scepticism about how manufacturers can transition to the biotechnology field,” says Henderson but insists that the talent entering biomanufacturing will be, as BioTalent says, “BioReady.” Being BioReady means an industry expert has taken the time to review and recognize an individual’s skill set to match those skills with employers’ needs. The benefits of being BioReady include having skills recognized by peers and employers, and growing a network of contacts in the bio-economy.

By Tim McCunn

I have laboured in the trenches of life sciences for well over 25 years. One of the earlier projects I became involved in was the creation of a life sciences venture capital fund which went on to become the Canadian Medical Discoveries Fund Inc. in the early ’90s. This period was marked by one of great optimism as Canada created hundreds of new life sciences companies where before there were very few. Unfortunately, the investment cycle was not kind to this experience and the rates of return results for most Canadian life science funds were not great (nor were they that great elsewhere) and predictably investment into this industry has significantly declined. But still—we demonstrated that Canada indeed has the entrepreneurial spirit and that we could build an industry!

“I’m not going to be polite about this. The problem with direct investing is this: Usually what happens is crappy companies come to me [and VCs], they ask for my help, for their capital. And usually, when the marketplace says, ‘No, you suck, go away,’ six months later I read that the Ontario government gave What-and-what company $50 million to build a plant in wherever and they’re touting they’re hiring 19 new chemists or something—and that’s after it’s been rejected by domain specialists, who actually are risk takers and whose reputation and capital are on the line. That’s the problem with direct investing. Usually governments end up funding the massive losers and then we all lose because there’s less money available for programs like SR&ED, which are more broadly distributed and more indiscriminately discriminately.

“There’s more money out there than there is good ideas. There’s so much money out there on the sidelines, waiting for people to put a good plan together. There’s tonnes of money out there and government does not need to go where VCs aren’t. The VCs aren’t places because they’re not worth the VC’s time.”

—Brian Bloom, President of Bloom Burton & Co., an investment banking group, speaking at “Connecting Life Sciences Across the Ontario-Quebec Corridor”

Canada has always had a fantastic reputation in the academic life sciences but now we can claim that we also have created a generation of life sciences entrepreneurs, many of whom are still here. There are many statistics which demonstrate that we as a country do indeed “punch above our weight” in this industry—from the groundbreaking world class discoveries in our institutions to the number of life sciences companies created. If anything, we have at the very least demonstrated “proof-of-concept” that indeed we can build life science companies. Given this undeniable evidence, it is now time to invest in a serious way to develop this great natural resource. The missing link is capital: We need to deploy significant capital if we ever hope to develop this industry. Just like other natural resources, without capital, it just will not get done.

The question is: how do we get the job done? We need to begin with a few “truths” or “consensuses.”

The innovation policy to date has failed to produce the number of world-beater companies we expected.

There is a national consensus that we must develop the innovation industry; that we have studied it to death and now is the time to take action actively.

There are many suggestions on the public policy agenda, with the latest being from the Jenkins Report. That report correctly identified the financing of innovative businesses as a problem and suggested the creation of more venture capital funds. This is a very sensible recommendation and indeed governments have been doing just that over the last few years. However, if we could make one single policy change that would have the greatest and most immediate impact on this industry, it without a doubt would be flow-through shares. With a simple legislative amendment to the Income Tax Act, we would unleash the forces of capitalism and witness an unprecedented investment into this industry and, I would predict, the long last realization of the greatest natural resource in Canada: our intellectual power.

After 20 years of advocating for this policy change, why has it not happened? In a word: the public policy intelligentsia are dead set against flow-through shares. My point is this: if our past policy choices have clearly not worked, when is it time to try something else?

Canada should implement this change and then measure it. If it doesn’t work, it’s terminated. Of course, if it does work, we will have provided young graduates and generations to come (make no mistake, the development of this industry is for the benefit of the young not the old!) with the greatest gift possible: a sustainable and growing Canadian innovation industry.

The Jenkins Report correctly stated that a guiding principle for a policy change should include that the total benefit of any given program should be greater than the cost of that program. In a 2010 study, PricewaterhouseCoopers estimated the impact on the Canadian economy of the introduction of flow-through shares:

  • Gross Output: $967 million
  • Value Added: $558 million
  • Wages and Salaries: $337 million
  • Employment: 7,945
  • Government Revenues: $81 million

Although there may be an upfront cost, over a short period of time, these costs would be more than recovered by the generating of real economic activity as demonstrated in the study quoted above. These are the numbers calculated by the accountants. In my experiences, however, they are dwarfed by the many other real benefits generated by the strengthening of this industry:

  • The creation of world-leading companies (think RIM)
  • The impact on Canadian productivity numbers (the driving force behind standard of living)
  • The type of employment for our kids
  • The translation of billions of dollars in research into real lasting economic benefits as opposed to selling the intellectual property to the Americans.

Flow-through shares have been used in the natural resource industry for years. There are many economic similarities between resource exploration and biotech: (i) high risk and high failure rate, (ii) need for significant risk capital, (iii) long period from discovery to commercial revenue; and (iv) large losses before
revenue.

The proposal to use the flow-through share incentives, which have been successfully applied to Canadian resource sector, makes sense for two additional reasons: (1) the similar economic challenge and (2) use an existing program that is well understood both by government and by the market.

How it works: the biotech company would “renounce” its qualifying expenses to a taxpayer in return for his investment. Those qualifying expenses are actual amounts expended by the company on research and development. There exists a well-oiled federal government program both with respect to flow-through shares and with respect to qualifying research and development expenses. By renouncing these expenses, they would of course not be available for a claim for the scientific research and experimental development tax credit.

The desired outcome is to accomplish in biotech what Canada has accomplished in the resource sector:

  • create multiple world-class Canadian biotech companies
  • create a robust public market to help propel Canada to the same rank it enjoys in resource financing (Canada and the TSX are world leaders)
  • fully exploit Canadian biotech innovation and, as a world leader, non-Canadian biotech innovation (i.e. import innovation from around the world)

The time to act is now. We cannot afford to continue along the same path and waste the greatest natural resource Canada has: its intellectual power.

Tim McCunn is a  Business Law Partner in the Borden Ladner Gervais Ottawa office and  is the Regional Chair of both the Corporate Commercial and the Life Science Industry Group and a member of the Capital Markets Group. Tim can be reached at tmccunn@blg.com.

“The Jenkins Report said we should reform SR&ED so that they’re based on wages. Well, in our sector that has huge implications, most of them negative, because lots of R&D spending in our company is not wage-based spending. So here we’ve had a group that went around the country and apparently talked to all kinds of wise people for a year, and now they’re going and pitching government on forming new policy on this which may be absolutely negative for our companies and may take away one of their competitive advantages. The SR&ED program is a good program and it does work. The problem with these policies is that they don’t reflect the fact that our industry is different from other industries.

“There is a lot of capital and the best ideas can attract that capital always. There are some challenges that people don’t think about. Almost all of our success stories have come out of our secondary markets. They haven’t come out of Boston; they’ve all come out of secondary markets. The characteristics of those deals are that those companies have typically raised $2 to $5 million in angel money, and even higher, and they typically raise somewhere between $3 to $5 million of what I would call “regional money”—so it might be regional development money or something else. We see these companies coming to us with $5 to $15 million in capital deployed from a very regional ecosystem. One of the things that I think is the advantage of having a domestic ecosystem that works is the breadth of the people at the table means that more opportunities are going to get our attention. So if I don’t like something because it doesn’t fit my therapeutic themes or my view on how to make money, but another VC does, then the company might get the champion they need. You need breadth within the local ecosystem because if you don’t have that breadth, then what’s going to get funded are only the things we like, and we’re not always right.”

—Peter Van der Velden, President & CEO, Lumira Capital, speaking at “Connecting Life Sciences Across the Ontario-Quebec Corridor”