Toronto, ON – Canada’s biotech industry lags behind the maturity of its US counterpart and remains dominated by small, undercapitalized companies. But a report released today by professional services firm, Ernst & Young, indicates the industry has started to focus on bringing products to market in a drive to reach profitability. Canada’s public biotech company revenues in 2004 increased by 21% to slightly over US$2 billion, while the total losses in Canadian public companies decreased by 30% to just over US$400 million.
Ernst & Young’s annual global report on the biotechnology industry, Beyond Borders, concludes that product success and strong financials have driven the biotechnology industry’s maturation. While the trend has been evident earlier and elsewhere in the global biotech sector, Canadian companies have begun to bring products to market with a special focus on targeted, personalized medicines. This coming of age of the industry is accompanied by an increasing maturity of the capital markets, whereby investors are more likely to value companies on the basis of their expected return on investment.
Contrary to expectations, in 2004 the number of public and private biotechnology companies in Canada remained stable at 472 compared with 470 in 2003. “The significant consolidation-through mergers and acquisitions-that we predicted last year in the Canadian biotech sector simply didn’t materialize,” says Rod Budd, a partner with Ernst & Young and the firm’s life sciences leader in Canada. “That leaves an industry dominated by very small, poorly capitalized companies, and one slow to restructure which makes funding even harder to source,” he says.
Rather than choosing to consolidate, Canadian biotech companies instead slashed expenditures or sought strategic alliances to continue operating in the absence of significant funding. It was not an approach Canadian capital markets reacted favourably to, the report finds.
The Canadian biotech industry’s market capitalization shrank from $13.8 billion in 2003 to $13.7 billion last year, despite an 8% increase in the value of the Canadian dollar in 2004. “In fact, had the 2004 market cap been converted at the December 31, 2003 exchange rate, the difference would have been a drop in market cap values of over a billion dollars less in 2004 than 2003,” says Mr Budd.
“For 2005, we are again predicting an inevitable number of consolidation moves in Canada,” he adds. “It’s not a magic-bullet solution, of course, since in our view, merging two or three weak biotech companies will only serve to create one large, weak biotech company." But, he adds, a larger, more mature company’s acquisition of a smaller firm’s technology can build a much better chance of success. In 2004, the industry began to recognize the need to be well capitalized and focused on profitability in order to survive. However, he believes it will remain difficult for Canadian biotech companies to obtain funding over the next couple of years.
Here are the highlights among the Canadian industry findings in the report: (All figures are US dollars.)
– Canadian companies had 15 products enter Phase III trials in 2004; 25 compounds entered Phase II; and several new products were approved for sale.
– The number of Canadian companies remains virtually unchanged since 2003 at 472 – the number of both public companies (82) and private companies (390) increased by one in 2004.
– Public company biotech revenues increased 21% ($2,091 million), while net losses dropped 30% ($408 million).
– 56% of Canada’s publicly listed biotech companies had less than two years of cash on hand in 2004 (vs 66% in 2003); just 38% have over five years of cash (up slightly from the year previous). Private firms are likely to have less cash than their public counterparts, further increasing pressure toward consolidation in that sector.
– Venture capitalists invested $271 million in private biotech firms in 2004, the most since 2001, and nearly 35% more than in 2003. The largest private investment in the Canadian industry took place in Q1 of 2004 with over $60 million invested in Aspreva Pharmaceutical.
– There were four Canadian biotech IPOs in 2004.
– The industry remains clustered around Montreal, Toronto and Vancouver.