The Last Word

By Roberto Bellini

DAWN OF A NEW QuébEc bIOTEcH ERA?

Roberto Bellini, President and Chief Executive Officer, BELLUS Health Inc. Many in our industry remember the golden era during the mid-1990s when biotech flourished in Québec.

At that time, there was a thriving group of biotech companies supported by a varied cast of players that helped these companies push their projects forward.

Québec was also home to the big industry players including many of the Canadian regional arms of the large pharmas, which contributed expertise and human resources; a deep group of contract organizations providing valuable support services; and a large number of venture capital groups to spur startups.

There was also a modest banking industry in Montréal to help raise capital and both Toronto and New York were only an hour’s flight away.

The “fleuron” of Québec’s biotech industry was Biochem Pharma, a company run by my father Dr. Francesco Bellini. It grew from a fledgling spinoff of L’Institut Armand Frappier with six employees to a biotech behemoth. At its peak, it had a market capitalization of $6 billion. More importantly, it was a fully integrated global player with more than 1,000 employees, strong recurring revenues and an independently sustainable business plan.

Unfortunately, our Québec biotech industry has largely suffered and generally not recovered – unlike our biotech counterparts in the U.S. – since the global tech and biotech bust in the early 2000s.

There is, however, reason to believe that within the next

LiFe Science FundS created Since 2011 With QuéBec activitieS few years, we will see a flourishing biotech industry in Québec. The following are key factors to support that:

Growing Access to Venture Capital

With approximately 35 per cent of their $1.5+ billion fund of funds committed to biotech, the establishment of Montréal-based Teralys in 2009 was hailed as a major step towards rebuilding the biotech venture capital community.

While it has taken a number of years to see the fruits of their labour, Teralys’ capital has contributed to kickstarting a number of new funds and an overall unprecedented amount of venture capital dedicated to biotech.

With the announcement of CTI Life Sciences II earlier this year, it’s estimated that seven funds have been created with varying forms of Québec investment commitments in the last four years. These funds have approximately $875 million of capital to deploy.

While many of these funds can invest across Canada (and often globally), much of the focus is on Québec. This group of funds also excludes the evergreen funds at Le Fonds FTQ and BDC Capital, as well as certain foreign VCs who are known to invest in Québec, including Domain Associates, Forbion, SR1 and Orbimed.

More importantly, the VC community has been rebuilt with a vision and purpose in mind. There are a diversity of investment strategies (incubators, single purpose vehicles, traditional company building) ranging from seed stage to clinical proof-of-concept.

This new generation is also comprised of a diverse group of VCs that have been supported with new capital (CTI, Lumira) and foreign VCs that have been attracted to set up offices in Canada (TVM, Sanderling).

While early stage capital is plentiful, Canada is still lacking market depth for later stage development companies to find the financing they require. IPO and follow-on financing markets have been routine lately in the U.S. and several Canadian companies have already accessed this market or are in the planning process to take advantage of this. However, domestic support is lacking.

Rise of Specialty Drugs Providing Growth Opportunity to Small Companies

Spending in the U.S. on specialty drugs, which have traditionally been developed and commercialized by biotechs, will likely surpass the spend on traditional drugs by 2018 according to market analytics firm Artemetrx. Specialty drugs are typically higher-cost therapies used to treat complex and chronic conditions. These drugs have several important characteristics that favour the biotech development model: • shorter development timelines • lower cost of development

THE LAST WORD

• and, most importantly, the ability to sell these specialized and high-priced drugs through smaller targeted sale-forces.

Without the need for large pharma’s extensive sales and distribution systems, biotech companies can now independently launch and grow their more specialized products.

While this has been true for cancer therapies for several years now, new product categories are emerging for smaller biotechs to develop and launch their own therapies. This couldn’t be more true than in the area of rare diseases as these drugs fully embody these values (potentially very low cost trials and rapid access to market with extremely high pricing).

For a local company developing a specialty drug, they no longer absolutely need a commercial partner with an existing sales and distribution infrastructure. In this new environment, a ‘go-commercial’ strategy is becoming more and more viable.

Drugs for rare diseases have been the launch pad for some of the most successful upstart biotech companies of recent memory including Vertex in cystic fibrosis, Alexion in paroxysmal nocturnal hemoglobinuria, and BioMarin in enzyme replacement therapies. While these are all American firms, there is no reason this same success can’t be reproduced north of the border.

Canada’s Lost deCade oF BioteCh investment

Management and Investor Aspirations

A crucial factor to building a successful ecosystem is a psychological one: the will and the persistence of key stakeholders to do it. The period from 2003-2012 is considered ‘Canada’s Lost Decade of Biotech Investment’ (Overall Canadian performance in biotech is a good proxy for Québec performance).

Even through this lost decade, there were a number of drug candidates and technologies developed successfully. This is to be expected from as rich a basin of strong scientific research.

These led to some of the best exits in Québec biotech history including the 2009 Virochem sale to Vertex ($500 million) and the 2011 Enobia sale to Alexion ($600 million upfront plus $500 million in milestones, and one of the largest returns on investment in Canadian biotech history).

Overall though, successes between 2003-2012 were few and far between resulting in little appetite from both management teams and investors to even take late-stage development risk (in both the Virochem and Enobia examples, the lead products were in Phase 2).

That mindset seems to be changing. Prometic, Québec (and Canada’s) largest biotech by market capitalization (~$2B) generates substantial recurring revenue from its protein purification platform and has commercial aspirations for its drug candidates. Clementia, in Phase 2 for an ultra-rare indication, has recently raised $60 million in a mezzanine financing. That level of financing support has not been seen in Québec for many years and could pave the way for Clementia’s drug through Phase 2 and beyond.

Are there challenges facing Québec biotech companies that are competing on an international stage? Absolutely. Intellectual property law, government policy towards biotech, attracting/keeping talent and a poor science translational efficiency rate are obstacles hampering the development of our companies. On the financing side, there is a also lack of public investors for Québec biotech stories though interest is increasing in other markets (Ontario, Western Canada and the U.S.).

But they don’t fundamentally undermine the notion that Québec is gearing up for a new positive era in biotech. This new era should produce several more success stories. These emergent companies can even surpass the star of the last Québec biotech boom**.

Roberto Bellini is the CEO of BELLUS Health (TSX: BLU), a Montréal-based company developing therapeutics for rare diseases, starting with conditions that affect the kidneys. Follow Roberto (@rbellini) on Twitter

* Source: Public documents including company website and press releases ** A recent article I wrote in February surmises that Canada will have a

Gilead of the north within 10 years. This belief relies on many of the same facts mentioned above. Hopefully, one or more of these breakout companies will be in Québec.

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