Biotechnology Focus March 2012 by Promotive Communications

INSIGHTS FOR THE LIFE SCIENCE INDUSTRY

MARCH 2012 VOLUME 15, NUMBER 3

HOT BUTTON

INSIDE:

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contents

MARCH 2012 – VOLUME 15 – NUMBER 3

Hot button Issues

FEATURES

Saskatchewan Growing Green

The concept of environmental sustainability resonates in Saskatchewan BY AG-WEST BIO

9 CANADIAN LIFE SCIENCE

SASKATCHEWAN

HOT BUTTON ISSUES

The concept of environmental sustainability resonates in Saskatchewan, a province that relies heavily on natural resources for the economy. With almost half of Canada’s agricultural land and nearly half the province covered in forest, agriculture, forestry and mining are the major industries here. The greentech industry has been building for 20 years. In the late ’80s, with the farm economy at a low, there was a push by the scientific community and the Ministry of Agriculture to create new markets for agricultural crops. Researchers got to work, producing new crop varieties and innovative technologies. Businesses have come to life based

CANADIAN LIFE SCIENCE

Aviation companies around the world are aiming to be carbon-neutral by the year 2020, and bio-based fuels are being explored as a way to reach that goal. Agrisoma, the industry lead for Prairie Gold, is developing carinata specifically as a feedstock for biojet fuels. In order to comply with the aviation industry’s standards, the fuel must be chemically identical to petroleum-based jet fuel. Test flights using Agrisoma’s carinata-based fuel are expected this spring. For the biojet fuel industry to advance in the province, it’s important have a clear understanding of the economics, logistics and challenges for production of these dedicated industrial oilseed crops, along with the processing and commercial use of biojet fuel.

As I contemplated the “hot button” issues for 2012, there were a ton of themes that jumped out at me: pending SR&ED reform that has the potential to negatively impact every single emerging biotech company in this country; cuts to the research investment at hospitals and academic centres in Canada that are the backbone of the life science innovation ecosystem in this country; pension plan reform that fails to acknowledge the fundamental and mutually beneficial role that pension funds have played in building the US innovation economy and the role that PE/VC returns have played in delivering premium returns for investors such as pension funds; the management of healthcare costs (a highly laudable goal) in a one-dimensional framework and that reflects little understanding of the opportunities afforded by new medicines, procedures and technologies; and the list goes on and on. In reviewing these particular potential topics, I concluded that my peers who were

6 BIOTECHNOLOGY FOCUS MARCH 2012

CANADIAN LIFE SCIENCE

TIME

FOR A LITTLE RESPECT AND A LOT MORE PROACTIVE ENGAGEMENT FROM KEY ECOSYSTEM STAKEHOLDERS LIKE GOVERNMENT

Photo: Deb Puttick

Photo: Prakash Venglat

asked to contribute to this edition would likely cover these topics with far more elegance and grace than I. As a result, I decided to go in a different direction, and as I reflected on the past 12 months and discussions with many friends and colleagues, I could not help but be amazed by two baffling but I believe related phenomena. The first issue is that if one were to believe only that which the lay press and media in this country reported, one would come to the very erroneous conclusion that innovation in Canada is virtually the exclusive domain of the ITC sector. The second is the belief held by many people that I consider pretty smart that the Canadian mineral extraction business—the bright light for Canada these days and the apple of every politician’s eye—happened all on its own without significant long-term government economic support. These misconceptions are fundamentally disturbing and in my view, at least in part, responsible for the emergence of so many “hot

By Ela Malkovsky

HOT BUTTON ISSUES

ASSESSING THE CANADIAN BIOTECH FINANCING GAP: WHAT SOURCES LEFT, WHY & HOW TO REPLACE THEM Biotech discoveries have a finite period within which they need to be commercialised, unlike gold and oil which can sit in the ground for decades and probably increase in value. Many biotech discoveries are now stagnating because Canadian biotech has suffered from a large financing gap for over four years. The annual gap might be approaching $1 billion when considering reduced levels of financing for private and public companies, plus the missed opportunities for growth and establishment of new companies. This problem and potential solutions can be assessed using the capital market concept of risk and reward. There is a wide spectrum of risk, ranging from government bonds and GICs at the low end to high risk discovery companies in resources, technology and biotech. There is also a wide spectrum of rewards, from the current two per cent GIC rates to potentially several hundred per cent, or more, returns for a successful discovery company. 20 BIOTECHNOLOGY FOCUS MARCH 2012

CANADIAN LIFE SCIENCE

By Ela Malkovsky

The SR&ED innovation incentive program is central in supporting R&D in Canada. In 2008 alone, Canadian companies spent $15.8 billion on industrial R&D activities, providing over 155,000 full-time jobs. In 2010, $768 million was spent on R&D by pharmaceutical and medicine manufacturers, and another $414 million on R&D relating to navigational, measuring, medical and control instruments.

HOT BUTTON ISSUES

POSITIVELY SHAPING THE FUTURE

Figure 8: What do you believe are the most important actions that government can take to improve Canada’s ability to compete globally in the life sciences industry? (respondents were asked to select top 3 choices) 78% 75%

NA NA

63% 62% 67%

Create more favourable tax incentives

84%

Research grants to companies

Improve speed of the regulatory process

49% 38% 51% 45% 37% 37% 40% 42%

2011 2009 2007 2006

16 BIOTECHNOLOGY FOCUS MARCH 2012

www.bioscienceworld.ca

However, unlike many of its predecessors, it appears the Jenkins report will result in some fundamental policy shifts at the federal level that will likely have significant consequences for the entire innovation ecosystem in Canada. As of the date of submitting this article, the 2012 federal budget has not yet been released. However, the federal government has made strong suggestions thatthe time for action (rather than more study) is finally over, starting with the 2012 budget. This article examines the Jenkins report and provides suggestions for implementation that could positively shape the future of Canada’s life sciences sector.

BACKGROUND The Jenkins panel was commissioned to address the following three questions: 1. What federal incentives are most effective in increasing business R&D and facilitating commercially relevant R&D partnerships? 2. Is the current mix and design of tax incentives and direct support for business R&D and business-focussed R&D appropriate? 3. What, if any, gaps are evident from the current suite of programming, and what might be done to fill the gaps? To aid its analysis, the panel invited interested parties to comment on 15specific questions relating to R&D and innovation. PwC submitted its response to these questions on February 18, 2011 . In our executive summary, we encouraged the panel to establish priority areas for Canada and review and revise policies and programs (including procurement policies) to focus on areas of strategic priorities. In my view, life sciences is one of these priority areas. As noted in our report, Inflection Point: Canadian Life Sciences Industry Forecast 2011, “For a nation as rich in knowledge and resources, Canada holds a unique opportunity to grow the value of its bio-economy into a key driver of its economic growth. Alignment of public policy into a fully enabling ecosystem supporting the full life cycle of development from discovery into the marketplace is critical

The Jenkins Report:

Positively shaping the future

MORE TO CONSIDER

to our global competitiveness.” The question is whether the government’s response to the Jenkins report will be aligned with these views so a better ecosystem for life sciences in Canada can be created. Let’s hope so, since this sector is uniquely positioned to help address Canada’s pending demographic challenges in managing health care delivery and costs as well as providing opportunities for greater economic wealth.

Several recommendations of the Jenkins panel could be tweaked to maximize the positive impact on the life sciences sector. These include: • Supplement the BDC direct investment model with a flow-through share regime for life sciences, since tax policy can be a much more powerful tool than direct funding. For example, a $200 million

Putting the ‘Tech’ in Biotech

Changes to the Canadian Scientific Research and Experimental Development Program: What to Expect in 2012 BY ELA MALKOVSKY

CONTINUED ON PAGE 26 24 BIOTECHNOLOGY FOCUS MARCH 2012

Development Bank of Canada (BDC) to solve this problem by disbursing additional funds, there are other solutions such as creating new tax incentives to foster a better ecosystem for risk taking. Of course, there are many within the life sciences community who are concerned with the proposal to remove the refundable R&D tax credit for small and medium size enterprises (SME’s). Currently SME’s can receive more than $1,000,000 annually from the federal program and, when combined with provincial incentives, R&D tax credits have been a significant source of non-dilutive funding for many life science companies. Although 2011 was an improvement over 2010, it is no secret that the funding environment in Canada has been very challenging for several years. Therefore the potential loss of R&D refunds could have a severe impact for the sector. Let’s hope the recommendation to redeploy “savings” from R&D program changes into new incentives to support the growth and profitability of SME’s provides an equal or greater benefit for the life sciences sector. Without any details, it is difficult to know. Nevertheless, there should not be any gap in time between the phase out of the existing R&D program and the phase in of any new programs.

Assessing the Canadian Biotech

Financing Gap: What sources left, why and how to replace them BY WAYNE SCHNARR

THE FUTURE OF SR&ED: THE JENKINS REPORT

THE JENKINS REPORT:

To remain competitive in the global pharmaceutical and biotechnology industries, there is a need to constantly develop and improve drugs and medical equipment through formal experimentation and testing. Here is where the SR&ED program comes into play; by refunding the costs of development and experimentation, the program enables companies to venture into projects where costs may be too high to undertake otherwise. Biotechnology sub-sectors eligible for the SR&ED tax incentive include medical equipment, biological product manufacturers, electro-medical apparatus, and many others. For example, your business may be eligible if you have worked on new devices to improve the quality of patient care, if you invested in gene therapy or experienced issues with the synthesis of a compound. The same applies for experimentation to improve drug affinity or stability, or attempts to increase the applications of a known compound. These are just a few specific examples in a sector of constant evolution and growth. The SR&ED program can offset costs of experimental development which ultimately leads to product improvement, innovation and competitive growth.

CANADIAN LIFE SCIENCE

Recently, much attention is being devoted to assess the SR&ED program in Canada and provide recommendations for improvement in order to ensure a more efficient appropriation of the federal budget in a recovering economy. This has brought about the question, what will revisions to the program mean for the future of companies conducting R&D in Canada? On October 17, 2011, the federally appointed panel chaired by Open Text chief strategy officer Tom Jenkins released a report entitled “Innovation Canada; A Call to Action”. Composed as a review of R&D funding, this report (commonly referred to as the Jenkins report) describes six recommended amendments to the program (Independent Panel on Federal Support to Research and Development, 2011).

By Gord Jans

Create incentives for risk capital

CANADIAN LIFE SCIENCE

On October 17, 2011 the report, “Innovation Canada: A Call to Action,” was released by the Independent Panel on Federal Support to Research and Development, commonly known as the Jenkins report.

BY GORD JANS

PUTTING THE ‘TECH’ IN BIOTECH As a world leader in health and life sciences, Canada has one of the most lucrative tax incentive programs for conducting Scientific Research and Experimental Development (SR&ED) in the world. According to Statistics Canada, the Canadian income tax system is the “most attractive in its treatment of R&D,” compared to ten other major industrial countries including France and the U.S.

Time for proactive engagement

Key ecosystem stakeholders such as government need to take part in shaping the industry’s future BY PETER VAN DER VELDEN

button” issues within the innovation economy in this country in general and the biotherapeutics and medtech sectors specifically. So this year I have two hot button issues: 1) that you, me and everyone else who cares about the future of biotech and medtech in this country must do a much better job in communicating with the stakeholders and policy makers who affect our current businesses and the future ability of our children to earn a meaningful livelihood in this country, and 2) that with the thoughtful and sustained commitment of governments in Canada we can build a better future for our children, but the time is now for governments to commit to a 20 year plan that allows us to create a sustainable Canadian economy that is not a product of the good graces of nature (aka rocks and trees), but that is a product of leveraging our own human capacity, and the outstanding academic and health care infrastructure of this country to allow Canadians to create the “gold and diamonds” of the future.

12 BIOTECHNOLOGY FOCUS MARCH 2012

CHANGES TO THE CANADIAN SCIENTIFIC RESEARCH & EXPERIMENTAL DEVELOPMENT PROGRAM: WHAT TO EXPECT IN 2012

COMPILED BY SHAWN LAWRENCE

FLYING HIGH ON CARINATA

PLANTS WITH INDUSTRIAL PUNCH Two crops have become the centre of attention in Saskatchewan: Camelina sativa (false flax) and Brassica carinata (Ethiopian mustard), commonly referred to as camelina and carinata, are ancient crops that grow on

CANADIAN LIFE SCIENCE

marginal land in dry conditions and were once primarily grown for food. These hardy plants show great potential as feedstocks for industrial products. A Genome Prairie project called Prairie Gold focuses on these crops. Research is being conducted by AAFC and two companies; Linnaeus Plant Sciences’ goal is to create value-added, renewable, biodegradable industrial oils and value-added bioproducts from camelina, as alternatives to petrochemical-based feedstocks, while Agrisoma Biosciences is developing carinata for use as aviation fuel.

HOT BUTTON ISSUES

GROWING GREEN

on years of research into fuels, bio-industrial oils, bioproducts and processes, remediation technologies and crop protection. Ron Kehrig, Sector Manager, Biofuels, Bioproduction and Forestry for Enterprise Saskatchewan, has been involved in building the bioproducts industry for the better part of two decades. He says the average person is very aware of the environmental implications of water and energy use and the impact of products – and knowledgeable about greentech. “If you think you can just get by with ‘marketing green’ or ‘green-washing’ today, you may be in for a surprise.” In addition, he says today’s green products can deliver sound performance and sustainability. “There’s no trade-off needed between the environment and a good product.” Saskatchewan’s technology infrastructure can provide much of what developing companies need in the bioproducts and bioprocessing space. Activities are supported by a research cluster on the University of Saskatchewan (U of S) campus in Saskatoon, including the Saskatchewan Research Council (SRC), National Research Council (NRC), the Canadian Light Source synchrotron, Agriculture & Agri-Food Canada (AAFC) and POS Bio-Sciences. Innovation Place research park houses numerous companies and is often a focal point for industry interactions.

What’s the buzz in Canadian

Biotech reader’s respond to the hot button issues facing the industry

Food Safety:

Genetically Modified Foods BY RONALD DOERING AND ADRIENNE BLANCHARD

The Last Word:

Biotech is better than you think BY PETER BRENDERS

WELCOME INITIATIVES On the positive side, the Jenkins panel recognized that government procurement can play a critical role in stimulating innovation and this is a welcome message. Procurement can be a very powerful tool for life sciences if the provinces adopt a co-ordinated approach aligned with the Jenkins report recommendations within their respective health and economic development ministries. The federal government may have a unique opportunity to empower the provinces to head in this direction as part of the 2014 health accord negotiations. In addition, the endorsement of a Small Business Innovation Research (SBIR) type of program that exists in the United States could represent a significant source of new funding for the Canadian life sciences sector. In the U.S. there has been extensive debate over the fact that so-called “majority investor owned” small businesses were not eligible for SBIR funding. These rules essentially prevented venture capital (VC) backed companies from participating in the program. In late 2011, the U.S. repealed this limitation and will now permit VC and other majority investor owned companies to apply for some SBIR funds (up to 25% of the SBIR budget for the National Institutes of Health and up to 15% for all other agencies). Also positive in the Jenkins report is the recommendation for increasing access to risk capital for high-growth innovative companies. Our report, Inflection Point: Canadian Life Sciences Industry Forecast 2011 confirmed there is strong demand from industry for government to implement incentives to increase risk capital (see figure 8). The significant assumption here is that life sciences are included in the definition of high-growth innovative sectors when this recommendation is implemented. While the Jenkins panel called on the Business MARCH 2012 BIOTECHNOLOGY FOCUS 17

MARCH 2012 BIOTECHNOLOGY FOCUS 3

Biotech

PUBLISHER’S NOTE

PUBLISHER/ EDITOR-IN-CHIEF STAFF WRITERS

Canada’s

biotech conundrum There’s a conundrum that appears in this issue of Biotechnology Focus and it’s exemplified by your comments in our bi-annual Hot Button Survey. On one side is Canada’s definite place among the world’s top life science industries thanks in large part to its storied legacy for innovative discoveries. Yet at the same time, the industry is saddled with some tough issues both in trying to capture the interest of global investors and in failing to translate innovative ideas into commercial products. Making matters tougher, the industry is facing a shrinking market and the loss of jobs due to tough economic times. This Hot Button issue is rather timely given the pending announcement of federal budget, where many wonder if the arrival of the Jenkins Report will trigger changes to the SR&ED program. As Gord Jans reports in his article, unlike previous federal reports on innovation, the Jenkins report could very well result in some fundamental policy shifts, “that will likely have significant consequences for the entire innovation ecosystem in Canada.” He mentions that there is recognition in the report of the impact of government procurement on innovation, endorsement of a small business innovation research program, and increasing access to risk capital, which should all be welcome in the life science industry. Likewise, Ela Malkovsky also addresses the future of SR&ED’s and the Jenkins report. She believes the proposed changes including the simplification of SR&ED and removing some of the administrative burden, will grow the value equation for investment into all Canadian-based operations . Diverging from the SR&ED debate but staying on the Hot Button Issue topic, Lumira Capital’s Peter van der Velden explains why investing in the life science industry makes sense, and that this sector actually outperforms most other sectors in Canada. The challenge is getting the message out there not just to the investor community, but government as well. Rounding out the line-up is healthcare consultant Wayne Schnarr. In his article, Assess the Canadian Biotech Financing Gap. Schnarr addresses the stagnant growth facing many Canadian biotech companies by highlighting the reasons why funding sources have left the sector and while adding how the industry can replace this missing funding. Schnarr also strikes a chord by emphasizing that the discoveries at Canadian institutions are “equal in quality to discoveries from the best institutions worldwide.” One needs only read the article in this issue focusing on Saskatchewan’s innovations, including Genome Prairie projects such as Prairie Gold or NRC researchers working on producing long-chain fatty acids which have far ranging applications from lubricants, jet fuels and bio-plastics to see that Schnarr is pretty much on the mark with his assertion.

Terri Pavelic Shawn Lawrence

Christopher Rogers

CONTRIBUTING WRITERS

Adrienne Blanchard

Ag-West Bio

Ela Malkovsky

Gord Jans

Peter Brenders

Peter van der Velden

Ronald Doering

Wayne Schnarr

National Account Manager GRAPHIC DESIGNER CONTROLLER MARKETING MANAGER

Marcello Sukhdeo Elena Pankova John R. Jones Mary Malofy

CIRCULATION DIRECTOR James Watson circulation@promotive.net Tel: 705-812-0611

EDITORIAL ADVISORY BOARD Celine Bak, Analytica Advisors; Rob Henderson, BioTalent Canada; Najla Guthrie, KGK Synergize; Pierre Bourassa, IRAP, Montréal; Brad Guthrie, Alberta Advanced Education and Technology; Carol Reynolds, Genome Prairie; Ulli Krull, UTM; John Kelly, Erie Innovation and Commercialization; Peter Pekos, Dalton Pharma Services; Brad Thompson, Oncolytics; Darrell Ethell, CanReg; John Hylton, John H. Hylton & Associates; Robert Foldes, Cognovie Inc.; Grant Tipler, RBC; Randal R.Goodfellow, P.Ag., Senior Vice President, Corporate Relations, Ensyn; Bob H. Sotiriadis, LLB, a partner with Leger Robic Richard; Dale Patterson, Genome Canada; Darcy Pawlik, Syngenta Seeds Canada Inc; Gail Garland, OBIO; Barry Gee, LifeSciences British Columbia; Bonnie Kuehl, Scientific Insights Consulting Group Inc. Biotechnology Focus is published 10 times per year by Promotive Communications Inc. 24-4 Vata Court, Aurora, Ontario L4G 4B6 Phone 905-727-3875 Fax 905-727-4428 www.bioscienceworld.ca E-mail: biotechnology_focus@promotive.net Subscription rate in Canada $35/year; USA $60/year; other countries $100/year. All rights reserved. No part of this publication may be reproduced without written consent. Publications Mail Registration Number: 40052410 Return undeliverable Canadian addresses to: circulation dept – 24-4 Vata Court, Aurora, Ontario L4G 4B6 National Library of Canada ISSN 1486-3138 \ All opinions expressed herein are those of the contributors and do not necessarily reflect the views of the publisher or any person or organization associated with the magazine.

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By Ag-West Bio

Saskatchewan growing green

Hot button Issues

on years of research into fuels, bio-industrial oils, bioproducts and processes, remediation technologies and crop protection. Ron Kehrig, sector manager, Biofuels, Bioproduction and Forestry for Enterprise Saskatchewan, has been involved in building the bioproducts industry for the better part of two decades. He says the average person is very aware of the environmental implications of water and energy use and the impact of products – and knowledgeable about greentech. “If you think you can just get by with ‘marketing green’ or ‘green-washing’ today, you may be in for a surprise.” In addition, he says today’s green products can deliver sound performance and sustainability. “There’s no trade-off needed between the environment and a good product.” Saskatchewan’s technology infrastructure can provide much of what developing companies need in the bioproducts and bioprocessing space. Activities are supported by a research cluster on the University of Saskatchewan (U of S) campus in Saskatoon, including the Saskatchewan Research Council (SRC), National Research Council (NRC), the Canadian Light Source synchrotron, Agriculture & Agri-Food Canada (AAFC) and POS Bio-Sciences. Innovation Place research park houses numerous companies and is often a focal point for industry interactions.

marginal land in dry conditions and were once primarily grown for food. These hardy plants show great potential as feedstocks for industrial products. A Genome Prairie project called Prairie Gold focuses on these crops. Research is being conducted by AAFC, NRC and two companies; Linnaeus Plant Sciences’ goal is to create valueadded, renewable, biodegradable industrial oils and value-added bioproducts from camelina, as alternatives to petrochemical-based feedstocks, while Agrisoma Biosciences is developing carinata for use as aviation fuel.

Flying high on carinata Aviation companies around the world are aiming to be carbon-neutral by the year 2020, and bio-based fuels are being explored as a way to reach that goal. Agrisoma, the industry lead for Prairie Gold, is developing carinata specifically as a feedstock for biojet fuels. In order to comply with the aviation industry’s standards, the fuel must be chemically identical to petroleum-based jet fuel. Test flights using Agrisoma’s carinata-based fuel are expected this spring. For the biojet fuel industry to advance in the province, it’s important to have a clear understanding of the economics, logistics and challenges for production of these dedicated industrial oilseed crops, along with the processing and commercial use of biojet fuel.

Plants with industrial punch Two crops have become the centre of attention in Saskatchewan: Camelina sativa (false flax) and Brassica carinata (Ethiopian mustard), commonly referred to as camelina and carinata, are ancient crops that grow on

Photo: Prakash Venglat

6 BIOTECHNOLOGY FOCUS MARCH 2012

CANADIAN LIFE SCIENCE

Photo: Deb Puttick

“If you think you can just get by with ‘marketing green’ or ‘green-washing’ today, you may be in for a surprise. There’s no trade-off needed between the environment and a good product.” — Ron Kehrig

With that in mind, Ag-West Bio is leading a feasibility study to assess opportunities in what appears to be a promising industry.

‘Taylor’ made oilseed crops At NRC, researchers are working to produce industrial oilseeds with very long-chain fatty acids (VLCFAs), specifically erucic and nervonic acids. VLCFAs have many uses as lubricants, jet fuels, detergents, coatings, bioplastics and hundreds of other potential or patented industrial applications. Researchers David Taylor and Elizabeth Marillia are developing the carinata germplasm, engineering plants with high levels of these fatty acids with the goal of making carinata oils competitive with petroleum-based products. Metabolix Oilseeds Inc. is developing a genetically modified camelina suitable for

producing plastics, fuels and chemicals as alternatives to petroleum-based products by using microbes that naturally produce polyhydroxyalkanoates (PHAs). By inserting genes from the microbes into camelina, the plants produce the PHA, which is then extracted from the seed oils. Bioproducts are also providing promise in industries such as pharmaceuticals and cosmetics. Prairie Tide Chemicals, a U of S start-up, is commercializing a technology platform based on isolating high-value cyclic peptides from flax. Peptides, currently synthesized and expensive, have numerous uses, from makeup to medicines and other industrial products. The technology, developed by Martin Reaney, will make these peptides available at a much lower cost – a boost for the flax industry. Flax is also known as a fibre crop. While linen has been around for centuries, flax fibre has a myriad of other uses, like insulation, plastic composites and absorbency products. Saskatchewan’s Biolin Research Inc. is working to increase the profitability of flax fibre.

Innovative fuel technologies Canadian canola is grown primarily for its heart-healthy oil. However, canola that doesn’t make the grade can be used to produce high-quality biodiesel. Milligan Bio-Tech in Foam Lake uses non-food grade seed (frost damaged, green or heated), giving producers a place to sell crops that would otherwise be unmarketable. The company also produces and markets a number of co-products: diesel fuel conditioner, penetrating oil (think WD40), road dust control agents, asphalt release agents and protein supplements for the livestock, hog and poultry Industries. Other biofuel activity in the province includes ethanol production from non-food grade wheat (the largest wheat ethanol plant in North America is Terra Grain Fuels in Belle Plaine) and cellulosic ethanol production from wheat straw and wood waste. Biomass is also used to create various bioproducts, like briquettes, firelogs, compost and syngas, which can be used as a feedstock to make a variety of liquid fuels, including gasoline. Syngas is also produced from methane

MARCH 2012 BIOTECHNOLOGY FOCUS 7

Hot button Issues

CANADIAN LIFE SCIENCE

and carbon dioxide, a process that turns two greenhouse gases into fuel. U of S College of Engineering researchers Hui Wang and Ajay Dalai worked with SRC’s Jianguo Zhang to develop a catalyst that offers high conversion rates without carbon buildup. The technology extends the life of the catalyst from 40 to 2,000 hours – a huge breakthrough in the industry. It’s a dirty job, but… Environmental assessment and remediation of industrial sites is another area where Saskatchewan companies and organizations are making their mark. For example, the Saskatchewan Research Council’s EcoAccounting experts provide life cycle assessments to model environmental effects of products, processes or systems, and calculate greenhouse gas emissions to estimate carbon footprints. The Toxicology Centre at the U of S is the largest university-based toxicology centre in Canada. This state-of-the-art research facility does analytical, aquatic, biochemical, environmental, mechanistic, radiation and wildlife toxicology research from molecular to ecosystem level, and includes CETES, a commercial testing service for potential hormone disrupting chemicals in the environment. Contango Strategies is providing scientific leadership and laboratory services in a Genome Prairie project named MAVEN (Microbial Assessment for Value-Added, Environmental, and Natural Re-

Photo: Deb Puttick

“As efficient as some of that is with integrated systems, making the transition to large-scale and newer technologies using biomass feedstock is challenging and hard to finance.” — Ron Kehrig 8 BIOTECHNOLOGY FOCUS MARCH 2012

sources), developing genomic approaches for identifying complex communities of microbes associated with uranium mining and milling to facilitate future remediation operations. The project includes the development of software programs to interpret the impact of these microscopic organisms. Mining operations can get help with cleanup from Prairie Plant Systems (PPS). The company has developed a system for reclaiming land in harsh environments, which it has used around mines in Saskatchewan’s north. PPS’s biotechnological approach identifies appropriate plants that can survive and thrive in the area being reclaimed, develops propagation protocols and determines the best technology and appropriate order for reintroduction of the species. Other companies are involved in waste water management. EnviroWay’s microbial or enzyme-based products include formulations for controlling algae growth, breaking down liquid organic waste and reducing odours in septic systems. EcoLibra Systems Inc. uses a combination of mechanical processes, techniques and proprietary reactions to effectively reclaim water from livestock manure and municipal sewage.

Environmental sleuthing at the atomic level The Canadian Light Source synchrotron on the U of S campus in Saskatoon is a powerful tool that helps scientists better understand biomass and bonding characteristics of biomaterials by allowing them to view matter at the atomic level – even in living organisms. Greentech research projects characterize some of the research activities. For example, one research team worked on acid mine drainage (AMD), caused when sulphur in mine tailings reacts with water and oxygen to produce sulphuric acid. AMD is a concern for water quality and lake acidification – and is also implicated in climate change. The researchers found two species of bacteria isolated from a tailings pond in Ontario that worked together to limit the amount of acid produced by sharing the sulphur in the tailings as an energy source.

Alternatives to chemical pesticides: Battles in miniature – and mustard Plants can’t run away when attacked, but they do defend themselves. They produce phytochemicals and sometimes have ‘good’ bacteria and fungi on their side, battling ‘bad’ microbes in the soil, or living right in the plant and promoting growth. By learning how plants protect themselves and by finding organisms

in nature that either attack weeds, preventing them from competing with crops, or enhance plant health, researchers hope to reduce the amount of chemical-based pesticides needed in agriculture. Researchers at AAFC focusing on natural controls for crop pests include Chantal Hamel, who is working to improve crops by managing microorganisms in the soil and within the plants, and Karen Bailey, who has developed a broadleaf weed control based on Phoma macrastoma, a naturally occurring soil fungus. The technology is registered in Canada and should be on the market by 2014. Mustard is grown in great quantities in Saskatchewan – about 80 per cent of Canada’s production – and it’s not just for hotdogs. Mustard has been shown to be effective for soil pest control. Saskatchewan’s Mustard Products and Technologies Inc. (MPT) has developed some of the world’s first organic soil fumigants from mustard that protect turf, strawberries and other high-value crops from nematodes.

Challenges and opportunities Growth in other sectors, such as mining and oil and gas has presented bio-industries with new challenges and opportunities beyond bioremediation. Use of greentech in enhanced oil recovery and mineral recovery are just a few new green technology markets. Ron Kehrig says much of the commercial activity is still first-generation biofuels. “As efficient as some of that is with integrated systems, making the transition to large-scale and newer technologies using biomass feedstock is challenging and hard to finance.” Although finding early-stage money is always a challenge for start-ups, Saskatchewan can offer many positives, including low corporate tax rates and a business-friendly government. Kehrig says the financing community is very open and experienced in working with bio-based ventures, noting “Ag-West Bio is foremost in that regard.” Kehrig is positive about new developments in the sector, crediting companies like Milligan Bio-Tech, Metabolix, Agrisoma, Contango Strategies and Linnaeus Plant Sciences for taking the industry in new directions. “From jet fuels and biopolymers to applications of bioprocessing in mining and other industries, here the industry is broadening its scope.”

For more Ag-Bio information visit our Energy Web Portal at www.bioscienceworld.ca

CANADIAN LIFE SCIENCE

compiled by shawn lawrence

wHat’s tHe buZZ In

canaDIan BIOtech?

This marks our eighth ‘Hot Button Issue’ in which we try to get to the bottom of all the issues facing the biotechnology and life science industries.

Through our surveys, our goal is to engage you, our readers, in the hopes that you provide insight into the happenings in and around the biotech space. We listened to your responses and tailored much of the other editorial to what you said were the hottest topics in Canadian biotech. Turning back to the survey, this time around we divvied up the responses into two streams: stream one focusing on the Biotechnology Industry, including C-level execs, entrepreneurs, investors, service providers, venture capitalists and other stakeholders; and stream two for researchers, innovators, lead investigators, scientists, research organizations and academia. While the questions may have differed from survey to survey, the responses showed that despite your various affiliations public, private and other, the majority share the same concerns, face the same challenges and are looking for solutions that will make Canada’s biotechnology sector stand out globally.

so wHat dId our readers Have to say about tHe Industry? C-Level Executives, Entrepreneurs, Investors, Service Providers, Venture Capitalists and other Stakeholders Results: Despite the financial challenges the industry as a whole is facing, there is a sense of optimism coupled with hope for new opportunities among those who took part in this survey. On the research front Canada is making its mark in such areas as DNA diagnostics, next generation sequencing, monoclonal antibody production, vaccine development and regenerative medicine. As such, the current state of research and innovation (more so the research side) was graded very well, with 17.9 per cent of the vote calling it excellent, 32.1 per cent describing it as very good and 25 per cent choosing the average option. Respondents point to the critical mass of quality research, the country’s legacy in such fields as regenerative medicine and medical breakthroughs such as insulin to back their answers. Likewise, many of your comments indicated that there is plenty of money going into research in Canada. Again the criticism was that the financial support just isn’t there for the development end of R&D. A good reflection of this is that our academic research in Canada is considered top-notch, but our innovation performance is facing constant criticism. For example, when The Science, Technology and Innovation Council released its report State of the Nation in 2010, it showed that research and development in Canada, specifically the latter was low by international standards. The fear is that in many instances just as companies are about to reach a point where they start to contribute to the innovation economy, but due to a lack of funds are forced to decide between closing-down or moving outside of Canada (or if they’re lucky being acquired by foreign interests). As one respondent explained, “this behavior would be akin to the Canadian government

paying for the construction of new oil wells, but then abandoning them and letting foreigners use them to pump out and mine all the oil without paying any (or only minimal) taxes to Canada.” It’s obvious then that industry is challenged by the lack of available capital. This is not surprising to us, as this message has been beaten to death over the course of our past seven hot button issues. Nothing has changed on VC front either with extremely conservative attitudes towards the industry prevailing. The industry is always at a disadvantage in dealing with the VC community, for starters biotech companies typically require more funding over a longer period of time compared to other knowledge-based industries, and it can be quite difficult to make VC’s understand the validity of these technologies. With these facts in

SR &ED IN THE BIOTECH INDUSTRY

he Scientific Research & Experimental Development (SR&ED) program is valued at over $3 billion annually, and is a valuable, and often essential, aspect of any biotechnology company. The program requirements can however be challenging and costs related to implementation and maintenance of tracking practices can be burdensome if not handled effectively. At NorthBridge we pride ourselves in being a professional engineering firm with hundreds of clients across Canada and over 20 years of experience. With our expertise, NorthBridge is up to date on the latest industry standards and can work with you to reduce compliance costs. Here are some examples of projects related to the biotechnology field that may be eligible for the SR&ED program: • Efficacy/application of drugs, vaccines, gene, and stem cell therapies. • Medical or diagnostic devices or methods for improved detection. • Renewable energy resources from biological sources to reduce environmental impact. • Natural health products such as extracts, supplements, vitamins or minerals. • Applications/biocompatibility of biomaterials.

1-855-SRED NOW (773-3669) sred@northbridgeconsultants.com www.northbridgeconsultants.com/biotech

MARCH 2012 BIOTECHNOLOGY FOCUS 9

CANADIAN LIFE SCIENCE

Hot button Issues

“If government was to institute matching funds similar to that used by the New Zealand Investment Fund or the Israeli Heznek Fund as detailed in the recent Jenkins report, it would provide a base foundation upon which the life sciences industry could begin to grow in Canada.” mind, the majority of you responded to our question on how the business of biotech was faring with some troubling statistics. In all, 37 per cent of you said that the industry was faring below average and 25.9 per cent of you gave the industry the lowest possible grade. Again, these low scores are tied to the funding gap that has come to be known as the “valley of death” stage in financing. This is the stage when they have high capital needs but little revenue. Canada does a good job of initiating start-up companies but as a Canadian biotech company needs more than $10 million to grow, there is almost no way to get it from domestic sources. Put plainly, our capital markets are unable to support growing them into full commercial enterprises and more needs to be done to help companies reach the stage of commercialization. As an example, in 2000, the height of venture capital activity in Canada, $5.9 billion was invested in 1,007 start-ups (Thomson Reuters). Last year, just $1.5 billion was raised by 444 Canadian firms. Clearly with venture capital activity dwindling, the money just isn’t there to help business reach their goal of commercialization. So, what’s the solution? Our readers made some suggestions starting with finding new ways to revitalize Canadian VC investment,

such as policy changes and adding more tax incentives for investors. As one reader put it, “if government was to institute matching funds similar to that used by the New Zealand Investment Fund or the Israeli Heznek Fund as detailed in the recent Jenkins report, it would provide a base foundation upon which the life sciences industry could begin to grow in Canada.” Suggestions were also made in other areas non-VC related such as flow-thru shares again being proposed, reinstating and expanding the scope of pre TPC (Tech Partnerships Program) and ensuring more money filters through NRC IRAP (under the current model IRAP runs out of money by mid-year). Readers also suggested forgoing the VC community, and targeting Angel Investors. Many note a very real trend of Angel activity in financing start-up, spurred by FedDev matching Angel and even VC investing through its various programs. Most importantly, our readers even offered tips to survive during these austere times, such as making sure you network with your peers, seek strategic alliances both in the public and private sector and never be afraid to partner. As the old saying goes, it’s not only what you know, but who you know. One question we posed to our reader’s was how we can improve public awareness

and support of the sector. The first step said many was addressing those who have an axe to grind with the industry directly, dispelling the myths they spread with the facts publicly either through ad campaigns or reaching out to media outlets to emphasize the potential benefits to Canada of investing in life sciences. Additionally, with the 2012 Budget announcement expected on March 29, 2012, the Jenkins report was also top of mind among our readers. Anticipating this sort of response, we took a preemptive step asking our readers in our survey whether they agreed with recommendations made by the Jenkins report, and most were on the fence. As one respondent put it, the devil is in the details. Specifically, the idea of supporting business oriented research & development should be a priority, but among the many recommendations, changes to the SR&ED model caused the most uproar. One respondent even called these recommendations a travesty, while others said that converting to a labour-based model was ludicrous. “The recommendations benefit large tech companies who have large payrolls, while in biotech, the model is to outsource and have smaller payrolls. Moreover, many biotech companies rely on SR&EDs for equipment purchases that are part and parcel to the R&D and not labour costs,” said one respondent. Finally, we asked our readers both in this category as well as those that took the other survey whether they thought government was listening to what the sector was trying to tell it. A resounding 70.4 per cent of this group

Business SURVEYS State of the Industry, how business is faring

State of Research and Innovation in Canada

Excellent: 0% Above Average: 7.4% Average: 29.6% Below Average: 37% Poor: 25.9%

Excellent: 17.9% Above Average: 32.1% Average: 25% Below Average 25% Poor: 0%

Is Government listening to what the life science field is telling it?

Current Industry Job Outlook Excellent: 0% Above Average: 3.7% Average: 33.3% Below Average: 37% Poor: 25.9%

Yes: 29.6% No: 70.4%

25% 29.6%

37%

25%

10 BIOTECHNOLOGY FOCUS MARCH 2012

6.7%

3.3%

Harder to come by: 83.3% Easier to come by: 0% The Same: 16.7%

3.7%

7.4% 25.9%

Financing Opportunities:

70.4% 32.1%

16.7%

25.9%

17.9% 29.6%

33.3% 37%

83.3%

March2012-one-third page.pdf 1 07/02/2012 4:52:09 PM

3.7%

7.4%

29.6% what is the state of 37% Research and Innovation in canada?

excellent: 3.3% above average: 33.3% average: 40% Below average: 16.7% Poor: 6.7% 6.7%

25%

Do25% you feel that 32.1% government is listening to what the life sciences field is telling it? Yes: 31% no: 69%

70.4%

29.6%

33.3%

Do you find granting opportunities:

37%

harder to come by: 82.1% the Same: 17.9% easier to come by: 0%

3.3% 17.9%

16.7% 33.3% 40%

31% 69%

said “no” while 69 per cent of the latter group (shown below) said “no.”

researcHers, Innovators, lead InvestIgators, scIentIsts, researcH organIZatIons and academIa results: For starters, it was surprising to find that the buzz on this side of the divide mirrored the industry’s Hot Button Issues. Canada strongest attributes according to this lot are our well-educated workforce: some of the best scientific minds in the world, leading universities, research institutes and hospitals coupled with great infrastructure. Our weakest attributes are poor translation to commercialization and little or no funds for development meaning research does not often become harnessed into industry relevant products. The culprit, an unfriendly environment for the sustainability of start-up companies in this space. From this one can conclude that the public sector understands the plight of the private sector, but what about their own challenges, concerns and hot button issues? Many of their issues are directly tied to government’s ability to support research and innovation in Canada. Specifically, their concerns aren’t so much how much money is going into R&D in this country but rather how it is being allocated. It is on this point really that their opinions differ from that of their private sector counterparts. Specifically, after years of funding basic research they’ve done a complete reversal, funding industrial partnerships while diminishing support for basic scientific research. Respondents were insistent that research dollars should be awarded based on the quality of the research proposal (as evaluated by peers) and not simply based on commercialization potential. While this may sound like a mixed message, the suggestion

16.7%

25.9%

17.9%

Saskatchewan is not just a pretty place. We are a HAVE province, with serious science capacity and a competitive business atmosphere. Starting or growing a bio-based business? Take a look at Saskatchewan. Chances are, we have what you need.

ReSeaRcheR SuRVeYS 25.9%

82.1%

does have some merit in that it recognizes that by making government science enslaved to current technology needs, you run the risk of killing true innovation. Either way, respondents to this survey did in fact put together a wish list suggesting ways to improve on current funding models. The suggested changes begin at the top, where our readers want government to create a senior cabinet post responsible for science. Moreover, they want more transparency and discipline in the funding models. Support projects right through completion rather than abandoning them half way through and increase funding to NSERC for discovery grant programs. Likewise, industry driven research does still need to be funded. It’s not a case of one or the other. Rather, our readers would like to see a balance struck between basic research and applied research, and perhaps the best way is through collaboration. For example, government can fund partnerships between industry and academia encouraging collaboration through open research agreements. Such a model has worked before as evidenced by the success of the Centre for Drug Research and Development and the NCE Centres of Excellence for Commercialization and Research Programs, as well as organizations such as the Quebec Consortium for Drug Discovery (CQDM), and other innovative public-private partnership models. C

CMY

For more survey results information visit our commercIalIZatIon web Portal at www.bioscienceworld.ca MARCH 2012 BIOTECHNOLOGY FOCUS 11

83.3%

CANADIAN LIFE SCIENCE

By Peter van der Velden

Hot button Issues

Time

for a little respect and a lot more proactive engagement from key ecosystem stakeholders like government As I contemplated the “hot button” issues for 2012, there were a ton of themes that jumped out at me: pending SR&ED reform that has the potential to negatively impact every single emerging biotech company in this country; cuts to the research investment at hospitals and academic centres in Canada that are the backbone of the life science innovation ecosystem in this country; pension plan reform that fails to acknowledge the fundamental and mutually beneficial role that pension funds have played in building the US innovation economy and the role that PE/VC returns have played in delivering premium returns for investors such as pension funds; the management of healthcare costs (a highly laudable goal) in a one-dimensional framework and that reflects little understanding of the opportunities afforded by new medicines, procedures and technologies; and the list goes on and on. In reviewing these particular potential topics, I concluded that my peers who were 12 BIOTECHNOLOGY FOCUS MARCH 2012

on commercializing their innovation. That product was ENB-0040, an enzyme replacement therapy for the rare and life threatening genetic disease known as hypophosphatasia that can cause skeletal deformity, severe muscle weakness and progressive damage to vital organs. That disease’s ties to Canada were exceptional, going all the way back to 1948 when a Canadian pediatrician, Dr. John C. Rathbun, was the first person to name the disease in response to a case report of a baby boy he treated and who ultimately died from acquired rickets complicated by epilepsy. Above and beyond all that, if you really want to know why this Canadian success story matters so very much go check out the human impact side of this story on Youtube by looking up the video entitled - First infant worldwide to take ENB 0040 as enzyme replacement for Hypophosphatasia. So great a Canadian innovation story, from the lab to the patient, it is also a great story about translating homegrown academically-generated innovation into a great investment for the Canadian and US investors who backed the company. While this story was widely reported by US media, including the WSJ and CBS news, in Canada there was virtually no coverage. No Globe and Mail, no CBC and no National Post coverage. Truly unbelievable, and this matters because if politicians lack knowledge of this kind of a Canadian success story it affords them the opportunity to shape innovation and healthcare policy in ways that are not good or supportive of our sector. Even worse, it is not just that the we, and by proxy the media, get it “wrong” on a single company basis in this country, as evidenced by the Enobia story, but we also get it wrong

on a holistic basis because the average Canadian has little or no view as to the greatness that goes on in these sectors in this country. Don’t believe me? Well like any good biotech venture capitalist I like data, and the data that I am about to share will, I suspect, be a big surprise for the vast majority of readers: 1. The largest exit transaction for a Canadian VC-backed deal during the past ten years was the aforementioned Enobia Pharma Inc., which sold for over US $1 billion in December 2011; 2. The second largest Canadian VC-backed exit in 2011 was another biotherapeutics company, Gemin X Pharmaceuticals, which sold for US $525 million; 3. During the past 10 years, six of the top 15 exits of VC-backed Canadian companies were in the biotech or medtech sectors. According to Thompson Reuters these companies had a combined exit value of $3.5 billion and an average return on capital invested of 7.17x. Interestingly the other nine deals in other sectors also generated $3.5 billion in exit value BUT, and here is the shocker, only a 4.4x return on capital; 4. During the past 10 years there have been six $300+ million M&A liquidity events for US companies that enjoyed significant investment support from a Canadian VC. Four of those were biotherapeutics companies (and I can’t help but point out that three of them were Lumira Capital-backed companies); 5. The top performing technology IPO in the US (all sectors) during the past five years was backed by a Canadian VC

Hot button Issues

So to kick this off, let me first say that as a 20+ year venture capitalist, with lots of friends and colleagues in all parts of the innovation ecosystem, I am really pleased to see company and investor success in all parts of the innovation ecosystem as it is my firm belief that this is the only road forward to sustainable and meaningful job and wealth creation for the next generations of Canadians (more on that later). While happy for the successes of my peers in Information and Communication Technology (ICT), what struck me was the marked absence of news and excitement with respect to the Canadian medtech and biotherapeutics sectors, despite some phenomenal outcomes in the sector this past year. To highlight this is worth looking at the way in which the lay media in Canada (national and local newspapers, television and CDN business magazines) covered two innovative Canadian companies that achieved meaningful “exits” in 2011: Radian6 and Enobia Pharma. During the summer of 2011, social media monitoring company Radian6 was sold to cloud computing giant Salesforce.com for approximately $325 million. The sale and the related story of this terrific east coast Canadian company was covered nationally (as an example the Globe and Mail and National Post both had a dozen and a half related articles), locally and every which way you can imagine and the hype and follow-on continued for months after the sale. All the press was terrific for this company, its management team and the investors who participated in this big win. Conversely, in the life sciences sector there were at least two such big success stories in 2011 but I want to focus on that of privatelyheld Canadian company Enobia Pharma Corp. (the other story being the sale of Gemin X Pharmaceuticals). Enobia was acquired in December 2011 by Alexion Pharmaceuticals Inc. in a deal valued at up to $1.08 billion, and targeted at expanding Alexion’s involvement with treatments for very rare life-threatening diseases. The story of Enobia has all the pieces of a classic innovative biotherapeutics company. Founded in the late 1990s by two biochemistry professors, Philippe Crine and Guy Boileau from the Université de Montréal, the company raised money, pursued development, almost failed, raised more money, was recapitalized by some old and some new domestic and foreign VC partners , and ultimately completed a sale that was the absolute talk of the town at the all-important JP Morgan Healthcare conference in San Francisco in January 2012. But the story is about so much more than just an investment success story. It is also a great human and Canadian story. Through all the ups and downs, its founders remained employees of the company and focused

Life Sciences Venture Investing Dramatically Outperformed Tech Venture Investing Over the Past Decade. Overall Life Sciences/Healthcare venture realized gross pooled mean IRR was 15 per cent for the past decade.

MARCH 2012 BIOTECHNOLOGY FOCUS 13

CANADIAN LIFE SCIENCE

Hot button Issues

What all the participants in the emerging and developing biotherapeutics and medtech sectors know is that what we do is difficult, it requires significant and meaningful engagement from a vast ecosystem, it leverages a tremendous Canadian hospital and academic healthcare infrastructure, it requires patience and experience, it and requires capital, and sometimes a lot of it. (Lumira) and that company was a biotherapeutics company Pharmasset Inc. which was recently sold for $11 billion, making it the highest price ever paid for a clinical stage company without a commercially approved product; 6. The top performing medtech IPO in the US during the past five years was also backed by a Canadian VC (Lumira) and that company was MAKO Surgical; and 7. This data is not unique to Canada. The July 2011 issue of NATURE BIOTECHNOLOGY contained an article entitled “In defense of life sciences venture” which highlighted the following: • Life Sciences Venture Investing Dramatically Outperformed Tech Venture Investing Over the Past Decade. Overall Life Sciences/Healthcare venture realized gross pooled mean IRR was 15.0 per cent for the past decade. This is in contrast to 5.5 per cent for all of venture capital, 3.0 per cent for IT and 4.1 per cent for Software. • Life Sciences Had A Lower Loss Rate and Higher Frequency of 5x+ Returns. There’s a perception that lots of Life Sciences deals lose money. It’s true; 58 per cent returned less than their invested capital. But surprisingly the failure rate in IT companies is much higher: almost 75 per cent of IT-related investments realized a return of 1x or less in the past decade. Furthermore, the frequency of 5x or greater returns is higher in Life Sciences – 8 per cent vs. 4 per cent for IT. Beyond the cold hard facts there are two other fundamental details that seem to get overlooked in the conversation as it relates to the biotherapeutics and medtech sectors. The first, as alluded to with the Enobia story, is that each one of the companies outlined above, and the thousands of other emerging companies in the sector, do a wonderful thing 14 BIOTECHNOLOGY FOCUS MARCH 2012

– they invent, develop and commercialize products and therapies that allow people to live healthier more productive and more fulfilled lives every day. When you cut through it all it is pretty incredible and something that everyone in the sector can feel very proud of. The second is that the profits generated by “big win” exits in the innovation sector are and should be important to all the stakeholders involved. I recognize that this is in marked contrast to comments by another venture capitalist that was recently quoted in the Globe and Mail as saying that for her investing in the sector was “not about the money to be made” and that it is all about “rescuing all the Canadian research that is created.” This view is fundamentally misaligned with the principals of venture capital investment, and in Canada, financing strategies that have deviated from these principals have created both short- and long-term problems for the sector (see my “Hot Button Issue” from last year’s March Issue of Biotechnology Focus). Positive financial outcomes are tremendously important as they reward entrepreneurship, encourage government investment in basic science, provide new capital to support the continuity of the innovation cycle, and by returning an above market rate of return to the limited partners investors create wealth and financial security for all Canadians. Those limited partners include governments, pension plans, and university endowments and by proxy millions of working Canadians. With respect to the half dozen companies listed earlier in this article, the beneficiaries include almost every Canadian (via CPPIB and the Business Development Bank of Canada), workers throughout Quebec (via Fonds de solidarité FTQ, Fondaction, and Capital régional et coopératif Desjardin), working Ontarians (retail LSIFs), shareholders of Canadian companies such as CIBC and Nordion, and health care workers in Nova Scotia (via NSAHO) to name just a few of the indirect stakeholders in these successful investments.

So despite our successes, why doesn’t it seem like we are quite there in having built a sustainable and self-supporting life sciences sector in this country? Well the answer to some degree is that it is tough, and that beyond market need and the financial and human capital to build a solution that addresses the need, it also takes a committed long term plan by all the stakeholders in the ecosystem and particularly governments to build a new business sector. When thinking about “projects” that take long term vision, many argue that it is impossible to engage governments because they are forced to live in the here and now in order to get reelected, but the simple reality is that governments have consistently found ways to do this for the “rocks and trees” part of the economy, and they now need to uphold the same philosophy with respect to the innovation economy. As an example, starting some 25 years ago the federal government prioritized the development of “mineral extraction businesses” and put in place a dizzying set of corporate tax based incentives to reward miners for exploration and extraction (see http://www. nrcan.gc.ca/minerals-metals/business-market/ mining-taxation-regime/4212). As the industry continued to “sputter” and the risk vs. reward curve for investors was insufficiently compelling to drive investment into the sector, the government put in place additional tax based incentives, this time directly targeted to investors. These direct incentives to investors have for the past ten years ranged between $326 million to $570 million annually (see http://www.fin.gc.ca/taxexp-depfisc/2010/ TEE2010_eng.pdf). Well low and behold, a foundation was built, commodities’ prices increased (demand grew), investors made money, reinvestment occurred, jobs were created and a significant industry was built in Canada. While the success in the mineral extraction business has been laudable it does come with a couple of clear misses: • The jobs creation part of the story was really a bit of an illusion as employment was just over 200,000 workers in 2007/2008—slightly lower than the peak of 210,000 workers in 1984; • The quality of that job creation is unclear given that when compared with the Canadian labour force in general the mining workforce has a substantially lower proportion of workers with a university level education (11 per cent compared with 22 per cent for Canadian labour force at large). In other words, this sector has failed to leverage the

substantial investments in education that are the pride of this country and something that every government in this country states is a priority; • The programs put in place failed to recognize or acknowledge that the resources being consumed are finite in nature, and that their extraction today should be the financial foundation of “next generations” economies of tomorrow by creating sovereign wealth pools for all future generations of Canadians as has been done in other resource rich countries like Brazil, Zambia, Norway, Australia, and virtually all the countries in the Middle East; and • That at some time the subsidies should end so they can be redeployed to support and build other parts of the Canadian economy rather that allowing Canadian companies to sell taxpayer subsidized coal, gas, iron ore, copper and nickel to countries like China (yes that is what those tax incentives all ultimately amount to). Wow, with 8-9 per cent growth in GDP does the Canadian government really think China needs our subsidies? Talk about misguided. So if I think about the “mining lesson” there are many parallels for having the government engage with the same depth, breadth and length of commitment with respect to the life sciences sector. The demand is phenomenal at 5 to 20 percent of GDP spending worldwide,

and there is huge and growing demand for cheaper and more effective medicines and improved quality of care. The fundamental resource is “in the ground” in Canada in the form of its leading academic and healthcare institutions, which are a proven, reliable and infinite source of healthcare innovation. There is great stakeholder alignment as the country is already a highly engaged participant, the provinces are amongst the largest buyers and purveyors of healthcare services in the world. Furthermore, like the mineral extraction opportunity of 25 years ago, there is a need and opportunity to governments to provide an integrated vision and strategy that is fundamentally enabling. So as the government looks to reign in costs, why not start by “eliminating the tax trough” for an industry that describes itself as “self-sustaining and world class”? Having done so, the government can and should focus on redirecting that capital to other needed sectors of the economy that could be the backbone for the country’s economy when the natural resources gravy train dries up. Can you imagine the economic benefit of half a billion dollars in annual incentives for cleantech, biotech, medtech, ITC, advanced manufacturing, and every other emerging sector of the innovation economy? Imagine what each of these sectors would look like with three to five billion dollars in investor subsidies over the past ten years and countless billions in

other forms of corporate incentives. What all the participants in the emerging and developing biotherapeutics and medtech sectors know is that what we do is difficult, it requires significant and meaningfully engagement from a vast ecosystem, it leverages a tremendous Canadian hospital and academic healthcare infrastructure, it requires patience and experience, it requires capital, and sometimes a lot of it. But what we also know is that if we do it right, and we do it right a lot more than we let on, then we can make a huge difference for all Canadians in terms of creating high value jobs, providing better and more cost effective health care, and in helping to provide the enhanced returns that are necessary to ensure adequate pensions for Canadians. So there are my “hot button issues” for 2012. As we at Lumira Capital look forward to closing and starting to invest a couple of new funds this year, our team is really excited about the road ahead and the opportunity to work with world class innovation and entrepreneurs in Canada and throughout North America.

For more venture caPItal information visit our commercIalIZatIon web Portal at www.bioscienceworld.ca

May 29 and 30, 2012 F U N D I N G I N N O V A T I V E C O M PA N I E S

St. Andrew’s Club & Conference Centre, 150 King Street West, Toronto

BioFinance 2012

is the leading investor conference in Canada for the life sciences industry. This event brings together key industry players interested in investment opportunities and issues affecting companies in the life sciences sector. Presenting companies span a range of industries including: biologics, medical devices, drug delivery, vaccines, diagnostics, bio-energy, green technologies, bio materials, industrial biotech, and research services. BioFinance 2012 will also feature 14 investor panels that address specific financing and management issues relevant to this industry.

www.biofinance.ca

• Contact mstinson@biofinance.ca • Tel 1-866-342-4933 MARCH 2012 BIOTECHNOLOGY FOCUS 15

CANADIAN LIFE SCIENCE

By Gord Jans

Hot button Issues

The Jenkins Report: Positively Shaping the Future

On October 17, 2011 the report, “Innovation Canada: A Call to Action,” was released by the Independent Panel on Federal Support to Research and Development, commonly known as the Jenkins report.

Figure 1: What do you believe are the most important actions that government can take to improve Canada’s ability to compete globally in the life sciences industry? (respondents were asked to select top 3 choices)

Create incentives for risk capital

78% 75%

NA NA

63% 62% 67%

Create more favourable tax incentives

84%

Research grants to companies

Improve speed of the regulatory process

16 BIOTECHNOLOGY FOCUS MARCH 2012

49% 38% 51% 45% 37% 37% 40% 42%

2011 2009 2007 2006

However, unlike many of its predecessors, it appears the Jenkins report will result in some fundamental policy shifts at the federal level that will likely have significant consequences for the entire innovation ecosystem in Canada. As of the date of submitting this article, the 2012 federal budget has not yet been released. However, the federal government has made strong suggestions that the time for action (rather than more study) is finally over, starting with the 2012 budget. This article examines the Jenkins report and provides suggestions for implementation that could positively shape the future of Canada’s life sciences sector.

BACKGROUND The Jenkins panel was commissioned to address the following three questions: 1. What federal incentives are most effective in increasing business R&D and facilitating commercially relevant R&D partnerships? 2. Is the current mix and design of tax incentives and direct support for business R&D and business-focussed R&D appropriate? 3. What, if any, gaps are evident from the current suite of programming, and what might be done to fill the gaps? To aid its analysis, the panel invited interested parties to comment on 15 specific questions relating to R&D and innovation. PwC submitted its response to these questions on February 18, 2011 . In our executive summary, we encouraged the panel to establish priority areas for Canada and review and revise policies and programs (including procurement policies) to focus on areas of strategic priorities. In my view, life sciences is one of these priority areas. As noted in our report, Inflection Point: Canadian Life Sciences Industry Forecast 2011, “For a nation as rich in knowledge and resources, Canada holds a unique opportunity to grow the value of its bio-economy into a key driver of its economic growth. Alignment of public policy into a fully enabling ecosystem supporting the full life

tion is implemented. While the Jenkins panel called on the Business Development Bank of Canada (BDC) to solve this problem by disbursing additional funds, there are other solutions such as creating new tax incentives to foster a better ecosystem for risk taking. Of course, there are many within the life sciences community who are concerned with the proposal to remove the refundable R&D tax credit for small and medium size enterprises (SME’s). Currently SME’s can receive more than $1,000,000 annually from the federal program and, when combined with provincial incentives, R&D tax credits have been a significant source of non-dilutive funding for many life science companies. Although 2011 was an improvement over 2010, it is no secret that the funding environment in Canada has been very challenging for several years. Therefore the potential loss of R&D refunds could have a severe impact for the sector. Let’s hope the recommendation to redeploy “savings” from R&D program changes into new incentives to support the growth and profitability of SME’s provides an equal or greater benefit for the life sciences sector. Without any details, it is difficult to know. Nevertheless, there should not be any gap in time between the phase out of the existing R&D program and the phase in of any new programs.

MORE TO CONSIDER

cycle of development from discovery into the marketplace is critical to our global competitiveness.” The question is whether the government’s response to the Jenkins report will be aligned with these views so a better ecosystem for life sciences in Canada can be created. Let’s hope so, since this sector is uniquely positioned to help address Canada’s pending demographic challenges in managing health care delivery and costs as well as providing opportunities for greater economic wealth.

WELCOME INITIATIVES On the positive side, the Jenkins panel recognized that government procurement can play a critical role in stimulating innovation and this is a welcome message. Procurement can be a very powerful tool for life sciences if the provinces adopt a co-ordinated approach aligned with the Jenkins report recommendations within their respective health and economic development ministries. The federal government may have a unique opportunity to empower the provinces to head in this direction as part of the 2014 health accord negotiations. In addition, the endorsement of a Small Business Innovation Research (SBIR) type of program that exists in the United States could represent a significant source of new funding for the Canadian life sciences sector. In the U.S. there has been extensive debate over the fact that so-called “majority investor owned” small businesses were not eligible for SBIR funding. These rules essentially prevented venture capital (VC) backed companies from participating in the program. In late 2011, the U.S. repealed this limitation and will now permit VC and other majority investor owned companies to apply for some SBIR funds (up to 25 per cent of the SBIR budget for the National Institutes of Health and up to 15 per cent for all other agencies). Also positive in the Jenkins report is the recommendation for increasing access to risk capital for high-growth innovative companies. Our report, Inflection Point: Canadian Life Sciences Industry Forecast 2011 confirmed there is strong demand from industry for government to implement incentives to increase risk capital (see figure 1). The significant assumption here is that life sciences are included in the definition of high-growth innovative sectors when this recommendaMARCH 2012 BIOTECHNOLOGY FOCUS 17

Hot button Issues

CANADIAN LIFE SCIENCE

yield far more capital for the sector than $200 million of direct funding. The reason is that in order to provide $200 million of tax relief, the flow-through investors must invest $800 million if their average tax rate is 25 per cent. Since federal corporate tax rates (15 per cent) are much lower than top marginal personal tax rates (29 per cent), a flow-through share regime that includes corporations in the definition of eligible investors may generate even more capital than one focused on individual investors. This type of program may also provide a significant catalyst to increase the demand for partnering with Canadian life science companies by large pharmaceutical, biotech and medtech players. As a reference point, in 2010 PwC prepared an economic impact study for BIOTECanada and we estimated that a mature flow-through share mechanism for life sciences could generate nearly $1 billion of economic output in Canada. • The proposed phase out of the refundable R&D tax credit should take into account the lengthy development and regulatory approval cycles. The Jenkins panel recommends the R&D tax credit be targeted at growing and profitable SME’s. Life science SME’s need time to meet the growth and profitability criteria. Imposing an annual profits test for refund eligibility would exclude the majority of Canadian life science SME’s. A more palatable approach would be to consider profitability over, say, a 10 year period and include any deferred revenues existing at the end of year 10 to account for licensing or partnering deals that may have occurred but are not yet included in profit. For example, in the first 10 years, a company would continue to be entitled to receive refundable R&D tax credits. However, if the profitability criterion is not met at the end of 10 years, the company would become liable to repay some or all of the R&D credits. • The types of organizations eligible to receive funding from an SBIRtype program in Canada should include all VC backed, publicly listed and other majority-owned companies. Given the current state of funding within the Canadian life sciences sector and recognizing that there are strong scientific capabilities in both public and private companies, all types of organizations should be eligible for SBIR funds. This would maximize the potential benefit to the sector and maximize the potential return for the government. In addition, unlike the U.S., there should not be any limit on how much of the SBIR budget each federal agency can allocate to different types of organizations. From a practical perspective, if companies with VC investors and public companies are excluded or otherwise limited, there would be relatively few eligible Canadian headquartered applicants within the life sciences sector. Accordingly, the criteria to receive the funding should be based on the merits of each applicant rather than the identity of the applicant’s investors.

A CATAYLST In closing, the Jenkins report can become a catalyst for positive change within the Canadian life sciences sector. However, the implementation of the recommendations must take into account the unique features of the industry in order for this positive change to occur. Supporting the life sciences sector is an important piece of the puzzle in achieving a more innovative economy. This sector is uniquely positioned to improve the long term health and wealth of Canadians.

The Jenkins report can become a catalyst for positive change within the Canadian life sciences sector. However, the implementation of the recommendations must take into account the unique features of the industry in order for this positive change to occur. Despite a bumpy road for investors over the last 30 years, the global race to lead in life sciences continues since the prize of understanding how disease and the human body functions on a molecular level is huge from both a societal and economic benefit perspective. Many other countries continue to link success in life sciences to economic success despite the challenging times. For example, since the global economic crisis began in 2008, a number of established and emerging economies have announced significant programs which in whole or in part were designed to increase financial support for the life sciences sector. These include Australia, France, Norway, the United Kingdom and the United States as well as emerging economies in China, India, Singapore and Taiwan. Innovation in life sciences cannot occur without investment. Canada should seize the opportunity to leverage the Jenkins panel recommendations and our success in weathering the global economic crisis and invest in 21st century innovative sectors such as life sciences.

For more Jenkins Report information visit our Best Practices Web Portal at www.bioscienceworld.ca

18 BIOTECHNOLOGY FOCUS MARCH 2012

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by Wayne schnarr

assessing The canaDian BioTech financing gap: WHat sourCes leFt, WHy & HoW to rePlaCe tHeM Biotech discoveries have a finite period within which they need to be commercialized, unlike gold and oil which can sit in the ground for decades and probably increase in value. Many biotech discoveries are now stagnating because Canadian biotech has suffered from a large financing gap for over four years. The annual gap might be approaching $1 billion when considering reduced levels of financing for private and public companies, plus the missed opportunities for growth and establishment of new companies. This problem and potential solutions can be assessed using the capital market concept of risk and reward. There is a wide spectrum of risk, ranging from government bonds and GICs at the low end to high risk discovery companies in resources, technology and biotech. There is also a wide spectrum of rewards, from the current two per cent GIC rates to potentially several hundred per cent, or more, returns for a successful discovery company. 20 BIOTECHNOLOGY FOCUS MARCH 2012

What funding sources left the sector? Private companies lost two major sources of funding. First, the limited partners (LPs) who previously funded many venture capital (VC) groups have not committed capital for new Canadian biotech funds. With few potential Canadian co-investors, it is harder to induce U.S. VCs to look at Canadian companies. Second, retail investors who funded the various labour-sponsored investment funds or LSIFs have been withdrawing funds and not reinvesting for several years. Public Canadian biotech companies have depended on three sources of funding, all of which have declined in the last few years. In the case of Canadian retail investors and small cap funds, biotech has not fared well competing with $1,500 per ounce gold and $100 per barrel oil. Competition is intense at foreign healthcare funds, which can now choose from over 1,000 public companies.

Why did these funding sources leave the sector? One reason is a dramatic shift by capital to the safe end of the risk spectrum after the financial crisis of 2008.

In the short term, the onus is on the industry to bring high risk capital back to Canadian biotech by delivering positive events and share price increases to shareholders. • Big generalist funds reduced their risk profile, with many abandoning small cap biotech. • Pension funds facing growing unfunded liabilities looked to mature companies for yield (dividends, distributions) and smaller potential capital gains. • Many specialty healthcare funds narrowed their focus to Phase 3, commercial and large cap investments. • Most Canadian small cap funds opted for the momentum of the mining and oil industries and reduced their biotech holdings. • Many retail investors adopted a similar approach or abandoned all high risk investments looking for dividends from stable large caps and distributions from REITs. Several Canadian companies have been involved in the successful development of novel therapeutic products but these successes have not always resulted in longer term shareholder returns. BioChem Pharma, AnorMED and CryoCath were acquired but those gains have been long forgotten by the capital markets. The $120 peak share price of QLT happened over 10 years ago, followed by a more recent $2 low. The success of Angiotech was followed by CCAA filing and debt restructuring which wiped out shareholder equity. Theratechnologies’ share price was over $12 during the Phase 3 trials of tesamorelin but is now about 80 per cent lower even with its U.S. approval. As a co-author of Equicom’s Canadian healthcare sector reviews 1, I track share price performance of Canadian healthcare companies. For a group of 97 companies tracked for share price performance in 2011, decliners outnumbered gainers by almost 2 to 1 (64 to 33) and 43 of 97 companies in this group had share price changes of 40 per cent or more. This volatility and poor share price performance does not help attract new capital.

How can the sector replace the missing funding? There are two approaches to increasing the Canadian biotech capital pool – increase the overall high risk capital pool, from both returning and new sources, and induce some

high risk capital to shift to the biotech sector. The global high risk capital pool will increase as capital markets stabilize and capital increases its risk tolerance. The largest exit from the Canadian high risk capital pool was by the large Canadian pension plans. I expect any return will be gradual, which has left the Canadian biotech VCs looking to new LPs for funding. Pharmaceutical companies have been expanding their VC funds but the $50 million for the GSK Canada Life Sciences Innovation Fund is the first one dedicated to Canadian biotech. One inducement for individuals to take more risk is tax-related, as in the LSIF and flow-through share systems. As the economy improves and investors are looking at their tax strategies, the capital investing in flow-through shares will probably increase as long as commodity prices remain high. We do not know whether allowing biotech and other companies to issue flow-through shares would significantly increase the high risk capital pool or just spread the existing pool across several more industries. I doubt that healthcare-based LSIFs could recover based on their poor performance over the last decade. In summary, a large portion of the financing gap faced by Canadian biotech was created by and is still subject to global market trends. There is no consensus on when, or if, these trends will again increase the Canadian biotech capital pool. Assuming that the Canadian high-risk capital pool will only slowly trend towards prior levels, the onus is on the Canadian biotech industry to increase its share of that capital pool and adjust its strategies to fit the new realities of the capital markets. In the short term, the onus is on the industry to bring high risk capital back to Canadian biotech by delivering positive events and share price increases to shareholders. There is a long list of products in Phase 3 or under regulatory review which can provide positive events 1, 2. For the earlier stage products, boards and management must create and execute sound clinical and regulatory strategies and quickly kill products that do not justify further development. MARCH 2012 BIOTECHNOLOGY FOCUS 21

Hot button Issues

Capital pools are allocated across this riskreward spectrum. Some of this capital is allocated to specialized healthcare and biotech funds and generalists may also allocate a portion of their funds to these sectors. However, there is no dedicated global or Canadian biotech capital pool. There are times when risk and reward become unbalanced. The tech boom of 2000 resulted from capital recklessly chasing the huge potential of e-commerce businesses while ignoring the risks in a new sector with miniscule revenues and ridiculous business plans. The tag-along biotech boom was similarly caused by capital chasing the huge potential of genomics and proteomics while ignoring the risks of these novel technologies with miniscule revenues and ridiculous business plans. Some e-commerce concepts have now matured into very large and highly profitable companies while proteomics and genomics are just starting to realize their commercial potential. Biotech is a high-risk proposition and funding Canadian biotech has never been easy. The critical question now for Canadian biotech is how to bridge this financing gap. However, two other questions need to be answered first – what capital sources left the sector and why did they leave?

Hot button Issues

CANADIAN LIFE SCIENCE

Many companies are frustrated when their positive events are ignored by the markets or viewed as a liquidity event. Amongst over 1,000 public healthcare companies worldwide and 3,000 or more Canadian small cap companies, positive events have to compete for investor attention. Companies also have to realize that investor strategies have changed dramatically. `Buy and hold` does not apply to small cap stocks – the strategy is often likely to be `buy, sell on the event and then decide whether to buy for the next event`. Bottom-fishing and momentum-buying are also investment, or more appropriately, trading strategies for small caps. Companies have to adjust their corporate and financing strategies to fit the current realities of the high risk and small cap markets. I believe that investors are more comfortable considering sectors where they understand the risks and rewards. Many biotech investors feel that they are just throwing money into a black box. Therefore, one way to induce more capital to at least look at biotech investment opportunities is to properly educate investors about the sector, company and product specific risks. This approach is unlikely to have much impact in the short term but might create a more friendly capital base in the long term.

What roles can government play in the biotech industry? Scientific discoveries at Canadian universities, hospitals and research institutes are equal in quality to discoveries from the best institutions worldwide. These discoveries are the foundations for many Canadian biotech companies. For the longer term sustainability of the biotech industry, governments must sustain their funding for these institutions. Governments have always picked some industries for special support and that is not likely to change. In some cases, they provide broad industry support. In other cases, they do choose individual companies, hopefully with sufficient external input to make unbiased, informed decisions. The Jenkins report recommended that the federal government look at more direct funding rather than relying on broad tax credit systems like SR&ED. Most companies starting pivotal studies of novel therapeutics, devices or diagnostics can 22 BIOTECHNOLOGY FOCUS MARCH 2012

CANADIAN LIFE SCIENCE

There is no simple list of solutions to the Canadian biotech financing gap. A large portion of the financing gap faced by Canadian biotech is beyond its control. I have tried to ask some basic questions about this gap, which could help create a list of potential industry actions for assessment and, hopefully, some implementation.

be financed by the capital markets or industry partners. There is a financing gap between academic research and these advanced clinical studies. What novel fund structures can use direct funding from various levels of government to induce high risk capital to return to the biotech industry and help fund this preclinical and early clinical gap? Governments are looking for sustainable companies which create jobs and tax revenue. The increased direct funding will probably go to those industries which can make the best case for their delivery of these two items. In the broader healthcare sector, an obvious target is long term care facilities: hospitals want them so they can free up beds for acute care, existing healthcare REITs can build and manage these facilities and there are many investors looking for the stable yields these facilities could generate. The Canadian biotech industry needs to do an inventory of all the companies which have been started and their fate: successful and sustainable, acquired, failed or still developing. Failed companies have still delivered

value if personnel have acquired expertise which they can use at their next company. Some acquired companies are shut down and the technology transferred to the acquiring company. These companies have also generated experienced personnel and hopefully capital gains for investors, some of which gets recycled into other biotech companies. Some acquired companies remain operational, such as the CryoCath development and manufacturing facility in Montreal after its acquisition by Medtronic, and the flu vaccine development and manufacturing facilities in Quebec after GSK’s acquisition of ID Biomedical. There is no simple list of solutions to the Canadian biotech financing gap. A large portion of the financing gap faced by Canadian biotech is beyond its control. I have tried to ask some basic questions about this gap, which could help create a list of potential industry actions for assessment and, hopefully, some implementation.

References 1. 2011 Canadian Healthcare Annual Review (W. Schnarr & R. Marshall, TMX Equicom) 2. Canadian Healthcare Roadmap - January 2012 (P. Flint, Bloom Burton & Co. Inc.) Wayne Schnarr is a mostly-retired healthcare consultant with over 30 years of experience in the biotech and financial industries. The opinions expressed in this article are strictly personal and do not reflect the opinions of any current or past employers or consulting clients.

For more Best Practices information visit our COMMERCIALIZATION Web Portal at www.bioscienceworld.ca

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Putting the ‘Tech’ in BioTech

By Ela Malkovsky

Hot button Issues

Changes to the Canadian Scientific Research & Experimental Development program: What to expect in 2012 As a world leader in health and life sciences, Canada has one of the most lucrative tax incentive programs for conducting Scientific Research and Experimental Development (SR&ED) in the world. According to Statistics Canada, the Canadian income tax system is the “most attractive in its treatment of R&D,” compared to ten other major industrial countries including France and the U.S.

CANADIAN LIFE SCIENCE

The Future of SR&ED: The Jenkins Report Recently, much attention is being devoted to assess the SR&ED program in Canada and provide recommendations for improvement in order to ensure a more efficient appropriation of the federal budget in a recovering economy. This has brought about the question, what will revisions to the program mean for the future of companies conducting R&D in Canada? On October 17, 2011, the federally appointed panel chaired by Open Text chief strategy officer Tom Jenkins released a report entitled “Innovation Canada; A Call to Action”. Composed as a review of R&D funding, this report (commonly referred to as the Jenkins report) describes six recommended amendments to the program (Independent Panel on Federal Support to Research and Development, 2011). Continued on page 26 24 BIOTECHNOLOGY FOCUS MARCH 2012

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It follows that companies requiring large non-labour expenditures will incur a decrease in R&D tax refunds if said recommendation for program simplification is implemented. Continued from page 24

1 Create an Industrial Research and Innovation Council (IRIC), with a clear business innovation mandate (including delivery of businessfacing innovation programs, development of a business innovation talent strategy, and other duties over time), and enhance the impact of programs through consolidation and improved whole-of-government evaluation.

Hot button Issues

2 Simplify the Scientific Research and Experimental Development (SR&ED) program by basing the tax credit for small and medium-sized enterprises (SMEs) on labour-related costs. Redeploy funds from the tax credit to a more complete set of direct support initiatives to help SMEs grow into larger, competitive firms.

3 Make business innovation one of the core objectives of procurement, with the supporting initiatives to achieve this objective. 4 Transform the institutes of the National Research Council (NRC) into a constellation of large-scale, sectoral collabourative R&D centers involving business, the university sector and the provinces, while transferring NRC public policy-related research activity to the appropriate federal agencies. 5 Help high-growth innovative firms access the risk capital they need through the establishment of new funds where gaps exist. 6 Establish a clear federal voice for innovation, and engage in a dialogue with the provinces to improve coordination and impact. The most significant changes to the program would likely result from the implementation of the second recommendation, namely, to simplify the SR&ED program by basing the tax credit for SMEs on labour-related costs. Eliminating SR&ED tax refunds on nonlabour-based expenditures, such as materials, equipment and overhead costs, will expectedly result in a bias towards labour-intensive 26 BIOTECHNOLOGY FOCUS MARCH 2012

sectors such as biotechnology and pharmaceuticals. Thus, the impact to companies conducting SR&ED in the biotechnology and pharmaceuticals sectors will be minimal. On the other hand, small and medium sized capital-intensive businesses, such as some manufacturing companies, will be impacted the most due to their high material and equipment expenditures required for prototyping and experimental production. It follows that companies requiring large non-labour expenditures will incur a decrease in R&D tax refunds if said recommendation for program simplification is implemented.

SR&ED Project Tracking In view of the recommended amendments to the SR&ED program, it has been suggested that the CRA is requiring more extensive support documentation. The documentation requirements are largely influenced by cases such as the Northwest Hydraulics vs. Tax Court of Canada ruling against a SR&ED claim due to insufficient documentation generated throughout the project. A heavier emphasis is now placed on contemporaneous documentation (documentation generated in real time throughout the project), that is specific to the work conducted, dated and notes individuals involved. In addition, the requirement to provide documentation demonstrating Systematic Investigation has been replaced with a requirement for documentation demonstrating a rigorous ‘five stage process’ of scientific investigation outlining a problem statement, clearly defining project objectives, identifying uncertainties, establishing hypotheses, and performing systematic testing to collect pertinent observations and data. To accommodate the recent program changes, a company will not have to completely overhaul its SR&ED activity process, but rather simply, the adaptation of SR&ED tracking systems will suffice. While standardized tracking software is commercially available, companies will benefit more by working with the CRA and SR&ED professionals to utilize individual and customized systems

developed in consideration of an individual company culture. Utilization of existing internal tracking systems will reduce the risk of a denied claim for several reasons. First, employees are more likely to provide pertinent contemporaneous tracking information if they are familiar with the system that they are using. Furthermore, familiarity with the system will reduce the risk that information is entered incorrectly or inconsistently and so will reduce resources required to monitor the information provided in line with current job/ project tracking to ensure all activities/functions are accounted for. Customized tracking systems are superior to standardized commercial tracking software because customized tracking systems play to the strengths of the company, resulting in maximal claim returns – meaning maximal funding to put back into innovation and stay ahead of the competition. In the end, it is vital for pharmaceutical and biotechnology companies to take advantage of government incentives such as the SR&ED program just to stay in the innovation game. But in order to get ahead of the competition, it is crucial to be aware and adapt to current incentive amendments. As such, devoting efforts to optimize internal tracking systems in accordance with CRA’s increased emphasis on documentation requirements will enhance the odds that a claim is successful in the future, allowing companies to reinvest in R&D and contribute to Canadian innovation. Northbridge is a Professional Engineering firm interested in the development of SMEs in the biotechnology and pharmaceutical sectors. Ela Malkovsky is an SR&ED Team Specialist and Editor-in-chief with NorthBridge and can be contacted at ela@northbridgeconsultants.com .

For more SR&ED information visit our COMMERCIALIZATION Web Portal at www.bioscienceworld.ca

CANADIAN LIFE SCIENCE

By Adrienne Blanchard, Ronald Doering, Joel Taller and Lewis Retik

Canada keeping pace on

food safety Food safety is an important part of the health and safety of Canadians, but we often don’t consider what it takes for a product to arrive at the dinner table.

Food safety in Canada In 2008, Canada went through a period of reflection when 23 Canadians died due to the presence of Listeria monocytogenes in ready-to-eat meat products. Following this unfortunate event, there was an independent investigation that culminated in what is referred to as the Weatherhill report. This report set out 57 recommendations ranging from reporting requirements at meat plants and recommendations on equipment design, to the training of inspectors and reviewing inspector resources. Many steps have been and continue to be taken to comply with the recommendations such as the Canadian Food Inspection Agency increasing food safety controls and implementing new procedures to reduce safety risks. Furthermore, the concept of food safety is evolving beyond just meat products to the food chain as a whole, and to food-like natural health products (NHPs). While NHPs are currently regulated as a subset of drugs, Health Canada is now taking a position that certain NHPs that look and feel like food may more appropriately be regulated as food. Health Canada is also looking at increased import controls with respect to both food (in the form of an import licence requiring each importer to have a Preventive Food Safety Control System) and natural health products (in the form of increased monitoring of good manufacturing practices).

Genetically engineered (GE) foods A topic of continued interest is that of labelling for GE foods. In the 1990s, environmentalists and others coined the term “frankenfoods” to imply foods containing genetically engineered (GE) ingredients were not safe. In the 17 years consumers have been eating GE foods, there have been no documented cases of any one taking ill by eating GE foods. Under our existing regulatory regime, which requires premarket approval for GE crops, if there is a clear, scientifically-established health risk or if the genetic modification significantly alters the nutritional value of the food, labelling is mandatory. These risks, however, have never been found and the labelling of GE foods continues to be an issue. Some groups continue to argue the public’s right to know should require mandatory labelling, enforced by government regulation. The issue is not that simple however. If GE and non-GE foods are substantially equivalent as Canada and the U.S. maintain, requiring labelling would likely confuse consumers. Consumers may conclude the labelling must mean something, but with more than 90% of processed food containing GE ingredients, labelling would not provide the consumer with much information that would be useful for decision-making. Moreover, mandatory labelling would be illegal under trade laws because without a scientific basis, the regulation would be a technical barrier to trade. The labelling issue became a hot topic in October 2011 when several media stories erroneously reported the United Nation’s Codex Alimentarius Commission (Codex) received consensus for a mandatory labelling scheme. Codex did not. What Codex did was finally achieve consensus on the rules for what would be described as containing, or

not containing, GE. Countries could adopt the standard or not as Codex is a voluntary system.

Canada’s labelling system Canada has a voluntary labelling system for genetically engineered products, which was formally adopted in April 2004 as the culmination of four years of meetings, drafts and lobbying. Under the Canadian General Standards Board, a draft standard was developed, later adopted by the Canadian Standards Council of Canada and set the voluntary standards for labelling and advertising of foods obtained, or not obtained, through genetic engineering. The Standard may be found at: http://www. tpsgc-pwgsc.gc.ca/ongc-cgsb/programmeprogram/norms-standards/internet/032-0315/ documents/commite-commmittee-eng.pdf. The essential provisions of the standard include, in section four, governing the claims that may be made about such products, requiring that they be understandable, informative, not false, not misleading and subject to verification. Section five sets out more detailed rules about making claims that foods are products of genetic engineering, setting out different rules for single-ingredient foods and multi-ingredient foods, providing for a level of 95 per cent for each, meaning that such a claim can only be made if, for single ingredient foods, more than 95 per cent of the source of the food is a product of genetic engineering. For an ingredient in a multi-ingredient food, such a claim can only be made when MARCH 2012 BIOTECHNOLOGY FOCUS 27

Hot button Issues

We typically hear about food safety issues only when something goes wrong. Canada has robust food and beverage regulatory structure and food safety policies and procedures designed to protect Canadians. This article will examine Canada’s food safety system with regard to food labelling, including that for genetically engineered foods, as well as recent changes with respect to how Natural Health Products and beverages are regulated.

more than 95 per cent of the source of the ingredient is a product of genetic engineering. Section six of the standard addresses products that are not products of genetic engineering, and the degree to which one can make such claims. The standard here is the reverse of what one can claim for GE food in that, for a single ingredient food, claims the food is not a product of genetic engineering may be made when less than 5 per cent is genetically engineered. Section seven sets out the requirement for verification and testing of claims as only verifiable claims are permitted. Eight years after the standard was developed in Canada, there are very few products labelled “does not contain GE ingredients”, presumably because most companies don’t see a marketing advantage. All but a small minority of Canadians accept the safety of GE foods and, for the reasons outlined above, Canada does not intend to introduce a mandatory labelling scheme.

Hot button Issues

The Crossover Effect: Energy drinks make the switch to foods In October 2011, Health Canada announced caffeinated energy drinks in beverage form would no longer be regulated as Natural Health Products (NHPs) and would be reclassified as foods. This long-awaited regulatory shift is based on Health Canada’s assessment that the consumption patterns, history of use and marketing of energy drinks better fits the regulatory definition of a food. This decision also brings Canada in line with other major trading partners such as the U.S. where energy drinks are regulated as foods. Products that do not contain caffeine or are not in beverage form such as powders, syrups and shots, will not form part of this transition. Coming just weeks after Postmedia News revealed the hotly contested findings of Health Canada’s questionable Expert Panel on Caffeinated Energy Drinks, Health Canada’s announcement reflected a more global approach. Taking into account all issues before arriving at a final decision, Health Canada has sent a signal to industry that it will be sticking to its plan to move forward with developing a regulatory framework for food-like NHPs. The first step in this transition is the issuance of Temporary Marketing Authorization Letters (TMALs), a mechanism built into the Food and Drugs Regulations that allows Health Canada to issue a temporary authorization for the sale of a food that is otherwise not compliant with the Food and Drug Regulations in order to generate information in support of an amendment to the Food and Drug Regulations. In this 28 BIOTECHNOLOGY FOCUS MARCH 2012

While Health Canada will have a hand in designing the framework for these studies, it is shifting the burden and cost of gathering this information to industry. case, TMALs will permit the sale of energy drinks for a period of up to five years, giving Health Canada and the beverage industry time to gather necessary information such as consumption data and incident reports that will aid the government in designing an appropriate food regulatory framework for these products. In order to be issued a TMAL, manufacturers have to agree to a strict set of requirements including: • Compliance with minimum and maximum limits for caffeine, vitamins, minerals and other ingredients (i.e. herbal extracts); • Including statements identifying these products as having a high caffeine content, not recommended for children, pregnant/ breastfeeding women or individuals sensitive to caffeine, or to be mixed with alcohol; • Compliance with all food labelling requirements including nutrition facts panels, ingredient and allergen labelling; • Adherence to specific requirements regarding serving sizes, resealable containers and the maximum amount of caffeine that will be permitted to be contained in either single serve containers or resealable containers; and • Agreeing to withdraw the product from sale if Health Canada determines it is in the public interest to do so. The Food Directorate has worked closely with industry to establish the above criteria and the timeframe for industry to transition to the new food labelling, balancing the consumer interest in the new information to be found on the food labels and the impact to industry required to make the above changes. In addition, manufacturers either directly, or through trade associations, in partnership with Health Canada, will have to agree to undertake a series of consumer research projects in order to generate data on the consumption of energy drinks and reporting health related incidents. While Health Canada will have a hand in designing the framework for these studies, it is shifting the burden and cost of

CANADIAN LIFE SCIENCE

gathering this information to industry. The second step in the transition of energy drinks to foods will begin once the analysis of consumer-generated data is completed by Health Canada, with the hope regulatory amendments will soon follow. In order for energy drinks to be properly classified as foods, amendments will have to prescribe that additives such as caffeine, vitamins and minerals can be added to these products; what, if any, herbs cannot be added; and ensure that the claims made are consistent with those permitted claims for foods. Energy drinks may be the first products to transition to foods, but they will not be the last. Health Canada has been holding off on licensing many food-like NHPs such as vitamin waters, gums and bars in order to develop a strategy to transition these types of products over to foods after a framework has been established. Once the issuance of TMALs for energy drinks is complete, it is believed they will soon be followed by other food-like NHPs. Each category of products will have to undergo their own scientific assessment and will likely face a unique set of issues in making the transition. The exact process each will follow is expected to be similar. Perhaps, assuming these products are destined to become foods, all food-like NHPs that sit with the Natural Health Products Directorate should all be transferred over to foods under limited duration TMALs as the Food Directorate finalizes limits on ingredients and more long-term research requirements that could then be attached to a longer term TMAL. Gowlings will continue to monitor and update clients on changes to Canada’s food safety system. We would be pleased to speak with you further about Canada’s regulatory system, labelling and what changes to the regulation of NHPs may mean for your company. Adrienne Blanchard, Joel Taller and Lewis Retik are partners in Gowlings’ Ottawa office with an expertise in Canada’s regulatory systems for food, natural health and life sciences products. Ronald Doering is Counsel with the Firm and is former president of the Canadian Food Inspection Agency. www.gowlings.com

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THE LAST WORD

By Peter Brenders

BIOTECH

is Better than you think

Peter Brenders, President and CEO BIOTECanada

BIOTECanada is celebrating 25 years as an industry association. These milestones remind us to reflect on how much the industry has accomplished. From global changes come opportunities. Our membership, with some 250 biotech companies working in all sectors, continues to grow every month. Moreover the work of our members is growing a competitive new economy built on an entrenched longevity of success. Every day I meet incredibly talented entrepreneurs who are pushing boundaries, developing useful products, and helping us with the solutions to some of our world’s largest challenges. And yes, we are seeing money being made in biotech. Even with the increasing knowledge and competition in our industry globally, Canadian companies are focused on growth and even executing exit strategies to create wealth for the investor. In the first 2 months of 2012 we’ve seen over $2 billion in deals. The driving forces we are seeing for company growth include technologies or products with the high potential for clinical development; products well positioned for large partnerships, products with public interest and with growing unmet medical needs that are highly attractive to the markets for financing. The Canadian biotech industry has certainly had a very difficult time over the last few years raising much needed capital. But one thing our industry has learned, is there is little point in complaining and much more value in showcasing our successes. By engaging the imagenenation our leaders are setting inspirational targets for our community to rally behind. We are showcasing these successes to our government and guiding them to achieve more. If Canada wants to compete and modernize its economy a strong portfolio of public policy tools must be in place. The success of research depends on access to capital and creating the environment for investment. Investors build industries not governments; governments enable investors. Last fall’s Research and Development Expert Panel Report outlined the need for a simpler more streamlined program, aimed at lessening the level of abuse from perceived applicants or their agents. Our association was

30 BIOTECHNOLOGY FOCUS MARCH 2012

pleased to see the panel confirm the need for funding for commercialization and risk capital, and the call to simplify the SR&ED tax credit. We have been on the record on how best to improve the existing SR&ED to remove some of the administrative burden, grow the value equation for investment into all Canadian-based operations and ultimately realize the levels of capital our industry requires to keep building here. However, we have voiced serious concerns about limiting the current SR&ED program to only including labour costs. In order to compensate for such a change, the new refundable SR&ED rate would have to be dramatically increased. As Minister Flaherty prepares to table Budget 2012, BIOTECanada has reminded the Government of Canada our biotechnology industry accounts for 11% of all business-sector R&D and represents the new economy. For every job created in the biotech industry, up to five additional jobs are created to build research facilities; maintain laboratory and computer equipment; supply laboratory and office equipment, and provide basic services to even the most modest biotechnology facilities. When you add the use of our innovations and biotechnologies, the Canadian bio-economy has grown to a value of more than $87 billion a year. Our world leading capacity in bio-based technologies, products and manufacturing has established Canada as a destination for research and development collaboration. We will be monitoring the upcoming Federal Budget announcement, with a particular look at how the recommendations from the Expert Panel on Research and Development may be implemented. Join us in our continued efforts, as we impress upon our elected officials the value and success of our industry and the increased benefits of investing in home grown innovations.

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Articles inside

What’s the buzz in Canadian

Food Safety

The Last Word

Saskatchewan Growing Green

Assessing the Canadian Biotech

The Jenkins Report