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SUCCESS STORIES IN CANADIAN HEALTHCARE

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SPOTLIGHT

SPOTLIGHT

BEYOND THE CELEBRATIONS

Canadian success stories need to be celebrated and, in the healthcare sector, we can applaud many people, discoveries, products and companies. However, honouring success is not sufficient since it generally focuses on past accomplishments. At the same time that we celebrate achievements, we need to ask the following questions. • Why were they successful? • Can these successes be repeated or were they unique events? • Why were other activities not successful? • Where are the opportunities of the future?

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The most prized and celebrated aspect of Canadian healthcare is its universality – every Canadian citizen has access to a basic set of health services. Access is not free since our taxes fund the 70 per cent paid for by governments, with individuals and companies paying the remainder either directly or indirectly through insurance and benefit plans. The basic set of health services may not include dental care, vision care or other healthcare services deemed non-essential by governments.

Although universality is untouchable, it is no longer business as usual in Canadian healthcare as per capita spending cannot continue to increase at annual rates well above GDP growth rates. There are some trends which are beyond any control, such as the aging population. The healthcare system pays for treating the increasing incidence of chronic conditions, such as diabetes and obesity, but has little impact on real solutions including education and attitude changes.

The biggest addressable challenge to healthcare budgets is an avalanche of new technologies, including drugs, imaging equipment and diagnostics. Total costs must be examined, such as the capital plus operating costs for every new medical product. Researchers, company management and healthcare administrators should always be asking the following two questions about any new service or product. • Does the new service or product provide equivalent patient benefit at a lower total cost? • Does the new product or service provide improved patient benefit at the same or lower cost? A yes answer to either question probably justifies the development or purchase of the new service or product.

Healthcare systems have the biggest problem when there is an increased patient benefit and an increased cost, and they have to answer the question ‘does the increased patient benefit justify the increase in costs?’ During the development of a product, management has to ask this question continually. If the answer is ever no, and new information is unlikely to change that answer, development should be terminated. However, that is a very difficult decision for a company whose valuation is based on that single product or where the board of directors is not sufficiently experienced or independent of management and founders.

The question is extremely difficult for physicians, especially oncologists, when there is no test to determine if the patient will benefit from a new drug. With new cancer drug costs often over $50,000 and an increase in median survival during Phase 3 clinical trials of only about three months, it is very expensive to treat all patients when many will derive no benefit and only a small group will survive an additional year or more. The healthcare system will readily adopt clinical diagnostics which help it allocate resources more effectively.

This question is also extremely difficult for governments because the public and political scrutiny and second-guessing is intense. However, the financial impact of these new therapies should not come as a surprise – simply looking at the pipelines of the major pharma, biotech and medical device companies should tell governments what might hit their budgets over the next decade. The budget impact of any of these products can be assessed when one considers how many units are needed for a province, where they should be located to maximize use and minimize patient travel, what is the installation schedule, what is the initial capital cost, what are the annual operating costs and what are the dollar savings to the healthcare system from reduced use of other services.

Medical Research

Canada has a rich history of medical research to be celebrated, ranging from insulin in the 1920s to polio vaccine manu-

A starting point for anybody assessing the Canadian healthcare sector is two CIHI reports – ‘National Health Expenditure Trends, 1975 to 2011’ and ‘Health Care Cost Drivers: The Facts’ – which contain the following data. • Health expenditure in 2011 is forecast to total $200.5 billion or $5,811 per capita. • Per capita health care spending increased by an average rate of 3.5% yearly from 1996 to 2009. • The major expenditure groups are:  Hospitals ............ 29%;  Drugs ............... 16%;  Physicians .......... 14%;  Other professionals .. 11%; and  Other institutions .... 10%.

facturing in the 1950s and now genes, T-cell receptors and stem cells. Success in medical research probably requires four components – excellent researchers, sustainable funding, critical mass and at least a little luck. Canada has excellent researchers and presumably its share of luck, so the focus has to be on sustainable funding and critical mass.

Medical research used to be primarily conducted at universities, but the focus has now shifted to teaching hospitals and their research institutes (RIs). These groups do not work in isolation as many researchers at the RIs for example, also have academic appointments. While the number of researchers in Canada has rapidly expanded in the last few decades, government funding has not kept pace. More researchers are applying for a stagnant pool of funding, with the result that a smaller proportion of the applicants get smaller grants. The size of the academic grants may also be reduced by the granting council’s attempts at a fair geographic distribution. The net impact is that academic research funding by governments alone is insufficient to support the creation of research groups with critical mass and sustainable funding.

Medical research has sought additional funding from two sources: philanthropists and industry. Universities have endowment funds and hospitals have foundations, both of which compete with many other charities for the same pool of philanthropic capital. The big difference between universities and RIs is their ability to compete for industry funding. Universities are generally looking for research funds with no strings attached whereas RIs are looking for partners to develop specific technologies and products. A third group of players are the government funded centres of excellence, which are providing to universities an infrastructure with a commercial focus that industry can more easily approach.

Big pharma and medical device companies created internal university campuses in the 1990s to develop their new technologies and products. They are now dismantling these universities because they have failed to deliver the new products needed by these companies to replace the drugs currently falling off the patent cliff. To replace their internal universities, these companies are looking to fund programs at established research centers. Specifically, they are looking to fund specific areas of research by groups which have research excellence and critical mass, and which realize that commercialization means better patient treatments.

As such, Canadian governments cannot afford to starve their universities and RIs because they are the source of future researchers, basic scientific discoveries and patient-oriented medical research. They must also realize that the other critical sources of funding, philanthropists and industry, are looking for research excellence and critical mass. If philanthropists do not see viable opportunities, they can wait or fund other charities. Moreover, if industry does not see viable opportunities in Canada, they are very willing to invest anywhere in the world.

Success in medical research comes in stages. The first stage might be discovery of a gene or receptor involved in certain diseases. The second stage could be the start of commercialization, such as starting a company or finding a development partner. However, the ultimate success is the use of an approved product or procedure in patient care. OBIO Ad (Final):Layout 1 12-05-14 5:13 PM Page 1

Commercializing Medical Products

Since most companies developing novel therapeutic and diagnostic products will fail to get their products approved, the success stories really deserve celebration. Levels of success could include product approvals, sustainable

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It fits better. OBIO™ members lead innovation in the life sciences. Every facet of health care with a stake in innovation is represented on OBIO Advisory Boards. Together, we’re building a bioscience cluster that nurtures and promotes development of innovative products and services to meet the health needs of growing Canadian and global markets.

companies and increased shareholder value.

The gold standard for novel medical products is U.S. FDA approval through the NDA or PMA process. We should applaud the short list of FDA-approved novel products from Canadian companies, which includes: • 3TC for HIV/AIDS and hepatitis B from

BioChem Pharma (later acquired by Shire

Pharmaceuticals); • Photofrin for Barrett’s esophagus and

Visudyne for AMD from QLT; • Coating technology for coronary stents from Angiotech; • Tesamorelin for HIV-associated lipodystrophy from Theratechnologies; • Mozobil for stem cell mobilization from

AnorMED (after its acquisition by Genzyme); and • Arctic Front for atrial fibrillation from Cryo-

Cath (after its acquisition by Medtronic).

Is there a common theme or model in these successes? In all cases, the products were partnered or the companies were acquired prior to FDA approval. However, there are major differences between the various transactions. For example, Glaxo (now GSK) licensed 3TC at a preclinical stage in 1990 whereas Merck Serono licensed U.S. rights to tesamorelin during a second Phase 3 trial in 2008. Each of these products and companies were unique and, considering the changes which are still reshaping the pharma and medical device industries, there are probably no broadly applicable models for success.

For companies that reach the first level of success and get their products approved, the next levels of success are rewarding their shareholders and building sustainable companies. BioChem Pharma unsuccessfully attempted to grow through internal R&D but still rewarded its shareholders with the sale to Shire. The sales of AnorMED and CryoCath provided rewards to short-term shareholders. QLT and Angiotech attempted to grow through acquisitions, which were major failures from a shareholder perspective. At this time, no independent sustainable Canadian medical product company has been created from an FDAapproved novel medical product.

One-product companies will at some time face the ‘acquire or be acquired’ option. Based on the examples mentioned above, on recent VC portfolio sales such as Enobia, GeminX and Sentinelle Medical, and the short term focus of investors in public companies, the current preference is for companies to be sold. While this will not create Canadian companies which can be the future acquirers, it will create a base of experienced managers and researchers, and satisfied investors who will look at future healthcare investment opportunities.

Canada has very few sustainable independent medical product companies. The generic drug industry has been a notable success story but only Apotex and Pharmascience remain independent after ongoing industry consolidation. This is a mature industry where new players face very high entry barriers. Several drug delivery companies have successfully developed products. Biovail which started developing controlled release drug products, grew into a specialty pharma company, and is now part of serial global M&A specialist Valeant Pharmaceuticals. Some companies failed to make the move to sustainability, such as Labopharm, while others are just starting that process, such as Cipher Pharmaceuticals. Paladin Labs started with a small group of specialty products and has used partners and equity financings to grow into a sustainable specialty pharma company focused on Canada but with selective international growth. Canada has an abundance of small companies with approved products for which sales are sufficient to allow them to survive but not grow. Consolidation amongst these companies might create some critical mass and sustainable companies with good growth potential.

Multinational pharma and medical device companies have been rationalizing infrastructure and personnel worldwide and those actions have impacted Canadian operations. However, some operations have survived and grown based on unique manufacturing expertise. When I worked at Connaught Laboratories in the late 1980s, employment was declining prior to its acquisition by Institut Merieux. Its specialized vaccine manufacturing capabilities, new products and changes to the vaccine market have resulted in expanded vaccine manufacturing operations. Since Medtronic acquired CryoCath technologies in late 2008, manufacturing of the complex consoles and catheters has remained in Montreal.

Although we cannot celebrate product and company failures, the industry would benefit from knowing why those products or companies failed in order to avoid repeating mistakes. Some of the factors contributing to a failure could include simple bad luck when a scientifically validated disease target is not clinically relevant, poor management, insufficient funding, poorly designed clinical programs and changing market dynamics. The analysis is often conducted because the management and directors want to know if there is any residual product value. The results of these analyses are rarely made public.

Healthcare Services

Catamaran Corp., recently formed from the merger of SXC Health Solutions and Catalyst Health Solutions, is a success story which needs to be celebrated. Although its head office and major revenue sources are now in the U.S., SXC originated in Canada as Systems Xcellence, whose business was described in its 2001 AIF as providing advanced on-line transaction processing solutions for the health-care management industry.

They had a cost-effective solution to an unmet healthcare need which they were able to grow both organically and through M&A, including expansion into the U.S. The PBM sector is now mature, going through consolidation and offers little opportunity for new entrants. However, the broader area of healthcare information technology is one which can address many needs within the healthcare services sector.

Canada has numerous small healthcare service companies which have revenues and are slightly profitable. If these companies are private and owned by founders, they are successes to the founders and employees. If these companies have a broader investor base, especially those which are public, investors are probably looking for capital gains, yield and liquidity, which can only come from growth and increased profitability. As mentioned for the smaller medical product companies, consolidation amongst these service companies might create critical mass and sustainable companies with growth potential.

During this ninth National Biotechnology Week, we should loudly celebrate past and current successes in Canadian healthcare. However, while you are applauding, start asking the questions and seeking the answers which will allow us to have an even better celebration during the 19th National Biotechnology Week in 2022.

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.

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