Canadian biotech firms face crunch time according to industry report

Toronto, ON June 12, 2003 The Canadian biotechnology industry is fundamentally strong, but without improvements in the capital markets in the short term, many players in the industry will need to do business differently or disappear so concludes a comprehensive report on the biotechnology industry, released today by professional services firm Ernst & Young.

“Concern is raised about the viability of a company if it has less than 18 months of cash on hand,” says Rod Budd, Ernst & Young’s Canadian life science leader. “Our survival index shows that almost half of Canadian public biotech companies are in that position. The blunt truth is that unless it gets much easier to access additional funding and soon the industry will need to embark on alternative activities over the next 18 months, if it expects to weather the ongoing market challenges."

The Ernst & Young report suggests the biotech sector will be marked by increased merger and acquisition activities over the next year-and-a-half, along with various other strategies, such as significant spending reductions including the dropping or selling of products.

“The broad capital market slump is making the drought in public market financing especially severe and as our report indicates, many firms in Canada have had little real success of late raising much needed capital,” says Budd. “Tough times demand creative responses, and unless we see novel business approaches emerging, many firms will be forced to close or merge."

“We expect considerable consolidation activity over the next six to 12 months,” he adds.

Despite the challenges faced by the industry, there are encouraging signs of strength within the sector. According to the Ernst & Young report, 20% of Canadian firms are breaking even or making profits.

“That’s good news, because it will sustain them into the future and reduce their reliance on capital markets,” says Budd. “As well, the funding challenges facing the majority of firms operating in the industry may play favourably in the strategic development of those companies with a positive cash flow, as it provides excellent opportunities for M&A activity.”

Also on the positive side, Canadian companies have over 30 products in phase III trials and more than 50 in phase II. Only about one third of these products are partnered and this maturity will also help advance the Canadian industry in the coming years.

The strong fundamentals underlying biotech including the number of products advancing through the regulatory process, recent improvements in the speed of approvals and the number of companies which are self-sustaining will provide a very significant base on which the Canadian industry can grow.

Following are the highlights among the Canadian industry findings in Ernst & Young’s Resilience: Americas Biotechnology Report 2003:

– Funding in 2002 totalled US$527 million consisting of $10 million in one IPO, $318 in secondary and other offerings, and $199 million in venture capital financing. This is 40% of the amount raised in 2001 and about 45% of the total in 2000.

– The average size of venture capital investments decreased from $2.3 million (2001) to less than $2 million in 2002.

– Public company revenues reached $1,466 million, an increase of 44% over the previous year.
– R&D spending among publicly traded firms increased 17% in 2002, over 2001.

– In 2002, market capitalization decreased by 31% ($8,867 million in 2002 vs $12,909 million in 2001).

– Canada ranked second behind the US with 417 biotech companies 85 public (unchanged over 2001) and 332 private companies.

– 2002 lacked any “blockbuster deals,” however, of note, Biovail acquired US-based Pharma PASS for about $190 million, and US-based Bayer took over Visible Genetics for $61.4 million.

The report will be released on June 22.