Outlook 2008 (9 sectors to watch): Biotech

The Canadian biotech sector is growing — but a worrying number of companies are heading south for investment dollars.

The Canadian biotech sector looks like it’s headed in the right direction. At 532, the number of companies has nearly doubled over the past nine years, and annual revenues are up 11%. The proportion of businesses generating profits has increased to 30% in 2007 from 28% in 2006, according to a recent poll. Yet for biotech executives, raising money remains a major concern. “The Canadian venture-capital market is not that strong in life sciences,” says Peter Brenders, the president and CEO of Ottawa-based BIOTECanada, the sector’s trade organization. And that reality is causing many companies to head south of the border for cash.

Generating interest among U.S. venture-capital firms is a challenge for Canadian biotechs, but the process could soon get easier. Finance Minister Jim Flaherty and U.S. Treasury Secretary Henry Paulson amended the Canada–United States Income Tax Convention in September to include limited liability companies. The change essentially removes a time-consuming and often costly administrative barrier for U.S. residents using this business structure to invest in Canadian companies. That will be “huge” for the biotech sector, says Brenders, who expects the amendment to become law in early 2008. He also expects the government to revamp its scientific research and experimental development tax program, providing further incentive for investment.

Cash injections should help improve the profitability outlook for many Canadian biotechs. In fact, two-thirds of the companies surveyed by BIOTECanada that are currently in the red expect to be in the black within five years. Additional funds should also help the firms attract experienced senior management — a key success factor in the sector.

As for public biotechs, they appear to have bottomed out, says Peter Winter, editor of Canadian Biotech News, a publication whose sector index shows a 29.7% decline during the first 11 months of 2007. And he isn’t expecting a quick turnaround. Winter predicts the index to stay the same or at most increase by 5% in 2008. What’s more, he says, Canadian companies are still far from reaching the stature of those in the States. “Some American biotechs,” Winter points out, “are as big as our entire biotech sector.”