Drug money

Canadian biotech and pharma get ready to provide the next line of blockbuster drugs.

The pursuit of the “magic pill” is no easy feat for Canada's pharmaceutical and biotech companies. Taking a drug all the way from the research bench to market is expensive, time-consuming and resource-intensive. But for those firms lucky enough to hit upon a major blockbuster–typically defined as any drug with annual sales of more than $1 billion–the rewards can be handsome. The global drug industry brought in a whopping $602 billion in sales last year, with North America accounting for almost half of that amount. In Canada alone, total drug expenditures for 2005 rose 11% to an estimated $24.8 billion, a 61% increase from five years ago. The majority of that growth came from prescription drugs. “We're not getting any younger. The slice of patients above the age of 60 consumes about 85% of the drugs and devices and diagnostics out there,” says Justin Stephenson, senior life sciences analyst at Vancouver-based independent investment dealer Haywood Securities Inc. “That is only going to get significantly bigger in the western world, which is the main market for Canadian health-care products in the next five to 10 years. More than 25% of the major blockbuster drugs of the Top 10 pharmas are coming off patent in the next three years. The pipeline is empty. So where are they going to get the next level of blockbuster earnings? They're going to get some of them from the Canadian health-care industry.”

Analysts point to three main therapeutic areas–cancer, central nervous system disorders (such as Alzheimer's, depression and pain), and cardiovascular disease–as core strengths of Canada's biopharmaceutical research industry. By focusing on advancing drugs in these three niche areas, they say, there's potential for larger commercialization success down the road. “Far and away the biggest value-creating step that a company can have is evolving from concept to drug,” says Brian Bapty, a biotechnology analyst with Vancouver-based brokerage Raymond James Financial Inc. “It's one of the best businesses to be in, albeit one of the higher-risk businesses.”

Bapty notes that there are three Canadian drug companies–Xenon Pharmaceuticals Inc., Neuromed Pharmaceuticals Inc. and Gemin X Biotechnologies Inc.–that have each seen some significant money-raising success in the past year, thanks to renewed interest by several major North American private equity players and global drug companies in Canada's rising biotech and pharmaceutical talent.

Vancouver-based Neuromed signed an initial $25-million collaboration deal with New Jersey-based drug giant Merck & Co. Inc. in March to further develop its leading chronic pain drug, NMED-160, a research deal that could eventually be worth close to $500 million for Neuromed. Montreal's Gemin X Biotechnologies closed a US$65.2-million private financing deal, one of the largest ever by a non-listed Canadian biotech, in May 2005, to develop and market its enzyme inhibitors against cancer. And Xenon, a Vancouver-based biotech, completed a US$31-million private equity financing last April that will allow it to further develop its product pipeline, which consists of small-molecule therapies for select neurological, cardiovascular and metabolic diseases.

Another promising sign for Canadian biotechs? Stephenson says in the next 12 months institutional and retail investors will be looking to take some of their profits from the red-hot commodities boom and invest in the biotech sector.

Of course, not every Canadian life sciences firm will make it to the big time when it comes to drug development. But that doesn't mean there aren't any money-making opportunities for the dozens of other small to medium-sized contract research organizations, or CROs, that conduct clinical trials, perform research or even manufacture drugs or devices on behalf of some of the largest global pharmaceutical companies. British-based GlaxoSmithKline, for example, conducts more than 100 studies a year in Canada, with the participation of some 10,500 patients in more than 1,000 medical centres. These studies make up more than 10% of GSK's worldwide clinical-testing operations.

According to Industry Canada, Big Pharma spends more than $1.3 billion a year on R&D–and many global drug makers are increasingly looking at Canada for top talent and a cost-competitive advantage over the United States. In 2004, Canada's 83 CROs brought in almost $900 million in sales; globally, these same organizations are expected to see annual growth rates ranging from between 10% to 17% from 2004 to 2008. “The CRO market has just exploded–and it's certainly been strong in Canada,” says Lauren Cuddy, former CEO of Burlington, Ont.-based Innovus Research, a CRO that was recently acquired by New Jersey-based i3 to form i3 Research. The company runs clinical studies on behalf of its multinational pharma clients in oncology, respiratory/infectious disease and central nervous system disorders.

Raymond James's Bapty says CROs represent a huge growth area for Canada's life sciences firms. Developing “an edge” is what's key to increasing money-making potential. Says Bapty: “If a CRO is nimble and can evolve technology that can enable its clients to get a drug approved faster or to reduce the risk of a clinical study, or even save them development money in the long run, that company will find it has a long-term business plan.”