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Canadian Genomics Space Should Gird for Widespread Consolidation

TORONTO, June 9 - Canadian biotech companies, including the country's burgeoning genomics sector, will likely undergo intense consolidation if they remain unable to balance their huge R&D spending with new revenue, according to an Ernst & Young report released today.

 

"It is questionable whether the current number of [Canadian biotech] companies is sustainable," according to the report, presented by Canada's Industry Minister Allan Rock at the start of the BIO 2002 meeting here.

 

The detailed audit, which chronicled the past five years of Canadian biotech performance, showed that "the majority" of the country's biotechs "are still reporting growing losses, as R&D spending increased 36 percent during 2001.

 

"If companies are unable to reduce these losses over the next few years, there will likely be continued pressure ... to fund research through other means than ... the capital markets," it read.

 

Canada has been sprouting more than 34 new biotech companies per year since 1997 to where the country now boasts 400 firms, nine percent of which are genomic tool and tech shops, according to Ernst & Young.

 

Of these 400, 85 are publicly traded. In 2001 they had a $20 billion market capitalization, a significant fall from the $26 billion they commanded in 2000. (Visible Genetics, it must be said, ranked fourth in Ernst & Young's top 10 biotech companies by market cap.)

 

Total annual revenues for these 85 companies were $1.5 billion last year, up from $959 million in 2000, and R&D jumped to $725 million in 2001 from $534 million one year earlier.

 

But the industry has fallen deeper into the red over the past two years: Net loss for the publicly traded biotechs reached $784 million in 2001 from $667 million in 2000, according to the report. This fact, combined with an anemic venture capital market and dwindling market caps, has conspired to hang a dark cloud over private and public companies alike.

 

In a roundtable discussion Ernst & Young conducted in March with 13 officials from biotech groups in the public, private, and academic sectors, "consolidation ... by foreign acquirers" was the top "threat" to the industry.

 

As track records go, the panelists have reason to worry: The number of Canadian companies acquired by foreign firms has increased every year since 1999 when observed as the percentage of all deals closed during those years, according to the Ernst & Young report. In other words, while foreign firms acquired 23, 36, and 39 Canadian companies in 1999, 2000, and 2001, respectively, the value of those deals jumped from 44 percent, to 47 percent, and to 88 percent of all deals closed for each year.

 

By comparison, the value of a Canadian acquisition of a foreign company as a percent of the total value of every deal fell from 55 percent in 1999 to 23 percent in 2000 and landing at 10 percent in 2001.

 

The panel said that a US-bound brain drain, an "uncompetitive" regulatory process, and poor public education are also threats.

 

Some of Canada's biggest weaknesses were its "thin" capital markets and "difficulty raising large amounts of cash ... and finding strategic partners," a "shortage" of experienced scientists, and a dearth of "innovative business models," said the panel.

 

But the panel hinted at several bright spots, including Canada's strong incubator segment, "good" infrastructure, and beefy tax credits.

 

For its part, the Canadian government is adopting a laissez-faire stance. In May, Rock, the industry minister, asked officials from the country's business, labor, and academic sectors to "work together to define an action plan" that will "improve our competitive position."

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