Canadian biotechs get profitable bucking trends.

Canada's biotech industry--lagging behind the maturity of its U.S. counterpart--remains dominated by small, undercapitalized companies. But a recent Ernst & Young LLP report indicates the industry has started to focus on bringing products to market in a drive to reach profitability. Canada's public biotech company revenues in 2004 increased by 21% to slightly over $2 billion (all figures in U.S. dollars), while the total losses in Canadian public companies decreased by 30% to just over $400 million.

Ernst & Young's annual global report on the biotechnology industry, Beyond Borders, concludes that product success and strong financials have driven the biotechnology industry's maturation. While the trend was evident earlier elsewhere, Canadian companies have started bringing products to market with a special focus on targeted, personalized medicines.

Contrary to expectations, in 2004 the number of public and private biotech companies in Canada remained stable at 472 compared with 470 in 2003. "The significant consolidation--through mergers and acquisitions--that we predicted last year in the Canadian biotech sector simply didn't materialize," says Rod Budd, a partner with Ernst & Young and the firm's life sciences leader in Canada. "That leaves an industry dominated by very small, poorly capitalized companies, and one slow to restructure which makes funding even harder to source," he says.

Rather than choosing to consolidate, Canadian biotech companies instead slashed expenditures or sought strategic alliances to continue operating. It was not an approach Canadian capital markets reacted favourably to, the report finds.

The Canadian biotech industry's market capitalization shrank from $13.8 billion in 2003 to $13.7 billion last year, despite an 8% increase in the value of the Canadian dollar in 2004.

"For 2005, we are again predicting an inevitable number of consolidation moves in Canada," says Budd. "It's not a magic-bullet solution, of course, since in our view, merging two or three weak biotech companies will only serve to create one large, weak biotech company. But, a larger, more mature company's acquisition of a smaller firm's technology can build a much better chance of success. It's clear that in 2004 the industry began to recognize the need to be well capitalized and focused on profitability in order to survive. It will remain difficult for Canadian biotech companies to obtain funding over the next couple of years. We believe that both restructuring and partnerships or alliances will help Canadian biotech get down to business and prosper."

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