The Impact of Biotechnology on the Health-Care Industry

Head Table Guests

Alex Squires, Security Analyst, Brenark Securities Ltd. and a Director, The Empire Club of Canada; Sonia Shirprashad, OAC Student, Jarvis Collegiate; Rev. Bill Middleton, Minister, Armour Heights Presbyterian Church; Z. Sam Ruttonsha, Vice-President, Royal Bank Capital Corporation; Andrew Szende; Director of Health Economic Development and Assistant Deputy Minister of Institutions, Ontario Ministry of Health; Ed Badovinac, Professor, Department of Telecommunications, George Brown College and a Director, The Empire Club of Canada; Gerald McDole, President and CEO, Astra Pharma Inc.; and Cameron Duff, Vice-President, Investment Banking, Deutsche Morgan Grenfell.

Introduction by Julie Hannaford

There is in Canada a group of people who are highly educated, who work unceasingly on projects few of us fully understand, who are often underpaid, and who are largely anonymous and yet, they are responsible for the greatest changes in the lives of Canadians today: they have pushed back the horizons of mortality; they have redefined our understanding of chronic disease; and, in many instances, they have been responsible for rendering treatable those diseases which once were regarded as untreatable. I refer to the group of people known generally as research scientists but in particular geneticists, biopharmacologists, and biotechnologists working in Canada together with such enterprises as Allelix. The currency of their research is dependent upon funding, and such funding whether it derives from private giving, government contribution, or private enterprise such as Allelix, is critical to Canada's leadership in medical advances in the 21st century.

Biotechnology, as we will hear today, has already been responsible for changing the way we understand disease and treat it. It is, therefore, a critical element in the future of Canadian health care. Put simply, the question that confronts Canadians is whether we shall promote an environment where biotechnological research and development prospers and flourishes and places Canada as a leader in fighting disease, or whether we shall be content to rely upon the creativity and human resources of those in other countries.

As we move from being occupied by health concerns and issues to being pre-occupied with them, our focus should not be upon the quality of life and health-care service we shall receive in the next 10 or 20 years, but rather what we shall be able to say to our children, 10 years, 15 years, and 20 years from now, as they confront disease, or as their children are confronted with disease. Shall we say that we as Canadians led the initiatives to develop those treatments that give them life, or shall we be faced with saying that we were hoping that someone else, somewhere else, would come up with the answer.

The Empire Club of Canada has invited Graham Strachan, President and CEO of Allelix Biopharmaceuticals Inc. to address these issues, not only because of his place in the industry as President and CEO of Allelix, but also because of his involvement in the biopharmaceutical industry in general. Allelix was one of the earliest companies in Canada to specialise in the development and application of biotechnology-derived products. Mr. Strachan was involved in its formation and was Allelix's first full-time employee. The National Biotechnology Advisory Committee is dedicated to advising the Minister of Industry on the status of biotechnology in Canada. Mr. Strachan is the Chair of that Advisory Committee. The Canadian Genetic Diseases Network, which is based in Vancouver, is currently through its steering committee, investigating the human resource requirements of the Canadian biotechnology industry. Mr. Strachan is the Chair of the Board of Directors of the Canadian

Genetic Diseases Network and he is chairing the steering committee. BIO is an international trade association for biotechnology companies based in Washington, D.C. Graham Strachan is a Director and a Past President of BIO. The Industrial Biotechnology Association of Canada is an association of those companies involved in biotechnological research and product development. Graham Strachan serves as its Director and Past Chair. Mr. Strachan is also a Director of Seragen Canada Inc. and Resolution Pharmaceuticals Inc.

Many of us owe the quality of life we enjoy today to biotechnology and the biopharmaceutical industry. Most of us in the future will be utterly dependent upon this industry, not only for our well-being but for potentially our very existence.

Our guest today provides us with both an historical context and a perspective on the future of biotechnology in the health-care industry, and it gives me great pleasure to ask you to welcome to The Empire Club of Canada today, Mr. Graham Strachan, President and CEO of Allelix Biopharmaceuticals.

Graham Strachan

Good afternoon, ladies and gentlemen. I would like to thank The Empire Club for inviting me here today to talk about my favourite subject, biotechnology and the way in which it is revolutionising modern medicine, as well as its impact on job creation and economic growth in Canada. I will also elaborate on my conviction that effective patent protection is absolutely critical to the continued health and vitality of this expanding industry.

Biotechnology and its impact on health care is as old as civilisation itself. The preservation of food by fermentation not only produced flavourful products like wine and cheese, but went a long way in preventing the spread of disease. In a more direct way, biotechnology is not a newcomer to the pharmaceutical industry. Vaccines and antibiotics have been produced for many years from living organisms.

However modern biotechnology is very recent. The basic scientific discovery, in 1953, was Watson and Crick's determination of the double-helix structure of DNA. Twenty years later, two brilliant scientists at Stanford University demonstrated successful gene cloning in bacteria. This led to the industrial application of genetic engineering and the production of recombinant human insulin. This was the origin of the first biopharmaceutical company, Genentech in 1976. Ten years later, in 1986, the first recombinant hormone, human insulin was approved for marketing.

In the pharmaceutical sector modern biotechnology, although still in its infancy, has produced a credible list of significant accomplishments, mainly recombinant forms of natural human hormones to treat many different diseases and disorders by harnessing the body's own defense mechanisms.

• Erythropoiten which frees patients from the bonds of dialysis and gives those undergoing chemotherapy the strength to fight off infections.

• Interferons offer relief and hope to patients with multiple sclerosis and cancer.

• Untold thousands of cancer patients gain relief with colony stimulating factors.

• Human growth hormone which enables short children to grow to their normal height safely.

• And, of course, recombinant human insulin now provides diabetics with plenty of safe, effective medicine.

So you can see, that within two short decades, biotechnology has resulted in many beneficial and innovative products to treat and prevent serious and debilitating diseases.

Currently some 24 biotechnology-derived pharmaceutical products are on the market and total worldwide sales exceed $8 billion. Another 284 products are currently in clinical trials for a wide range of diseases and disorders, including osteoporosis, rheumatoid arthritis, Alzheimer's disease and cancer.

But that's not the whole story--the best is yet to come. We have just seen the tip of the iceberg. Increasingly proteins are also being used as research tools to aid in the discovery and design of new organic molecules, better aspirins if you will, which are the basis of the traditional pharmaceutical industry.

This approach builds on the dramatic progress made over the last 10 years in understanding the underlying mechanisms of disease, especially at the genetic level. Indeed, the drug discovery process has been radically changed by biotechnology.

Until recently, the approach to discover new drugs was highly empirical and chemistry-driven, with the medicinal chemist producing new molecules for biological evaluation. These molecules were typically identified from a somewhat superficial knowledge of disease mechanisms or by modifying existing drugs. Today the process is much more biology-driven and incorporates scientific advances in three major areas. Firstly, advances in molecular biology are providing new insights into the origin and mechanism of disease. Secondly, there is an increasing understanding of the relationship between molecular structure and biological function, so called functional genomics, which is revealing many new gene-based targets for drug discovery. And, thirdly the production of new compounds, has been revolutionised by the techniques of combinatorial chemistry and high-throughput screening methods.

A practical illustration of the power of these new approaches is an Allelix discovery programme to develop new drugs to treat schizophrenia. We target specific protein molecules in the brain, a dopamine receptor, which is overly abundant in those afflicted with schizophrenia. Professor Phil Seeman, a world-renowned neuropharma cologist at the University of Toronto, determined that a specific dopamine receptor, the D4 receptor, is implicated in schizophrenia. A collaboration with Professor Seeman helped us understand the biology of the dopamine receptors. Allelix now makes large quantities of the D4 receptor by modern gene-cloning techniques. This receptor is then used in high-speed robotic tests to rapidly evaluate thousands of chemical compounds. In conjunction with a major international pharmaceutical company as our strategic partner, Hoechst Marion Roussel, we are looking for novel chemicals which block this D4 receptor. This promises to deliver a more effective and safer drug, one with less side effects than those presently available to treat schizophrenia.

The paradigm shift in the way drugs are discovered created the window of opportunity for new start-up companies to emerge in the pharmaceutical sector just as the introduction of the semiconductor in the 1950s created many new electronic companies. By and large, it is the new biopharmaceutical companies that are at the forefront in applying the new technologies to drug discovery. Today the established pharmaceutical companies increasingly look to the smaller dedicated biopharmaceutical companies as translators of academic research and a source of innovative new technology and products which they access through strategic partnerships.

According to the latest Ernst & Young figures, there are now 132 dedicated biopharmaceutical companies across Canada. This is nearly double the number since 1993 when Bill C-91, the legislation relating to patent protection for pharmaceuticals was passed. Ontario has the largest share of these biotechnology companies, with 43 per cent of Canada's firms. Further evidence of the explosive growth in this sector is:

• The increase in the number of jobs created. Government data indicates the sector now directly employs 8,000 Canadians in highly skilled, knowledge-based jobs. This is expected to reach 12,000 jobs by the year 2,000, an increase of 50 per cent in just three years.

• The growth within existing companies has also been significant with 59 firms now publicly traded compared to only 23 in 1994.

• And the sector has been particularly successful in attracting investment capital to fund the growth of Canadian biopharmaceutical companies. In 1996 alone over a billion dollars of public equity was raised, and close to $200 million of venture capital.

Without question our biopharmaceutical companies are becoming an increasingly visible and significant component of the overall Canadian pharmaceutical industry, alongside the brand-name companies and the generic firms, both of which I should emphasise continue to thrive and prosper in the new environment.

The biotech companies play an important role today in providing a Canadian capability to translate basic scientific discoveries from our universities and medical schools into commercial products. We are now seeing the results in enhanced industrial and economic activity--in new jobs--as we capitalise on the massive public investment over many years in academic research in the life sciences, largely paid for by Canadian taxpayers. Until recently, such discoveries were typically licensed offshore and the technology commercialised in the U.S. or Europe. The value added within Canada was low.

It is this ability to exploit applications for our research within Canada which has fostered the emergence of the new generation of innovative biopharmaceutical companies. I expect companies like BioChem Pharma, Biomira, QLT, Allelix and others will evolve into significant international players over the next decade, resulting in Canada having one or more pharmaceutical company equivalents of major industry success stories like Northern Telecom or Bombardier. The 132 Canadian biopharmaceutical companies are working on literally hundreds of products that will prevent, diagnose, treat and cure difficult, chronic and often fatal diseases.

Several products have already come forward from Canada onto international markets--one for AIDS, 3TC from BioChem Pharma; two for cancer, Photofrin from QLT and Truquant from Biomira; and several vaccines from Connaught. These products are significant additions to the 20 or so other biopharmaceutical products already marketed worldwide. I believe Canadians should take pride that their home-grown biopharmaceutical industry has innovation, not imitation, as its primary focus.

The reason, in my view, that our sector is showing such robust growth and vitality is because the critical ingredients for success are in place, many resulting from farsighted government policy initiatives implemented several years ago. We have a strong life-sciences research base and a pool of well-trained and motivated scientists. Since 1993, we have had a national policy that encourages innovation by providing improved patent protection for pharmaceutical inventions--quite a change from the previous 25 years when patent protection was essentially eliminated. And federal tax policies have been very effective in encouraging risk capital to invest in this sector knowing that the investment is protected, albeit for a limited period, by patents. This direct linkage between patents and investment means that full and effective patent protection is absolutely essential for the continued survival and growth of Canadian biopharmaceutical companies.

The development process for pharmaceutical products, because it is tightly regulated and rightly so is lengthy, typically 10 to 12 years from lab bench to market and extremely expensive, often costing anywhere between 100 to 400 million dollars to produce just one new drug. In addition, the risks inherent in the research process are huge, as fewer than one half of one percent of all compounds that enter pre-clinical testing emerge as marketable drugs.

The availability of significant financing at reasonable cost is obviously important to biopharmaceutical companies because of the lengthy nature of the development process and the risks. Historically, affordable risk capital was a problem in Canada because the biotech sector is both quantitatively and qualitatively different from our mainstream industries. However, since patent protection was strengthened in Canada in 1993 investment capital is much more readily available to finance the start-up and development of our biopharmaceutical companies. In a nutshell, patents serve as a key incentive for investing risk capital, promoting innovations and facilitating technology transfer.

In my experience, one of the first questions asked of the biopharmaceutical company CEO when trying to raise money from the financial gatekeepers is the patent status of the company's product or technology. Anything less than a positive response inevitably invites scepticism. And the financial community is becoming extremely knowledgeable about the importance of patent issues. All investors expect, indeed insist, that companies have strong patent protection to offer the promise of market exclusivity that is necessary to show the return on investment required to attract the large amounts of capital this business demands. Without solid patents, raising capital to develop life-science discoveries will be next to impossible and this blossoming industry will wilt on the vine.

All of the progress we have made in developing this industry over the last four years is now at risk with the parliamentary review of Bill C-91 now underway. Without the patent protection for our technology provided by C91, Canadian biopharmaceutical companies will perish. The continued strong growth of this sector depends upon retention of Bill C-91's provisions that allow us to attract investment and recover the hundreds of millions of dollars we invest in research to develop new and innovative products that will be cost-effective for the health-care system.

Canadian biopharmaceutical companies through the Industrial Biotechnology Association of Canada are urging the federal government not to retreat from the progress Canada has made with Bill C-91 which has delivered on its threefold objectives of:

• Improving our competitiveness as a nation;

• Stimulating R and D in this country; and

• Continuing to offer Canadian consumers patented drugs at fair and reasonable prices under the strict control of the Patented Medicines Prices Review Board.

Indeed the federal government should implement further improvements to bring our patent system up to a level comparable with our competitors. The biopharm sector is concerned that simply maintaining our current level of patent protection--20 years from the filing date--places Canada at a disadvantage since the effective patent life for products in the marketplace is more like eight to 10 years. Other countries have provided additional incentives for innovators. The U.S., the European Community and Japan all provide for patent term restoration. Up to four or five years of patent life are added to partially compensate for the long regulatory reviews unique to this sector.

Further, we need to strengthen the enforcement mechanism built into the Canadian system. Right now we rely on Linkage Regulations to prevent copying of a patented pharmaceutical product before the courts have had the opportunity to consider if valid patents are being infringed under Canadian law. These linkage provisions are precariously placed within the patent regulations and could be reversed at any time without public review. These linkage regulations should, in my view, be embodied in the Patent Act itself.

In our own case, which would be typical for the industry, Allelix filed its patents for our lead product, PTH for the treatment of osteoporosis back in 1989. Although we are in advanced clinical development of PTH, we do not expect that Astra, our commercialisation partner, will be able to market the product until the year 2000. This will leave only nine years of effective patent life in which to actually sell the product and start to earn back some of the tens of millions of dollars invested in its development. For a product as innovative as PTH, which is expected to regrow bone quite aggressively through a unique mode of action, I do not believe this is adequate or fair. But beyond that, the only thing preventing another company from copying PTH in Canada before the nine years are up, is the Linkage Regulation. Allelix investors should be able to count on this protection and right now we can't.

The strength of Canadian patents is equally important. Industry needs to respect granted patent rights; and if they don't, if they perceive legitimate weakness, there should be an inexpensive forum to resolve that weakness so companies can plan sensibly going forward. Canadian industry would benefit from the introduction of a European style of patent opposition. This system allows stakeholders with legitimate reasons to challenge the grant of competitive patents. It would introduce a degree of rigour into the current Canadian patent system that would enhance both the quality and the strength of granted patents. Few Canadian biopharmaceutical companies can afford the expense and uncertainty of court action to overturn patents, the only avenue presently available to remove suspect granted patents.

In conclusion, in its review of Bill C-91, I would urge the federal government to recognise that with anything less than full and effective patent protection in Canada, most of the young, innovative biopharmaceutical companies will predictably disappear--fold or leave the country. They will do so because the source of capital, based on the expectation of an adequate return on investment, will dry up. This would have a devastating effect on this high-tech, knowledge-intensive sector. We will once again see our scientists leave Canada for the U.S. and other countries, with the loss of thousands of high-quality jobs and few of the many products being developed across Canada right now will ever make it to international markets. Moreover, it is unrealistic to expect that our trading partners will ignore any significant dilution of Canadian patent protection for pharmaceutical inventions. And, I think we might expect retaliatory action by the U.S. and others.

Canadian biopharm companies need to be able to complete globally on a level playing field with companies in other countries. Strong patent protection is the very lifeblood of biopharmaceutical companies like Allelix and it is imperative that we maintain international standards if we are to compete internationally and continue to grow this sunrise industry.

Let Mark Twain, himself a prolific inventor under his real name of Samuel Clemens, have the last word: "A country without a Patent Office and good patent laws is just a crab and can't travel anyways but sideways and backways."

I sincerely hope this is not Canada's fate.

The appreciation of the meeting was expressed by Alex Squires, Security Analyst, Brenark Securities Ltd. and a Director, The Empire Club of Canada.