The Chamber of Commerce of Metropolitan Montreal

Speech - guest speaker: Dr. Francesco Bellini, chairman and chief executive officer, Neurochem Inc. The future of biopharmaceutical companies in Canada

The Future of Biotech in Canada

Notes for remarks by

Dr. Francesco Bellini
Chairman and Chief Executive Officer Neurochem Inc.

To the Chambre de Commerce du Montréal Métropolitain

Montreal April 20, 2004

Distinguished guests, ladies and gentlemen, dear friends:

Bonjour. Good afternoon. First, I would like to thank the Chambre de Commerce for the invitation to speak here today. I'd also like to express my appreciation for the terrific job your organization does promoting this great city of ours and its business community. (pause)

I share your desire to ensure the economic prosperity of Montréal, Québec and Canada. In that regard, my appearance here today is quite timely. Because, frankly, I believe the future of Canada's biotech industry — which not very long ago was one of Montréal's real strengths — is now in jeopardy. Unless, that is, concrete steps are taken to create the sort of environment that will reward risk takers and attract significant new investment. Over the next few minutes, I would like to share some insights into how we might revive the biotech boom of a decade ago.

But I'm getting ahead of myself. Allow me to put things in perspective with a brief biotech history lesson. When BioChem Pharma was founded in 1986, the industry did not really exist in Canada. There was just a handful of companies worldwide. When we went looking for financial backing, we had to literally educate people — investors, governments and the public alike — about what we were up to, about the immense promise of biotech in terms of breakthroughs in healthcare, about the tremendous potential for a rising industry to reward skeptical investors and to generate jobs and wealth.

Eventually, the industry did take root here in Canada. Indeed, Canadian biotechs have made significant contributions to healthcare advances. These include 3TC – which remains the cornerstone of today's HIV/AIDS combination therapies — and Zeffix for the treatment of chronic hepatitis B, both from BioChem. There's also Visudyne ®, a breakthrough treatment for macular degeneration that was developed by QLT Inc. of Vancouver, just to cite a couple of examples.

When I temporarily exited the local biotech scene back in May of 2001, following the merger of BioChem with Shire, things were still relatively healthy. Montréal boasted well.

Over 100 biotech firms bent on emulating the sort of success BioChem had achieved and directly employing thousands of people. However, upon my return two years later, the buzz was pretty much gone. That was partly a reflection of a general malaise that impacted the entire North American biotech sector.

In fact, there was not one single, successful biotech IPO anywhere in North America during the 14-month stretch from July 2002 to September 2003.

The good news is that biotech rebounded sharply late last year — or at least the more established companies did. The NASDAQ biotech index wound up with a 47% gain for 2003, most of which came in the later months, and there was some $19 billion in new biotech financings. Neurochem, the company I now lead, successfully completed in September a North American equity issue that raised more than $85 million and had its shares listed on NASDAQ, in addition to the Toronto Stock Exchange. And I am pleased to add that since then the share price of Neurochem has more than doubled.

So some Canadian biotechs, Neurochem included, are doing quite well. Unfortunately, however, our company — which has a strong management team with a proven track record and promising late-stage product candidates — is an exception. The bad news is that the industry as a whole has problems. Most smaller Canadian biotechs are still having a tough time raising the financing they require to make a go of it. Many, in fact, have disappeared.

What's the problem? Well, for starters, there are too many companies chasing the same disease targets, hoping to find that elusive “silver bullet” such as a cure for cancer. Then it takes a long time to develop a drug and most investors today don't have that kind of patience.

Despite vastly increased expenditures on R&D, the number of new drugs approved in a given year by the U.S. Food and Drug Administration FDA has been on pretty much of a downward trend over the past decade. So given the economics of our business, it's little wonder that even the big multinational drug companies have lost much of their appeal for investors — never mind the biotech wannabes!

Having made you aware of the high risks inherent in the biotech and pharmaceutical fields, I hasten to add that our business can also be immensely rewarding — in more ways than one. Companies that succeed in a big way, as BioChem did, create an enormous amount of wealth that has all sorts of beneficial spin-off impacts on the local and national economies and on the communities where they operate. I expect many of you in this room are aware of the boost the Montréal area received as a result of BioChem's success — many investors became wealthy and hopefully they paid a lot of taxes, the region benefited from lucrative work for legal and accounting firms, many highly rewardingand well paid jobs were created as well as generous supports for the arts, healthcare, education and community projects

Not to be overlooked is the fact that investments in health-related R&D also lead to discoveries that help Canadians live longer, healthier and more productive lives. For instance Neurochem will soon have three product candidates in Phase III clinical trials — one of which (Alzhemed™) has the potential to revolutionize the treatment of Alzheimer's Disease, just as of 3TC did for HIV/AIDS. At the risk of sounding altruistic, it is difficult to overstate the sense of fulfillment that comes with the knowledge you have helped make a difference in terms of preventing and treating a deadly disease and saving lives.

As I have often observed, I believe it is the opportunity to do something truly worthwhile that helps attract so many great people to our industry.

The bottom line, though, is that it's getting tougher and tougher for most industry players to find sufficient financing to pursue their business plan, partlybecause many of the biotech companies in Canada are still embryonic, with no late-stage products. As a result, they are viewed as less mature than their US counterparts, and less attractive to the American investors.

I would like to talk now about the role the government should play to best support this industry.

I guess it is somewhat ironic that, when the industry was at its peak and awash in private-sector capital, generous research-and-development tax credits and other forms of government support also were widely available.

Unfortunately, that is no longer the case. So the Canadian biotech sector finds itself in a dilemma. Private-sector investors, for the most part, are still soured on the industry. At the same time, tax incentives have been reduced and government funding has become scarcer.

Here in Québec, for instance, the government announced in its recent budget that corporate tax credits would be reduced by 30% in fiscal 2004-05. By the government's own reckoning, that will mean a loss of $634 million to Québec companies over the next year. The government is also eliminating the five-year tax holiday for new corporations and reducing the level of investment by agencies such as the Société Générale de Financement du Québec and Innovatech, which have supported biotech. As for Ottawa, the biotech and pharma sector welcomed an additional investment of $400 million to enhance immunization programs across the country that was announced in the latest federal budget, as well as increased support for the federal granting councils that fund R&D. But here again, there was little in the way of concrete support for corporations in general or the biotech sector in particular. And neither budget offered any tax relief for individual investors.

In fact, the Québec budget imposed new limits on the deductibility of investment expenses and on deductions for stock options. Previously, an individual could borrow money to invest and then deduct the interest expenses occurred from the loan against any other taxable income, including employment income. Under the new budget, however, deductions for investment expenses will essentially be limited to the amount of investment income only.

With regard to options, the stock-option deduction will now be limited to 25% of the deemed employee benefit for Quebec tax purpose. That compares with 37.5% prior to last month's provincial budget and the 50% stock-option deduction allowed for federal tax purposes.

As you may be aware, stock options are an integralpart of most compensation packages in our industry, so this latter measure is particularly hard to swallow. Simply put, these changes will make it harder to attract top-level talent to work here in Quebec, they will further inhibit access to capital from local investors and they will kill the will of risk-taker entrepreneurs to start new ventures.

Lest anyone doubt the value of tax incentives for individual investors, I can tell you quite frankly that, if it weren't for the late and lamented Québec Stock Savings Plan, there would have been no BioChem Pharma success story.

For someone wanting to start up a biotech firm in Québec today, it's very tough — even for those researchers, like myself, who might prove to be good managers, given time and adequate financing.

That's unfortunate, because our industry is one that creates a lot of high-quality, well-paid jobs, while helping this country remain competitive in the knowledge-based global economy of the 21 st century. And it's an industry with a great long-term future.

Let's face it, we live in an era where the populations of western nations are aging rapidly and the need for new, more effective therapies is going to be greater rather than less. So this is a good business to be in, both from a caring and a commercial perspective. But we must make sure that Canada and Québec don't miss the boat — that we ensure ourselves a vital role in the bright future that awaits the global biotech and biopharma industries.

As you may have read, my partners and I at Picchio Pharma are doing our bit to hel p r evitalize the Montréal-area biotech scene by investing in yet another venture, ViroChem Pharma Inc. So you can't say I am not willing to put my money where my mouth is. (pause)

ViroChem will recommence R&D activities in HIV/AIDS and Hepatitis C that had been shelved by Shire. Notwithstanding my earlier remarks about governments generally cutting back on their support, I am pleased to note that, in this instance, our partners include a subsidiary of the Caisse de dépôt et placement du Québec, as well as the Business Development Bank of Canada and the QFL's Solidarity Fund. However, rumors on the street have it that some of those institutions could be walking away from directly investing in this knowledge-based industry.

It is my view that, rather than pulling back, we must demonstrate the confidence and foresight to invest in our collective future. Moreover, we must act soon. If not, we risk seeing the biotech sector whither away.

It would be disastrous if we were to allow the research and technological infrastructure built up with great effort and cost during the biotech boom to gradually crumble — if we were to miss out on the tremendous economic potential represented by the BioChem Pharmas and Angiotechs and Neurochems of tomorrow, which might never get off the ground for lack of support.

So what exactly should be done? I wasn't kidding when I said that, had it not been for the Québec Stock Savings Plan — and the sympathetic banker who let me mortgage my house back in 1986 and then deduct the interest against my income — there would have been no BioChem Pharma. And I think its incumbent on us to figure out a way to give today's start-ups a similar mechanism to attract the requisite financing. So I would like to take this opportunity to issue a call for action in that regard.

I'm aware that the 1980s was a different era. I know that today government money is scarce — and should be used to service its stakeholders, which is the public. I understand, too, that governments or their agencies are not in a position to put a lot of taxpayers' money at risk up front by underwriting the costs of high risk biotech startups. However, I'd like to suggest that there are alternative win/win solutions that would nurture investments in biotech and other high-risk, high-reward economic sectors — without costing governments a penny up front.

Here in Québec, for example, there already exists a lifetime $500,000 exemption for capital gains realized on the disposition of shares in qualified small business corporations and/or qualified farm property. Why not apply this approach to public biotech and high-tech firms?

Similarly, in the United States, there used to be a measure whereby investors in high-risk, public companies who held their shares for a minimum of one year were exempted from capital-gains taxes. This is another avenue worth investigating.

What I am proposing is that policy makers and federal and provincial governments come up with some tax stimulus in the form of measures that would essentially exempt investors in high-risk ventures from capital-gains taxes, at least until such time as the enterprises become profitable. One way this might be done, for instance, would be to create pools of venture capital earmarked specifically for investment in eligible biotechnology and high-tech firms.

I'm not a tax expert. So I will leave it to the accountants and lawyers to come up with a workable solution and specifics as to precisely how such an exemption might work, who would qualify etc.

However, I know enough about business to understand that even start-up companies need to buy or rent premises, hire employees, create jobs and spend money on equipment and supplies — all of which generate economic activity and tax revenues, in the form of property and sales taxes, payroll taxes, personal income taxes etc. As the growing entities become profitable and start paying dividends, these would, of course, be taxed as well.

Meanwhile, the government would not really be foregoing any revenues it would otherwise have received because, if the capital-gains exemptions were not there, most of these high risk ventures and the activities they generate wouldn't exist in the first place.

The competition to attract clusters of excellence in the biotech and pharmaceutical industries is more intense than ever. It pits Montreal against Quebec City, Quebec City against Ontario or Alberta and then Canada not just against the United States, but also cities in Europe and Asia. The investments will flow to venues that provide the most attractive environment in terms of:

  • the availability of top-notch scientific and technical talent;
  • effective laws to protect intellectual property; and
  • a favourable business and tax climate.

With its world-class universities and research centres and — historically, at least — supportive financial and government infrastructures, Montréal measures up pretty well in most respects. But we can't rest on past laurels and risk falling behind the competition.

What it boils down to is this: if we wish to attract investment that might well go elsewhere — if we want private-sector investors to shoulder the enormous risks that are inherent in biotech and other knowledge-based, research-intensive industries, we must give them sufficient incentive.

Incidentally, I am certainly not alone in my thinking on this issue. Just last week, I read of a new report prepared for the Information Technology Association of Canada, which warned that this country is losing too many technology startups to foreign ownership, simply because there is not enough capital available to support their growth.

To conclude, there is much discussion these days about new ways of doing things and increased collaboration between the private and public sectors. In that respect, it is vital that governments here in Qu é bec and elsewhere in Canada appreciate the win/win potential of biotech as both an economic driver and a key to healthcare breakthroughs. If we want to revitalize our biotech sector and realize that enormous potential, we need clear commitments to create an environment that attracts high-tech investments, rewards risk-taking and allows us to be even more competitive internationally.

I would be pleased to personally sit down with policy makers and senior government officials to help make the case for our industry. And I would urge you to support our cause, in the interests of a prosperous economic future for Montr é al and Qué bec.

Thank you very much. Merci beaucoup.

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