R&D Big Spenders

Biotech leads the way in R&D investment

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By Patricia Nicholson

Research Infosource Inc. (Toronto, ON) has released its annual list of Canada’s Top 100 Corporate R&D Spenders. The list is based on data collected by Research Infosource on more than 600 public and private Canadian companies. Not surprisingly, pharma and biotech companies are well represented among these big spenders.

“This year we’re tracking 31 biotech companies in the top 100,” says Ron Freedman, president of Research Infosource. That figure includes large pharmaceutical companies as well as smaller biotechs. “They account for about 17 per cent of total spending, which puts the pharma/biotech sector into second place overall if we include Nortel’s results. But if you take Nortel’s results out, pharma/bio is the number 1 sector in the country.”

It is worth noting that Nortel Networks Corp. (Brampton, ON) occupies the first-place position by such a wide margin that its huge numbers can skew the other results. The communications giant was responsible for $3.5 billion of the $10.9 billion spent on corporate R&D in Canada in the 2002 fiscal year.

Freedman describes three distinct groups within the pharma/biotech sector, each with a different R&D spending profile.

“There are the multinationals — the Rx&D members. There are the startup and early stage companies — and their fortunes, of course, will be linked to the investment cycle, and whether biotech is in or out of favour and what’s happening with the investors. And then the third group of companies is the generics,” Freedman says.

While the multinationals continue to spend significant R&D dollars, Freedman says they have pulled back from the peak spending seen in the late ’90s. Another trend that Freedman notes is that Apotex Inc. (Weston, ON), the largest of the generic drug companies, invested enough money in R&D to make it the top pharmaceutical company on the list, ranking 13th overall.

While several other big pharma companies including Pfizer Canada Inc. (Kirkland, QC), GlaxoSmithKline Inc. (Mississauga, ON), Merck Frosst Canada Ltd. (Kirkland, QC) and Aventis Pasteur Ltd. (Toronto, ON) are listed in the top 25, biotech companies do not make an appearance until number 27 (Toronto, Ont.-based MDS Inc., followed by Mississauga, Ont.-based Biovail Corp. at 28).

QLT Inc. (Vancouver, BC), which ranked at 32 on the top 100 list, was the third largest biotech R&D spender last year. However, QLT spent a much higher percentage of revenue — 38.5 per cent — on R&D than either MDS, which spent 4.7 per cent, or Biovail, which spent 6.6 per cent of revenues on R&D.

“We spend a good deal of our earnings on re-investing into our business, particularly into R&D,” says Paul Hastings, president and CEO of QLT. “Particularly since we’re a young biotech company and our focus is to become a multi-product company versus a one-product company, spending this much on R&D is, from my point of view, quite appropriate.”

Investing in Products

QLT is one of the few Canadian biotech companies that already has a successful product on the market — the age-related macular degeneration drug Visudyne®. But R&D investment does not stop with a product launch.

“I would say the bulk of it is in clinical trials, and beyond that I’d say a very large portion of the R&D spend is on maximizing the product that is on the market today,” Hastings says of QLT’s R&D spending strategy. “In other words, not just putting the product on the market and then stopping spending on it, but putting the product on the market and continuing to spend on it, to maximize it. Because once you have a product on the market, the best R&D spend in terms of a return on your investment is in the product that’s already on the market, because the product is already approved. All you need to do to get it further approved is get through the efficacy studies, whereas you’ve already proven its safety.”

Hastings says tough economic times don’t necessarily justify R&D cuts.

“Just because times are good and I have lots of money to spend, it doesn’t mean I can squander all over the place,” Hastings says. “You don’t spend less when times are bad, but you don’t spend more when times are good. You spend an even amount of money over time to create the best value proposition for your shareholders.”

For QLT, the biotech sector does not end at the Canadian border. Hastings says he prefers to measure the company’s progress against the model of successful international biotech companies, rather than just the Canadian sector.

“If we want to compete as a country in terms of attracting the kind of talent to build biotechnology and high-tech companies, we’ve got to spend the kind of money that other companies are spending for the return on our investments here in Canada. So that’s what we do,” Hastings says. “It’s really common- sensical in a high-risk/high-reward pharmaceutical development case. It’s not rocket science from our point of view — it’s the basics of running a pharmaceutical company.”

Intense R&D

With fat pipelines and few approved products, the sector’s dependence on R&D to bring products to market makes it common for biotech companies to spend a large (often colossal) percentage of revenues on R&D. The big pharmas, while spending more money, spend a much smaller percentage of their total revenues on R&D than small biotechs do.

“What we call the R&D Intensity Ratio, which is R&D as a per cent of sales, is about 15 per cent for the 31 companies,” Freedman says of the pharmaceutical and biotech companies included on the top 100 list. “That’s very good,” he adds. “That compares with a top 100 intensity of 4.6 per cent.”

Indeed, nine of the top 10 research-intensive companies are biotechs, with Theratechnologies Inc. (St-Laurent, QC) leading the way with 761.5 per cent of revenues spent on R&D, followed by Neurochem Inc. (St-Laurent, QC) at 673.9 per cent and GlycoDesign Inc. (Toronto, ON) at 569.1 per cent.

Overall, R&D spending across all sectors increased by 6.5 per cent in 2002, omitting the Nortel Networks data (including Nortel Networks’ results, there was an overall decrease in R&D spending of 8.7 per cent). Compared to spending in 2001 and 2000 — when R&D expenditures rose by 23.3 per cent and 26 per cent respectively — the numbers are modest, and reflect the overall economic downturn. But the pharmaceutical and biotechnology sector saw a much larger increase of 17.4 per cent in R&D spending.

“I think it’s really terrific. In an era where most industries were cutting back, the pharma/bio sector is continuing to grow strongly,” Freedman says. “It’s fair to say that pharma/bio’s increase was the largest of all the major sectors this year.”

R&D Growth

Among the top 10 R&D growth companies, half are biotechs. Inflazyme Pharmaceuticals Ltd. (Richmond, BC) is the highest-ranking biotech on the growth list, at second place, with a jump of 111.9 per cent in R&D spending from the previous fiscal year.

Michael Liggett, chief financial officer of Inflazyme Pharmaceuticals, says the company had three programs in clinical development at that time.

“That really pushes up our expenditure level,” Liggett says. He adds that the company’s fiscal year-end is in March, rather than December like most of the other companies in the survey, so the numbers are several months older. Inflazyme Pharmaceuticals already has data from its 2003 fiscal year, and the company’s R&D spending intensity has decreased substantially, partly because it has fewer products in trials and partly because of a development deal.

“The other key point for fiscal ’03 is that we have a collaboration with Aventis Pharma,” Liggett says. “They have now taken over all the clinical development costs for our most advanced product.” Essentially, the deal has allowed Inflazyme Pharmaceuticals to continue clinical trials without taking on huge R&D costs. “It had quite the dramatic impact for us. It was quite a coup.”

But Liggett says R&D spending is not difficult to justify to shareholders in the biotech sector.

“For a company like us, that’s our business — an early stage biotech company,” Liggett says. “In fact, they get more upset if you have it sitting there in GICs getting three per cent return. That’s not what they’re in business for. They want to see that you’re investing it in good programs that will generate superior returns for them.”

Even during economic downturns, biotechs need to spend on R&D. Liggett points out that biotech companies are developing the products of the future, and the money they spend now will bring forth those products.

“It bodes well for the long-term survival of a lot of companies,” he says. His only caveat is the sector’s dependence on financial markets, which means that biotechs have to choose higher-payoff programs that will generate returns before the company runs out of cash. But not spending on R&D is not an option.

“I don’t think any company could stop doing their R&D right now and just sit on the cash until the markets come back,” Liggett says. “They’ll just get killed.”