Hector MacKay-Dunn, Q.C., is a senior corporate partner with Farris, Vaughan, Wills & Murphy LLP. Over the course of his 25-plus years practising law he has represented important clients in every industry that’s boomed (and flopped) in Vancouver. He did mining deals when Vancouver was a mining town. He was one of the go-to technology lawyers when everyone was going to become a dotcom billionaire (on the strength of those of his clients who survived, he has a strong tech practice post-bust). Today, as BC positions itself to overtake the larger and more established Canadian biotechnology clusters in Ontario and Quebec, MacKay-Dunn is earning new recognition as Vancouver’s—and, suggest some colleagues, Canada’s—leading biotechnology lawyer.
Modesty is not one of MacKay-Dunn’s strengths. He accepts the accolades. There are few lawyers in Canada who do what he does. Fewer yet who’ve done it as long as he has. And, on the global stage, only a handful who share the distinction of acting for a profitable biotechnology company.
In fact, MacKay-Dunn has two high profile biotechnology clients who are profitable. Victoria-based Aspreva Pharmaceuticals, which completed a US$91 million IPO in March 2005, expects to post a positive income this year. Vancouver-based QLT Inc., which scored big time last year when it scooped up Atrix Laboratories for US$855 million, has been profitable for five years.
Acting for established names like QLT and up-and-comers such as Aspreva, and a slew of early-stage biotech companies, is how MacKay-Dunn has earned his biotech stripes. But you won’t find him listed in any legal Who’s Who—not even in Lexpert—as a biotechnology lawyer. Why?
The answer is because MacKay-Dunn is a corporate biotech lawyer, a new kind of animal.
Historically, if one can use such a word in reference to an industry that is by the most generous count, 25 years old, biotechnology lawyers were by definition intellectual property (IP) lawyers. As the industry has shifted from a research-based outlook to a much stronger focus on commercialization, it has acquired a need for sophisticated, industry specific representation from its legal advisors. Enter lawyers like MacKay-Dunn.
As pointed out by Bill Newell, QLT’s Senior Vice-President and Chief Business Officer, “At one level, general corporate and financing-related legal services, particularly in capital raising, are at the core of the biotechnology industry today.” Corporate lawyers have by no means supplanted IP lawyers and patent agents. They can’t. IP, as Newell is quick to point out, is a key concern for these companies throughout their life cycle. But, as the industry matures, biotech clients are now recognizing the need for biotech dealmakers. And, as QLT’s 2004 acquisition of Atrix underscores, a need for cross-border biotech dealmakers.
Biotechnology’s need for dealmakers has important implications for major Canadian law firms, specifically the transactional firms that dominate cross-border deals. Some firms have simply assumed that when the biotech industry matures the important cross-border deals will migrate to them as a matter of course. This is a large assumption. Others, having fumbled a similar play when the information technology (IT) sector demanded industry-specific corporate/commercial advice, are busy positioning themselves as having depth in biotechnology or life sciences. A third group is debating whether the biotech sector will ever become robust enough to support their fees.
Meanwhile, a fourth group of practitioners has been representing the industry since its infancy. A few, like MacKay-Dunn, are already seeing payback. For this group, biotech is more than simply a profitable practice area. Although potentially lucrative, biotechnology is probably the most high-risk practice area a firm can invest in.
But, biotechnology is a global industry in which Canada has an opportunity to become a world leader. By extension, this also provides Canadian lawyers with a crack at global practice opportunities as they drive deals and coordinate international counsel for Canadian-headquartered, multinational biotech clients.
Sounds great. And it may happen, if they don’t flub it. Trouble is the biotechnology sector is even more complicated, and exponentially higher-risk, than the last “emerging” practice area which was IT. And most law firms seriously fumbled the IT play. As the firms examine biotech, the IT experience provides lessons to be learned. At the same time, to blindly assume that the evolution and needs of the biotech sector will mirror those of IT is perhaps the single biggest mistake law firms can make.
The unique nature of the biotech industry suggests the following eight lessons must be heeded if law firms are to capitalize on the opportunities offered.
LESSON #1. SMALL IS BEAUTIFUL. Some 4,300 biotechnology companies operate worldwide. About 500 of them are in Canada. This is why Canadian governments are so excited. Massive commercial exploitation is on everyone’s agenda. According to the federal government’s recent Biotechnology Strategy Report, the sector “presents an exceptional economic opportunity for Canada in the 21st century.... It holds the key to a productive, prosperous economy that creates sophisticated jobs for today’s young knowledge workers and the youth of tomorrow.” Every province wants to be in the game and, to a certain extent, is. For example, Saskatoon is widely recognized as the world’s leading centre for agricultural biotechnology.
But—and this is a big “but”—you won’t find a Canadian Pfizer or GlaxoSmithKline among these 500 biotech companies. What differentiates biotechnology from Big Pharma—apart from the “technical” definition that equates Big Pharma with pills, and biotechs with living matter and engineering—is that Big Pharma is, well, big. Biotech companies are generally small. Tiny, in fact. They are generally privatecompanies that employ fewer than 20 people, have less than two years of cash on hand, and are years, if not decades away, from profitability.
The predominance of unproven, unprofitable early-stage companies is no surprise given the relative youth of the overall industry sector. But it does present a problem for the law firms who have biotech aspirations.
As pointed out by Jeffrey Graham, “A relatively small percentage of the sector is actually making money. It’s very, very difficult to support small, struggling early-stage companies because their needs are far greater than their resources. It’s a difficult proposition for the classic legal services providers to support the biotech community in the way it needs to be supported at the early-stage of the life cycle.” Graham is a Toronto partner with Borden Ladner Gervais LLP (BLG) and leads the firm’s national biotechnology practice group, which includes John Godber and Ian Webb in Vancouver.
Law firms have to make hard decisions, such as not collecting fees for a year or two, which is precisely what Farris did with a number of its biotech clients. “What we have done is focus on young, growth-stage companies. Companies that didn’t really know how to get things going but had a good idea,” explains MacKay-Dunn. “We were there for them at the beginning. In some cases, we didn’t charge fees for over a year. If they didn’t make it, fair enough. But if they did...” Jackpot. Or, at least a loyal, solvent client such as QLT or Aspreva.
Farris built its IT client base in much the same way (ditto real estate and mining). Tellingly, this is precisely the way most law firms—particularly the major Bay Street law firms—didn’t built their IT practices prior to and during the dotcom boom.
“My impression is that the approach of some firms, perhaps the Toronto firms, McCarthy Tétrault excepted, is they may have thought they can’t afford to mess around with these small technology companies,” says MacKay-Dunn. “So they’ll wait until the start-ups grow up and leave the small law firms that helped them get going.”
On the other hand, George Takach and Barry Sookman at McCarthys built early relationships with start-ups, a strategy that’s still providing significant payback. McCarthys is taking the same approach to biotechnology. In Vancouver, a group of lawyers headed by Joseph Garcia (“The only lawyer in Canada who knew he wanted to be a biotech lawyer when he was a little boy,” quips a competitor) has been building relationships with the industry almost since before there was an industry. In Toronto the firm recruited Vanessa Grant from Torys LLP in order to leverage her existing client base and do much the same thing.
Neither Garcia nor Grant suggest that McCarthys is a “great bargain” when it comes to legal fees. “But the firm has said we’re prepared to work with the clients and to put an investment in them now,” says Grant. That means employing a little more flexibility than one would with a blue-chip institutional client, and banking on more bucks—and first-mover advantage—in the future.
It worked with IT. But is anyone other than McCarthys—and those few firms that employed a similar strategy—paying attention?
As pointed out by Iain Mant, a Vancouver corporate partner with Fasken Martineau DuMoulin LLP, “In this city the same firms that paid attention to IT are the firms that are paying attention to biotech.” Mant acts for several public and private companies in the industry.
But paying attention to biotech is not enough—you’ve got to do biotech. And the sector is both too small and too specialized for mass entrants. As Mant goes on to explain, “If you buy into the philosophy that it’s a growing market, you’d be foolish not to be in the game. But you can’t be in the game just because you have one client.”
For the firms that cede first-mover advantage to competitors, playing catch up may be an even more arduous process than it was with IT (a decade later McCarthys still leads the pack). Biotech will be a harder contest than IT. A biotech client is going to be a money-starved start-up for a long, long time—frequently, more than a decade. QLT, says CEO Paul Hastings, “burned cash for 20 years.” This gives the first-mover law firms 10 years or so to build a client relationship and a long ramp-up time to grow in industry expertise alongside the client.
Of course hand-offs to firms playing the wait-for-them-to-grow game may happen. But, if the IT experience repeats itself, this won’t happen often enough to warrant calling the strategy a success. More importantly, if it repeats itself, the winners in any such hand-offs may not be the Bay Street firms. The winners will probably be US and global law firms with more established reputations for doing deals in the biotechnology sector.
LESSON #2. THE PLAYING FIELD IS GLOBAL. As noted by Jeff Graham at BLG, “One of the challenges facing all of us is that as these companies grow, we have to work hard to continue to lead in providing legal services for them. There is a perception in the eyes of some of our corporate leaders that, as these companies grow, lawyers from other jurisdictions can serve them better.” Translation: as soon as they reach a certain size Canadian biotechs get hijacked by US counsel.
It’s not a hard-and-fast rule. The jewels of the Canadian biotech industry (i.e., companies with approved products like QLT, Aspreva, fellow Vancouverite Angiotech Pharmaceuticals or Winnipeg-based Cangene Corp.) continue to place most of their legal work in the hands of Canadian lawyers.
IP biotech lawyers, such as Patricia Rae with Toronto-based IP boutique Sim, Hughes, Ashton & McKay LLP, are actually seeing a reversal of past practice. “There was a tendency in the past for Canadian companies to look to US practitioners to do their work for them, particularly when they had US investors. But I think some of the Canadian universities and companies are beginning to realize that that’s a very expensive way to go. They’re beginning to use people here more.”
But never exclusively. For IP lawyers, sharing clients with US and global counsel has always been a reality of practice. They know, from the get-go, that the Canadian part of the work they do just isn’t as important to clients as the US part. “The US market is always the bigger, and usually primary, destination for a biotech’s IP,” says Christian Cawthorn, a patent agent/partner with Swabey Ogilvy Renault in Montreal. “They do the US first, Europe second and Canada maybe third.” Because of “real world” ordering of priorities, Canadian IP lawyers have developed means of staying relevant to Canadian biotech clients with aspirations outside of Canada, either by building reciprocal relationships with US colleagues or by becoming registered US patent agents.
With biotechs becoming more business-oriented and more conscious of what investors want, global IP issues continue to overshadow Canadian issues. Micheline Gravelle, a registered Canadian and US patent agent with IP boutique Bereskin & Parr, is under no illusions. “Every investor is going to ask ‘do you have a position [i.e., market exclusivity via patents] in the US, Europe and then Japan?’ Canada is way down on the list.”
And, as biotech products get more and more complicated and need to be more and more narrowly defined, companies learn to shop around for IP counsel who are the most experienced in their specific area. If they find such counsel in Canada, great. But they’re more than willing to go elsewhere.
This attitude regarding IP spills over into other practice areas. Just because the company is Canadian doesn’t guarantee that its Canadian corporate counsel will be its strategic corporate counsel. The business is global and, as Bill Newell at QLT sees it, “It really is a multinational marketplace for service providers.”
This multinational nature of the marketplace is reinforced by “the internationalization” of management at Canadian biotech companies. As explained by Christopher Barry, “A good part of the management and technical talent at Canadian companies is international.” Barry is a corporate partner with US-based Dorsey & Whitney LLP and co-chair of the firm’s Canada group. QLT, led by self-described “Europeanized American” Paul Hastings since 2000, is a case in point. Hastings, in turn, has paid no attention to borders in recruiting additional members of the QLT team.
There is an upside, of course. It is possible to secure and retain the work. Hector MacKay-Dunn has survived six CEOs at QLT, most of them non-Canadian. And, as QLT grows into a cross-border and eventually global player, the company’s lawyers acquire a cross-border and eventually global reputation.
“Biotechnology is a global business,” says Jeff Graham at BLG. “So Canadian lawyers have an opportunity to work in an international sector as a consequence.” And, if they play their cards right, become internationally recognized as the Canadian biotech sector becomes globally important.
But this is only if—and this is the biggest “if”—biotech clients stay Canadian long enough to build a thriving Canadian biotech industry.
LESSON #3. NORTH-SOUTH TRUMPS EAST-WEST. Richard Glickman, CEO of Aspreva, does not mince words. “There is a very strong North-South rather than East-West technology and finance relationship here.” That relationship has been key in building the Canadian biotech sector. Where would Aspreva be without US capital? But it has a downside.
“Now that we’ve had success here, we worry about someone in Mississippi making an offer for our companies and moving them south,” says Leo Raffin, a partner with Lang Michener LLP in Vancouver. It’s not just self-interest speaking, although it’s hard to deny that strategic counsel get higher fees, more interesting work and stronger reputations than local counsel.
Biotech’s emerging dealmakers, such as MacKay-Dunn, clearly prefer cross-border deals that keep headquarters and corporate work in Canada. Given the industry has virtually no domestic mergers, they don’t even mind deals that move the locus of power of an established company south. For BC lawyers in particular, this has long been a normal stage in the life cycle of companies, regardless of industry. But they are very concerned about redomicilisation of early stage companies—and not even via take-overs.
“The first Canadian deal US venture capital (VC) funds do, they want to make the Canadian company a US company,” says MacKay-Dunn. “I’m raising a red flag about this phenomenon because if US VCs encourage Canadian start-ups to become US entities, we lose the benefit as a
community to enjoy the growth of these companies.
“There is nothing wrong with being bought out in the end,” he continues. “But it is something else to be bought out before you’ve had a chance to establish yourself, made a footprint and created spin-off benefits.” In other words, contributed to the creation of a biotechnology sector. But this may be the price of US funding of Canadian biotechnology.
Biotech companies “burn” through money at a phenomenal rate. They generally tap out Canadian VCs at an early stage (most recent numbers give the average cost of bringing a single product in life sciences to market at US$950 million, with costs frequently reaching US$1.5 billion).
If the price of taking their product to the next level is redomicilisation, few companies will say no. The effect for the industry, however, may be eternal infancy. That is, Canadian biotech clusters will serve as an early-stage pipeline for a more mature US industry. For law firms the implications are clear: working with start-ups at reduced rates only to lose them to US counsel because they exit Canada just as they’re about to hit their stride. In other words, no upside.
The solution, says Christopher Barry, is for US VCs to do more Canadian deals and to learn that there are advantages to investing in companies that remain Canadian. MacKay-Dunn agrees. “For many people in the US biotech industry the world stops at the US border. They’re afraid because they don’t know what’s on the other side. They need to do one deal that really succeeds.” In addition, suggests Barry, some relatively simple changes in Canadian tax law could remove many of the principal objections raised by US venture capital firms to investment in private Canadian life sciences companies without involving much revenue loss to Canada.
Ironically, what may save the “Americanization” of the Canadian biotech industry is the “Americanization” of that industry’s management, exemplified by Hastings and Newell at QLT. These executives form a bridge between the Canadian companies they lead and the US VCs that fund them, giving the latter a higher level of comfort when investing in the “foreign” Canadian jurisdiction. Newell was formerly partner with McCutchen, Doyle, Brown & Enerson LLP, a US law firm.
The flow of money from US VCs and the acquisition of management talent from the more mature US biotech market underscores that this is yet one more industry in which the North-South axis is more important than the East-West axis. The money and a significant part of the talent driving the Vancouver industry is virtually all from the US West Coast. Similarly, in Montreal investment comes predominantly from US East Coast centres like Boston.
“As a rule of thumb, VCs don’t like to be more than an hour flight away from investments,” explains Edward (Ted) Claxton, a corporate partner with Stikeman Elliott LLP’s Montreal office and co-chair of the firm’s life sciences group. “It’s easier to deal between Montreal and Boston than Montreal and Vancouver.”
The north-south axis of the sector is demonstrated in other ways. Cross-border mergers outnumber and dwarf domestic mergers. The biggest financings are by definition cross-border. Licensing agreements, a key revenue stream for biotechs, are by definition cross-border or global. And even early-stage companies, if they know what they’re doing, incorporate a cross-border strategy into their business plan from day one.
For law firms, all of this means that a cross-border strategy must be of central importance in building strength in biotechnology. That is precisely why the growing biotech practice at Torys, spun off from the firm’s technology group (which is taking a serious run at the technology group at McCarthys), is headed by Cheryl Reicin, a US corporate lawyer with extensive connections to New York VCs.
LESSON #4. BUSINESS TRUMPS SCIENCE. James Crick (the discoverer of the DNA helix) would turn over in his grave. Nevertheless, the rise of the biotech dealmaker reflects, if not precisely, the triumph of business over science, then certainly the subordination of
science to business.
As pointed out by David Jennings, “During the last 15 years the industry has changed quite dramatically throughout North America.” Jennings is lead outside counsel for Angiotech and a partner with Vancouver boutique Irwin, White & Jennings, which focuses on working with venture capital funds and companies seeking VC funding. “What we have now is a much clearer understanding of the commercial reality of biotechnology. This is not just a sandbox for scientists to play in. There has to be a commercial gain at the end of it to warrant the investment.”
This “maturing” of the sector has changed the nature of the biotech client, even for IP practitioners. “When I started out, I worked with universities all across Canada,” recalls Micheline Gravelle. “Now, most of my clients are small to mid-sized biotech companies.
Universities are still very active, that’s where most research commences, but now people take the research out of the universities and develop companies. It’s been incredible to watch.”
How universities and business work together has changed too, says Jennings. “Universities have recognized the importance of working with industry. At first, the relationship was adversarial. They [the universities] were keeping [the invention] and how dare you [the company] ask.” That model is gone. Today’s biotech companies are very cognizant of the business reality in which they operate. As Cheryl Reicin at Torys puts it, “This is not a science project. It’s how we make money.”
In the new model, scientists do the science but the companies themselves are more likely to be managed by experienced business people. As Eileen McMahon notes, “Boards and investors are trying to recruit some seasoned US executives to lead companies now.” McMahon is an IP and regulatory partner with Torys and a core part of the firm’s developing biotech practice. She goes on to point out that “In the 1980s you never would have seen this. In many cases the scientist who had worked on the invention would become the president of the biotech start-up.” This had significant—and for the most part negative—implications as to how the company was run and financed. After all, how many VC connections was the learned professor likely to have? “Now, people hired to lead companies often don’t have science backgrounds. They are true businessmen and women.”
These businessmen and women, in turn, hire corporate lawyers who are able to demonstrate that they understand the business.
LESSON #5. THE CORPORATE “DABBLER” IS DYING. For obvious reasons, i.e., science is really hard, there are no biotech “dabblers” in IP law. Specialisation, built on an appropriate science background, is necessary. In the US, particularly in technology and life sciences-focused firms like Wilson Sonsini Goodrich & Rosati or Cooley Godward LLP and Dorsey & Whitney LLP, individual patent agents work exclusively with certain types of molecules or very narrowly defined technologies.
Discover the legal area of life sciences and the work of Canadian life sciences lawyers in relation to other field of law.
On the corporate side, things are somewhat more fuzzy. While the US abounds in full-time biotechnology lawyers, particularly in biotech centres such as California, Canada has almost no lawyers who claim that biotech employs them full time. Joe Garcia and Vanessa Grant at McCarthys form the exception, not the rule. Although clients like QLT and Aspreva keep him very busy, not even MacKay-Dunn claims to do nothing but biotech work. For many of the emerging biotech dealmakers, industry-specific work may comprise as little as a third of their practice.
But, while the sector is not robust enough to support corporate lawyers dedicated to biotechnology work, it is complex and sophisticated enough to demand experienced and industry-focused service.
As McMahon explains, “In the 1980s, you’d have general corporate lawyers dabbling in biotechnology without bringing to bear any industry experience. In my view that’s gone. The clients are very savvy. They want people with industry knowledge, who know what working with the FDA means—who know what FDA means, what protein means. They’re looking for people who have a more sophisticated understanding of the industry. You still get some dabbling, but it’s decreasing. You can fake it a bit on the corporate side. That’s dangerous for clients.”
And expensive. Periodically, Vanessa Grant sits across the table from corporate dabblers. Invariably these are the deals that cause the parties involved the most frustration. “I did a deal a while ago where I had a mining lawyer on the other side,” Grant recalls. “I spent a lot of my time and my client’s money educating the other side.” Here’s the kicker. “Now his law firm says they have a life sciences practice.” It’s unlikely this particular life sciences practice will thrive. The sector is not big enough to support a cadre of “pretenders” and the clients are too smart to be “faked out” repeatedly.
There are many firms who now have a small part of the biotech legal work available. US experience strongly suggests that as the industry matures the client base will consolidate around the top two or three players. In California, which has the highest concentration of both biotech companies and corporate biotech lawyers, most of the biotech work goes to Wilson Sonsini and Cooley Godward.
LESSON #6. IP IS KEY. BUT IT’S NOT THE ONLY THING. A comprehensive life sciences or biotechnology practice, maintains Vanessa Grant, is a “three legged stool: financing, IP protection and relationship contracting and agreements.” Law firms vary dramatically in the capability they have in each of these areas and most, suggests Grant, only have two legs of the stool. Most corporate law firms are missing the IP leg.
“We do have some IP lawyers, but we have not tried to develop IP lawyers who have the degree of specialization in biotech necessary to service the industry properly,” acknowledges Ted Claxton at Stikeman Elliott. “Our principal interest in biotech, as in other practice areas, is the transactional work.” Curtis Cusinato, a corporate partner in the firm’s Toronto office, agrees. “We have traditionally been strong in capital markets and M&A work, so we have a very good core competency in biotech on that side. But it is unclear how we will develop some of those other areas.” Currently the firm partners with IP boutiques, domestic and global.
Stikeman Elliott’s approach is no different than that of many major corporate firms. The strategy at Torys of ramping up its IP practice as part of its overall business plan to complement, among others, its IT and biotech practice groups is less common. Somewhat ironically, law firms with clear biotech IP strengths with strong corporate capabilities may actually be disadvantaged in capturing non-IP biotech work. Think of biotech at Ogilvy Renault LLP in Montreal and you think of IP practitioners and patent agents like Christian Cawthorn. Think biotech dealmaker in Montreal and you’re much more likely to end up with Richard Cherney at IP-weak Davies Ward Phillips & Vineberg LLP.
History repeating itself? When IT first burst onto the business scene, law firms with strong IP-capability committed the cardinal error of confusing it with IP. Many firms thus missed out on the much more profitable corporate component of tech work. Biotech’s even longer and more intimate association with IP means the odds of making the same mistake again are high.
Gowling Lafleur Henderson LLP is taking steps to make sure that the same mistake does not repeat itself. Given its acknowledged strength in IP, the firm naturally saw IP as its biotech “drawing card,” says Jane Steinberg, who heads up the firm’s national life sciences group. “Protection of IP is really the bedrock of the biotechnology industry. So Gowlings viewed itself as perfectly positioned to service the industry.”
But Gowlings also recognised that IP strength was not enough. In 2002 the firm tasked three associates, all with a mixture of business and IP practices, to research industry needs and plot out the firm’s biotech strategy. Acting on their recommendations, Gowlings has been courting biotech start-ups. It has also creatively approached the fee dilemma (see Lesson #1) by pairing young lawyers (lower rates) with start-up clients.
“It is not the conventional law firm model,” notes Steinberg. “There probably will be no big paybacks for quite a few years. But, nonetheless, when we positioned the young people in our office to build the practice we thought they and the biotech clients would be maturing at the same time. They will grow together.”
It worked for Hector MacKay-Dunn and Farris.
LESSON #7. THE PAYBACK IS YEARS—MAYBE DECADES—AWAY. For MacKay-Dunn the “big deals” (and big fees) of clients like QLT and Aspreva are the payback for paying attention to the biotech sector for 20-plus years. Eric Elvidge, managing partner of the Ottawa office of Blake, Cassels & Graydon LLP, is now profiting from time spent in the 1980s when he first started working with Cangene Corp., a company he took public in 1995. (Cangene is an intermittently profitable biotech company—2000 was an amazing year; 2004, not so much.) Elvidge has also just closed a US$42.5 million financing for Ottawa-based Zelos Therapeutics.
“Biotech companies chew through so much money and they take so long to get from the initial stage, the idea, to commercialisation and the market that it can be eight to 12 years and millions and millions of dollars before they get something to sell,” says Elvidge. That means everyone who wants to make money on biotech, be they investors or service providers, has to be patient. Very patient.
Ted Claxton agrees with Elvidge. “Lawyers need some stamina to persevere in this sector. We firmly believe this is a good sector to be in, but it’s a building sector. In the long run it will be lucrative.”
Problem is law firms are uncommonly bad at long run planning. Even the groundbreaking plunge by McCarthys into IT didn’t require the sort of “stamina” demanded by biotech. Most IT clients made it, or didn’t, within six to 24 months. More importantly, there was a boom in IT clients, hundreds and hundreds of them during the dotcom bubble. As pointed out by Richard Cherney at Davies, a veteran of the up-and-down Quebec biotech sector, the time, money and discipline necessary to build a viable biotech company precludes a biotech bubble.
But it also means law firms investing time and talent into biotech clients today are not going to see payback until 2015—or later. The sector, as Jeff Graham at BLG recalls, has been on the “edge of blossoming into full potential” for more than 10 years. Plus, for every biotech client that succeeds, a half dozen or more will fail—a high risk business for a profession pathologically adverse to risk. Will they do it?
The answer: a resounding...maybe.
Martin Kratz, who heads the technology group at Bennett Jones LLP in Calgary, states the obvious when he notes that “It is the nature of law firms to be conservative.” His firm, he says, has been ramping up its biotech capabilities, both in IP with high-profile recruits from Toronto IP boutiques Dimock Stratton LLP and Sim, Hughes, Ashton & McKay, and, more slowly, on the corporate side. “Historically, the legal community has had difficulty identifying new trends and adapting to meet those needs…. There are firms who are alive to the opportunity and are making the investments and building capability in the area. We’re in the mid-phase of the legal community acknowledging biotechnology as a mainstream practice area.”
Acknowledging it—indeed, defining it—as a practice area is a first step. And it’s one some firms are still struggling with. “What does it mean to have a biotech practice?” asks Geoffrey Taber, a corporate partner with Osler, Hoskin & Harcourt LLP in Toronto and “founder” of the firm’s tech practice. “I wouldn’t say we have a life science practice but we have a lot of clients in the area.” The firm acts, for example, for Genesys Capital Partners Inc., one of the more active Canadian biotech investment managers, and has done deals for Biovail Corp.
Shahir Guindi, a partner in the Montreal office of Osler, has been in on almost every Quebec biotech financing over the last two years (granted, comparatively lean years for the ndustry). “We’ve made a decision we don’t not want to be in the area,” says Taber. But the Osler biotech strategy going forward is still evolving with Taber and his colleagues debating how best to invest in the area. “You can’t have great lawyers in M&A and dabblers in biotech. But if biotech companies can’t pay our fees, how do we deal with that?”
Another question: can Canadian law firms afford not to invest in biotech? For Joy Morrow, a partner with the Ottawa office of IP boutique Smart & Biggar/Fetherstonhaugh, there is only one answer. No. “Canada’s just about ready to hit its stride,” she says. Except for the US, Canada has more biotechnology companies than any other country—or, in the case of Europe and Asia-Pacific, region—plus more per capita investment in R&D than the States. “I think we are in for some very exciting times in the next 10 years as at least some of these start-ups survive and go on to become important companies in their own right. We will be at the forefront of contributing to biotech advances.”
Curtis Cusinato at Stikemans agrees. “Canada is viewed as an incredibly strong partner in the world life sciences markets, particularly in unique areas like genomics and genetics. We are going to see Canada’s role grow and for law firms, as the Canadian market develops, there will be a greater demand for expertise.” And, don’t forget, global relevance. All we need for this rosy picture to play out is a few more success stories.
LESSON #8. THERE’S MORE TO BIOTECH THAN TORONTO. Canada has had its share—more than, some would say—of biotechnology success stories. If success is profitability, then at the end of 2004 there were 24 successful biotech companies in the world, according to Thomson Financial. By the end of 2005, when Aspreva’s revenues come on stream, BC will be home to three of the world’s biotech moneymakers. Quebec’s Axcan Pharma Inc. is also making money. The Quebec industry has delivered some big pharma contenders, such as BioChem Pharma and Merck (although these days no one’s calling Vioxx a success story). Even Manitoba launched a winner in Cangene Corp., which has two approved products on the market and a pipeline that has an additional two under regulatory review.
Ontario has…BioVail Corp., profitable for a number of years but currently under investigation by the SEC and OSC for how it arrived at those numbers and other infractions. Plus, according to purists, not a biotechnology company at all, because as one lawyer put it, Biovail “avoids the discovery stage of the industry” by in-licensing products.
Ontario—specifically—Toronto, expects more from itself. It gave the world insulin and the polio vaccine. It spearheaded stem cell research. It outperforms every other Canadian centre on sheer volume of scientific research. The academic publications that come out of the University of Toronto’s Faculty of Medicine are second in quantity only to the number produced by Harvard. And, it’s where the money is. Canadian capital markets, public and private, have long centred on Toronto. The government is onside, supporting initiatives such as the MaRS (Medical and Related Sciences) Discovery District.
But Ontario is still playing catch-up. And not just in commercialisation. According to Statistics Canada, of the 9,661 biotech products/processes approved, on the market, or in production in Canada in 2001, 8,087 were in Quebec and 1,048 in BC. Ontario had 405. What’s going on?
In a November 16, 2004 Financial Post article, John Mendlein, Chairman and CEO of Affinium Pharmaceuticals, argued that the “primary determinative force” that builds biotech success is “the mindset of the individuals involved in creating the businesses...this requires a mindset that is willing to accept fewer, but bigger, riskier investments.” He argues that this is not how Ontario biotech investors are thinking right now. “Ontario has an implicit local investment biotech theory: make small biotech businesses with small amounts of capital. This is nutty.”
But typical of a risk-adverse business culture that doesn’t understand the nature of biotech very well. As Cheryl Reicin at Torys explains, “Running a biotech company is like riding a roller coaster or being manic depressive. You’re either going to find a cure for cancer or the company will go under.” In other words, it’s high-risk. And high-risk industries thrive in entrepreneurial business cultures.
No wonder a disproportionate number of biotech success stories are coming out of Vancouver. “I think we are more risk-takers here,” says Richard Glickman, Aspreva’s CEO. Industries such as mining have trained people to “take risk in investing,” he suggests. “The combination of access to risk capital, the quality of science coming out of our universities, plus the natural North-South interaction we have with California have created a different environment in British Columbia than in Toronto and Montreal. We did not have government handouts. Nor did we have a strong venture capital base. Other areas had these incentives, but they did not have the right blend of characteristics to achieve success. BC works because we have a special spirit here and we have built a sense of community in the biotech industry here that rivals any other biotech cluster in North America.”
High-risk tolerance plus a low-local VC base have also translated into a high-level of comfort among the BC biotechs for sourcing money in the US, well ahead of Ontario and Quebec (the latter relying, instead, on public funds, and the former expecting more, not unreasonably but mistakenly, from its local capital base).
“BC is well ahead of any other region in the country in having a practical approach,” says Paul Hastings, QLT’s CEO. “Part of that is the open-mindedness of the province and its science community to understanding what is needed and necessary to do business. What is necessary is that there is almost no border when it comes to biotech. Money is going to come to us from the US, from Europe.”
The other parts of Canada are learning. Quebec’s biotech industry is transitioning from, as Ted Claxton phrases it, “an unhealthy reliance on public funds” and building relationships with US VCs. Ontario’s biotech leaders like John Mendlein are educating the local VCs, while other players—including law firms, most notably Torys—are building bridges between US VCs, their Canadian counterparts and local biotechs. But the long-term viability of the Canadian biotech industry may not be centred on Ontario.
For law firms, particularly for Toronto’s Seven Sisters, that means they must pay attention to what’s happening in the rest of Canada, particularly in Vancouver and Montreal (but not exclusively—Alberta, according to BioAlberta, is home to 63 biotech companies, Saskatchewan leads the world in agricultural biotech research, and Manitoba already gave us Cangene). And it shouldn’t be too hard, right? This, after all, is why these firms spent the late 1990s building national platforms.
SOME GET IT. Beth Macdonald, a Vancouver partner with McCarthys, sees her biotech practice as operating along a web of clusters. In Toronto Vanessa Grant at McCarthys is building her biotech practice by leveraging the firms national platform to get retainers with clients in Vancouver and Montreal, as well as in Toronto. It will be years, if not decades, before the Canadian biotechnology industry is robust enough to support full-time biotech lawyers focused on just a local client base.
That’s the conventional wisdom. For Farris and Hector MacKay-Dunn, so long as clients like QLT and newer successes like Aspreva continue to grow, and take their lawyers with them, a BC-based client base is just fine, thank you.
Marzena Czarnecka is a Calgary-based Lexpert staff writer.