Pay tied to raising capital

Biotech sector: Remuneration suffers in sector of mainly small firms

Jonathan Ratner, Financial Post
March 01, 2006

Canada's biotechnology sector has changed dramatically since the technology bubble burst in late 2000. With an eye to profits and better capitalization, companies have cut spending and pursued alliances, while investors are more realistic about the industry's prospects.

With a few exceptions, the sector is dominated by small companies.

"This is like an early-stage mining and exploration industry, but with drugs," said Sunil Vidyarthi, portfolio manager and president of Value Sciences.

A report by the investment firm points out Canada has some of the best technology in both the information and biotechnology fields. However, funding remains a challenge. Despite healthy profits at some firms, cash flow eludes most companies.

"Half of the industry is going along quite well, and the other half is really starved for cash and looking for ways of raising it," said Rod Budd, national director of life sciences for Ernst & Young LLP.

Only three firms, AEterna Zentaris Inc., QLT Inc. and Angiotech Pharmaceuticals Inc., have more than $2.5-million in revenue in the most recent quarter, according to FPinfomart.

AEterna has roughly $63-million in net sales in the third quarter, QLT has slightly more than US$50-million and Angiotech has just under US$50-million.

According to FP Datagroup, William L. Hunter, Angiotech's president and chief executive, received $1,323,217 in total compensation in 2004, topping the compensation list for biotechnology executives among Canadian companies listed on the Toronto Stock Exchange.

Robert Foster, Isotechnika Inc.'s chairman and chief executive was second with $832,671, and Donald Corcoran, president and chief executive of MethylGene Inc., was third with $814,242.

The data does not include options. Executives must have held the position for an entire fiscal year.

"One of the biggest determining factors in compensation for executives in these companies that don't have a lot of cash is certainly going to be equated with raising funds," Mr. Budd says.

When companies generate profits the measure of success changes.

Mr. Budd says raising capital is an issue, because investors are looking for sound returns, whereas in the late 1990s through 2000, they invested "on a hope and a prayer."

With little venture capital, companies have adapted by forming research and other alliances.

"A lot of executive bonuses are determined by the kind of collaboration agreements that the executives enter into," Mr. Budd says.

MethylGene, which is considered one of the smaller biotechnology companies in Canada, entered a license and collaboration agreement with U.S.-based Pharmion Corp. on Jan. 31 that could could be worth US$272-million.

Montreal-based MethylGene will receive an upfront payment of US$25-million, which includes a US$5-million equity investment, and could receive US$145-million more in payments if development, regulatory and sales goals are met.

In February, Vancouver-based Angiotech, criticized for being dependent on a single product, announced a $900-million acquisition of American Medical Instruments Holdings Inc. That move is expected to boost the company's bottom line and provide greater diversification.

"I do believe longer-term, Angiotech has very good prospects," Mr. Vidyarthi says. "Whether they'll be successful or not, we don't know.

He points out many Canadian biotech companies are in the same boat.

Like Angiotech, QLT faces challenges related to its patents. Furthermore, the Vancouver-based company is in the midst of upheaval at the executive level.

On Monday, Robert Butchofsky, was named chief executive of QLT after holding the title on an interim basis.

"Here you bet on the people, not the sector or the economy," according to the Value Sciences report.

"If someone can come up with a cure for a deadly disease, the market will come to them."

While the success of one breakthrough product can make or break a Canadian biotech company, it's difficult to predict the success of a project in its early stage.

Products must pass a series of clinical trials and meet regulatory approval before entering the marketplace.