Canada: Growing a Canadian Life Science Company: Avoiding the Common Pitfalls

Last Updated: October 26 2005

By Ms Cheryl Reicin, Ms Eileen McMahon and Dr Calvin Stiller

© 2005 Torys LLP and Dr. Calvin Stiller. All rights reserved.

Published in Bio Business, Summer 2005.

Canada’s rich technology, educated and relatively inexpensive labour force, and close proximity to the U.S. market make Canada a fertile ground for a life science company’s incubation and growth. However, while increasing amounts of capital are designated for medical research and the resulting life science companies, these companies continuously struggle, generally, to raise money faster than they spend it. Capital expenditures required to bring a drug to market, for instance, are now estimated to average over $900 million. Furthermore, management time must be compressed in the rush to develop technology before it becomes obsolete or before competition overtakes it.

The scarcity of cash and limited management time can often lead companies to make short-term decisions that have negative long-term consequences. This article outlines the authors’ top 10 tips for developing a life science company and avoiding common pitfalls.

  1. Become the maven in your company. Learn everything you can about the science, business, competition, intellectual property and regulatory framework relating to your company. If there is ever a time to let your perfectionist tendencies guide you, it is in gathering information relevant to your new venture. Companies often make the mistake of believing that potential investors, or big pharmaceutical companies or other partners, will be more knowledgeable and experienced than the potential life science company itself; so they conclude that there is no need to gather information for the investors. For instance, biotech companies that approach a big pharma regarding an alliance should not rely on that organization to assess the intellectual property or regulatory landscape. These biotech companies need to invest in and develop their own intellectual property and regulatory strategies. Information is power, especially if that information enables you to understand your ownership rights, your freedom to operate in your market and your regulatory pathway to that market. And if the person you are speaking to knows more about the subject than you do, you will be at a disadvantage.

    Potential investors are turned off when companies are not on top of their game. They will learn this quickly by asking a few pointed questions. Investors ideally do not like to be involved in the nitty gritty of building a company, and if they see that management is not mastering the details, this is a signal that they will have to become more involved than they want to. Read whatever you can. Network with and seek out people who may have information for you, and ask these people for additional resources. You can never be too prepared. However, use your information wisely – demonstrating your knowledge or name-dropping is not the same being fully informed and connected. And as the company goes forward, continue to broaden your information and track new developments.
  2. Have a long-term strategic plan. A scientific idea or breakthrough is great. But to succeed in this business, you need to have a clearly identifiable road to riches for you and your investors. This plan should be clear in your mind and easily describable. It may change many times throughout the course of your company, but it is still important to have a plan and be disciplined in carrying it out. As part of this plan, you will need to address regulatory, in particular FDA, reimbursement and intellectual property issues. Remember even the best scientific achievement is not worth much to a company unless it can be turned into a marketable product or a product that has a value to another entity or person. When you approach investors, they will want to know your timeframe and they will test you to see whether it is realistic and whether there is flexibility for set backs. Being overly optimistic is almost as bad as being too slow. Pragmatic alacrity might be your modus operandi.
  3. Start with a cross-border strategy. One of the biggest and most frequent mistakes Canadian companies make is thinking locally from the beginning and believing that when they are more established they will build in a cross-border strategy. However, the simple act of incorporating in a local jurisdiction may devalue the business by making it less desirable to U.S. investors and to potential acquirors, such as pharmaceutical companies. The issues of whether intellectual property best resides in Canada, offshore or the United States and how the company is structured require careful consideration; the wrong decision cannot be easily undone without significant cost. Life science companies have substantial capital needs and it is unlikely that a company will be able to finance from start to finish through the Canadian capital markets. Ideally, a Canadian-based company will want to have a structure that is favourable to both Canadian and U.S. investors.
  4. Build the best team. The team is not only critical to your success, but also reflects on you. Venture capitalists have a saying: "First-rate people hire first-rate people. Second-rate people hire third-rate people." Surround yourself with the best human resources. Do not compromise. In real estate, the most important feature is location; in biotech, it is your human resources. No matter how good your science and patents are, it is likely that substantial changes will be required, whether through enhancements, improvements or a complete revamping or replacement of the technology. Unless your team members have the ability to be innovative, flexible, persistent, focused, and on top of all that, to work well together, the company is unlikely to go very far.
  5. Investors view management as the single most important component of their investment decision. They know that good people will be able to figure out and enhance even mediocre science. Yet, ironically, the types of management characteristics that are considered ideal are somewhat contradictory. One who is innovative—for example, creates inventions that might go against popular opinion—is often not a consensus builder. And a person who is flexible is often not one who is persistent. It is rare and invaluable to find leaders who are able to appropriately combine all of these desired characteristics. More commonly, a team will have to be built with people who respect and admire each other’s strengths and tolerate each other’s weaknesses in order to achieve the combination of characteristics required for success. In addition, the qualities needed in the leader at the start-up phase rarely equip that same individual to lead the company through the growth phase. The most successful companies are those whose team and CEO recognize that and prepare for growth.

  6. Invest strategically in your patents. Intellectual property is generally the only real (non-walking) asset of a life science company in its early stages. It is therefore one of your most important investments. Spend your money wisely. Two areas are critical: developing a strategy to protect your core product and maintaining a watch on the patents of your competitors. No investor expects guarantees; however, investors do expect leadership in developing and executing an IP strategy. It’s never too early to get professional involvement. Allowing your PhDs to draft the claims of your patents is generally not a wise strategy. Get some seasoned advice on the scope of the key claims covering your product in view of the prior art that your company is aware of. Ensure that your strategy for dealing with the patents of your competitors is a sound one. Cover the basics, such as ensuring that your company has title or an exclusive licence to all its IP assets. Properly handling these issues will inspire investor confidence. Mishandling or ignoring these issues will result in missed opportunities.
  7. It is crucial to spend dollars preparing patents that are designed to create the most economic value. Conversely, filing patents and inventions that are unlikely to have commercial value is not a good use of funds. Filing a patent that is not strategically drafted with the best claim coverage can also result in devaluing your most precious assets. Lastly, patenting inventions that may not be in your core area but may add commercial value to another party should not be overlooked. As life science companies require tremendous capital resources, licensing or selling non-core technology can provide much needed capital without diluting equity.

  8. Choose the right professionals and invest in them. The previous paragraph stressed the importance of structuring the best portfolio. Selecting the most experienced patent counsel in your particular area is the first step in achieving this result. The right professional can save you time and money by focusing on your most important issues. This also applies to your corporate and tax lawyers and accountants. The right professionals are those who are experts in your industry and can anticipate issues rather than merely reacting to your needs; they are valuable advisers rather than just technicians. Drawing on their experience, they can also help accurately assess which obligations and issues are worth focusing on, and they understand the business terms that can be negotiated in your dealings with partners and investors. Interacting directly with your professional advisers is critical to both keeping them focused on your company needs and informing yourself of outside opinions. Although these advisers will remain independent of the company (and, it is hoped, objective), they should be part of the team.
  9. Counsel who are expert in your industry are likely to also have a wealth of valuable contacts. Be mindful when you interview professionals that they are also interviewing you. If you impress them, they will be more likely to open their Rolodexes to you. A recommendation from a trusted professional can be your gateway to investors, industry specialists, bankers, directors, managers and partners.

  10. Know your weaknesses and have a plan to overcome them. The top venture capitalists, bankers and investors know the industry and your business well. Do not neglect to acknowledge the pitfalls when presenting your vision to them; otherwise you may create the impression that you are unprepared and do not understand the work ahead of you. Anticipate their difficult questions and answer them before they put the questions to you. Companies mistakenly believe that by only presenting the positives and not the negatives, they will impress potential investors. While this may work for certain angels and non-sophisticated investors, it will not work for the more sophisticated ones. In fact, discussing your concerns and weaknesses in a well-considered manner will enhance your presentation. If you identify problems and put forward the means for solving them, you will gain investors’ confidence and also get more substantive input from them.
  11. Choose investors with added value. Does this sound familiar? This is along the same lines as the tips to surround yourself with the best human resources and choose the right professionals. In the area of life sciences, it is people who will build your business. As important as the money, investors can give you their insight, experience and connections. The right investors will also provide a lifeline to the next round of investors. It is important that you develop a strong relationship with your investors. There will be times that will be very difficult and you will not always meet investors’ expectations. Do your own due diligence to find out how investors treat their portfolio companies during tough times. Remember this is a marriage; you are going to be in this for good and for bad. A lack of mutual support during the bad times can be quite unpleasant and counterproductive to building a business.
  12. Cultivate your network. You will need many different types of contacts to start and grow your company. Every investor, professional, industry executive and board member is a potential resource. Respond to all contacts in a timely manner. Do not lead contacts on; deal with them in a straightforward and honest manner. Be mindful not to burn bridges – the community is small.
  13. Persevere. Building a life science company is akin to riding a roller coaster; in the normal course of growth, there will be tremendous ups and tremendous downs. Deciding whether to cut losses and change course or to continue moving ahead with the original plan is a difficult judgment call that may ultimately affect the success or failure of the company. The key to success is to be prepared to abandon, in a prompt fashion, a failing project after careful consideration and to pursue each successful project as tenaciously as humanly possible. The collective wisdom of your team (both in-house and professional consultants and investors), combined with the discipline of objectivity by the leader, increases the chance that you will know the right time to execute such changes. Keep in mind that virtually every successful life science company has had its share of failures along the way.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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