A new dawn for life science innovation in Montreal/Quebec? Just don't call the new breed "Quebec Inc"!

I have been reading with great interest of the new resolve to create a new wave of life science investment here in Quebec, with the intent of re-establishing the province (as well as Canada more generally) as a key biotech and drug discovery cluster. A hub of excellence in life science research and development, and theoretically at least, in actual "product" development, which of course is what is needed for sustainability. Now while one could write a book on the history of the biopharma sector in Quebec, I don't have the time to write that book and I doubt that anyone outside of that business area really needs to read it, either. So we will skip right to the heart of the matter and get down to what needs to be done, and not done.

First of all, what better place to begin than at the end? To cut a long story short, after more than a decade of recognition as a key biotech cluster, there was a devolution and deconstruction of what had been built here in Quebec (particularly in Montreal) that corresponded contemporaneously with the recession that kicked in during late 2008, and which grew steadily worse thereafter. Now let's be clear on one major point: it was not that the biotech sector coincidentally came to it's own crossroads at the same time as the economy failed; rather it was that the people who were investing in biotech were hit by the economic crises erupting in their own financial institutions. Money dried up, life science and biotech were considered too high risk (which of course they were since day one!), and plugs were rather mercilessly pulled on enterprises that often had tens of millions (and in some cases hundreds of millions) of dollars invested in them. It wasn't so much that a magic light bulb had gone on and a sudden realization that no financial exit was in sight for investors, rather it was just a paradigm shift back to the thinking that biotech was too risky, investors had become risk-averse, therefore biotech was out. Whether the biotech companies themselves, or the investors with a keen interest in their growth (and an exit) should have been working on setting up of a longer term funding program that would have carried those companies forward in new deeper-pocket series of financing rounds is a moot point: neither did it, and the companies in general evaporated over time. 
Would you get into the car manufacturing business without fully understanding the process of building a car? It was as if no one had truly understood that developing drugs (even if you race past the risks and over the hurdles) was something that happens over a 10-15 year time frame, and/or, no one had thought about the fact that they weren't intending or capable of funding the process for more than five years. So they went ahead and began building the new cars, got maybe a third of the way in, and then when big people started banging tables that no new cars had come off the production line yet, and nobody had money to finish the job, well, what were they supposed to do? The answer in 99% of the cases was to scrap the half-built cars. No one had analysed or worried about who was going to fund the later stages of product development, they just went ahead and dug into it, and nobody seemed to mind that 99% of the appointed CEOs had never led production of a single car in their entire careers. 
It wasn't too long before big pharma followed the trend and various big names such as Merck, AstraZeneca and Pfizer (among others) announced R&D layoffs or even closed research centers in and around Montreal. The forest fire has had a devastating effect on the local industry and of course on the livelihoods of a pool of scientific talent that had been built here and lived here, most of whom were faced with moving to the USA or Europe, or going home to lick their wounds. 

It now appears that maybe that fire is just about out, perhaps with some sizzling embers remaining, but the "insurance companies" have handed over the money for rebuilding, and more or less everything is in place to begin again. Once more, to cut what could be a ten page document short, below is a list of some key points that need to be considered/addressed if this new wave is to go further than the last, and achieve some degree of real sustainability:

• The first point is one that seems to have been noticed and resolved. The names of the companies involved in this new round have both governmental-financial credibility as well as tech product development and real life science investment expertise. When you hear names such as Teralys (the giant fund of funds), Lumira Capital and TVM Capital, as well as some big pharma partners, you know that this is indeed a "new breed". 

• One has to hope and pray that no one intends to also rebuild what was colloquially known locally as "Quebec Inc." Why? Well, first off, they failed, quite frequently and often miserably. The typical situation was a respected head honcho who was able to attract political interest in raising a fund, but who for some unknown reason surrounded him/herself with a bunch of rather averagely-talented and often inexperienced PhDs. A doctorate was seen as a sort of passport into that world, even if it was the case that many of those PhDs had not succeeded at being scientists, first, and that was why they were looking for new careers. Suddenly, they were to be the key advisers on whether to invest in this idea or that one, with zero experience in (life science) product development-commercialization? There were probably a few MBAs around also, but at least historically, they knew way more about business than life science, and had never been close to the business of life science. The outcome was the inevitable one: the head honcho made all of the key decisions while the team dozed through various meetings and always agreed with the boss. Just as they slept through board meetings even when representing that boss and his company, in various entities that they had invested in. It was a staggering mistake to not go out and hunt for the brightest PhD talent who were entrepreneurially-minded, and woo them away from the lab bench; rather than just bringing in those who had not exactly shone in their supposed single area of expertise: cold, hard science. But they were local, they knew this person, or that one, so, fine, they were in.

• There will have to be a serious, detailed due diligence done on the science, the technology arising out of that science, and the overall potential for commercialization and profitability, before placing a penny into it. Let's not repeat past mistakes, and fund our old buddies, or a politically important ally, all in the usual attempt to keep the same wheel (i.e. dirty circle) spinning round and round. Profitability? As a key determinant of life science investment? Isn't that a dirty word in academic science? Well, yes, it might have been, but now the potential for it is a must, as it has to be about profit for everyone's sake, as well as in terms of a suitable and timely exit for early stage investors. The focus must be on products, not ideas, and more than before, there should be an almost complete drug development plan in place alongside or as part of the business plan. A much greater degree of clarity on company identity, what the technology is and how it will be developed   for the marketplace, with a realistic idea of how it is all going to be funded at various stages, will be mandatory. No more of the "we will worry about that when (i.e. if) we get there" attitude that pervaded the old wave.  

• I never really got the need to always invest in a pack, with one house insisting that four other major local players equally committed to financing a new venture. Not least because they essentially could not stand each other's company, and the in-fighting began before the financing was even closed. If the need to spread the risk was so high, why invest in the first place? Or, if you prefer the positive spin, if the potential for commercialization and product development was so great, why not jump in and take all the profit and credit when it works out? This is perhaps more readily possible with the greater depth of the new funds, but still. Going into a financial investment in a local company with four other members of QC Inc. was a bit like marrying four partners and having to get into bed with all of them, at the same time. The honeymoon was terribly short, and divorces were sadly inevitable! Such practices also meant that no one had true control over the investment, and all the squabbling simply froze the company in inertia and delayed progress. It would be refreshing to see a company funded by one major player, with a majority on the board, and thus the company could be driven forward with the singular vision of a board and management who are aligned in approach, and who prefer to celebrate achievements rather than squabbling over differences. 

• Incubation for longer in well-funded institutions such as universities and research centers, until such time as it is truly ready to be transferred out, is a new given. The temptation to put in place a management team of one CEO, one CSO, and a whole slew of VPs, alongside a core research team of 10-20 people, is another classical mistake. It seems to be done simply to add credibility to a small organization, but it ends up strangling it, both fiscally and figuratively. The typical annual cost of a CEO, a CSO, VP Finance, VP BizDev and VP R&D collectively can easily approach $1M, all for a company with nothing remotely close to market. It's ridiculous! The VPs all running around like chickens with their heads cut off because they don't really have jobs to do, as the science has not gotten "there" yet. So we all get to blame the science as the reason why we cannot do our jobs, no new sources of funding or revenue were raised, and zero meaningful business relationships were established. Then when the science does get "there", but "people" tell us it's weak, we can still use it as our excuse for achieving next-to-nothing in three years. Such journeymen rarely made it to three years anyway, having zero loyalty: it was about musical offices and any company who would offer them even $10K more to achieve the same thing in different premises. The bottom line is clear: one key senior manager, such as a CEO with scientific know-how, or a CSO or VP R&D, can run the entire show, with a board, until such time as growth is needed, not just desirable. Focus on science and tech development first, before spending a million a year on talking heads.

• One must do one's best to avoid the overtly selfish and stereotypically mercenary CEO and CSO types. Now don't get me wrong, I have nothing against a head honcho who wants to build a mansion in the country, and who uses a company to do so, providing he or she is smart enough to realize that it has to be done by truly creating value for stakeholders via growing that company. An ambitious person who actually earns that massive bonus is okay by me. But a malingerer can be detected from a mile away: demanding maximum bonus each year for reaching rather arbitrary developmental milestones that primarily serve to guarantee the next tranche of cash. Nothing more. Spin the wheel, for three years, and then when the cash runs dry, jump elsewhere. And why not, we all know that if I am too successful and take the company too far forward, I will be "thanked" and squeezed out for a new, bigger CEO! Let's just play the game, I will get into bed with the CSO, and we can make this thing roll. 

• The CSO species is another thing entirely. They do have a much more fundamental claim than most, due to the fact their expertise garnered over many years of dedicated research is what is at the foundation of any new biotech. Such types, while often being scientifically brilliant, are used to total control and do not comfortably handle having a "boss" (the CEO) or higher order bosses (the board). They have even more reason to be paranoid and guarded because at some point, inevitably the CSO begins to get in the way of "doing business", is too possessive or controlling, and the board charges the CEO with getting rid of him. In early days, the CSO might get into bed with the CEO, but just as with other people we share our bed with, things can go south, and divorce comes-a-knocking. One or both want the other ousted, in a way to protect themselves. The CSO often has less interest in true growth because it almost always leads to their own exit, back to the academic ivory tower they came from, if that option is still wide open to them. Successive dilution in finance rounds makes the ongoing CSO salary (in addition to the university one) the prize, rather than taking the company to a sale in five years. But for such an enterprise to succeed, I feel that one must have and build a lot of confidence between CSO and potential investor, and if it doesn't feel right, don't do it. A CSO with an agenda can completely derail a biotech operation, especially because he or she was hired for scientific expertise and oversight, so we gotta believe what they are telling us to do, right? Often, wrong! Not surprisingly, the CSO often has a great deal of staff loyalty as they brought >90% of the staff with them, from their university empires. This usually includes one or two "henchmen" who are there primarily for eyes and ears to ensure ongoing control over the "situation" , all in a usually vain attempt to maintain the agenda. It's like a private little club, with management on the outside looking in. 

• One used to see a small biotech with a few million dollars of funding, a research staff of maybe 10-15, and sometimes 3-5 different programs "running". This is simply laughable. It's a bit like going to Vegas and you are in on a big game with a huge pot, but you insist on spreading some money onto nearby tables, to spread the risk. Seemingly without realizing that you are not left with enough money to guarantee success on any one of the tables! So you pour it down the tubes. There has simply got to be an investment in one major idea and technology, and an entire team focused on it, if there is to be any hope of achieving something real, and being able to build a bridge over such a quicksand-laden territory as drug discovery and development. 

• There is the whole question of pharma. Get into bed right away, or not? There are some fundamental differences (enjoyed by both entities) between big pharma and biotech, and big pharma often don't like the slightly "sloppier" practices in biotech or how they go about validating targets for drug discovery. While a degree of freedom and independence is a good thing, if the whole idea in any new model is to eventually offload drug candidates to a pharma with deeper pockets, or raise new R&D money from them, then I believe that getting into bed with pharma sooner, rather than later, is probably best. If I was a VP Biz Dev in even a brand new biotech, I would commence to build bridges and relationships with pharma as quickly as possible, even if we were three years away from having any potentially licensable asset to do business with, because, well, it's just the smart thing to do. Rather than doing what hasn't worked before, waiting two and a half years, and then realizing I now had a job to do. The sooner that a biotech can begin to build a relationship and trust with pharma, the better chances of being taken seriously and getting to the negotiating table when the time is right.  

• I assume that people have realized by now that almost no biotech ever has the resources needed to go from drug discovery to the marketplace: it's just too long and too expensive. Thus I feel that any new model has to include the idea, right from the get-go, that we will offload (via licensing or outright sale) exciting products in mid-development to big pharma, in return for funds that provide an exit (if early investors wish to cash in) and extends the life of the company significantly. There is nothing shameful at all in offloading an exciting drug candidate at the Phase II clinical trial stage, in return for tens of millions of dollars, or for partnerships that further the company's own growth and credibility. One needs to stop daydreaming about a 50X ROI; it's 2012, not 2002. Those dreams have faded away. If one can generate even a nice little 3-5X on initial investment over a short time frame, it's perfectly acceptable, or should be. Not least because it might actually be realistic in most cases. Instead of spreading the cash far and wide, necessitating that one big win, be more cautious with it, choose your battles, and focus on your best bets. Being prepared to settle for less can end up bringing you more!

• Lastly, and by no means least, the boards that run these new biotechs must out-perform their former versions, by a huge margin. From my own experience, and from what I have gathered by talking to a bunch of people, most of the board meetings were dominated by one or two big voices, with a bunch of sheep sitting around dozing or agreeing with the big local CEO of another firm, who one might want a job with one day. Furthermore, that local CEO who was banging the table about company X not doing well, was competing via his company Y for the same funds from the same stakeholders sitting at the boardroom table of company X. It got way too incestuous, on many levels. The egos of local stakeholders physically getting in the way of doing business together, to the detriment of companies whose boardrooms they shared. Chairmen of those boards only interested in staying on good terms with whomever could serve (i.e. pay) them best. The more junior so-called scientific experts sitting silently through two years of board meetings, as the alpha-dogs barked. God knows what they told their bosses upon returning to home base, on how they were having an impact on the running of that biotech. Too many boards became almost ad hoc SABs also. There wasn't any real business development going on, so let's meet every three months and fight over scientific aspects, even though that is not our own area of expertise, so we have a nice get-out clause for suggesting something ridiculous. I could go on and on, there's enough material to fill an entire chapter on this aspect alone!

Finally, what else can I say? Well, there's a ton more to say, especially for such an historic and rather complex set of individuals and technologies and challenges. But I feel certain that if at least all of the points above are addressed in some way, and improved upon, then this new wave of life science investment might just have a better chance of going somewhere. If not all the way. We need to remember that it's not just about creating infrastructure to rehire all that scientific talent and expertise currently being unemployed, but rather, it's about using that talent to rebuild Quebec life science and innovation in a fashion that creates long-term growth and real sustainability for everyone. Now that's the kind of "profitability" that most definitely is not a dirty word! Here's hoping! - Kevin Mc