Access to capital remains largest challenge to Ontario's life sciences sector

A new report on Ontario's life sciences (LS) sector says the province risks stalling over a decade of impressive growth unless it adopts a coordinated economic strategy. Produced by Life Sciences Ontario (LSO), the report quantifies the size and impact of the highly fragmented LS sector which includes 5,645 mainly small firms with revenues of $40.5 billion (2009) and employment of nearly 83,000 with wages 26.5% above than the provincial average.

That places Ontario as second only to California and just ahead of Florida and Texas, as ranked by number of firms. Ontario's position when ranked by employment falls to third behind California and New Jersey, closely followed by another six US states whose LS employment exceeds 70,000.

For it to grow to its full potential, however, the report — based on the US Battelle/BIO model — argues that the perennial problem of adequate access to capital must be overcome and that improvements must be made to the data collection required to make better policy and management decisions. Other issues high on the sector's radar are more support for commercialization and innovation and the creation of a forum for policy discussion.

"The main goal is to see life sciences in Ontario reach full potential. There are huge opportunities unrealized," says LSO executive director Dr Jason Field. "The US recognized the magnitude of the economic potential. It's a high-risk sector like natural resources in that it needs government support. We haven't recognized the intellectual power of life sciences so we need to derisk it for business ... The sector in Ontario is big but it could be so much bigger."

The LS industry comprises four key subsectors: agricultural feedstock and chemicals; drugs and pharmaceuticals; medical devices and equipment; and, research, testing and medical laboratories. Using the expanded definition of LS which includes hospitals and other health services, dairies, distilleries and food processing, the sector's size jumps to 65,200 firms employing 578,000.

But most Ontario LS firms are small, with 63% employing less than 10 people and only 4% employing more than 100. Lower valuations than their US counterparts and a cheap Canadian dollar also make Canadian firms vulnerable to acquisition, hindering efforts to grow large Canadian-headquartered corporations.

"We now know we are a sector made up primarily of a ton of small companies and not a very good record of growing them," says Field. "We need to find out what's preventing us from developing a world class life sciences company. It's a fundamental question we're asking ourselves. Governments are already providing support through research funding, tax credits and purchasing among others. We are using them all for the maximum potential so it may mean we need to fundamentally shift what we are doing and figure out that growth strategy.

Funding and support remain key challenges for the province's LS sector. Field says the real issue is not the quantity of risk capital but its diversity. He argues that the information technology (IT) sector is even more diverse yet governments have embraced the challenges with a series of programs and support mechanisms targeting its many segments.

"The same should be applied to life sciences. There's a convergence of technologies. For example in the health care sector, we need a holistic approach to prevention and treatment, detection and chronic management to the end-of-life cycle," he says. "There's no other space that offers the province a better return on investment than life sciences, from reducing health care costs to boosting youth employment."

Between 2001 and 2013, Ontario's share of venture capital investment declined from 55% of the Canadian total to 35% and is now below the national average on a per capita basis. A 2012 survey of LSO stakeholders found that 81% of respondents had less than one year of operating capital while 56% had less than six months.

Ontario's track record of LS firms and public equity markets is even worse with LS representing the smallest industrial sector on the TSX/TSXV.

"It's a public perception issue. We're seen more as a cost than as a contributor. The sector is big but it could be so much bigger," says Field. "One area we should look at is flow-through shares. BIOTECanada advocates this."

While Ontario's LS sector is performing well in terms of commercialization, Field says it's falling down in its ability to grow companies and keep them in Ontario. To help build critical mass, Ontario has increased its interaction and collaboration with Quebec with several policy papers and the development of the Ontario Quebec Life Sciences Corridor."

Perhaps the biggest challenge to researching the provincial LS sector is the available of solid, detailed data. Field says the deterioration of data in recent years is frustrating and the problem is particularly acute for the research, testing and medical laboratories subsector. To compensate, he has developed a sound methodology for estimating the sector's size and other attributes.

"Testing labs have many locations across the province which is a challenge from a data perspective. We had to use a weighting factor to adjust it for employment and we had to use occupation codes as the data was so poor. We even had to pay for a custom Statistics Canada report," says Field.

The LSO report also examines LS talent and availability. It found that while enrollment in LS disciplines was adequate, there was a high unemployment rate among recent graduates. There is also a significant lack of experienced senior management and entrepreneurs "with deep knowledge of product commercialization". Women make up the majority of graduates from LS disciplines but that dominance is not reflected in employment or wages.

For the full report, go to www.lifesciencesontario.ca.

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