After several years where the industry has been focusing on developing the technology, creating case studies and obtaining funding, revenue growth is now starting to take off.
The global market for AI applications in drug development grew 61.1 percent in 2020, and is projected to reach US$5.1 billion by 2025 with a compound annual growth rate of 29.6 percent. This is an increase of more than US$3.6 billion from the market size in 2020.
With a total of US$11.8 billion funding in the industry and more than US$2.1 billion invested already this year, AI drug development companies have enjoyed remarkable attention from risk-tolerant investors.
However, significant consolidation is now starting to appear. The average funding size has increased from US$10.7 million in 2015 to US$51.7 million in 2020, while the number of funding rounds has decreased since 2018. Funding rounds are becoming fewer, but bigger, and already established revenue-generating players are now often favoured by investors.
Canada the first country with a national AI strategy
Canada’s early focus on AI and its long-standing academic expertise in this field have helped the industry flourish and get a head start.
Toronto has predominantly been leading the Canadian scientific excellence in AI and machine learning, but a collaborative AI ecosystem was established between Canada’s three major centres for AI: Edmonton, Montreal, and Toronto.
To continue to foster this growth and maintain its leadership position, Canada launched a CDN$125-million Pan-Canadian Artificial Intelligence Strategy in 2017, making it the first country to release a national AI strategy.
One of Canada’s five federally funded innovation superclusters is focused on AI. Scale AI, based in Quebec, has a program to fund up to 80 percent of the costs of AI training projects tailored to Canadian companies. Scale AI also reimburses up to 50 percent of expenses for approved projects that target the adoption or commercialization of AI for supply chains.
And Canada’s expertise and strategy is now paying off. When it comes to funding for AI in drug development, Canada was the second most funded country in 2020 with US$432.7 million in funding.
Moreover, Canadian AI firms accounted for a staggering 20.6 percent of the total revenue for AI drug development in 2020, despite less than one percent of the global revenue being earned in Canada.
Significant challenges ahead
As the AI drug development industry matures, vendors will experience significant challenges in the coming years:
- A strong consolidation of the investments in the industry means a few front runners now receive larger proportions of the overall funding, while late entrants struggle to keep up.
- The trend towards R&D outsourcing in big pharma has intensified in recent years, which means big pharma may be less keen on acquiring AI specialists than expected.
- For many of the pharmaceutical companies prioritising internal R&D capabilities, interoperability challenges, siloed data and ongoing quantum computing readiness programs still need attention, before being able to reach the full potential of AI acquisitions.
- After years of focusing on developing solutions and establishing initial partnerships, the competition amongst AI specialists has started to be reflected in revenue. Large milestone payments now differentiate the players and further amplify the industry consolidation.
The largest and most successful AI firms are going for a long-term contract research organization (CRO) strategy supporting the pharmaceutical industry as a separate entity. They have no intention of being acquired by their pharma partners.
Pharmaceutical companies outsource their clinical research capabilities to CROs for several reasons, including the therapeutic expertise of the CRO, cost benefits and geographic reach. The aim is to help bring new drugs and treatments to patients faster.
However, for many of the smaller CRO players with strong solutions but less progression business-development wise, the best exit strategy may often be an acquisition by these larger AI firms as they expand their capabilities. This way, they will be able to continue adding significant value by working on multiple projects across the pharmaceutical industry, as opposed to only supporting a single pharma acquirer.
Canadian AI companies will require global outreach
Will Canada be able to maintain its strong position in AI drug development?
Canada’s expertise lies mostly in early-stage drug discovery and drug design, but the country is represented within all three categories of AI drug development: insight engines, drug design and clinical trials.
While Vancouver-based AbCellera is in the lead on the global scale with its AI-powered antibody drug discovery platform, companies like Deep Genomics, ProteinQure, Cyclica, BenchSci, Altis Labs and WinterLight Labs — all based in Toronto — and Imagia in Montreal are also performing very well and are expected to continue to do so.
However, during the next five years, growth will primarily be driven by milestone payments and royalties from AI partnerships with large multinational pharmaceutical companies.
While Canada has shown extraordinary skills in fostering a scientific lead and developing a start-up ecosystem, long-term success for Canadian companies in this field will require a global outreach for business development opportunities and pharmaceutical industry access. As consolidation continues and competition from market leaders intensifies, it may become harder to justify operating as a separate entity with a niche product.
Intense focus on global business development and long-term strategic planning, will therefore be essential for survival, and will shape the foundation for Canada’s continued success in AI drug development in the coming years.
Dr. Ulrik Kristensen, PhD, is the founder and principal analyst at Emersion Insights, a UK-based independent supplier of market intelligence and consultancy to the global healthcare technology industry. He leads the research covering artificial intelligence, drug development, genomics and digital health.