Thought Leadership

February 2012

Update on the Life Sciences Sector- A Rebirth of the Biotech Era

Did you know that 10 of the most potent drugs developped in recent years are biologic products?

Yet, due to a mismatch in the risk vs reward model experienced by institutional and individual investors alike in recent years, the Life sciences sector and the biotech sector especially have been starved by the lack of funds avaible to fuel their ongoing activities.

The Life Sciences sector has been hit by a number of sequential closings of R& D sites in and around Montreal. While the phenomenon is universal in this day and age, Montreal has been particularily affected by this contraction of this facet of
the industry.

We attribute these closings to the drive by Big Pharma to rationalize their operations and strategically choosing to cut their R & D and infrastructure costs. Their business models are all changing to reflect the following:

  • Significant loss of revenue due to patent expirations in 2012-2014;
  • Slower anticipated sales growth opportunities in the Western World;
  • A growing demand from BRIC countries and oher emerging markets for current and market specific new drugs and   therapeutics;
  • A recognition that the future may lie more on personalized medicine and biologics at the heart of new therapies;
  • A reallignment of their R & D inhouse development programs to reflect the disappointing results achieved over the last 5 years; and
  • A renewed interest in outsourcing some of their discovery activities and to enter more
    collaborative agreements with smaller entities.

We are now witnessing the rebirth of the smaller Biotech laboratories and early stage drug development companies, and their joint development programs with Big Pharma are bound to increase the chances of success in this very long and risky business.

Having the complementary skills offered by both Big Pharma and Early stage R & D based companies, will surely lead to better outcomes in the long run. The next challenges will be for them to find ways to meet the payors’ wishes to contain spiraling and budget paralyzing health care costs, and to make more efficient use of monies spent through out the process from discovery in the lab to post marketing evidential studies, to support continuing programs.

It should be pleasing to the long time supporters of the Biotech Era, that there is finally recognition that biotech companies and smaller life science companies may well have an advantage in the earlier stages of drug development. This should also alleviate their dependency for short term and longer term financing on both the venture capitalists and the public markets alike.

The Canadian government is expected to announce changes to its current R & D tax programs which have a major impact on the continued operations of the Life Sciences sector. Based on the Jenkins report issued earlier in 2011, some expect the tax credit program to be more focused and to advantage the larger and more successful companies. If that were the case, where will we stand with respect to innovation in 5 to 10 years from now?

We will venture to suggest that a better turn of events would result if the R & D tax program allowed companies in a tax loss position to recover in cash their tax credits at the end of the year in which the expenses are incurred. This will allow smaller
biotech companies and start ups to survive while they are not yet generating revenues and taxable income. A revised program imposing some form of clawback for the used up R & D tax credits could also be considered.

This may in fact be the reward to the government for supporting early stage companies.

 

December 2011

Commercial disputes and alternative dispute resolutions- Is there a place for Professional Accountants?

Many commercial contracts include some form of dispute resolution clauses as part of the Closing Agreements. Some are boilerplate text that allow for mediation or an arbitration process, if the parties can agree, or ultimately, the dispute will result in a full blown legal disupte to be settled through lengthy and costly Court proceedings.

In the course of our experiences working with commercial disputes, we noted that too often the dispute resolution clauses were deficient in the following ways:

  • They tended to be too vague and left a lot to interpretation and differences of opinion between the parties;
  • They referred to “ past practices or generally accepted accounting principles” ; and
  • They offered the possibility for parties to agree on a binding (or non-binding) arbitration process, without naming the
    designated pre-approved arbitrator at the outset.

Disputes emaniating from commercial contracts cannot be completely avoided. It is especially true when circumstances change and the original agreement no longer makes sence for one or both parties, and terms need to be changed or the contract terminated.

Having said that, details about how the termination clause can be triggered are usually very good. What is generally missing is the details around the method of calculating of damages upon which both parties agree at the outset. For example, how do you measure the opportunity cost to one or the other party should the contract be terminated early.

If historical data is used as a benchmark, then examples and details should be included an an exhibit to the contract.

If G.A.A.P. references are included then, they should state which sets of rules will prevail. Different parties often adhere to different accounting principles – such as those applicable to public companies, privately held companies, and not for profit institutions. Furthermore parties frequently choose to use GAAP based on their own country of origin – IFRS, US GAAP or Canadian GAAP (which may differ from IFRS).

Such precision in original contract drafting prove very valuable when both parties approach the quantification of a sttlement proposal under a dispute resolution or simply in the application of an early termination clause.

Should you opt for an arbitration as the chosen road to a dispute resolution, then you should insist on having a binding decision as the outcome, and with agreed upon terms of reference, indicating both the arbitration processes imposed on the parties and the arbitrator, and acceptable timelines

By the way, it is not frequent that we see the name of an experienced professional accountant as the agreed upon nominee as the arbitrator. We see more frequently an experienced lawyer or retired judge. You should consider the naming of a professional accountant where matters such as GAAP or the quantification of damages is important in your reaching an eventual resolution.

They bring an intimate knowledge and appreciation for what are acceptable alternatives under various GAAP practices, as well as experience in choosing the apporpriate ones depending on the circumstances. A deeper knowledge of how financial statements are prepared and on standards of financial reporting, is an added value to reaching a more equitable resolution for all.