If there is one thing I have learned from my days in the economic development world, it is that Canada truly is well known for its generous R&D tax credits around the world. My recent functions have convinced me even more, as recent incentives analysis of other jurisdictions such as the UK, has revealed that other countries have been implementing R&D tax credits based on the fundamentals of the Canadian system.
But reality is such that while economic development folks like I – now involved in site selection, are scattering the globe to attract new foreign investments - very few would know exactly just how much more attractive Canada really is for companies such as the biotechs, typically involved in significant levels of research and development.
A National Strategy
The Canadian biotech industry has grown rapidly over the last decade or so. In1983, the federal government started implementing a series of initiatives in order to generate such buzz through its national biotech strategy in the areas of economic and innovation policy. The strategy has been renewed constantly over the years to keep up with the development of the ever changing landscape of the biotech world.
Such federal measures involved government funding and granting programs for R&D projects, the so generous R&D tax credits program and the development of specialized research facilities in order to support the biotech companies.
By 2003, the favorable environment created by the federal government had stimulated the growth of the Canadian biotech industry to such levels that InPharma ranked Canada second in the world in terms of biotech companies right after the United States.
A Vigorous Industry
By then, the industry accounted for 490 companies . The Canadian biotech industry was rapidly expanding as the number of biotech companies in Canada increased from 208 companies during the 1997 to 2003 period, representing a growth of 74%. It generated 11,863 biotech-related jobs for Canada while the industry employed a total number of over 75,000 people.
The total revenue generated by the biotech companies was reaching the $31 Billion mark, a staggering 114% increase over 1997. With $11 Billion, Ontario is the leading Canadian province in terms of total revenues, representing 36%, followed by Quebec with $9.7 Billion (31%) and British Columbia with $4.4 Billion (14%).
Biotech related revenues totaled $3.8 Billion, representing a growth of 373% over the seven year period of 1997-2003. Ontario is still leading with 53% but is followed by British Columbia which generated 20% and Quebec is third with 12%.
The in-depth analysis of the industry reveals that these numbers are generated and largely concentrated around two fields of activities. The human health sector leads the biotech industry accounting for 53% of the total biotech companies and for 88% of all R&D expenditures. The agriculture sector of biotechnology follows with 18% and 4%, respectively. R&D expenditures reached $1.5 Billion for biotech companies alone.
Top Biotechnology Clusters
The Canadian biotechnology industry is heavily concentrated in three provinces. These provinces account for 75% of all biotech companies in Canada. Quebec has 146 companies, Ontario 129, and British Columbia 91.
In terms of effort devoted to R&D, the results are just as similar with the province of Quebec leading the pack with 33% of Canadian R&D expenditures followed by Ontario, 31% and finally, British Columbia with 25%.
These three leading jurisdictions have flourished around four cities that could be considered as serious contenders to the status of clusters: Montreal, Toronto, Ottawa and Vancouver. This is not to say that the other Canadian cities do not have a great business case to present, but considering the level of competitiveness in today’s world, one may need to be slightly humble about his Canadian bragging.
Montreal
Montreal ranks as a leading Canadian biotech cluster, and the city of Montreal is home to nearly 70% of Quebec’s biotechnology companies. The cluster is focused in and mostly related to the pharmaceutical industry. Montreal is a world leader in the fields of neurology, oncology, cardio-vascular disease, virology, epidemiology and immunology. The city is also host to top global pharmaceutical companies: Merck Frosst, Wyeth, Pfizer, Abbott and Bristol-Myers Squibb and biopharmaceutical companies such as ID Biomedical.
It accounts for 661 companies and research organisms in the life science sector that employs 37,250 people. Of the 146 biotechnology companies located in Quebec, 102 are located in the Greater Montreal Region employing more than 2,590 field-related people.
The companies can count on a complete R&D infrastructure. Of the four major universities in Montreal - McGill University, Universitéde Montréal, Université du Québec à Montréal, Concordia University, and 11 university institutions - two of them are dedicated to and specialize in life sciences: McGill University and Université de Montréal. Montreal’s universities train over 2,000 biopharmaceuticals graduates every year.
Montreal also boasts 125 public and parapublic research centers that provide a solid R&D infrastructure with access to state-of-the-art equipment for start-ups and leading edge companies.
In December 2004, Commerce Magazine ranked Quebec 3rd in North America after California and Massachusetts in terms of biotech cluster size. It also recognized the biopharmaceutical clustering with an 8th place ranking. Montreal has six dedicated applied sciences research laboratories owned by the pharmaceutical giants, such as DSM Biologics, a Netherland multinational, that invested over $125M in early 2000’s.
Toronto
Second when considering its biotech cluster size, the multicultural and metropolitan region of Toronto totals nearly 85% of Ontario’s companies.
The cluster has developed its expertise in genomics, proteomics, stem cell research, photonics, drug research and development and neuro-sciences. Researchers are focusing on biomaterials, biomedical engineering, cancer, cardiovascular disease, central nervous system disorders, human genomics, organ transplantation, and women's health. Of course, Toronto would not be considered a real cluster if it did not host some of the largest biomedical companies that have their offices in the Greater Toronto Region. Top biotech players include: Aventis Pasteur Limited, Biovail, Inventis, Lorus Therapeutics, and MDS. Moreover, a new biomedical complex is in the midst of being built in the Toronto area. The Medical and Related Sciences Discovery District (MaRS) will be funded by a joint partnership of public and private organizations. An amount of $345 million is expected to be invested in the new complex.
Of the 129 biotechnology companies located in the province of Ontario, 110 are located in the Greater Toronto Area and employ more than 2,980 field-related people.
The companies can interact and are in synergy with over a 100 hospitals and research institutes. The Toronto area is also home to four major universities providing such numerous field-research institutes. Top biotech centers of excellence would include the University of Toronto, York University, Ryerson University and The Michener Institute of Applied Health Sciences.
Ottawa
The smallest cluster of our top four Canadian clusters is Ottawa with 5% of Ontario’s biotechnology companies.
The Canadian Capital is better known for the presence of telecom giants such as Nortel and JDS. The Greater Ottawa Area is a well renowned tech centre with 90% of all of Canada’s industrial tele-communications research and development being conducted there.
The presence of such a high level of technological researchers gave rise to, and provided synergies for, the emergence of a biotech and biomedical industry. Top players are involved in projects such as bioinformatics, stem cells and regenerative medicine, drug discovery, medical devices, bioproducts and convergent technologies. Major biotechnology companies are also located in Ottawa: Aventis Behring and MDS Nordion.
There are almost 100 life sciences companies in Ottawa employing close to 4,000 related-workers. When considering all levels of employees involved in research institutions, the cluster employs more than 7,000 people.
Ottawa’s two major universities include Carleton and the University of Ottawa with specialized research units generating a population of over 25,000 students. The city houses some of Canada’s top government research centers, with the presence of 40 National Research Councils, and numerous research and development organizations.
Vancouver’s Biotechnology Cluster
The biotechnology cluster of Vancouver gathers more than 85% of British Columbia’s bio-technology companies. 70% of the biotechnology companies are mainly involved in biomedical and biopharmaceutical applications. The cluster has strength in the areas of health and genomics research with major biotech companies located in the area such as Angiotech, Cardiome Pharma Corporation, AnorMED, Abgenix Biopharma and QLT.
Of the 91 biotechnology companies located in the province of British Columbia, 77 are located in the Greater Vancouver Area and employ over 2,600 biotech field-related people.
The city is home to two universities and one technology institution: University of British Columbia, Simon Fraser University and the BC Institute of Technology. Several research institutes and specialized centers in the life science sector are located in Vancouver.
British Columbia universities graduate about 4,500 students per year in engineering and sciences. The BC Institute of Technology graduates 1,700 students per year in engineering/sciences/high tech trades.
So how much more exactly …?
Remember the initial reference to the generous Canadian tax credit programs. The Federal Government alone offers a 20% Scientific Research and Experimental Development investment tax credits for all R&D expenditures conducted. Additionally, an enhanced rate of 35%, which is applicable to the first two millions of dollars of qualifying R&D expenditures each year, is available to small Canada-controlled Private Corporations (CCPC).
Provincial Governments across Canada also have complimentary R&D tax credit programs:
Quebec
• Basic 20% refundable tax credit, or
• 37.5% refundable tax credit on the first CDN$2 Million on admissible expenses
• 40% refundable tax credit contract for prescribed research centres’ R&D costs.
Ontario
• 10% refundable tax credit for SMEs
• 100% tax deduction on the qualifying intellectual property acquisition costs
• 20% refundable tax credit for academic R&D (university, institution)
British Columbia
• 10% corporate income tax credit
• 100% exemption from provincial sales tax on R&D equipment
• 100% exemption from provincial sales tax on production machinery and equipment
Actual cost for one dollar of R&D expenditure is in fact as low as $0.218 in Quebec for SME and $0.375 in British Columbia for Large Corporations.
When these provincial programs are compared to the US 20% tax credit where R&D expenditure admissibility is based on incremental expenses, it is easy to understand why Canada really does have a great success story to share. This success is not only perceivable in the biotech world, as other industries such as aerospace have been enjoying this more favorable business climate for decades now.
Where does Canada rank when compared?
To understand the success of the Canadian biotech industry’s development, one needs to look closely at its lower setting-up and operating costs. KPMG’s Competitive Alternatives Study (2004) measured 27 cost components accounting for 85% of all costs.
According to the biotechnology industry cost comparison analysis, Canada has top ranking with its Canadian cluster gathering at least a 10% cost advantage over US cities. The model assumes a 23% level of R&D over sales and is characterized by a strong workforce consisting primarily of research scientists and technicians, thus generating significant levels of tax-eligible R&D activities.
International Results
Canada, with a score of 83.4, is the cost leader within the biotech industry with a cost advantage of 5.2% over Australia’s 88.6, its closest competitor, and a 16.6% cost advantage over the United States. The cost of labor and benefits and the effective tax rates are key factors in determining Canada’s ranking within the biotechnology industry.
The most expensive country within the biotechnology industry is Japan (135.9), with costs approximately 24 % higher than in Canada.
Cities Results
The KPMG’s study also provides the results for selected cities, such as Montreal, Ottawa, Toronto and Vancouver. Montreal scores a low 83.3 and is considered the least costly within the biotechnology industry with a cost advantage of 16.7% over the United States’ average. Ottawa (86.4) takes the second place; Vancouver (88.1) is third, followed by Toronto (89.8), the most expensive of the four Canadian cities.
The cost of labor and benefits and the effective tax rates, including the provincial R&D Tax Credit Program, are key factors in determining Montreal’s ranking. As a comparison for US cities the results were the following: Atlanta (99.7), Boston (106.3), San Diego (111.8).
Planning Your Next Move
Just about any site selection process for biotechs seeking to relocate or expand will integrate key indicators such as access to cluster and a favorable corporate business environment.
When considering North America, any serious process should consider Canadian clusters not only because they are providing access to real biotech clusters with leading edge companies and on-going research, but mostly because of the significant level of R&D expenditures commanded by the industry and the generous incentives generated by the Canadian R&D tax program.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG [member firm name or jurisdiction].
The information contained is of a general nature and is not intended to address the circumstances of any particular individual or entity.
© 2005 KPMG LLP, the Canadian member firm of KPMG International, a Swiss cooperative. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative
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