Business and History - Connaught Laboratories

Connaught Laboratories' recent acquisitions and joint ventures have propelled it into the international marketplace.

EARLY IN 1993, TORONTO'S venerable Connaught Laboratories Ltd. had reached a crisis point in its long history.
It was apparent that after almost 70 years, Connaught had become too big for Canada and too small for the rest of the world. The choices were obvious: Stay small and fight a rear-guard action for domestic markets, or jump into the exploding field of the New Biology, with aggressive joint ventures and enhanced research and development.
"We had to become world competitive or stagnate," says chairman and CEO, William Cochrane. "Everything pointed to a strategy of looking outside of Canada for our growth and potential."
Last year, Connaught suddenly embarked on a rapid series of acquisitions and joint ventures that propelled it into the international marketplace. And a recent discovery that might eventually free diabetics from daily insulin shots could open the door to a market conservatively estimated at $1.5 billion. As it now stands, Connaught is one of the three biggest biological companies in the world - not taking into account the biological divisions of the large pharmaceutical companies. (Pharmaceutical companies develop chemically-based drugs, while biologicals use live cultures to make their products, which include vaccines and insulin).
This is heady stuff for a company that started out as a sleepy university lab in 1917, when William Gooderham, founder of Gooderham and Worts Ltd., donated a 157 acre farm to the University of Toronto for the creation of immunology labs. The world had just begun to recognize
the importance of publicly financed preventive medicine, and the university had started to make quantities of tetanus and dyptheria vaccines - an endeavor made more urgent by the outbreak of the First World War. Located at what is now Bathurst and Steeles, the new site was considered to be sufficiently isolated for work with infectious diseases.
Since then, about half of the original endowment has been sold off, and the 50 buildings on the remaining 75 acres provide a visual history of the lab. Named after the Duke of Connaught, Governor-General at the time, the original 1917 structure is a Victorian collection of gables and roofs set up to produce vaccines and serums for the university. Sawdust from the lab had hardly settled when Frederick Banting and Charles Best startled the world with the discovery of insulin in 1921. The university immediately turned to Connaught as its insulin production vehicle, making it the world's first producer of insulin. In fact, the first director of insulin production was Charles Best himself.
Things hummed along normally until 1954 when Salk's discovery of polio vaccine caused another round of expansion. Groups of low, red brick buildings are a result of the polio vaccine discovery - in fact, Connaught developed the cell culture that made possible mass production of this vaccine.
Connaught had grown under the university, but by the late 60s, it became obvious that it was inappropriate for a university to own what had become a commercial enterprise. Because the federal government was concerned that this
unique commercial concern remain in Canadian hands, the Canadian Development Corporation purchased it in 1972.
The switch from an academic culture to a commercial one was not without its problems, but Cochrane believes strongly that it was necessary. "A number of people thought that Connaught's purpose should be non-profit," he says , "and there was a period of uncertainty. But over time people began to realize that we were on the move."
Cochrane came to Connaught in 1978 after a career that saw him as, among other things, president of the University of Calgary and Alberta's deputy minister of health. "I think there had been a certain loss of scientific vigor in the I latter part of the '60s," he concedes, "so there was a need to restructure and redirect the research thrust and to look at the technologies in terms of manufacturing them efficiently."
The main difference between academic and commercial R and D, he believes, is that the university atmosphere encourages "pure" research which involves individual, unstructured work. This is a very productive research approach, and one that has supplied us with many of our most valuable inventions, but it simply wasn't going to work as a management philosophy for a commercial lab.
"Back in 1976, there were only two or three of us in senior management who
were trained in the commercial area," says Alun Davies, who became Connaught's president in 1975 after 14 years in the pharmaceutical industry. "The company was losing millions every year. Our first job was to change that, which we did in 1979, the first year we made a profit.
"In 1972, Connaught Labs had roughly 900 people and annual sales of about $15 million," explains Davies. "Now, with less than 750 people, we have annual sales in the $75 million range."
This was accomplished, Davies says, in spite of a still very "thin" management team (the major appointments that helped solidify the company weren't made until the early 80s) by concentrating on two key areas: improved productivity and long-term strategic planning. Some departments were discontinued and some staff was laid off. But basically the company slimmed down through slow attrition - a hiring freeze coincided with a large number of retirements. And, as Davies points out, "'Are just became more efficient - the cost of our main products didn't rise for three years."
The elements of the long-term strategy were more elaborate. It took years of careful negotiations to pave the path for last year's round of activities, highlighted by the joint venture with the world's second largest manufacturer of insulin, were trained in the commercial area," says Alun Davies, who became Connaught's president in 1975 after 14 years in the pharmaceutical industry. "The company was losing millions every year. Our first job was to change that, which we did in 1979, the first year we made a profit.
"In 1972, Connaught Labs had roughly 900 people and annual sales of about $15 million," explains Davies. "Now, with less than 750 people, we have annual sales in the $75 million range."
This was accomplished, Davies says, in spite of a still very "thin" management team (the major appointments that helped solidify the company weren't made until the early 80s) by concentrating on two key areas: improved productivity and long-term strategic planning. Some departments were discontinued and some staff was laid off. But basically the company slimmed down through slow attrition - a hiring freeze coincided with a large number of retirements. And, as Davies points out, "We just became more efficient - the cost of our main products didn't rise for three years."
The elements of the long-term strategy were more elaborate. It took years of careful negotiations to pave the path for last year's round of activities, highlighted by the joint venture with the world's second largest manufacturer of insulin, Novo Industri A/S of Denmark.
Under the terms of this agreement, considered by company officials as its first major jump in the international marketplace, Novo will manufacture insulin in Canada for distribution by Connaught. To do this, the Danish company has created a new Canadian subsidiary, Novo Laboratories Ltd., which will lease, modernize and operate Connaught's insulin production facilities. Under the new arrangement, Connaught personnel currently working in the facilities will continue to work in insulin production. Another subsidiary company, Connaught-Novo, will be owned by both parent companies. This move is expected, among other things, to bring the Canadian diabetic purer, human insulin faster than would have been necessary. Also, Novo's Canadian facility may be used to supply world markets.
This is of more significance than it might first appear. Because of the connection between Connaught and insulin, it is generally assumed that it benefited from a head start and had a lock on world sales. Perhaps it should, but the sad truth is that back in the '20s, the university signed away most of its rights. Consequently, Connaught has the entire Canadian market, but only one or two percent of world sales, none of which are in the U.S. The company needed a powerful ally and Novo makes and sells 40 percent of the world's insulin.
Last year, Connaught also became the sole owner of Connaught Labs Inc., in Swiftwater, Pennsylvania, a vaccine production plant that is a reversal of the usual U.S.-Canadian corporate trend. This was added to its other subsidiaries - Bioresources Inc. (a blood plasma collection operation) in Halifax N.S., and Dominion Biologicals Inc. (a blood serum typing company) in Truro N . S.
In addition, they formed an agreement with Integrated Genetics Inc. of Massachusetts, a deal that should allow Connaught to be first on the market with a hepatitis vaccine by as early as 1986. A similar agreement with a Japanese company is expected to result in an improved pertussis vaccine for whooping cough.
Next, a marketing arrangement was entered into with the U.S. pharmaceuticals giant, E.R. Squibb and Sons Inc., that will give Connaught access to the lucrative American market through Squibb's huge selling and distribution network.
These agreements and joint ventures are important for Connaught, but if the company is going to make it internationally, it will be largely on its own breakthroughs ? and that means research and development. The Connaught Research Institute was created with this in mind, explains Dr. Keith Dorrington, director of the Institute and vice-president of research and technology at Connaught Laboratories Ltd.
"The original objective of the Institute," Dorrington says, "was to give research a focus within the company, create an atmosphere more academic than the rest of the firm in order to make it easier to recruit academics, and to underline to employees the importance being placed on research."
The Institute has about 100 on staff, about half with PhDs, and, Dorrington says he wouldn't be surprised to see it increase by 50 percent in the next two years.
Dorrington, who was head of biochemistry at University of Toronto before he joined the company last year, likes being in a commercial establishment for a change. "I'm enjoying the rapid decision making and the ability to see results in a short time," he says enthusiastically. "It will be satisfying to work on something and then three or four years later see it being produced here."
He stresses that the pure academic approach of individuals doing their research will be replaced with teams of scientists working on specific areas in the future. Right now, the two main areas of research, indeed the two main tools being used by all biologists, are genetic engineering and mono-cloning, which have put the biological industry through a revolution.
Up until 10 years ago, scientists at Connaught had to grow all of their bacteria cultures. Now they use a deceptively plain grey box ? the "gene machine" or synthesizer ? which produces serums by manipulating genetic material.
They also use a production technique called mono-cloning to replicate and produce antibodies at an accelerated pace. "This is done," explains Dorrington, "by fusing cells together to produce another cell that continually replicates itself to make specific antibodies. The old way was to inject an animal with a dose of a disease and obtain the antibodies produced in the animal's blood."
Dorrington is optimistic about the future the new biology will mean to Connaught.
"Ten years ago there were 13 or 14 Major vaccine producers in North America," he explains. "Now there are maybe five. This is partly because the market became stagnant as the birth rate dropped. But now new vaccines are being developed to attack the so-called 'adult' diseases like hepatitis, herpes and other venereal diseases. We are also working on an influenza vaccine that will protect against all strains. The first one out with this will definitely make money."
Genetic engineering is largely responsible for these new opportunities. In fact, it has become to biology what the microchip is to the electronics industry, and, according to Dorrington, "The few companies that are left are now likely to ?row as the marketplace expands."
There is a feeling of excitement round Connaught these days, and one thing that makes the excitement almost palpable is a new scientific breakthrough being pioneered by the company. Called Cell Microencapsulation, this is a procedure in which living cells are placed inside plastic capsules and injected into the patient's body to act as an artificial organ. The capsules are so tiny that large numbers can pass through a hypodermic needle. The injected cells
are protected against attack from the body's immune system by the capsule's walls highly specialized polymers which allow small molecules, such as insulin, to pass through while blocking larger molecules, such as antibodies, which would destroy the cells.
In the case of insulin molecules, for example, they would be released by the body's triggering system just as they are in a normal pancreas, making the encapsulated cell a miniature organ. This makes the procedure not only potentially useful for diabetes, but also for other hormonal problems, such as birth control and liver disease.
In animal experiments conducted at Connaught by Dr. A.M. Sun, microencapsulated cells monitored more than a year after injection were still alive and functioning. Company officials estimate that, in the field of diabetes alone, the gross sales revenues for the manufacturer would be between $1.5 and $6 billion.
However, even if a technique or substance shows tremendous promise, the company still has long and expensive clinical and regulatory trials to go through before a new product can reach the marketplace. This is one of the frustrating and nerve-wracking aspects of the industry.
"Usually by the time a product gets to the stage of full clinical trials, you have a pretty good idea that it's going to be marketed," Dorrington says. "But that doesn't mean you will make the money on it you thought you would when you started the research. It depends on what your competition was doing all that time."
This underlines the intense competition that pervades the high-tech biological industry. Security around Connaught is as tight as you will find anywhere, and the chain-link fences, I.D. badges and check points aren't just because of the work done with infectious bacteria.
In fact, Ron Balmer believes the biological field is even riskier than the electronics industry. "With a hard product like electronics," explains Balmer, "your research comes to an end when you prove something works. But when you are working with disease control, you may start down one track only to have some unpredictable fault turn up. So you have to start over - and you don't have a firm drawing or design to go back to."
Balmer points out that even when you have a finished product, you still have to obtain approval from various governments, and they are not easy to get. "After all," he says "you are putting things into the human body."
All of this activity comes under the broad heading of R and D. Connaught plows some 90 percent of its profits - or about $15 million a year - back into R and D, which is why Balmer feels they are lucky to be owned by the CDC.
"The CDC is a very lenient parent," he explains. "It has allowed us the opportunity of using our funds to expand. For example, we might have had a parent who would 'milk' us of our profits. But, except for one time, the CDC has never required a dividend from us so we have been able to plow our profits back."
Connaught is a unique company in a unique industry. Not only do biological companies have to make a profit - they must also deal with the ethical and moral questions raised by the fact that products save human lives and therefore must be made available. The way around this seems to be skilled negotiations with governments.
In Canada, its products are bought by provincially-owned labs, which distribute them to hospitals and doctors. Internationally, most governments deal with collective purchasing agencies, such as UNICEF, which tender contracts. Connaught regularly bids on these, in addition to arranging technology transfer operations in such countries as Pakistan, India, Indonesia and the Sudan. In Pakistan, for example, it is building polio, measles and rabies vaccine plants, as well as training personnel for them - operations that are subsidized by both the Canadian and Pakistani governments.
"None of the new genetic engineering companies have expertise in areas such as manufacturing, marketing, production and management - and more particularly - the sensitive business of how to work with government authorities to obtain licensing. Connaught is a totally integrated company, and that makes us unique," says William Cochrane, who believes that in the near future, the biological industry may rival electronics in importance.
"And here is a Canadian company on the leading edge," says Connaught's visionary "ready to capitalize on it."