Money down the test tube

In early February 2009, the U.S. Securities and Exchange Commission levied a $1-million civil penalty against Eugene Melnyk, the Ontario-born, Barbados-residing owner of the Ottawa Senators hockey team. Melnyk, the SEC said, had violated various stock-disclosure and antifraud provisions during his tenure as president of Biovail Corporation, the one-time Canadian pharmaceutical wunderkind. It was the second time in less than a year that the SEC rapped the collective knuckles of Biovail executives. In March 2008, Biovail was made to pay a $10-million civil penalty for having “actively misled investors and analysts about the reasons for the company’s poor performance,” according to an SEC complaint. The SEC wanted to bar Melnyk from serving on the board of any publicly traded company in the U.S., which it ultimately did in 2011. (Melnyk settled with the SEC without admitting any wrongdoing.)

Despite the fines and resulting headlines, Melnyk’s reputation hardly suffered in the eyes of the Canadian government. Not five months after the second SEC judgment, Melnyk was at a sod-turning announcement for PurGenesis, a Quebec biotech company specializing in the production of spinach-based antioxidant medications and cosmetics.

“The government of Canada is proud to lend its support to this firm, the country’s first to manufacture plant-based medication,” said Quebec MP Steven Blaney, announcing $282,000 in new funding to PurGenesis in June 2009. All told, the federal government has invested $3.2 million in the company. Melnyk, PurGenesis’s president, chairman and largest investor, hinted at the many well-paying jobs that would result from the investment.The federal government apparently thought so as well, noting how the Montmagny plant “is expected to create some 100 jobs within the next two years,” according to a statement at the time. Montmagny Mayor Jean-Guy Desrosiers called the PurGenesis plant “one of the most important files of my political career.”

Yet nearly four years after that announcement, and after a total of $8.2 million in federal and provincial government grants and loan guarantees, PurGenesis largely remains a pipe dream. Today, that 17,500-sq.-ft. plant is as quiet as the graveyard across the street. Its doors are locked, the parking lot is empty and mail is piling up in the mailbox. The same goes for PurGenesis’s Montreal offices, also empty on a recent Tuesday afternoon. After an initial rollout, the company website has since been replaced with a blank page simply reading “under construction.” PurGenesis president André Boulet didn’t respond to interview requests. And those jobs have never materialized.

The pharmaceutical industry is a highly speculative field, in which the failure rate for drugs “is typically 80 per cent,” as former Biovail and current PurGenesis CFO Brian Crombie admits. Yet despite this, and despite the fact that with a personal wealth estimated at $973 million, Melnyk arguably has the financial wherewithal to fund the company on his own, the Conservative government poured money into the venture.

PurGenesis is hardly the government’s only risky investment. Prime Minister Stephen Harper recently announced a $400-million venture capital initiative that effectively puts the government in the business of high-risk financing. It includes up to $100 million to recapitalize existing large funds that hold investments in other venture capital funds. It’s a dramatic about-face for a Prime Minister who, as leader of the official Opposition, often chastised the governing Liberals for “picking winners and losers” by investing in the private sector. The venture capital initiative in general, and investments in the type of unproven science that PurGenesis is peddling in particular, suggest that the government’s frequent trumpeting of the free market is more jargon than ideology.

PurGenesis’s science is based on the unique properties of baby spinach. The plant is rich in thylakoids, the pouch-like membranes containing the light-absorbing chemical chlorophyll. According to PurGenesis founder Boulet, who helped pioneer the science, thylakoids have anti-inflammatory properties ideal for the treatment of ulcerative colitis and psoriasis. The company also plans to market a cosmetic line; according to PurGenesis promotional material, thylakoids harvested from baby spinach are powerful antioxidants that can be used in anti-aging creams.

Yet the process of converting Boulet’s research into sellable products has been fraught with uncertainty. Far from creating near-instantaneous, stable and high-paying jobs, pharmaceutical start-ups are known for long periods of what Crombie calls “hibernation” between production for pre-clinical and clinical trials. Translation: contrary to what Blaney announced in 2009, PurGenesis’s $12.8-million, government-subsidized plant will remain largely shuttered as PurGenesis awaits approval from the U.S. Food and Drug Administration and Health Canada. And that’s if the drugs are approved at all.

“That’s the challenge of pharmaceutical development,” Crombie told Maclean’s. “I checked out the science as I took a look at joining the company, and I think that the science is great. But the reality is that doesn’t count for anything until Health Canada or the FDA say it’s great.” (As part of the SEC settlement, Crombie was also barred from serving on a publicly traded company. He had a similar settlement with the Ontario Securities Commission.)

Despite the inherent start-stop nature of the workflow at the PurGenesis plant, Boulet let it be known that the government investment would help generate scores of permanent jobs. He further intimated that the baby spinach could be grown in the Montmagny area, creating even more jobs. Montmagny’s mayor says Boulet told him how the town’s temperature and climate are ideal for baby spinach—though a Quebec government report, published just last year, says that, given infrastructure and financial problems, growing spinach there could take up to five more years before it’s viable.

In an email exchange with Maclean’s, Melnyk said he invested in PurGenesis only after the company had secured government funding—although PurGenesis received all its federal funding at least a year after Melnyk joined PurGenesis in 2007.

“Some of the greatest discoveries in medicine were founded here in laboratories in Canada, including Quebec,” says Melnyk, who ranks 75th on Canadian Business magazine’s “2012 rich 100” list. “Medical research can happen anywhere in the world. I choose to do it in Canada because I believe we have some of the greatest scientific minds, certainly not because of modest financial grants.”

Yet shortly after this email, Melnyk spokesperson Ken Villazor wrote Maclean’s, noting how similar federal and provincial government grants allowed Biovail, Melnyk’s former company, to build its plant in Steinbach, Man., in 1992*. “Today, that manufacturing facility produces 12 products to the global marketplace, producing over 1.2 billion tablets and capsules,” Villazor says. “If there is anyone who recognizes the full benefit and value of government grants to drive employment and the economy, it would be [Melnyk].”

In fact, it was the investment of people like Melnyk, who reportedly injected $12.5 million into the company, that helped convince the government to get involved in PurGenesis. “We consider it sharing the risk,” says Christian Audet, a regional director with Canada Economic Development for Quebec Regions. “PurGenesis is a young company that developed a multi-million-dollar project, and there was significant fundraising from the private sector in which [Melnyk] decided to support the project.” The government announcement of 100 jobs by 2011 was PurGenesis’s own estimate, Audet added.

It wasn’t long ago when Stephen Harper decried any type of government intervention in business. In a 2002 opinion column entitled “Get the state out of the economy,” Harper, who was then on the cusp of becoming leader of the official Opposition, blamed the Liberal government’s “large cash infusions [ . . . ] for the purpose of so-called regional development” for the economic demise of Canada’s Atlantic region. The solution, wrote the future prime minister, was “an open, unsubsidized and productive economy.” In 2004, ensconced as official Opposition leader, Harper was as unequivocal: “We don’t agree with corporate welfare and subsidization. Business should be business and government should run public-interest concerns.”

The Prime Minister has apparently changed tack since assuming office. The budget for the Economic Development Agency of Canada for the Regions of Quebec has increased by roughly 15 per cent, to nearly $253 million, since the Conservatives took power in 2006.

Under Harper, Ottawa has also continued to pick corporate winners and losers. According to a recent auditor general’s report, Canada’s aerospace industry has received $1.2 billion in grants and loans from the federal government since 2007. One of the biggest recipients of these funds is Bombardier, once Harper’s target of choice when it came to pillorying the corporate-welfare excesses of the Liberal government. More recently, Harper travelled to Oakville, Ont., in early January to announce a $250-million renewed contribution to carmakers through the Automobile Innovation Fund—just days after car companies reported 2012 was their second-best year on record for sales in Canada.

The Conservative government ideology might well have changed with the times, of course. As Université Laval economist Stephen Gordon notes, there is an argument to be made for this kind of spending during an economic downturn. “In a recession, there are other reasons for throwing money around,” he says. “It made a lot of sense to me at the time to intervene to prevent a catastrophic collapse of the auto sector in the middle of a recession. It makes much less sense to throw money at the auto sector three years later.”

In PurGenesis’s case, advocates of stimulus spending would argue that, at the very least, it took equipment and man-hours to build the PurGenesis plant, and there is now a high-tech pharmaceutical plant where there was once only pasture.

There’s still a chance that, despite the odds stacked against PurGenesis, it might eventually get the regulatory approval it seeks and bring a product to market. The company’s colitis medication is currently undergoing stage 2 tests in Germany; Crombie says the results should be known by this March at the latest. If successful, the product will be further tested before receiving Health Canada and FDA approval. “It was up to the government whether they wanted to support it, and I think it was probably the right decision,” says Crombie. “Pharmaceutical development is risky, and I happen to believe that these clinical trials will be positive, but you don’t know.”

One person who doesn’t seem the least bit worried about the fate of PurGenesis is Montmagny mayor Desrosiers. He chuckles when reminded of his bon mots regarding PurGenesis’s importance to his town, and compares having the empty, expensive plant in his town to owning Nortel stock. “As long as they aren’t dead, maybe my shares will gain value once again,” he says. Never mind that Nortel is dead and its shares are now worthless.

PurGenesis’s municipal tax exemption expires in 2014, after which the town can always repossess the building if the taxes aren’t paid. But Desrosiers doubts it will come to that. “One day or another, if it isn’t PurGenesis who uses it, it’ll be someone else. No matter what, one of these days we’ll make money on it.” Sadly, the odds aren’t nearly as good for Canadian taxpayers.

*an earlier version of this article misnamed the town.