THE VC VISTA

Industry Views on Canadian Biotech Financings for 2005-06

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Compiled by Deborah Komlos

The outlook for biotech financings in Canada in the next year is cautiously optimistic. There are several companies hoping to make the leap to become public entities, and we know of several that have recently signed mandates with investment bankers.

There are continued positive signs, such as Canada’s great sources of research talent. The advantage of the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program returning cash to the private companies makes doing research here very attractive. It also allows investors such as the venture capitalists to make better returns.

However, the commercialization of new products lags due to the historically smaller size of venture capital deals in Canada as compared to the U.S. In the last 18 months, there has been a trend towards larger deal size that is allowing for a faster move to commercialization. I expect this trend will continue.

American VCs are reluctant to invest in Canada, as companies have been undercapitalized and there are enough great opportunities in the U.S. The different currency, laws and travel time all discourage the investment. In addition, they view Canadian CEOs as not having enough U.S. or international experience to move quickly.

There have been several foreign companies that have set up research operations in Canada and they are funded by the labour-sponsored funds. The Canadian funding and ownership gives these companies access to the SR&ED tax credits and the benefits of the lower dollar. A majority of the U.S. parent firms of the new companies are venture-funded, and their experience in Canada may give those U.S. VCs better insight into Canada.

The key to attracting capital is to have strong leadership teams — the board of directors, scientific advisory boards and the executive team are all important. A broad group from different geographies with previous experience will create the credibility to interest investors. Great advisors, both in the legal and accounting professions, need to understand cross-border issues and how to simplify the situation to make it effective for all concerned.

We are seeing improvements in numbers and transaction size for companies that have invested wisely and met their milestones.

On a cautionary note, labour-sponsored funds raised little money in the spring RRSP season, and that always puts a damper on the number of deals done. There may be a number of great deals being reviewed by the VCs, but they are not as aggressive and are saving their funds for the existing investee companies. This creates the need to find other forms of financing, such as private placements and the IPO market. There will be an increased demand for SR&ED tax credit financing to stretch the remaining cash as companies await the closing of their financings.

Overall, I believe the funds raised in 2005–06 will be up, but not from the VCs.

Grant Tipler is manager of Life Sciences & Health Care at RBC Royal Bank (Toronto, ON).


Canadian life sciences companies are doing two things on a continuous basis: developing world-class science and finding money to support that development. Some have been very successful and built world-class companies — BioChem Pharma Inc. (acquired by Shire Pharmaceuticals Group PLC, Basingstoke, U.K.), QLT Inc. (Vancouver, BC) and Angiotech Pharmaceuticals Inc. (Vancouver, BC) are all examples. Close behind them is a broad and exciting range of companies and products from across Canada that are poised to join their ranks.

The lifeblood of this sector is risk capital, and for every dollar available there are 100 life sciences CEOs with an outstretched hand. These days, the competition is even tighter as other sectors — including mining and energy — are showing investors very attractive returns.

Follow the Money
The funding that is available in Canada is only a fraction of what is available globally. The U.S., for example, has individual VC firms and public funds with more life sciences money under management than the entire Canadian VC community. This is not a comment on the Canadian VC landscape, which has supported and funded the second-most active biotechnology community outside the U.S. It is a call to Canadian biotech companies to fish where the fish are. One way they can do this is to access the vast pool of U.S. capital as early and often as possible. World-class science attracts world-class investors.

While it is not easy to get attention in a competitive market, it is possible. In particular, be prepared. First impressions count, so spend time upfront developing a quality presentation that clearly speaks to your business plan and product development strategy. Make sure your meeting targets are comfortable with stories like yours (visit their Web sites, read their criteria, review their existing portfolio). Become a ferocious networker — attend the key conferences, meet with investment bankers who will refer you to relevant VCs, and subscribe to industry journals. If you execute on these suggestions, and truly have a breakthrough-type technology, the dollars will flow, blind to the presence of the 49th parallel.

IPO Ahead — Proceed With Caution
Historically, another financing route was to go public, and the sector saw windows of opportunity in 1995-96 and in 1999-2000. Although there was no equivalent window in 2004 and early 2005, there were opportunities for good stories with reasonable valuations to access the market — such as MethylGene Inc. (Montreal, QC), SemBioSys Genetics Inc. (Calgary, AB), Chemokine Therapeutics Corp. (Vancouver, BC), OccuLogix Inc. (Toronto, ON), Aspreva Pharmaceuticals Corp. (Victoria, BC) and Atrium Biotechnologies Inc. (Quebec City, QC).

It has been our experience that private companies should not rush to go public. Instead of a handful of shareholders with five-year investment horizons, one can end up with thousands of shareholders who continuously monitor share price and fund manager performance that isn’t evaluated in conjunction with drug-development milestones. Staying private and attracting quality VC shareholders allows companies to build the fundamentals (the most important being clinical data) and position for a more successful eventual IPO, at a higher valuation and with greater institutional support.

Concerns often raised about staying private relate to attracting a stronger valuation and excessive dilution at lower prices. Our advice is not to worry. If you are going to produce and commercialize a product worth hundreds of millions of dollars, there will be plenty of upside for everyone. Look at the formative history of Amgen Inc. (Thousand Oaks, CA), which only became the world’s largest biotech company after a series of highly dilutive financings.

If an IPO is at hand, do your homework. Meet with as many investment banks as possible. Meet their analysts. Do they focus on a specific disease or indication? Talk to the institutional traders. Does the bank regularly trade stocks in your peer group? Look at the firms’ historical ability to execute and support an IPO. Finally, start early. It takes months, not weeks or days, to do prospectus drafting and presentation development effectively.

Jason Hogan is executive vice-president, and Wayne Schnarr, PhD, is life sciences specialist with The Equicom Group (Toronto, ON).


For investors, the lure of investing in the biotechnology sector is the promise of superior returns, by choosing a portfolio of high-potential, high-risk companies. For Canadian investors, this promise has not been based on any long-term historical performance; rather, it has been largely faith-based — that is, returns will come. As we forge ahead into 2005 and beyond, the sector will need to start delivering on that promise or the Canadian biotechnology opportunity will continue to be an undercapitalized and underexploited one.

We have a handful of Canadian biotech companies delivering on the promise. Unfortunately, since the last significant Canadian biotech IPO window five years ago, the sector has not delivered the promised returns. (During the period 2000-04, VCs have invested in excess of $3 billion in the Canadian life sciences equity markets.) Admittedly, this time period has been difficult on investors. However, many high-potential, high-risk sectors — including the U.S. biotechnology sector — have recovered well over the past year and a half. The time for the Canadian biotech sector to deliver on its promise is now.

The absence of profitable exits (IPO or M&A) has slowed the flow of funds into the Canadian sector of late. In the absence of realizations and profits, I expect that the Canadian VC situation will remain status quo or worsen in the short term. Significant institutional capital remains on the sidelines, waiting for VCs and their portfolio companies to deliver on the promise before committing further funds. In addition, the amount of VC in reserve for new or follow-on investments is falling rapidly. To maintain the status quo of VC investment, VC funds will need to be replenished, either through realizations or further fundraising activities. If the sector delivers on the promise in 2005, it is reasonable to expect that it will be on the road to recovery. If it doesn’t, however, it may be on the fast track to a crisis.

One recent trend that I find disconcerting is the growing tendency for significant amounts of Canadian venture capital to flow into the Canadian subsidiaries of private U.S. biotechnology companies. This activity will lead to a branch plant biotechnology sector in Canada, where foreign firms exploit the country’s high-quality scientific resources. Under this scenario, profits from those discoveries and developments will flow out of Canada, as opposed to helping build a self-sustaining local sector. If we can’t rally our own community around Canadian companies, how can we expect other risk capital to follow suit?

Ironically, at the same time, there have been several significant financings of Canadian-based companies by U.S. VCs.

The growing trend of internationally sourced VC investing in Canada is a sign of a maturing sector and bodes well for the future. This positive trend will grow as this activity moves from being largely independent of Canadian VCs to being more integrated with the local community.

As the Canadian VC landscape takes shape in 2005, public sector investment and support for the biotechnology sector continues to grow. Another positive development is the increased government investment in, and support for, basic and applied research funding, as well as infrastructure projects (e.g., MaRS Discovery District, Toronto, Ont.). In particular, the growth in applied R&D funding (e.g., IRAP-TPC, the joint program of the Industrial Research Assistance Program of the National Research Council of Canada, Ottawa, Ont., and Technology Partnerships Canada, of Industry Canada, Ottawa, Ont.), and proof of principle funding (e.g., the Canadian Institutes of Health Research — Ottawa, Ont. — Proof of Principle Grants program) is a sign of the maturation of the sector; an increase in this targeted public funding will likely attract more risk capital to early stage VC financing.

Additionally, the federal government’s ongoing commitment to the Business Development Bank of Canada’s (Montreal, QC) venture capital programs is indicative of its commitment to growth of the private biotechnology sector. These public sector investments may not have a significant impact on the private sector in 2005. However, the Canadian biotechnology sector will be well served by these strategic investments over the long term.

There does exist a significant investment opportunity in Canada — an underserved and underexploited opportunity. I do have reason to be optimistic, despite all the constraints involved in building a Canadian-based biotechnology company. I am confident that some newer companies will soon start to deliver on their potential — moving the promise of investing in biotechnology from a faith-based process to a performance-based one. Then, and only then, will our sector begin to thrive.

Kelly Holman is managing director at Genesys Capital Partners Inc. (Toronto, ON).


Successful venture capital investing in biotechnology is difficult — and this task is further complicated by current market conditions.

For a commercializable technology, securing suitable early investors — typically, angel or seed funding — ensures that it can be developed to a state in which it is appealing to later stage funding sources.

Financing beyond the seed stage has tended to come from labour-sponsored technology investment funds (LSTIFs). After one or more financing rounds from the mainstream VC firms, most of the developing companies will require further financing. Over the past two years we have seen increasing U.S. VC investment in Canadian life sciences firms — including Aspreva Pharmaceuticals Corp. (Victoria, BC), Gemin X Biotechnologies Inc. (Montreal, QC) and Neuromed Technologies Inc. (Vancouver, BC). Because few of these transactions were done at higher valuations, much of the “value” that has been built up by mainstream Canadian funds is being “captured” by the U.S. VCs.

In Ontario, the VC supply comes largely from the various labour-sponsored VC funds that have been tapping into the retail market since the late ’80s. So far, few of the LSTIFs have produced returns to stimulate market growth for this asset class. Accordingly, we have seen the market decrease by 50 per cent per year over the last several years. As the LSTIFs tended to invest in early stage investments, we would expect new investments by these funds to decrease in 2005-06.

For a few Canadian life sciences firms, tapping into the U.S. market would be a viable alternative. In these cases, the U.S. VCs would often prepare the firm for an exit, via an IPO or trade sale, hire more seasoned U.S. management, and in some cases, even turn the firm into a U.S. company. We expect that the “cherry picking” by U.S. VCs will increase as there are few, if any, Canadian VCs of sufficient size to be able to provide a real alternative to later stage Canadian life sciences companies.

Recently, the U.S. public market has shown some positive signs, such as the post-issue strength of IPOs. How and when the positive trends in the U.S. will filter down to Canada remains to be seen. Typically, the Canadian market lags behind the U.S. by six to eight months, assuming that the improving environment for life sciences/biotech markets is sustained.

My wish list includes increased and improved focus by the granting agencies for early stage companies, perhaps allocating grants into “commercial/applied research” and basic research. The existing seed funding could then focus on a smaller universe of seed stage companies. Further downstream, the mainstream VC funds will have fewer seed stage companies to screen, support and develop with their finite resources. For the later stage companies, we would need to foster the development of one substantial (> $200 million), or a few smaller late stage investment funds to act as an alternative to the U.S. VC funds — and perhaps be able to finally capture some of the value built-up during the mainstream funding continuum. Finally, we need the Canadian public market to recover to provide viable exits for life sciences/biotech companies.

Denis Ho is the Toronto, Ont.-based managing director of BDC Venture Capital, Life Sciences of Business Development Bank of Canada (Montreal, QC).