Life Sciences Gives Quebec Special Place on the VC Map –

Canada is all about clusters. Not hockey. Not beer. Not logging. But clusters.

For most North Americans in the Contiguous 48, clusters are associated with a delicious amalgamation of chocolate and peanuts. For Canadians, however, clusters refer to the clubby way in which companies that share an industry tend to spring up in the same geographic region. It’s a term used without solicitation by every Canadian interviewed for this article, especially when asked to explain why industries in particular regions never seem to exhibit much year-to-year variance in venture capital consumption.

“Clusters usually take a long time to build, and can go back 10, 15 or 20 years,” explains Charles Cazabon, a Montreal-based vice president of venture capital with the Business Development Bank of Canada. “Ontario, for example, has a pretty significant telecom cluster.”

In Quebec, the dominant cluster involves biopharmaceuticals. This isn’t a new phenomenon, but nonetheless continues to amaze considering how low the sector generally ranks on venture capital disbursement lists for other regions (in both Canada and the U.S.). According to data from Toronto research firm Macdonald & Associates1, 48 Quebec-based biopharma companies raised $108.63 million worth of venture capital during 2002.

“The VC industry goes back quite a ways in Quebec, and one of the first things it happened to focus on was life sciences,” says Kirk Falconer, director of research and analysis at Macdonald & Associates. “But I’d say that around 75% of all the life sciences activity in Montreal involves biopharma, so that ends up being Quebec’s concentration since Montreal is [the province’s] largest city.”

Nearly half of the Quebec-based biopharma startups receiving venture capital last year only scored $1 million or less, but a handful of companies nonetheless managed to walk away with hefty paydays. The sector’s biggest winner was Gemin X Biotechnologies Inc., a Montreal-based company focused on oncology therapeutics to modulate cell death (a.k.a. apoptosis). The company had already raised over $17 million since its 1997 founding, but added another $14.38 million in third-round backing from ProQuest Investments and SB Life Sciences Venture Management. Other cash-laden biopharma plays in Quebec included $11.51 million for Ville St. Laurent-based antibiotics developer PhageTech Inc. and $8.27 million for Montreal-based BioAxone Therapeutic Inc., a drug development company focused on the central nervous system (CNS).

Each of these companies is essentially trying to become the next Neurochem Inc., a Ville St. Laurent-based venture-backed biopharma shop that grabbed $32 million in June 2000 via an IPO on the Toronto Stock Exchange. Neurochem, which majors in CNS disease and minors in amyloid-related ailments associated with aging and chronic inflammation, received approximately $10 million in three rounds of funding from investors like Atlas Venture, CDP Capital, Fonds de Solidarite, Quorum Growth and Innovatech Montreal. The company’s stock was still hovering near its IPO offering price as of press time, but the simple fact that it went public has served as a bit of local inspiration.

“When a company succeeds like that, it helps pave the way for new companies to begin here,” says Hubert Manseau, president and chief executive of Innovatech Montreal. “New [entrepreneurs] are given the idea that it could be fun to start their own biotech company and that they can succeed.”

Biopharma funding represented 69.7% of all venture capital pumped into Quebec-based life sciences companies last year. Other significant sub-sectors included medical devices and equipment with 12 companies netting $32.97 million (21.15%), while another dozen medical and biotech software and informatics companies raised $11.69 million (9.24%).

It is important to note that private money is not the only source of capital for Quebec-based life sciences companies. In addition to the aforementioned disbursements, the provincial government has allocated a total of $85 million to the biotech sector through the 2004-2005 fiscal year, according to a supplementary budget amendment. This capital includes the creation of two new biotech development centers (or mini-clusters) to be located in Sherbrooke and St. Hyacinthe.

Outside The Cluster

Considering that biopharma and biotech seem to be Quebec’s once and future kings, it’s easy to overlook what seems to be a burgeoning information technology sector. In fact, more venture capital was plugged into IT companies last year than into life sciences companies ($250.55 million vs. $155.91 million). It might be easy to dismiss these comparative numbers by pointing out that Macdonald & Associates uses a particularly broad IT classification, but local high-tech executives believe that they are in the midst of a friendly uprising.

“Montreal surely has had a lot of investment into biotech over the past five or six years, but you’ve also had a lot of investments into smaller IT companies,” says Brian Barry, chief executive of Montreal-based Hyperchip Inc. “We also have a good infrastructure in terms of telecom companies, so that has made it easier to get funding, especially seed money for good products.”

Barry knows of what he speaks. His company raised more venture capital than any other Quebec-based company last year, with a total infusion of $50.42 million. The fourth-round deal included $14.4 million of pure equity from TechnoCap, Vertex Technology Fund, Advent International, Optical Capital Group, JT Ventures, Artemis and Pilgrim Baxter, plus a $36.01 million loan from Investissement-Quebec.

Hyperchip essentially tries to simplify core network routing, which puts it square in the middle of the communications and networking sub-sector. Last year, 18 communications and networking companies raised $101.31 million in venture capital. This makes it by far the most VC-showered IT sector, with 59.56% of the entire IT take. Other significant communications and networking fund rounds included $27.26 million for Ville St. Laurent-based photonic equipment maker ITF Optical Technologies Inc. and $12.42 million for Montreal-based telecom infrastructure provider Octasic Inc.

Quebec’s second-largest IT sector (in terms of VC dollars) was software, which actually included more companies raising capital last year than did biopharma. Overall, 49 software companies raised $56.83 million for 22,65% of the IT pie. Following software were the semiconductor sector with $31.43 million for four companies and the Internet-focused and computer hardware/electronics sector essentially tied with $30.55 million for 15 and 29 companies, respectively.

Although not as pronounced as in the biotech sector, the IT sector also has received substantial government support in Quebec. The province’s 2001-2002 budget, for example, included $25.22 million for a national optics institute, plus another $10.8 million to increase the number of graduates from optics and photonics programs. “Maybe it’s just because I focus on telecom instead of biotech, but I think that the IT sector has received a lot of support from the Quebec government,” says Greg Smitherman, a Palo Alto, Calif.-based partner with Hyperchip investor Advent International.

1 Macdonald & Associates provides its data in Canadian dollars, but VCJ has converted the amounts into U.S. dollars. The conversion rate used is CAD$1 = US$0.719.