Special Report: Canada’s Craving For Life Sciences –

The Canadian venture capital community is in love with life sciences. No other sector in the country raised as much money over the last year or saw so many of its companies receive funding. In total, VCs invested $329 million in 110 life sciences startups in 2003, giving them 26% of all invested capital, according to research firm Macdonald & Associates.

But all is not rosy. In fact, it may be time to ask whether the love affair with life sciences is destined to end in heartbreak. Several critical factors already are starting to strain the relationship.

The first is that there has been no major exit either IPO or acquisition by a Canadian life sciences firm in more than three years. The longer this trend continues, say industry watchers, the more momentum the sector is bound to lose.

A second concern is that many Canadian investors have belatedly come to the conclusion that, unlike their deep-pocketed U.S. counterparts, they simply don’t have the kind of capital required to shepherd therapeutic and drug discovery deals from start to finish. Typically drug deals can take up to eight years and demand as much as $100 million to reach the goal line. In the past, domestic biotech companies used the Canadian public markets as a way to raise mezzanine financing before testing their luck on NASDAQ. But with the Canadian public markets sealed shut, late stage financing of any kind has all but disappeared.

Finally, many governmental investment vehicles created over the last decade to bolster the life sciences industry in Canada are now being dismantled, creating serious questions about the future of the industry.

Currently, the biggest unanswered question is the province of Quebec. Starting in the early 1990s, Quebec’s provincial government identified biotech as a strategically important industry that could boost the provinces’ economic competitiveness with the rest of Canada and the US. It created a number of venture funds and a variety of tax incentives to pump up the industry. For instance, the $100 million-per-year Bio-Levier program was designed to attract investors from the U.S., Europe and other parts of Canada by promising low-interest loans of up to $20 million for companies that raised a minimum of $7 million in venture capital. But that program was put on hiatus late last year.

And then in early April came the bombshell that Montreal-based Innovatech, a government-backed venture fund that invested heavily in regional biotech companies, was being put up for sale to private investors. The fund, which has about $342 million in 130 to 150 companies, now has a market value of about $160 million, according to a recent report in the Montreal Gazette.

The attitude of Quebec’s newly elected Liberal government toward biotech outreach was articulated by finance minister Yves Seguin when, in his first budget speech, he said, “rather than asking what the state can do for us, we should ask ourselves what we can do without it.”

Still, local VCs are taking the government’s change of heart in stride. And many even see it as a positive turn of events. “I believe the biotech sector is now sufficiently mature and robust enough to stand on its own two feet,” says Mark de Groot, founder of MSBi, a $26 million early-stage venture fund based in Montreal. “It appears that the [Quebec] government has come to the realization that these kinds of investment activities are best left to the private sector.” de Groot and other Canadian venture investors say the industry will benefit because strong companies will survive while weaker companies that were once artificially supported by public funds won’t.

Ron Budd, who leads the life sciences division at Ernst & Young Canada, says the country’s biotech industry is fundamentally strong, but he doubts that government-sponsored funding will be replaced automatically by a renewed interest from private equity investors. “Many firms in Canada have had little real success of late raising much needed capital,” he says. “Tough times demand creative responses, and unless we see novel business approaches emerging, many firms will be forced to close or merge.”

One novel approach is to reach out to American executives who have the industry connections and business skills to take fledgling Canadian biotech companies to the next level. Ron Patterson, a senior partner at MM Partners in Toronto concedes that Canada has a first-class reputation for producing great science, but a third-class reputation when it comes to commercializing that science and moving a discovery from the lab to the marketplace.

That’s why he helped recruit an American chief executive with deep industry expertise to the helm of Affinium Pharmaceuticals, a Toronto-based drug developer that has secured more than $30 million funding and has since signed licensing agreements with the likes of Pfizer and GlaxoSmithKline. “It’s incredibly useful having someone with a U.S. network as CEO because that is where all the deals are struck,” says Patterson.

It’s not just U.S. CEOs that are now being enticed to Canada, but U.S. venture firms as well. Nancy Harrison, a senior vice president at Ventures West in Vancouver and one of the best known biotech investors in Canada, is currently helping portfolio company Celator Technologies raise a $30 million Series B round outside of Canada. Celator, headquartered in Vancouver, has already set up a subsidiary in Princeton, N.J., to aid that process.

“Canadian companies have the same chance of interesting investors in San Francisco as those in Florida or Texas or anyplace that is outside the typical scope of travel,” she says. She adds it’s also a matter of educating U.S. investors on the fact that Canadian companies offer a cheaper labor pool as well as a 30% tax credit on R&D.

Some U.S. investors need little convincing. Firms like MPM Capital, Sprout Group, InterWest Partners, Sanderling Ventures, and Cogene Biotech Ventures have all made substantial investments in Canadian life sciences firms.

Sprout Group and InterWest, for their part, recently participated in an eye-popping $57 million Series A round in Victoria, B.C.-based Aspreva Pharmaceuticals. Aspreva partners with large pharmaceutical makers like F. Hoffmann-La Roche to help develop and bring to market new applications for drug development.

MPM Capital and Cogene Biotech, meanwhile, participated in a $32 million Series C round in Vancouver-based NeuroMed Technologies late last year. “This is a company with a really exciting therapeutics platform,” says Christopher Kersey, managing director at Cogene Biotech. “We see a lot of major benefits in cross-border investing in terms of tax credits, lower cost of living, and the sheer quality of science coming out of Canadian academic institutions. We are actively looking for more investments there.”

The future of the Canadian biotech industry might be more uncertain than ever before, but venture investors are keeping the faith. “I think we are still in the early days and have some real success stories ahead of us,” says Patterson of MM Partners. “If anything, we are far more seasoned today than we were five years ago. Companies are no longer just focused on the science, but on actually building great businesses.”