Government makes strategic investments in biotechnology sector

Feds strike high profile at Bio 2002

Ottawa is injecting nearly $300 million into early stage venture capital financing and skills training for biotechnology — two areas repeatedly cited as requiring urgent attention if Canada is to commandeer the sector and become a leading innovation nation. The separate funding initiatives were introduced during last week’s massive Bio2002 International Biotechnology Convention and Exhibition in Toronto, where the federal government struck a high profile, with major speeches from federal ministers extolling the virtues of Canada’s biotechnology industry, research infrastructure and expertise.

The largest of the two initiatives is $200 million over five years to be invested by the Business Development Bank of Canada (BDC) in seed and early-stage biotech companies. The second initiative pumps $88 million into the Strategic Training Initiative in Health Research, administered by the Canadian Institutes of Health Research (CIHR) (see page 2).

The decision by the BDC Venture Capital division to invest $200 million in early-stage biotechnology ventures effectively triples its funding devoted to the life sciences. The rapidly growing evergreen fund will allocate $185 million to all stages of early-stage biotech firms, particularly those with products in Phase II development and requiring investment of $5-15 million. BDC will invest between $500,000 and $5 million in each successful firm, with most deals requiring syndication.

“It takes a lot of money to bring these companies to the public market. Three years ago we did an economic impact study using 1999 data and it suggested that, on average, companies needed $23 million before going public. That amount is now probably $35 million to $50 million,” says Michel Ré, BDC’s executive VP investment. “The public market wants to see maturity in these companies.”

The remaining $15 million has been reserved for seed financing proposals in the areas of therapeutics, diagnostics and medical devices. BDC will consider research with promising commercial potential and Ré says the technology doesn’t necessarily have to be part of a commercial entity. It could be an early-stage firm or scientists seeking financial assistance to develop their ideas. The seed fund will focus on research that’s just past fundamental.

The Finance department has looked at BDC’s corporate plan for the next five years and sees significant growth in VC investment for that period. The government has facilitated the $200 million in biotechnology funds through the purchase of dividend paying shares, capitalizing the crown corporation so it can perform VC activities. International banking regulations for capitalization require that the bank holds $1 in equity for every $1 in VC it lends.

“There are more than 400 biotechnology firms in Canada right now and we have invested in 42 or about 10%,” says Ré. “With an additional $200 million, we will be able to support the move-to-market of another 40 or 50 companies. Since we will leverage financing for a lot of these projects, it could easily bring $1 billion in financing to Canada over the next five years.”

BDC is part of the Industry Canada portfolio and the two organizations have held discussions about the kind of role BDC should be playing to bridge the financing gap for early-stage biotech firms. The decision to go ahead with the new funding was made at the request of minister Alan Rock, who was seeking new initiatives for biotechnology as part of the department’s participation in BIO2002.

“The minister’s office wanted to report some good news for the industry and to at least start addressing the financing gaps. Our branch was involved,” says Dr George Michaliszyn, director of Industry Canada’s life sciences branch. “Not all the details are worked out as we have to fine tune the application areas.”

Michaliszyn says biotechnology is entering a much tougher financing period. Big pharma appears willing to wait until further development takes place before considering collaboration with small biotech firms, and Industry Canada has identified Phase II firms as requiring the most assistance. With the innovation strategy now forging ahead, the time is ripe to consider how to best stimulate the industry.

“The innovation strategy will provide an opportunity for more to be done with this sector,” says Michaliszyn. “ We see biotechnology as a strong growth opportunity and this is an early announceable.”

Reaction from the biotech sector has been largely positive, with the country’s largest industry association calling it an “excellent start”. BIOTECanada president Janet Lambert says there has been a lot of discussion within the industry about the path to commercialization, and the BDC investment and the strategic training initiative are viewed as encouraging developments.

“It’s important we don’t see patent and brain drain, and then have to buy it back at inflated prices,” says Lambert. “Industry Canada is reaching out with the innovation strategy and it’s an opportunity for the industry to put meat on the bones of what the government is looking for before the final document is written.”

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