Banking on Uncle Sam

Curt Cherewayko

British Columbia may offer investors the best bang for their buck when investing in research and development, but accessing capital and attracting U.S. investors remain major challenges for life science companies in Canada.

That’s the verdict of this year’s Canadian Life Sciences Industry Forecast, published by PricewaterhouseCoopers LLP, with the majority of respondents insisting that access to venture and other type of capital is the single biggest hurdle they face. The level of interest in Canadian companies among U.S. investors, as well as a lack of contacts and networks with venture capitalists south of the border, were primary concerns.

“I think that British Columbia is a market that is relatively underserved by capital,” said Steve Hnatiuk of Yaletown Venture Partners. “The good things that are going on here, including a solid history of returns over an extended period of time, is a story that is largely unknown beyond a fairly small group.”

According to the Ministry of Economic Development’s investment capital branch, the province received 17% of the overall venture capital invested in Canada in 2006, more than double the percentage in 2001. Approximately one-third of all venture cap investment in B.C. comes from the U.S. And, according to the branch, last year B.C. received more investment for clean technology than any other jurisdiction in Canada.

Vancouver-based Yaletown, which has a portfolio divided between clean tech and IT companies, has most of its investments in B.C. and the remaining 20% in Washington and Oregon. It has partnered with nearly all local venture funds, as well as a number of funds in central Canada, but the majority of its syndicate partners are based on the U.S. West Coast.
Hnatiuk said that early seed venture money doesn’t travel well; if investors choose to invest outside of their core markets, they partner up with local firms that know the terrain. He, therefore, places a large part of the burden to attract more investment dollars in B.C. on the shoulders of local venture fund managers.

“It’s up to professional fund managers that are based here that are knowledgeable about this market,” he said. “To reach out to the broader venture community, whether that be east or south, and show them good quality deals and attract them here as partners.”

The province has had a number of quality deals in the last decade. Between 1997 and 2004, B.C. outperformed Massachusetts and California – the leading destinations of venture capital in North America – when it came to value for each dollar invested in research and development, according to a UBC Sauder School of Business study.

During the same time period, Canadian exit values averaged US$59 million. American exit values more than tripled that, averaging US$192 million, the report said.

“The amount of research dollars here and the community here doesn’t really justify being much bigger,” said Chris Laird, vice-president of Ventures West Management. “I think we do a lot with what we have, and what we have is of high quality.”

Out of Ventures West’s Vancouver office, Laird raises capital for life science companies located along the West Coast. One of Laird and Ventures West’s most recent successes was the company’s lead role in June’s Series A financing for Vancouver’s Aquinox Pharmaceuticals Inc., a spin-off from the University of British Columbia and the BC Cancer Agency.

The $14.5 million round of financing included two new investors from the U.S. – New Jersey’s
Johnson & Johnson Development Corp. and Baker Brothers Investments of New York.

Today, life science companies are more mature, said Laird. They’re often at the “proof of concept” or final stage of Phase 2 studies prior to going public. Therefore, it can take a bigger commitment from investors and deeper pockets to guide a company through development to dividend.

“A life science company looking to raise money to fund extensive Phase 2 studies, you’re talking about a 35 [to] 40 million dollar venture raise,” said Laird. “To access that amount of capital, almost by default, you have to go to international markets.” •