Washington Editor

VANCOUVER, British Columbia - For maturing Canadian biotech firms, an inherent financing difficulty is the lack of available mezzanine-level funding in their country. Although that can be overcome by attracting U.S. venture capitalists, that sometimes is easier said than done.

With this seaside city as a backdrop, a number of panelists addressed that topic during last week's third BioPartnering North America conference.

Funding at early stages isn't a problem, said Malcolm Kendall, vice president at MDS Capital Corp.'s Vancouver office, noting that "there's a good base of life science venture capital investors in Canada." However, he added that "there is not enough money around the table to get them into later-stage clinical development."

To get funding for Phase II and beyond, he and three other panelists pointed to a solution - bringing in investments from the lower 48.

But to secure U.S. venture capital, several more hurdles must be overcome. Issues of distance can prove problematic, as can question marks surrounding management and intellectual property. A number of financial concerns, such as foreign exchange, also must be addressed. Some Canadian companies even turn to the Toronto Stock Exchange for mezzanine-round funding, which, while flipping some of the company's shares into public hands, it's not as liquid of an event as listing on Nasdaq or the New York Stock Exchange.

"There are issues with regard to how capital gains are handled," Kendall told BioWorld Financial Watch, adding that the common LLP structure of U.S. venture firms creates tax implications. "Also, the flow-through tax consequences to limited partners may present a problem."

Of course, such issues are manageable.

OVP Venture Partners in Seattle recently closed its first investment in a Canadian company, GenoLogics Life Sciences Software Inc. in Victoria, British Columbia. As its name suggests, the company is focused on bioinformatics software, and its flagship product for proteomics, ProteusLIMS, is a system for the management of data and the documentation of workflow. That platform provides a means for centralized storage and communication of data stemming from gel research, liquid chromatography, mass spectrometry and protein searches.

Chad Waite, general partner at OVP, noted that his firm's proximity to the provincial capital erased any distance complications in developing the GenoLogics investment. But other questions, largely related to tax concerns, did surface.

"The problem for us," Waite told BioWorld Financial Watch, "was that we would have to register some of our limited partners, because of what their structure is, as taxpaying entities in British Columbia."

Among OVP's limited partners are CalPERS, the pension fund for state employees in California, as well as pension funds for the State of Washington and the State of Oregon.

"So I'm going to go to CalPERS and tell them they have to register as taxpaying entities in British Columbia?" Waite joked. "That would go over well in Sacramento."

So instead, GenoLogics established a U.S. subsidiary as a pass-through structure. OVP made its investment in the U.S. subsidiary, which turned around and invested in its Canadian parent. Waite also said GenoLogics entered an indemnity agreement to pay any unanticipated tax consequences on behalf of its investors.

Also, both Kendall and Waite said there is help from the Canadian government, which is creating tax incentives to help harmonize systems with U.S. tax structure.

In the GenoLogics investment, OVP co-led a $5 million round in concert with a Canadian backer. Both were joined by another Canadian investor. Previously, 3-year-old GenoLogics had been capitalized through angel investors, as well as friends and family support.

OVP invests in early stage entities, with about a third of its $500 million in assets invested in the life sciences sector. Its remaining funding is centered on communications and information technology. OVP manages six funds, and with other offices in Portland, Ore., the venture firm invests primarily in the Pacific Northwest.

Its decision to invest in Canada didn't come overnight. In fact, OVP came close to two other Canadian investments before the deals fell apart during due diligence. With GenoLogics, all the elements came together.

"It's not easy," Kendall said, "but it's being done."

In addition to OVP's new relationship with GenoLogics, there are plenty of other Canadian companies attracting U.S. investors.

Neuromed Technologies Inc., a Vancouver company developing next-generation chronic pain drugs, raised $32 million in a Series C financing that closed a little more than a year ago. The round was led by MPM Capital Ltd., and it marked that Boston-based venture firm's first Canadian investment.

Within the past year, a newer drug company, Aspreva Pharmaceuticals Corp., raised $57 million in its Series A financing. The lead investor, the Sprout Group, is headquartered in Menlo Park, Calif. Victoria-based Aspreva was established to follow a pharmaceutical asset partnering model, and it initially is focused on treating autoimmune diseases with its first licensed therapeutic, CellCept (mycophenolate mofetil). Making more recent financial headlines, the company last month filed for its initial public offering. It is seeking a listing in the U.S. and Canada.

"There are financial structures that work," Kendall said. "And as U.S. investors become more familiar and comfortable with those, more capital will flow up here."

In the end, exit strategies are what venture capital investors care about, regardless of nationality. Acquisitions are the most common outlet, though public listings, such as the dual registration planned by Aspreva, can be an option. OVP's investment deal with GenoLogics calls for a public listing in the U.S., by way of an exchange offer, should the software firm not get swallowed up beforehand. n

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