Special To BioWorld Financial Watch

The public biotechnology sector in Canada seems to have fallen completely off investors' radar screens.

In fact, Canadian biotech stocks — like their counterparts in the United States — have suffered horribly over the last 12 months. Even Canada's leading biotech firms are trading at or near their 52-week lows. For instance, Allelix Biopharmaceuticals Inc.'s stock price (TSE:AXB) has dropped 45 percent since the beginning of 1998 — from C$11.50 on the first trading day of the new year to C$6.25 on Aug. 21. This lack of investor support is all the more unsettling given the string of positive product developments that Allelix has reported over the last six months.

The biotech sector's dismal performance is also reflected by the continuing erosion in the Yorkton Life Sciences Index (YLSI), which is an unweighted average of all 48 biotechnology and life sciences stocks that trade on the Toronto Stock Exchange. The index measures the changes in daily closing prices relative to a base price. In the last 12 months, the YLSI has dropped by a full 10 percent. But it had been steadily losing ground since the beginning of 1997, when it was just above 3,500. Nineteen months later, at the end of July 1998, the YLSI stood at 3,063.9. In contrast, the index soared during 1995 and 1996, growing 94 percent in value over the two-year period.

The biotech sector's poor performance can be traced to the fact that it comprises mostly small-capitalization firms, explained Ezra Lwowski, life sciences analyst at Toronto-based Yorkton Securities Inc. Small-cap stocks are the issues that have suffered the most in the wake of the Asian market collapse and Canada's currency value woes. And until the market stabilizes, the downward trend is likely to continue for the foreseeable future, Lwowski added.

Not only are already-public stocks taking a beating, but the window for initial public offerings is firmly closed. Given this unpleasant scenario, one might be forgiven for believing that Canadian biotech firms are having difficulty accessing the capital they need to maintain operations and implement important research and clinical trials.

Enter The Venture Investors

At one time this assumption might have been accurate. In the past, Canada's biotechnology industry was plagued by a lack of patient investment capital. Today, however, that is no longer the case. Innovative young Canadian life science companies now appear to have access to the kind of capital they need to grow to world-class stature.

According to an annual survey of the venture capital industry conducted by Toronto-based Macdonald & Associates on behalf of the Canadian Venture Capital Association, also of Toronto, and published in April 1998, the venture capital community as a whole continues to experience record-setting levels of growth, attracting significant amounts of new capital each year and disbursing even greater amounts. Venture capital firms disbursed a total of C$1.8 billion in 1997, a 66 percent increase over the C$1.1 billion they invested in 1996. The life sciences sector continues to play an important role in stimulating the venture industry; in 1997 venture capitalists disbursed a total of C$203.4 million through 166 separate investments in biotech and life sciences companies, the survey reported.

As well, there appears to be a growing involvement by venture investors in life science deals valued at C$5 million or more. Between 1992 and 1994, there were only five deals done in the sector involving more than C$5 million. By 1996, there were 23 deals of this size and together they absorbed C$167 million. The upward trend continued in 1997, with 33 large deals consuming C$217 million. There is every indication that 1998 will follow suit, with yet more large-scale investments.

Early-Stage Financing Grows

How things change. Once, a CEO of a start-up biotech company had very few doors to knock on in the search for capital; now, investors are lining up on that CEO's doorstep.

This is not to imply that fund-raising is easy. To the contrary, it can be time-consuming and frustrating. But there are ways to make the process run smoothly. According to Ronald E. Layden, president and CEO of start-up Viron Therapeutics Inc., "The key is to have good science and management and then find one venture firm that will support you. This generally helps when you need to bring together a consortium of investors."

Layden's company, which is located in London, Ontario, raised C$2.15M in its initial round of venture financing in April this year. Viron was conceived by two scientists at the John P. Robarts Research Institute who also are affiliated with the University of Western Ontario (UWO) and the London Health Sciences Centre (LHSC). Viron was formed by those institutions as a joint venture.

The scientists — Alex Lucas, a cardiologist at LHSC and a member of the UWO department of medicine, and Grant McFadden, head of the Robarts Laboratory for Viral Immunology and Pathogenesis and a member of the department of microbiology and immunology at UWO — have made critical discoveries involving the identification of unique proteins that allow viruses to avoid detection and destruction by the body's immune system.

According to McFadden, "These viruses teach us a lot about how the immune system fails, not just in viral infections, but in cancers and other immune diseases." These "subversive" viral proteins, or viroceptors, mimic important cellular receptors and divert the attention of the immune system. In essence, the viruses have "learned" to interrupt the immune system's circuitry at its earliest stages. Viron will exploit these novel proteins to develop new therapies for a variety of immune disorders such as rheumatoid arthritis and asthma.

The investment in Viron was led by Eastern Technology Seed Investment Fund (ETSIF), of Toronto, and GeneChem Technologies Venture Fund LP, of Montreal. The investment syndicate also included Trudell Medical Ltd., of London, Ontario, and the Royal Bank Capital Corp., of Toronto. "With the support of the ETSIF coupled with our exciting new technology, we did indeed have venture capital groups coming to us," said Layden. "The problem then becomes one of choice, so that your choice of investing parties complements the aims and objectives of the company."

The New Dedicated Funds

Layden's experience with the venture capital community has become typical today, for new dedicated venture funds are forming almost as fast as the biotechnology companies themselves. For the first time, biotechnology companies have a significant choice in the type of fund they approach. The ETSIF itself was only formed in October 1997 as a C$25 million seed capital fund aimed primarily at commercializing promising research projects at universities and other facilities in Eastern Canada. In fact, ETSIF is so new that Viron was the first investment by the fund, said Ted Anderson, president of ETSIF.

ETSIF is a partnership between Ventures West, of Vancouver, the Bank of Montreal Capital Corp. and the Business Development Bank of Canada. ETSIF is the third fund in the pan-Canadian seed capital fund established by the Business Development Bank and other partners. These three funds now provide seed capital across Canada.

One of the other funds, Western Technology Seed Investment Fund, was established in March 1997. The Bank of Montreal Capital Corp., the Business Development Bank of Canada and Ventures West participate in this fund. The third member of the Pan-Canadian set is T2C2 (which stands for Transfer, state-of-the-art Technologies, optimal Commercialization and interactive Capital), a seed fund established by the Business Development Bank of Canada and Sofinov. T2C2, which provides funding in Quebec, has a mandate to invest actively in companies too small for traditional venture capital groups. More specifically, the company's mission is to identify, evaluate and market technologies developed mainly in universities, private and public research centers and companies. Since its formation, T2C2 has financed 15 projects in less than a year. Of these, 10 were in health sciences and five in information technologies. The total investment in the 15 companies was C$3 million, with an average amount of C$200,000.

Genomics is the focus of another new venture capital fund, GeneChem Technologies Venture Fund LP, which is sponsored by Canada's leading biotech company, BioChem Pharma Inc. (ME, TSE:BCH; NASDAQ:BCHE), and its newly created subsidiary, GeneChem Financial Corp. Based in Laval, Quebec, BioChem Pharma is investing C$30 million in the fund, which has committed capital of C$100 million from Canadian investors. The fund will invest in academic projects and early-stage private or public companies, in the area of genomics and related technologies for human application.

There's also a new venture development company focusing on early-stage biomedical discoveries from Canadian universities and research centers. Milestone Medica Corp., of Toronto, is launching with a capital fund of C$15 million. Its mission, according to President and CEO David Shindler, is to be Canada's first-choice partner for early-stage biomedical technology development. "We will be identifying and investing in Canadian technology and working with researchers and universities in managing further development," Shindler said. "This will be achieved by not only providing seed investment to overcome the development gap that occurs when technologies are not developed enough to attract traditional venture capital funding, but also by bringing management and planning expertise to help build value in fledgling companies." As a further incentive for the academic entrepreneurs, Milestone will give them shares in Milestone itself; this unique strategy is intended to enable the scientists to participate in the long-term success of the venture company.

For small and medium-sized businesses, the 1990s will be remembered as the decade when Canada's venture capital sector came of age — in large part because average Canadians had the opportunity to share in the potential benefits of supporting their country's entrepreneurs through Labour-Sponsored Investment Funds (LSIFs), said Ron Begg, president of Working Ventures Canadian Fund, of Toronto, Canada's leading labor-sponsored investment fund. One of those LSIFs, which targets the life sciences, is the Canadian Medical Discoveries Fund (CMDF), of London, Ontario. The CMDF is a venture capital mutual fund designed to enable Canadians to profit from the commercialization of medical research in Canada. It is one of six specialized funds of MDS Capital Corp., of Toronto, which collectively target approximately C$600 million toward health and life sciences. The fund seeks out early-stage companies with the potential to become industry leaders in global markets; these companies must have a base of unique or proprietary products or services that offer lasting competitive advantage. A typical investment will range between C$1 million and C$15 million, made at staged intervals. To date, CMDF has invested more than $162 million in 38 life science companies.

Another labor-sponsored investment fund, Sofinov, was launched in 1995 by the Caisse de depot et placement du Quebec, a global institutional investor that invests the funds entrusted to it. Sofinov targets companies of all sizes in three main sectors: biotechnology and health care, information technologies and innovative industrial technologies. The biotechnology and health care sector represents about two-thirds of the total value of inov's portfolio; Sofinov has invested about C$300 million in 40 companies in this sector.

The Working Opportunity Fund is a $200 million, Vancouver-based fund that invests solely in companies based in British Columbia. It has seven biotech companies in its portfolio, representing an investment of more than C$10 million.

Momentum Continues

The Canadian biotechnology community can look back on 1997 as a productive and successful year. All stages, from academic research through product commercialization, are now being addressed through a dazzling array of public and private sources of finance. Private sector firms and government granting agencies are supporting basic research. A number of newly established ultra-early venture capital firms are dealing directly with university researchers and providing funds to establish intellectual property protection and initial proof of concept. Initial seed funding is also now available for life sciences through more traditional sources such as the banking community and pools of venture capital.

According to figures released by Industry Canada at the end of 1997, the country now has the second-largest industrial biotechnology community in the world, with approximately 400 companies whose combined revenues approach C$2 billion and research expenditures, C$500 million.

There is every reason to believe this momentum will continue. There have already been some very significant venture financings in the first seven months of 1998. In May, GlycoDesign Inc., a glycobiology company located in Toronto, raised C$16.35 million in a financing deal that is estimated to be one of the largest private placements ever in the Canadian biopharmaceutical industry. Nine Canadian venture capital organizations were involved in the financing, including Bank of Montreal Capital Corp., BioCapital Investments Limited Partnership, Ventures West VI Limited Partnership and Triax Growth Fund. In addition, the Canadian Medical Discovery Fund, MDS Health Ventures Inc., Working Ventures Canadian Fund, Royal Bank Capital Corp. and the Business Development Bank of Canada all increased their stakes in the company. GlycoDesign has developed a unique technology platform to discover and develop inhibitors of key carbohydrate processing enzymes. The company already has a lead therapeutic carbohydrate processing inhibitor in clinical development and a number of other compounds in the pipeline.

A close second in the private funding stakes is MethylGene Inc., of Montreal, which completed a second round of private funding of C$15.8 million in March to support drug discovery and development programs. The investors in this round include founding investors Le Fonds de Solidarite des Travailleurs du Quebec (FSTQ), Innovatech du Grand Montreal and Investissement BioCapital Inc. New investors included Sofinov, GeneChem Technologies Venture Fund LP, Canadian Medical Discovery Fund Inc. and Royal Bank Capital Corporation. MethylGene's scientific platforms include three distinct chemical approaches to inhibit cancer and other diseases using antisense compounds.

In June and August, RTP Pharma Inc., of Montreal, raised a total of C$20 million in two separate private placements. The most recent involved an equity investment of C$5.2 million from EGS Partners, of New York, and Credit Agricole, of France. This financing followed a C$14.6 million private placement led by Elan Pharmaceuticals, of Dublin, Ireland, announced in June. "The C$20 million RTP has raised this summer represents a significant endorsement of our technology and corporate strategy," said Gary Pace, RTP's president and CEO. The funds generated from these private placements will be used primarily for the clinical advancement of the company's products based on its proprietary insoluble drug delivery (IDD) technology.

RTP is applying its technology to improve the effectiveness of insoluble drugs. IDD has potential applicability to a broad range of therapies, including anesthetics, anti-cancer agents and immunosuppressants. A number of these products have been successfully reformulated, including an immune suppressant and an anti-cancer agent, which are currently undergoing Phase I/II studies.

Public Financings

Also during 1998, several public companies have successfully completed secondary issues. The most notable of these include two leading British Columbia-based companies. StressGen Biotechnologies Corp. (TSE:SSB), of Victoria, raised C$23.2 million from a special warrant financing after obtaining final receipts for a prospectus filed in August in the provinces of British Columbia, Ontario and Manitoba. The company announced the completion of the financing in June, indicating that proceeds would be held in trust pending clearance of the final prospectus. Receipts for the prospectus qualify the distribution of common shares issuable upon the exercise of 7,030,303 special warrants issued in June.

In July, Vancouver-based QLT PhotoTherapeutics Inc. (TSE:QLT) successfully completed a C$23 million stock offering through the sale of one million common shares at C$23.00 per share.

As well, BioChem Pharma made a capital investment of C$150 million in CliniChem Development Inc. The company, based in Montreal, was formed by BioChem Pharma to conduct the clinical development and commercialization of certain of its therapeutic and vaccine product candidates. BioChem Pharma made a special distribution of Class A common shares of CliniChem by way of a dividend in kind to the shareholders of BioChem Pharma. Each shareholder received one CliniChem common share for every 40 common shares of BioChem Pharma owned.

In the transaction, BioChem Pharma retained an option to acquire commercialization rights covering individual products developed by CliniChem on a country-by-country basis. BioChem Pharma, as holder of the Class B common shares of CliniChem, also holds an option to purchase all of the outstanding CliniChem common shares at a price to be set according to a predetermined formula.

CliniChem is listed on the Toronto and Montreal stock exchanges under the symbol BCC.A. "The formation of CliniChem is a major element of our strategy to invest heavily in research and development in order to assure a growing pipeline and to benefit shareholders in the long run," said Francesco Bellini, CEO of BioChem Pharma.

The Future

The long-term outlook for the Canadian biotechnology industry is excellent. Currently, the Canadian biotechnology industry has approximately 5 percent of the world's market for products and services and more than 100 promising products in the pipeline. According to the National Biotechnology Advisory Committee Sixth Report, titled "Leading Into The Next Millennium," released in March, Canada should set itself a goal of capturing 10 percent of global biotechnology sales (US$5 billion) by 2005 if it is to maintain a leadership position in the sector.

To achieve it, Canada needs to focus national attention on biotechnology. Adequate financing is one of the building blocks required to attain that goal, too; clearly the industry is benefiting from the venture capital initiatives that have taken place during the past year.

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