What does the world’s largest health-focused investment firm know about Canada’s life sciences sector that domestic investors do not?
According to BIOTECanada, a national non-profit association dedicated to building the bio-based economy, the country is home to 668 core biotechnology firms, the second-highest such concentration in the world.
After considering the application of biotechnology to traditional industries, the sector accounts 6.4 per cent of the country’s GDP.
It’s no surprise, then, that life sciences cut a huge swath in Canadian law firms. The difficulty,
however, is that money has always been hard to come by for Canadian life sciences entrepreneurs, especially in recent years.
Domestically, venture capital activity in life sciences fell by 41 percent in 2009 to just $215 million invested through 39 transactions. That’s where lawyers come in.
“The added value our life sciences group brings to clients is an industry expertise that allows us to help them structure and strategize in a way that makes them attractive to investors,” says Cheryl Reicin, the Toronto-based head of Torys LLP’s life sciences practice group.
Reicin, who spent two decades practising in the United States before moving to Torys in 2005, believes U.S. venture capital groups can be a good source of funds for Canadian life sciences companies.
In fact, while biotechnology investment in the United States declined in 2009, the 19-per-cent drop was less than the decrease in the venture capital market as a whole. Biotechnology has also become the single-largest investment sector for venture capital, drawing US$3.5 billion.
Reicin points to the interest displayed by her client, OrbiMed Healthcare Fund Management, in the Canadian life sciences sector. The company, which has more than US$7 billion in assets under its management, has made its single-largest life sciences venture capital investment in a Montreal-based company, Enobia Pharma Inc., which develops therapies to treat serious genetic bone disorders.
To be sure, OrbiMed partnered with Canadian investors, including CTI Life Sciences Fund LP of Montreal, the Fonds de solidarité FTQ, and Desjardins Venture Capital, as well as U.K.-based Lothian Partners.
But there’s no doubt that OrbiMed, whose general partner Jonathan Silverstein is now Enobia’s chairman, was the largest contributor to the $90.1 million of investor capital that has made its way to the Montreal company so far.
“OrbiMed is considered a thought leader in life sciences investing, so when they invest, other venture capitalists are likely to follow,” says Reicin.
Silverstein says there’s no secret behind OrbiMed’s investment in a Canadian life sciences enterprise. “Enobia is our largest venture capital investment because it deserves to be. They’ve met every milestone base for further financing that has been set for them.”
Still, there’s nothing specific to Canada about the investment.
“We like to invest globally, particularly in regions of the world where there are undiscovered gems,” Silverstein says. “With the venture capital community drying up in Canada and elsewhere, there are more global opportunities than in the past.”
OrbiMed recently raised $550 million for its venture fund for North American and European investors. “When you’re dealing with that kind of money, investors are looking for fund managers who have the ability to invest across multiple firms through multiple rounds of financing,” Silverstein says.
“We don’t worry about whether it’s Series B or Series C or an IPO because we look to long-term relationships with companies that are as successful as Enobia has been.”
But Enobia wasn’t OrbiMed’s first Canadian foray.
In April 2006, OrbiMed was one of the main subscribers to a US$21.5-million private placement in Toronto’s ARIUS Research Inc., a biotech company personalizing cancer therapy through the discovery and development of cancer-fighting antibodies.
The investment was a huge success. Barely two years later, pharmaceutical giant Roche acquired ARIUS.
“That was a very nice exit,” Silverstein recalls.
Meanwhile, in August 2007, OrbiMed and Delphi Ventures, another U.S. venture capital firm, led a syndicate that invested US$32 million in Toronto-based NeurAxon Inc., a developer of next-generation pain treatments. Again, Canadian funds participated in the venture but not as the lead lenders.
“Foreign investors, including OrbiMed, want local partners because they value support from the community and support on the ground,” Reicin says. “Ironically, strong community support doesn’t seem to be enough to attract Canadian [venture] capital alone.”
More recently, in August 2009 NeurAxon raised a further US$8.75 million through the sale of convertible debentures to OrbiMed and others.
As a result, given the relative unavailability of venture capital financing in Canada, it’s important for Canadian companies to appeal to U.S. as well as domestic investors.
“When OrbiMed invested in Enobia, we had to come up with a structure that was U.S.-friendly,” Reicin says.
The difficulty was that structuring the transaction with a U.S. parent had tax advantages but that meant Enobia would have to give up generous research-and-development grants available in Canada.
“In the end, we went with the U.S. parent because it was a cleaner structure with better tax advantages,” Silverstein says. “Taxes are always one of our primary considerations.”
Unfortunately, Canada isn’t always tax-friendly to foreign investors. “OrbiMed was considering buying drug royalties out of Canada, but we pulled out when we discovered that it would subject us to double taxation,” Silverstein says.
In this regard, foreign investors have welcomed the federal government’s recent decision to eliminate the need for income tax clearance certificates for Canadian companies disposing of their shares.
Despite the fact that many of Canada’s treaties provide that no tax is payable in respect of gains from such transactions unless they derived their value principally from real property located here, purchasers of these shares were liable for penalties if they didn’t withhold funds until the Canada Revenue Agency provided a compliance certificate.
Because the CRA was months behind in providing them, many observers believe the delay presented a significant disincentive to investing in Canada, especially for private concerns. But whether Canadian investors see the light and join the party remains to be seen.