Global report cites Canadian biotech funding crisis: Ernst & Young

(Toronto, 20 May 2008)—Venture financing in the private Canadian biotechnology sector shot up 72% in 2007, but the surge may be indicative of wider issues, Ernst & Young revealed today in Beyond borders: Global biotechnology report 2008.

“Canada’s biotech industry is facing a real funding crisis,” says Rod Budd, Ernst & Young’s Canadian biotech industry leader. “In Canada, the industry market cap dropped 26% in 2007, funding to public companies dropped by almost US$900 million and the number of companies shrunk by 14% reflecting the long-awaited consolidation. It’s getting harder and harder to attract investors to this area.”

At first glance, the Canadian biotechnology industry appeared to sustain advances of the past decade. In 2007, companies generated revenues of almost US$2.7 billion and attracted more than US$1 billion in capital. However, there are some disturbing trends that bring the industry’s sustainability into question.

The declining market cap is one of the more significant trends. The depressed share values of most companies make it difficult to attract investors to the sector. That’s why the IPO market has been closed in Canada since 2005. There was only one Canadian IPO in 2007. Public companies are being forced to partner their drugs prematurely, or for less than optimal value, because they are having difficulty funding expensive clinical trials.

Without a strong public market ready to accept and invest in biotech stocks, Budd says, venture funding will be limited to a handful of successful private companies. And the pool of those companies is likely to dwindle as they move away from Canada in search of financing.

“We’ve got to start talking about how to curb this trend,” says Budd. “Flow-through shares could be a good option for this sector. Refundable research and development tax credits for public companies and programs that participate in seed financing for start-ups should all be considered.”

“The Canadian industry has to make commercial success a top priority. In this country, we’ve got the pipeline of late-stage products which should make the public market for biotech stocks as attractive as ever. But it’s going to take a lot of support from the industry itself and the public sector.”

Globally, the Ernst & Young report found venture financing reached an all-time high in 2007, with investment totalling about US$7.5 billion. Companies in the Americas and Europe raised more than US$29.9 billion — a new high, excluding the outlier genomics bubble year of 2000. Global public biotechnology company revenues rose by 8% in 2007, crossing the US$80 billion threshold for the first time.

Other Canadian highlights from Beyond borders: Global biotechnology report 2008

• Revenues increased slightly, by 1%.
• Research and development spending increased by 12%.
• Overall net loss increased 21% from US$594 million to US$722 million.
• Venture funding of private companies increased significantly in 2007, from US$250 million in 2006 to US$353 million in 2007, half of which was raised in the first quarter.
• The average deal size of a venture capital investment increased from US$4.9 million to over US$7.5 million.
• The number of companies in the sector decreased by 64 to 404 companies.

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