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Five to choose from.
Despite the mounting interest in commercializing Canadian research, it remains a challenge for entrepreneurial scientists to find enough capital to launch a startup — or to keep one afloat.
Macdonald & Associates Ltd. (Toronto, ON) tracks private equity and venture capital investments in Canada. Kathy Jeramaz-Larson, vice-president and chief operating officer of Macdonald & Associates, says that 40 per cent of the early stage money invested in the first two quarters of 2004 went into life science. Of the approximately $167 million invested in life science in that period, 88 per cent (approximately $148 million) went into biopharmaceuticals. That amount can be further broken down into drug discovery (67.5 per cent of biopharma investments) and diagnostics (21 per cent of biopharma investments).
The biopharma investments were spread over 29 companies, seven of which represented new investments and 22 of which received follow-on dollars.
“There’s a mix,” Jeramaz-Larson says of the investors included in those numbers. “We track venture capital money; we don’t track the angel money. But there are a couple of funds that do invest in the earlier, the seed.”
“Seed” investors such as Foragen Technologies Management Inc. (Guelph, ON) and AVAC Ltd. (Calgary, AB) are included, as well as specialty firms such as the Canadian Medical Discoveries Fund Inc. (London, ON). But large institutional dollars make up a large part of Macdonald & Associates’ figures.
“Biotech, especially, (is) a longer-term type of investment which requires more patient capital, longer term money,” Jeramaz-Larson says. “Generally speaking, because life science needs more patient capital and longer-term outlook, you need groups with deeper pockets.” Boosting Research
From the academic side, organizations such as the Canada Foundation for Innovation (CFI) (Ottawa, ON), Canadian Institutes of Health Research (Ottawa, ON), National Research Council of Canada (NRC) (Ottawa, ON), Genome Canada (Ottawa, ON) and its provincial counterparts, and the Natural Sciences and Engineering Research Council of Canada (NSERC) (Ottawa, ON), along with a host of private funding sources, pump millions into Canadian research every year. Accessing and leveraging those funds can be the key to success.
Denys Cooper, senior advisor, Technology & International at NRC’s Industrial Research Assistance Program (IRAP) (Ottawa, ON), says the five main financing components for companies are:
Venture capital and stock placements are options usually reserved for later stage companies, and Cooper says angel funding is difficult to come by. But government funding and tax credits can go a long way: Cooper says IRAP contributed a total of $87 million to life science industries, including biotechnology, in 2003-2004.
“There are three types of IRAP funding,” Cooper says. The first is funding for R&D projects. “Typically it goes from $15,000 up to as high as $350,000. It is a contribution and is non-repayable. Typically we fund the salaries and subcontracts, and maybe some travel, and some of the projects may be connected internationally.
“The second level is negotiated with the government under the youth program to bring in some unemployed youth, and it can be any young person to be hired by a company,” Cooper says. IRAP contributes $12,000 toward the salary of a recent graduate from high school, college or university. “Typically at a first-level job. And we spend $5 million dollars on that a year. It funds 450 positions, and that’s just a great program. A fantastic program. In many cases, it’s the first scientist or engineer a company hired.
“Then we have a third program which is a Precommercialization Assistance program. If you’ve got an idea, it’s been demonstrated, you’ve got the patents and you now want to scale it up,” Cooper says. “The level of funding has been recently increased from a maximum of $500,000 to $1 million.”
The Precommercialization Assistance program is connected with Industry Canada’s Technology Partnerships Canada, and Cooper says it tends to fund large complex projects that are often at a later stage. The funding is conditionally repayable. Taxing Issues
“A form of early stage financing is absolutely the R&D tax credit under the Canada Revenue Agency,” Cooper says. “And it’s very important because in a small company, that’s 35 per cent cash if they’re in a loss position. Most people don’t even recognize that situation . . . there are still only 11,000 companies applying for these tax credits. We don’t know why the numbers are so low. There should be something like 20,000 companies applying for that.”
Cooper estimates the total value of federal R&D tax credits at $1.5 billion.
“The next level of financing is NSERC,” Cooper says. NSERC has two programs that help businesses hire graduates: the Industrial Research Fellowship (IRF), and the Undergraduate Student Research Award (USRA).
“That program is for companies to hire a new PhD or post-doc graduate from university to put them into industry,” Cooper says of IRF. “The company claims back a portion of the salary up to $30,000 per year.” Cooper estimates that IRF funds about 75 post-doc positions per year.
“Then they also have a USRA,” Cooper says. “That is for people to work in industry on research projects, and it’s for summer and co-op students.” He estimates that USRA funds between 300 and 400 positions per year.
“Then we’re looking at international projects with firms where they get involved with universities. NSERC has a program called CRD — Collaborative Research and Development program. Under that, where a professor and a small company want to get involved in a big European Union project for instance, the prof applies to NSERC and the SME applies to IRAP,” Cooper says. Academic Assistance
Tech transfer facilities can help academics navigate the path from lab discovery to commercial discovery, including help with accessing funds.
“There is funding around, but there’s not a lot of it,” says Darlene Homonko, PhD, technology manager, Life Sciences for the University of Toronto Innovations Foundation (UTIF) (Toronto, ON). “From a tech transfer perspective, there’s not a lot of money for very early stage opportunities that don’t have a solid product base to them yet.”
Products that will need more than a year and a half to reach the market may have trouble getting the funds to advance.
“Capital markets are looking for products. They’re looking for validated targets. They’re looking for products that they can bring into the industry, that will have traction in the industry,” Homonko says.
“Angels, by tradition, don’t really do biotech,” she says, explaining that the long timeline and high risk of many biotech products don’t appeal to most Canadian angel investors.
The entrepreneurial scientist remains the model for early stage biotech in Canada, and Homonko says the researcher with a great idea still has a shot at success.
“Where we’re challenged is to bring the proper structure around it so that it is attractive, so that it does get access to that money,” she says. “That’s where technology transfer plays a big role. Being able to see the opportunity, to share the vision, and then help grow that vision. There are a lot of different ways to do that, and with early stage money being scarce, it’s even more of a challenge. It requires even more co-operative thought and creative thought on how to move that opportunity forward.”
Tech transfer organizations such as UTIF are becoming more proactive in seeking ways to bring good ideas out of the lab and onto the road to commercialization. Homonko says groups are trying to structure some novel programs that will help address the “missing piece” of funding for proof of principle.
“An inventor will have a product — a potential product, like a gene or a protein that he or she believes is involved in a signalling pathway that could be a drug candidate, but he or she doesn’t have the resources in the lab to test it. So we’re trying to work with different structures and different models and different strengths within the technology transfer community to allow that product to get some information around it so that it can then be attractive to the capital markets and individual financing groups within the capital markets and industry partners. So that’s kind of a new thing,” Homonko says.
“There is this missing link, this missing piece of information for a lot of technologies,” she says. “It’s too expensive for the institutes to go out and get that work done by contract groups, so we’re trying to address it internally through groups that already have structures in place, or have received money from CFI grants, et cetera.”
The idea, she says, is to try to work as a group to address common needs.
“So it’s not a financing, but the idea is that we’re trying to answer what’s come back to us from the capital markets — that either they don’t have the money, or they’re not willing to fund proof of principle,” Homonko says. Research funding from traditional sources may be useful for that purpose if used wisely.
“Using that funding to be directed toward answering questions and completing experiments that have commercial value — answering commercially relevant questions as well as, hopefully, academic questions as well,” Homonko says, using cancer research as an example. “Any grants that came to you from the Canadian Cancer Society, you’d want to structure them so that they’re answering academic questions. But that academic question will also lead you toward a POP — proof of principle — type of result, so that you could use that to build on your commercial value. Just as an example.”
Because tech transfer facilities can offer advice on such strategies long before it’s time to go solo by forming a company, researchers with potentially commercial ideas should approach tech transfer offices long before they’re considering going out on their own.
“Especially if you feel, ultimately, that you have something of high commercial value,” Homonko says.
