Funding Canadian Medical Advances: ALL CANADIANS CAN HELP BOOST BIOTECH

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By Patricia Nicholson

Individual Canadians may not think of themselves as biotech venture capitalists, but each of us has the opportunity to help commercialize scientific research — a few thousand dollars at a time.

The Canadian Medical Discoveries Fund Inc. (CMDF) (London, ON) is a labour-sponsored investment fund (LSIF) that focuses exclusively on life science companies.

“Every Canadian can participate in this,” says Dale Patterson, executive vice-president of Medical Discovery Management Corp., which manages CMDF. While other funds may include a life science component, CMDF is the only one dedicated to the sector.

“When we talk to people, we talk to them about it being, first of all, a good investment,” Patterson says. “Secondly, there are tax credits that are available if that’s what drives some of your investment. But it’s also building Canada and building the Canadian biotechnology life sciences sector. And then fourthly, it’s all part of the wellness agenda. It’s in all of our interests to find medical discoveries that either benefit us or our kids or our grandkids down the road.”

Canadians can invest up to $5,000 in the fund and receive a tax credit of 15 to 35 per cent of that investment.

Fifteen per cent is the federal tax credit, explains Dr. Calvin Stiller, chairman and CEO of CMDF. Residents of Ontario, Saskatchewan, New Brunswick and Nova Scotia are eligible for an additional 15 per cent provincial tax credit.

“And then Ontario has a special category, which is called research-oriented investment funds,” Stiller says. This category is eligible for a further five per cent tax credit.

The reason the federal and some provincial governments offer tax credits of up to $1,750 on a $5,000 LSIF outlay is to encourage investment in certain areas and to compensate for risks.

“The rationale is that labour-sponsored funds are mandated to invest at the early stage and at the seed stage. And that’s where the most risk is. So in order for the government to encourage our funds to invest in the early stage, you have to offset that risk with the tax credit,” Patterson says. “The traditional venture capital funds that don’t have tax credits, their game is to be as late in the process as they can be. And the reason for that is the further along you go in the company, the less risk there is.”

Investments in CMDF are subject to what is called an eight-year hold, Patterson explains.

“So if you were to call your broker and say, ‘I want to buy $5,000 worth of CMDF this year for my RRSP,’ you’ll get the RRSP deduction and the tax credits, but with that $5,000 you have to keep it in the fund for eight years. And the reason for that is because these are such early stage investments, it takes eight to 10 years for them to mature,” Patterson says. “Now having said that, if you decided a year from now that you wanted to bail out of CMDF for any reason — or any other labour-sponsored fund — you could get your money back but what you have to return is the tax credits.”

Stiller says he advises investors to make the most of the system by putting their tax credits to work.

“We’ll do our best to make good money on this, but you should be investing that tax credit in something like an interest-bearing commercial paper,” Stiller says. “And you can see the kind of overall returns with tax credits plus the value that you can get even though the market’s been essentially flat during that time.”

Assets and Attitudes
Before the fund was launched in 1994, Stiller was head of the transplant unit at University Hospital in London, Ont. (now part of London Health Sciences Centre) and a member of the executive committee of the Medical Research Council of Canada, the predecessor to the Canadian Institutes of Health Research (Ottawa, ON).

“One of the things that was so evident to us was that although we had science that was as good as any country in the OECD (Organisation for Economic Co-operation and Development) . . . qualitatively, quantitatively, we had no biotech industry. We had virtually nothing at that time,” Stiller says. A study was commissioned to investigate the reasons for that. The results indicated that “we had a problem with assets and attitudes,” Stiller says.

“The assets issue was we didn’t have smart, risk-tolerant capital. And we needed that — we needed pools of that: venture capital. And the second thing was, we needed change in attitudes between the private sector and the scientific community because at that time there was no real interchange and no trust. So we recommended forming a venture capital fund.”

In seven of its nine years in operation, CMDF has been Canada’s number 1 venture capital investor in life sciences, in terms of both the number of investments and the total amount of money invested, Stiller says.

“The fact that over the years 100,000 Canadians have written cheques from $1,000 to $5,000 to invest in Canadian science is really something,” Stiller says. “So I think the labour-sponsored funds create a particularly important cog in the wheel of commercializing science.”

Broad Portfolio
Patterson says CMDF has raised about $350 million, of which about $300 million is invested in its portfolio of more than 40 companies. The portfolio is split almost evenly between public and private companies.

With some, Patterson says, “we just decided to go in when they’d been wanting to raise another significant amount of money and were already a public company. Some of them have matured — have become public since we’ve owned them.

“Of course the role of a VC fund is to get in there and make an investment in the company and as it grows continue to monitor that. That brings us a return in terms of our share value and then we need an exit strategy, which is usually a merger, an acquisition, an IPO of some form,” Patterson says, adding that some investments have taken longer to mature than was hoped. “Our major hits are still probably a year or two away,” he says.

Stiller is animated on the subject of CMDF’s portfolio. “The breadth of the portfolio, the depth of it, the geographic spread from coast to coast and into the U.S., the disease categories — it’s very impressive,” he says. However, in a gloomy market, performance in terms of returns can be another story.

“Well, we’ve outperformed all the indices over the last three years,” Stiller says (see graph). “As you know, 2000 to 2003 has been a very difficult time. So we’ve outperformed all the indices — but we’re not very happy,” he says of CMDF’s performance.

Unique Role
The intention of LSIFs is to boost emerging sectors by funding small companies, eventually creating jobs in those sectors. But Patterson says CMDF is more active in the industry than just financing.

“We’ve always taken our role as CMDF in terms of nation-building a little more seriously in the sense that other funds won’t do the kinds of things we do that build the industry,” Patterson says, pointing out that Stiller is more than a venture capitalist, he is also a researcher, a scientist and a physician, among other roles. “Cal is the chairman of the Ontario Research and Development Challenge Fund, and on the board of the Innovation Trust, and co-chairs the Cancer Research Initiative in Ontario.” Patterson is also heavily involved in the industry. He is chair of the Biotechnology Human Resource Council (Ottawa, ON) board of directors, and has recently become chair of the founding steering committee for the newly formed Biotechnology Council of Ontario (Toronto, ON).

CMDF has clear benefits for the biotech companies it finances and the broader industry. But Stiller says it also benefits individual investors, as well as Canada as a whole.

“Life science is going to be the largest single industry in the world — the largest single industrial sector in the world,” Stiller says. “For somebody not to be invested in that area is counterintuitive.” But he points out that investing in a matched TSX fund will only provide about three per cent exposure to life sciences, and a NASDAQ fund only about 13 per cent exposure.

“If a Canadian wants to invest in the biotechnology industry and they want a portfolio that has a fairly broad representation and has private and public companies and represents several of the disease areas — because you don’t know where the big breakthroughs are going to come — there’s no other fund,” Stiller says. “Do we have the big winners in there? I don’t know. My hope is we do. So from the standpoint of an individual, I think it really makes sense.

“Is it important for Canada? You’re darned right it is, because we need venture capital. We need lots of venture capital. We need twice as much venture capital. And we need it smart, and we need it patient, and we need it passionate. And CMDF is one of those,” Stiller says. “I would say to somebody, it doesn’t have to be CMDF, but part of your commitment to this country should be to put something in venture capital that keeps this very important area vibrant and growing and keeps our young people here. Because this is really where Canada has a chance to shine from an economic standpoint. And it’s going to take money — it’s going to take risk-tolerant money — to do that.”