Ali Tehrani is President and CEO of Zymeworks, a clinical-stage, biopharmaceutical company dedicated to the discovery, development, and commercialization of next-generation biotherapeutics.Alana Paterson/The Globe and Mail
Lloyd Segal made history two weeks ago, leading the biggest initial public offering ever by a Canadian biotechnology startup. His Montreal-based cancer drug developer, Repare Therapeutics, raised US$253-million and during its first day of trading on the Nasdaq the stock soared by more than 50 per cent, giving the company a valuation of more than US$1-billion.
“I think it’s a watershed, Canada is clearly now in the race,” the chief executive, who previously ran three Canadian biotech companies, told The Globe and Mail this week. But, Mr. Segal added: “It wasn’t even the biggest IPO for a biotech company on the Nasdaq that week.” Both Boston-area-based Forma Therapeutics Holdings. Inc. and China’s Genetron Holdings Ltd had raised more.
“We’ve come very far but we have a long way to go.”
That’s true for the entire Canadian biotech sector. A generation ago, a handful of pharmaceutical developers – including AIDS treatment pioneer Biochem Pharma of Montreal and Vancouver’s QLT Inc. – reached billion-dollar-plus valuations. The success was fleeting. Those early leaders – and the others that tried to follow– were bought out, starved of capital or crashed. Investors retreated and the industry lapsed into a decade-long funk.
What investors need to know about the biotech boom spurred by the global COVID-19 pandemic
But Repare is now the fifth Canadian biotechnology developer in the past 18 months to reach the $1-billion mark in valuation (two when they were bought out) and one of seven to debut on Nasdaq, either through an initial public offering, cross-listing or a reverse takeover.
Long-time sector participants say the industry is the strongest they’ve ever seen it. “Canadian biopharma is having a moment,” said Cheryl Reicin, who leads the life sciences practice for law firm Torys LLP. “The real action is just starting.”
But a key ingredient is missing. While U.S. funds and individual investors are cashing in on some of the country’s recent biotech successes, Canadian institutional investors – with the exception of Quebec capital providers touting regional economic development agendas, the federal Business Development Bank of Canada (BDC) and a lone domestic investment by the Canada Pension Plan Investment Board – have been nowhere to be found.
“The TSX is a great exchange – if you want to take a metals, oil and gas or materials business public it’s one of the best in the world,” Mr. Segal said. He was told by advisers not to waste time pursuing a dual-listing of Repare on the Toronto Stock Exchange – and didn’t. “But they can’t create buyers. And the buyers of biotech issuances are not in Canada. I’d love for that to be different. …The Canadian portfolio managers, pension funds, other funds – they’re just not there for biotech.”
But now, the CPPIB has allocated a tiny portion of its assets to a group actively investing in the global biotech sector; other pension funds are making similar moves. “There’s a very attractive investment opportunity in companies that are highly exposed to innovations in health care,” says Paul McCracken, a senior portfolio manager with the CPPIB. “It’s a great diversification opportunity.” The sector’s renaissance in this country – nurtured by government and cultivated by Americans – might finally have garnered the interest from Canada’s big players.
canadian biotech annual
equity financing acivity
Year
Deals
Sum of gross proceeds (millions $)
2014
14
$365
2015
14
$889
2016
15
$161
2017
24
$822
2018
28
$735
2019
28
$1,016
2020
YTD
25
$1,615
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: Bloom Burton
canadian biotech annual
equity financing acivity
Year
Deals
Sum of gross proceeds (millions $)
2014
14
$365
2015
14
$889
2016
15
$161
2017
24
$822
2018
28
$735
2019
28
$1,016
2020
YTD
25
$1,615
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: refinitiv
canadian biotech annual equity financing acivity
Year
Deals
Sum of gross proceeds (In millions of dollars)
2014
14
$365
2015
14
$889
2016
15
$161
2017
24
$822
2018
$735
28
2019
28
$1,016
2020
YTD
25
$1,615
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: Bloom Burton
This isn’t so much a Canadian biotech moment as a global one, and it’s been going on for some time. Canada is catching up.
While Canadian investors flocked to fads like blockchain and cannabis stocks, the biotech industry experienced a lengthy run of success centred in the United States as the benchmark NYSE Arca Biotechnology index (BTK), consistently outperformed the S&P 500 and Nasdaq index over the past decade.
That has been driven in large part by a buoyant and prolonged market for biotech and health-care IPOs since 2013. It shows no signs of tailing off, said Chris Raymond, a health-care analyst with U.S. investment bank Piper Sandler. In the past four quarters, health-care companies, including biotechs, have accounted for almost half of the 141 initial public offerings in the United States and 39 per cent of the US$38.2-billion raised, according to IPO tracker Renaissance Capital.
Canadian companies have been active in the U.S. market. Hamilton cancer treatment developer Fusion Pharmaceuticals attracted more than US$200-million in an IPO on Nasdaq in June, while Victoria lupus drug developer Aurinia Pharmaceuticals raised nearly US$200-million in December on the Nasdaq and TSX after reporting successful human trial results; it filed a new drug application in May with the U.S. Food and Drug Administration – the first such move in years by a Canadian company. And Montreal’s Bellus Health, chaired by ex-BioChem CEO Francesco Bellini, debuted last September on Nasdaq with a US$70-million offering. The company, managed by his son Roberto, is set to publish human trial results within weeks for its cough-suppressing drug that, if successful, could vault it into the billion-dollar club.
Biotech IPOs on U.S. exchanges
Cumulative annual number
Key IPOs by Canadian biotechs
400
6
5
Aurinia: Sept. 2, 2014
4
1
Zymeworks: May 1, 2017
2
300
Clementia: Aug. 2, 2017
3
3
2
Bellus: Sept. 9, 2019
4
200
Repare: June 19
5
1
Fusion Pharma.: June 26
6
100
0
2005
2007
2009
2011
2013
2015
2017
2019
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: piper sandler & co.
Biotech IPOs on U.S. exchanges
Cumulative annual number
Key IPOs by Canadian
biotechs
400
6
5
4
Aurinia: Sept. 2, 2014
1
Zymeworks: May 1, 2017
2
300
Clementia: Aug. 2, 2017
3
3
2
Bellus: Sept. 9, 2019
4
200
Repare: June 19
5
1
Fusion Pharma.: June 26
6
100
0
2005
2007
2009
2011
2013
2015
2017
2019
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: piper sandler & co.
Biotech IPOs on U.S. exchanges
Cumulative annual number
450
Key IPOs by Canadian biotechs
6
400
5
4
1
Aurinia: Sept. 2, 2014
350
2
Zymeworks: May 1, 2017
300
3
Clementia: Aug. 2, 2017
3
2
250
Bellus: Sept. 9, 2019
4
200
5
Repare: June 19
1
150
6
Fusion Pharma.: June 26
100
50
0
2005
2007
2009
2011
2013
2015
2017
2019
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: piper sandler & co.
In total, Canadian life-sciences companies raised a record $921-million in venture capital in 2019, according to Refinitiv. And publicly traded Canadian firms have sold $1.6-billion in equity so far this year, up from $1-billion in all of 2019 and $735-million the year before that, according to data from Toronto life-sciences investment dealer Bloom Burton & Co. The Canadian government has committed hundreds of millions of dollars to support COVID-19 projects; the biggest recipient, Vancouver’s AbCellera Biologics Inc. also raised US$105-million in venture capital in May and is seen as an IPO candidate in the near future.
Of course, the biotech boom predates the global race to develop vaccines and treatments for COVID-19. But as of June 24, US$7.3-billion has flowed into U.S. health-care funds this year, suggesting either that the spread of the virus has heightened interest in health care stocks or prompted a move away from sectors hard-hit by the pandemic. “People are realizing health care is a good defensive asset to have in a downturn,” said Jean-François Pariseau, partner with Amplitude Venture Capital, an investment firm focused on life sciences recently spun out of BDC.
Advances in several areas have turned this era into “far and away the most innovative age in biotechnology,” said Jerel Davis, managing partner with San Francisco-based Versant Ventures, a biotech financier.
Researchers have built on such breakthroughs as the mapping of the human genome, advances in cell therapy, development of antibodies and the use of computer modelling in drug discovery to devise more targeted approaches to treating a range of diseases. That includes an explosion of new methods to go after cancer in ways that maximize the therapeutic impact on diseased cells while minimizing collateral damage.
For example, Repare is developing “precision oncology” drugs that attack genetic defects in tumours, preventing toxic cells from repairing their DNA. The goal is to treat smaller patient groups based on their genetic makeup, with the hope the drugs will respond more effectively with fewer side effects.
Fusion is developing a “smartbomb for cancer cells,” says its CEO John Valliant, combining antibodies that target cancer cells with a payload of radioactive “alpha” isotope particles that kill the cells from within. Research on mice has shown the therapy shrinks tumours from a range of cancers; initial human trials are under way.
Meanwhile, Mr. Raymond said the U.S. Food and Drug Administration, which regulates the industry, has transformed from a stern judge to an “active participant” in helping bring innovative medicines to market. For example, the FDA expedites approvals for “orphan” drugs that treat rare diseases and “breakthrough” therapies for serious conditions where early clinical evidence shows a new treatment substantially improves results over existing remedies.
Despite the wave of promising developments, biotech remains a notoriously difficult business. It typically costs hundreds of millions of dollars in research and development just to earn regulatory approval for new treatments. Breakthrough therapies can build foundations for giant companies – or be sidelined by the next scientific advances. It’s common for companies to attain billion-dollar valuations before their treatments get approved, fuelling a market for risk-oriented investors who can make fortunes even if the treatment fails.
BDC, an early backer of Montreal’s Clementia Pharmaceuticals, reaped a US$100-million-plus profit on a slightly less than US$20-million investment when the company sold to Ipsen SA for US$1-billion in early 2019. It was one of the biggest venture capital windfalls ever for BDC and became a calling card for Amplitude after the spinout. But then, the FDA in December raised safety concerns and placed a partial clinical hold on trials involving children under the age of 14 on Clementia’s drug, palovarotene, which treats a rare, debilitating chronic disease that causes soft tissue to turn into bone. Ipsen has since restarted trials in people 14 and older, but it also wrote down Clementia’s value by more than 70 per cent.
For biotech companies, it’s hard enough to achieve success, harder still to maintain it. QLT, which commercialized the first drug to treat a leading cause of blindness in older people, and stent maker Angiotech Pharmaceuticals, were pioneers of the local biotechnology scene. But neither Vancouver firm could build on their initial successes, which propelled each to $2-billion valuations two decades ago. Both tried unsuccessfully to diversify, faced competition and faded. QLT sold its key assets and merged in 2016 into a new company that later went bankrupt. Angiotech filed for creditor protection in 2011 and sold to a private equity group in 2017.
Canadian biotechnology entrepreneurs have faced additional challenges, starting with a general hostility toward the idea of creating companies around scientific discoveries. “The socialized medicine we’ve had in Canada has really set the stage for this idea that you do great science and then you give it away like insulin,” said David O’Neill, president of the Fight Against Cancer Innovation Trust, which commercializes research from the publicly funded Ontario Institute for Cancer Research. “But people didn’t think about the jobs and industry that could be created when you did that.”
Clementia founder Clarissa Desjardins (who is married to Mr. Segal), helped invent a research tool in the mid-1990s known as fluorescent peptides while earning her PhD at McGill University’s Montreal Neurological Institute. She decided to become an entrepreneur and take the product to market. But when she suggested the idea to a co-inventor, he told her “In science, we don’t sell our ideas, we give them freely to our colleagues,” she recalled. He eventually relented, but not before another academic colleague labelled her an “academic prostitute.”
Torys’ Ms. Reicin said when she moved to Canada from the United States in 2005, “it was a swear word to say ‘commercialization.’” She joined a committee of a government-funded entity that supported research and innovation; the committee’s purpose was to support commercialization, but members were still debating the merits of commercializing science. “I said, ‘Call me when you want to make money,’” she said.
Entrepreneurs who did press ahead with startups in Canada ran into money problems. It was relatively easy to get initial funding, particularly during the stock-market bubble at the turn of the century, “but when the market died off there were no buyers, nobody who would finance a biotech company, regardless whether you made your milestones or not,” Mr. Segal said. “There was none of the next piece of infrastructure a growing biotech needs – global investors with a deep knowledge and deep experience of how you get from great idea to great drug candidate.”
Many firms also hit a wall during the financial crisis of 2008. “A lot of these things should have never been funded and were kept alive too long and their failures were failures that reflected on all of us in the industry, whether we deserved it or not,” said Shermaine Tilley, managing partner of Montreal’s CTI Life Sciences Fund, which was co-created Caisse de dépôt et placement du Québec in 2006.
Industry players credit governments for helping to start the industry’s turnaround. The Conservatives in 2010 changed the federal tax code, making it easier for foreign venture capital firms to invest here. Two years later, it announced plans to pump $400-million into Canada’s hard-hit venture capital industry (a program that was repeated by the subsequent Liberal government); that helped several domestic biotechnology VC firms raise their next funds. Wealthy B.C. investors, spurred on by generous provincial tax credits, have proved a steady source of angel funding for the province’s biotechs, including Vancouver’s Zymeworks Inc., one of Canada’s most valuable biotechs. Federal and provincial governments funded research institutes, incubators and centres of excellence to shore up the industry during its tougher times; at least two of today’s most promising biotechs, Fusion and Bellus, owe part of their success to those bodies.
Big-league U.S. investors also began to move north as they saw opportunities to fund underappreciated companies outside the spotlight of Silicon Valley and Boston. OrbiMed Advisors of New York, one of the world’s leading biotech investors, has backed at least a half-dozen Canadian companies in the past five years, including AbCellera, Repare, Fusion, Clementia and Bellus.
Ms. Desjardins said having OrbiMed onboard brought “a pace, scale and level of expertise that was really like joining the big leagues.” (OrbiMed declined an interview request). “It was quite different in terms of the scale of financing and the pace at which you could go and build a global network. OrbiMed’s goal as stated was to just build the best company with the best people worldwide that you could, and money was no object. That was very different from our early experience” building biotech firms.
San Francisco’s Versant Partners has also been particularly active here. The firm, one of the most prominent biotech venture capitalists from the Bay Area, benefited from managing partner Jerel Davis’s Canadian wife wanting to live in Vancouver. The firm liked what it observed in Canada. There were not only good scientists that had worked for pharmaceutical giants like Merck, but also an underdeveloped sector lacking management talent and institutional capital. “Canada was punching way below its weight in terms of dollars in the system and output in the form of returns and success stories,” Mr. Davis said. “Our thesis as we entered was that we have real potential to have real impact.”
Versant entered Canada in 2013 with plans to create companies from scratch, something it was doing in other markets. Versant would find promising patented discoveries that could meet a market need and build companies around them, recruiting seasoned professionals to run the businesses (Mr. Segal joined Versant as an entrepreneur-in-residence in August, 2016, and became CEO of Versant-created Repare in 2017). It has since committed US$200-million to Canadian ventures.
A Versant-created Canadian company typically has researchers and a head office here but also key operations in a biotech centre such as Boston. Versant has since built eight companies in Canada and had five “exits,” including the Repare IPO, the sale of BlueRock Therapeutics last year to Bayer in a deal valuing the company at US$1-billion and a planned reverse takeover by its Chinook Therapeutics, based in Vancouver and Seattle, of a Nasdaq-listed company. Versant also launched a US$100-million venture capital fund in 2018 focused on Canadian opportunities and supported by long-time Quebec institutional investors in the domestic sector: Fonds de solidarité FTQ, BDC, the Caisse and funds-of-funds investor Teralys Capital, which is backed by FTQ and the Caisse. Those players have also been active supporters of domestic venture capital firms including Amplitude, CTI, Genesys Capital and Lumira Ventures, who are all raising funds this year after realizing at least one blockbuster “exit” from past investments.
“This sector is reviving,” said Didier Leconte, vice-president, life sciences and fund management, with the Fonds in a recent interview. “This is not the industry that existed in the early 2000s. ... If local institutional investors don’t help finance [domestic companies] they will move away. Everything is here, we have all the inventions and the science. We have a bit of [domestic] capital, but we need more.”
Ali Tehrani set out 16 years ago to use computer modelling to help drug developers identify promising therapies faster and cheaper than conventional methods. The Iranian-born PhD graduate in microbiology from University of British Columbia raised tens of millions of dollars from angels and venture capitalists for his startup Zymeworks Inc., then signed deals with nine pharmaceutical companies to help them identify drug candidates. They paid Zymeworks US$200-million up front and the deals could be worth up to US$8-billion if the drugs pass a series of development milestones, plus further royalties if the drugs make it to market.
Now, Zymeworks is developing its own cancer drugs. Mr. Tehrani’s goal is to build Canada’s first pharmaceutical giant, and industry watchers in Canada say his company, along with Fusion and AbCellera, have the potential to do that, with platforms that can churn out a succession of valuable therapies.
When Zymeworks went public in 2017 Mr. Tehrani wanted to bring Canadian public investors into the fold, pursuing dual listings on both the New York and Toronto Stock Exchanges. At the time, he told the Globe there was ample demand for the stock from the United States, but he decided to raise half of the funds in Canada to whet local investor appetites. “I kept telling [Canadian investors], ‘If you can’t come in and support great Canadian companies, you won’t have other great Canadian companies come to you’” in the future, he said. “Hopefully, this should make the path slightly easier for other [Canadian biotech firms] to follow us.”
But last fall, Zymeworks delisted from the TSX to focus on the NYSE, where most of the trading happened. “The institutional money on Bay Street is just turned off by biotech,” he says now. “I’ve been in all those offices. It comes off as a lack of understanding and a lack of desire to understand.” His message to Canadian fund managers: “You’re missing out and you’re going to keep missing out, and you’ll keep making excuses why it doesn’t make sense for you. But you’ll see more of us do this.”
Other industry players agree conventional money managers here aren’t interested in Canadian biotech. When Bloom Burton underwrites Canadian biotech financings, the book is entirely made up of retail investors – individuals or family offices – or dominated by U.S. funds, with the balance made up of retail investors, said CEO Brian Bloom. “And in any scenario we have zero percent Canadian institutions,” he added. “Zero … the big institutions are nowhere.”
Structurally it’s easy to understand why. Biotech stocks in Canada are stuck in a no-man’s land. Health-care stocks – a hodgepodge of specialty pharmaceutical companies, cannabis startups and retirement-home operators in addition to biotechs – make up 1 per cent of the TSX composite index. Bausch Health Cos. Inc., formerly known as Valeant Pharmaceuticals, accounts for one-third of the TSX health care subindex while cannabis companies account for 40-per-cent-plus.
To the average Canadian fund manager, domestic biotech stocks amount to a tiny market of small-cap names: Only five Canadian biotechs have market capitalizations exceeding $400-million (the top TSX-listed company, Aurinia, is worth $2.3-billion). Considering the effort and depth of knowledge to needed to invest wisely in biotech, most funds haven’t bothered, and there are almost no funds specializing in health care.
Carmen Tang, an equity analyst for AGF Investments with a master’s degree in pharmacology, estimates she is one of “a handful or less” of experts working for Canadian fund managers who focus on biotech. “The Canadian biotech space is such a small part of the index naturally you won’t have too many investment professionals focusing” there, she said. “A lot of institutional investors that focus only in Canada may say, ‘I can ignore that part of the index and still do very fine.’”
To break through, Canadian biotechs must start out with science that can compete globally. A global biotechnology giant may yet spring from Canada but its growth will be largely funded by U.S. investors and it will trade on a U.S. exchange. But the domestic sector may yet win broader Canadian institutional support.
In the past year, the Canada Pension Plan Investment Board has begun actively investing in the global biotech sector through its thematic investing group which deploys $6-billion in assets – a sliver of the fund’s $410-billion total – in evolving areas of the global economy it believes will make a long-term impact.
“We’re in the midst of a major technological renaissance in our ability as a society to read and write biology, create new biological insights, use machine learning to gain new insights and come up with new solutions for human health and beyond is significant,” said Mr. McCracken, a senior portfolio manager with the thematic investing group focusing on health care.
So far CPPIB has invested in five biotechs as part of the strategy. One was Hamilton’s Fusion, and the rest were U.S. companies. “The quality of the companies coming out of Canada [is] world class,” Mr. McCracken said. But doesn’t mean CPPIB will invest further here: “It’s definitely a global strategy,” he noted. “We are evaluating opportunities everywhere…there are some great opportunities emerging from Canada and we look forward to evaluating all of them.”
Another Canadian pension giant, PSP Investments, is pursuing a similar long-term innovation and diversification strategy. In the past two years it has backed several U.S. biotech firms including two as co-investors with CPPIB.
Industry observers here are hopeful the two pension funds will encourage others domestically to develop their own internal expertise and follow suit. “Given the returns and given what the future looks like, I can’t imagine there’s a single pension fund in Canada that isn’t looking at this,” Ms. Reicin said. “And if they aren’t, they should be. We can’t just invest in oil and gas and mining. ... This is where the future is at.”
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