Despite a number of setbacks involving Quebec-based life sciences companies, lawyers remain optimistic about the industry’s prospects.

The latest disaster came when Laval-based Neurochem Inc. failed a North American, Phase-three human clinical trial for its Alzheimer’s treatment, which took more than two years to complete and cost the company $30-million. The stock plunged on the news.

Before that was YMBiosciences Inc., which suffered a similar misstep last January. It negatively affected every Canadian biotech financing for months.

Caprion Pharmaceuticals’ failure last year to close what was supposed to be the largest IPO in Canadian biotech history also had a depressing ripple effect across the country.

A high-profile hiccup in the sector reminds investors just how risky life sciences is, and it sends people running for the exits.

As companies prepare to attend BioContact Quebec, the annual gathering of life-science firms, which takes place in Quebec City Oct. 3-5, 2007, the mood on the street seems positive.

“Cautiously optimistic is probably the best way of describing it,” says Paul Marcotte, a partner with the Montreal office of Fasken Martineau DuMoulin. The cautious optimism centres on money. For the past four years, there has been little to speak of, and now there’s a trickle.

“There’s some money coming in from outside from sophisticated players in the field,” says Gino Martel, a partner with the Montreal office of Ogilvy Renault. He points to several sizeable financings in the industry, including Topigen Pharmaceuticals Inc. and its $75- million Series C financing round. Ogilvy Renault represented the company, and Osler Hoskin & Harcourt LLP was on for investors.

Other financiers that have been active in the sector include Quebec biotech’s usual suspects and angels: BDC Venture Capital, Caisse de Depot et Placement Du Quebec, Desjardins Venture Capital, T2C2/BIO 2000 and Lothian Partners 27 (sarl) SICAR.

There are also two new players — MMV Financial Inc. and, the big one, NovaQuest — both U.S. venture capital (VC) players.

Quebec’s biotech firms have been increasingly looking to U.S. venture capitalists ever since many of its provincial funding programs expired in 2003.

MMV and NovaQuest’s investments aren’t huge for an industry where a big pharmaceutical company can spend $1-billion to bring a product to market. However, as Mr. Marcotte notes, their interest and investment in Quebec is among the “promising signs that business will pick up and it will be easier for this young industry to get financing.”

Life-science firms share his cautious optimism. This year’s BioQuebec survey reports that the financial situation of 90% of the province’s biotech companies is either better or at least no worse than it was last year. Among those tepid optimists, half believe their financial situation has improved.

“This clearly indicates optimism in the biotech industry,” says Christian Cawthorn, a partner with Ogilvy Renault, and a patent agent with Swabey Ogilvy Renault, the law firm’s international intellectual property powerhouse.

“We are seeing the biotech industry maturing in that they are looking for alternate financing sources which were not available in the past.

“The biotech companies are seeking collaboration with Big Pharma to get financing to advance research and development of their products,” he notes.

Not that long ago, a firm deploying such a strategy would be accused of selling out, and there were concerns such action would lead to a hollowing out of corporate Quebec. The fear was that the province would be turned into nothing more than an early-stage lab, with the creativity and research being siphoned into the pockets of foreign pharmaceutical companies, which would make all the cash and hire foreign lawyers to do the deals.

Today, it is called strategic partnering and it is the bread and butter of most life-science lawyers who do deals. They are much more philosophical about the idea drain than they used to be.

“At the end of the day, the science being developed in the R&D labs will most likely end up in the hands of one of the major pharmaceutical companies,” says Mr. Martel. “The amount of capital required to continuously develop marketable drugs is too significant for small-and medium-sized companies to bear over the long term.”

But that’s no reason for nationalists (or sovereignists) to moan and groan.

“Some stars will continue to emerge providing substantial rates of return for the VCs and royalties to the universities or other incubators of the technology,” says Mr. Martel. “Some VCs will reinvest a portion of their earnings in the potential stars of the future and the royalties earned by the universities and other incubators will get reinvested in future projects. This recirculation of funds allows the universities and other incubators to keep on generating the new ideas for tomorrow, provides seed money for future spin-offs and financial resources to continuously provide innovative R&D opportunities for researchers. This is an ongoing cycle.”

Sound familiar? It’s a little like the model in the oil and gas industry. “The biotech industry is in some ways like the oil and gas and in general, mining industries,” agrees Mr. Martel. “A great deal of capital is required. There is a great deal of risk but a significant reward if the research and development pan out. Like the international pharmaceutical companies that dominate the world landscape, these industries are also dominated by major players, which are prepared to pay substantial premiums to successful ventures.”

In other words, it’s not a case of selling out; rather it’s a case buying into a global industry.

The trick, of course, is to do it at a decent price, and Quebec’s companies are learning how to do that, says Mr. Cawthorn.

Shahir Guindi, a partner with the Montreal office of Osler, agrees. He points to the $112-million merger between Caprion and Ecopia Biosciences Inc. as an example. (Stikeman Elliot represented Caprion, Mc-Carthy Tetrault LLP represented Ecopia and Osler was on for the placement agents.) The merger came after Caprion scrapped its planned IPO and Ecopia failed to raise money on the TSX. As one analyst noted, “From that moment on, anybody with an interest in these companies, whether separate or merged, would have them for a song.”

“But the management of both companies showed strong leadership, they merged into Thallion, and their future is brighter,” says Mr. Guindi.

Mr. Guindi and Mr. Martel both anticipate more consolidation in the junior end of Quebec’s life-sciences sector. Two such mergers along the Caprion and Ecopia line are said to be quietly in the pipe. “Consolidation is something that will serve the industry well,” says Mr. Martel. “We still have too many small companies.”

However, as Mr. Cawthorn points out, increasingly sophisticated small companies that are getting more and more creative in their financing needs are aggressively looking south and across the Atlantic, where London’s Alternative Investment Market beckons.

“We believe our life-sciences industry is active enough to produce clients that will need assistance to raise money on AIM,” says Mr. Marcotte.

Even with this new optimistic attitude, Quebec’s biotech sector won’t have a smooth upward ride. More bad news will come.

“Only one molecule out of 10,000 will eventually hit the market,” says Mr. Cawthorn. That means for every one good news story, you have 10,000 bad ones.

Good thing the industry is full of optimists. Today anyway.

Credit: Financial Post

(Copyright National Post 2007)