The Ontario Bioscience Innovation Organization (OBIO™) is a private sector, membership-based organization that is Ontario’s leading advocate for its human health life science sector. OBIO is engaged in advocacy to enable development and commercialization in Ontario of life science technology through investment, strategic alliances, stakeholder engagement, thought leadership and industry promotion. Our goal is to build a leading bioscience cluster in Ontario to deliver innovative products/services to a global market. Vision: To create a new Ontario that is a world leader in healthcare innovation and a global location of choice for bioscience commercialization. Mission: To advocate for the growth and development of the commercial bioscience industry in Ontario, resulting in improved patient outcomes, increased healthcare efficiency and greater prosperity for all. CONSULTATION ON HOW TO BETTER ENCOURAGE PRIVATE SECTOR INVESTMENT AND MANAGEMENT OF SEED AND LARGE-SCALE VENTURE CAPITAL FUNDS RESPONSE PROVIDED BY OBIO ON BEHALF OF ONTARIO’S HUMAN HEALTH TECHNOLOGY AND BIOSCIENCE INDUSTRIES July 27, 2012 OBIO Recommendation #1: Provide stability by committing to a long term plan OBIO Recommendation #2: Manage Government’s investment via a Technology Focused Fund of Funds that has designated amounts for health sciences and accountability timelines for distribution. OBIO Recommendation #3: Encourage and motivate/incentivize Private Sector Investment, Foreign Investment and Pension Fund Investment Introduction Ontario's life sciences companies are engaged in the development of new therapeutics and technologies which promise enhanced opportunities for maintenance of health, through better prevention, diagnosis and treatment of illness. Ontario's life sciences companies continue to be challenged by the slow global economic recovery. Restrictions in the availability of the right kind of strategic capital continue to constrain this sector's ability to ensure Ontario's 'human capital' provides its greatest return on our societal investment. With few exceptions the local SME industry continues to operate with insufficient financial resources and a very narrow range of options to pursue capital, a fact that has been reported worldwide by PWC, E&Y and others. Response to Department of Finance Consultation July 27, 2012 Page 1 Ontario’s SMEs focus on commercialization of technology and are engaged in collaborations with both academic institutions and industry for services, technologies and people. However, financial constraints including funding are the main barrier preventing companies from hiring and obtaining needed skills. A focus on competitively funded commercialization is critical to spurring the growth of new companies that can contribute to Canada’s economy. In recognition of both the unique challenges associated with, and varied opportunities provided by the life sciences industry, the Ontario Bioscience Industry Organization (OBIO) was formed in 2009. Representing the interests of small and medium size enterprises (SMEs), OBIO focuses on industry-led, multi-stakeholder approaches to ensure the advancement of the life sciences industry sector within Ontario. As in 2009 and 2010, a 2011 survey conducted by OBIO, polled executives on specific and actionable recommendations for improvements to existing government funding initiatives. Chief Executives were consistent in raising concern over the level and structure of support offered by government programs, the inefficiencies engendered by the application processes, and the challenges to their ongoing operations brought about by delays in disbursement. Ontario’s human health sector (HHS) has taken action to develop a strong biotechnology cluster in Ontario. In 2011, OBIO organized the Ontario Bioscience Economic Strategy Team (OBEST™) of over 220 volunteers to develop a province-wide strategic vision to support the growth and viability of Ontario’s bioscience industry. The OBEST strategy was launched to stop the downturn in the human health and biotechnology sector and take up the challenge of pivoting Ontario’s economy towards renewed prosperity and growth. OBEST recognized the need to take action in order to ensure Ontario does not lose the opportunity for building a globally-recognized bioscience sector that develops and exports new products and services capable of addressing global healthcare priorities. OBEST strategies ensure our investments in research and innovation will not be lost to other regions to realize the economic benefits of a growing industry. The OBEST call to action brought together an army of people, from academia, government, patient groups, financial and capital markets, and industry, who worked for six months and 5,000 person hours building a collaborative, interactive and implementable plan for the industry to become an economic engine in Ontario. Ontario’s bioscience community is now fully engaged in the implementation of the OBEST plan. OBIO, through OBEST continues to work with industry leaders on the development of this strategic plan with the goal of addressing health care costs, delivering high value jobs in the knowledge economy, generating exports, innovation adoption, exploiting opportunities for wealth creation and improved health care for all Ontarians. The industry continues to work with government to implement programs that address the needs of the human health technology and bioscience sector. Response to Department of Finance Consultation July 27, 2012 Page 2 OBIO RESPONSE ON BEHALF OF ONTARIO’S HUMAN HEALTH TECHNOLOGY AND BIOSCIENCE INDUSTRIES The following recommendations prepared by OBIO in consultation with industry leadership are provided to assist the government in achieving its OBJECTIVES (listed below) for the $400 million Government has made available to help increase private sector investments in early-stage risk capital and to support the creation of large-scale venture capital funds led by the private sector. GOVERNMENT OBJECTIVES Contribute to the development of a sustainable venture capital eco-system led by private sector investment that includes: Domestic and international institutional investors; and Large-scale venture capital funds managed by the private sector Increase the number of successful Canadian companies by encouraging private sector investments in early-stage risk capital and helping to ensure highpotential innovative firms have access to financing; and, Develop a deeper pool of experienced fund managers in Canada, including by attracting foreign expertise and capital to Canada’s capital market OBIO Recommendation #1: Provide stability by committing to a long term plan Achievement of Governments objective for a sustainable venture capital eco-system and an increased number of successful Canadian companies is strengthened by signalling government’s long term vision to investors and high growth firms (as evidenced in other jurisdictions). OBIO recommends that the Federal Government institute a ten year annual funding commitment of $1 billion dollars invested at a rate of $100 million per year. This will provide stability for both early and late stage companies by ensuring a baseline funding commitment in place despite the inevitable market fluctuations. Implementing a long term investment program allows both innovative firms and investors to develop programs over a long term planning horizon knowing that a committed base-line number will be invested in the market over multiple years whatever investment mechanism the government chooses. Stability has many spin-off benefits. Key among these - stability will help to attract the “deeper pool of experienced fund managers” – another Government objective. One of the barriers to attracting top notch international talent is the uncertainty of follow-on employment opportunities for career driven individuals relocating to Canada. Being able to provide multiple receptors within Canada for talent will attract and keep foreign expertise thus increasing the breadth and depth of management knowhow capable of taking full advantage of human health and bioscience technologies being developed in Canada. Response to Department of Finance Consultation July 27, 2012 Page 3 OBIO Recommendation #2: Manage Government’s investment via a Technology Focused Fund of Funds that has designated amounts for health sciences, appropriate expertise, across Canada focus and accountability timelines for distribution. A number of existing Canadian organizations already have the resources, skills and relationships required to invest funds into venture capital funds and as such act as ‘fund of funds’ managers. OBIO recommends the federal government engage existing entities to manage government’s investment by investing as a ‘lead order’ into several ‘fund of funds’. Using existing capacity rather than trying to build the required capability from the ground up will avoid start-up delays and allow funds to be deployed quickly. Using existing capacity also avoids waste and duplication of efforts and ensures funds are disbursed by an experienced manager, avoiding the ‘learning curve’ of a new organization. While experimenting across a multiple number of models is recommended, consideration should be given to existing ‘fund of funds’ managers including but not limited to: Business Development Bank of Canada; Teralys Capital and North Leaf Capital. Such a fund should be nationwide and not limited by provincial restrictions. Recommended directives to a ‘fund of funds’ manager by the federal government include: 1. Minimum fund size for life sciences should be $250 million. This is necessary to ensure the fund is able to do sufficient follow-ons and will be given serious consideration by other VC funds. It will also help ensure that all segments of biotech can reasonably fall within the scope of the investment portfolio. Investment trends in the Canadian industry are often driven by the availability of funding favouring smaller investments in medical devices whereas biotherapeutics requiring significant funding are difficult to finance given fund sizes. History confirms the need for a required allocation of funds to ensure life science investment. A case in point is the less than 1% of total capital advanced by BDC to the life science sector in 2010. 2. Participation by multi-national biotech/ pharmaceutical companies as limited partners or as general partners in recipient VC funds is encouraged as per the Quebec successes of 2012. 3. Federal money should not be used to protect private investors (i.e. there should be no provisions for government to take losses first or guarantee returns). 4. Recipient funds to be return-oriented with appropriate timelines for health sciences and insulated from government influence for regional development etc. 5. Foreign VCs should be allowed to vie for the general partner role in recipient funds as long as they establish a dedicated, Canadian-resident VC fund for this purpose and invest in Canadian companies. 6. Compensation for general partners should be designed to properly incent the general partner while benchmarked against practices in global jurisdictions. Funds should be accountable for distribution in a timely manner. Summary Rationale for government investment via a fund of funds business model Infrastructure already exists: No new programs need to be created however existing ones need to innovate their processes to create an environment for success. All investors should share the risk Evergreen potential via reinvestment Allow follow-on investments Funding accessible to both private and public companies Response to Department of Finance Consultation July 27, 2012 Page 4 High growth companies stay in Canada Build breadth and depth of Management knowhow: Select funds based on deployment track record and ability to build healthcare companies for the long term. OBIO Recommendation #3: Encourage Private Sector Investment, Foreign Investment and Pension Fund Investment In 2012, most institutional investors have vacated the VC landscape in part due to the small Canadian investment base. As in the past, consideration should be given to encouraging pension funds to show leadership by investing 12% of their portfolios in Canadian healthcare fund of funds. Such a directive equates to the 12% of Canada’s GDP spent on healthcare which determines the core functioning of society. Government’s focus should be on attracting growth capital using fund of funds as the business model. This approach will attract private sector investment and allow private markets to handle foreign investment. Positively, foreign investment will be attracted to invest alongside Canadian VCs by the stability afforded government’s long term investment commitment. Companies who have VC-like investment vehicles should be incentivised to invest in Canadian companies. Additionally, foreign investors should be encouraged to stay invested in Canada by removing existing restrictions for non-CCPC companies allowing them to benefit equally from SR&ED. SR&ED is seen as a strong and positive program. Opening SR&ED up to any company conducting research in Canada will create sector jobs and attract both foreign VCs (by leveraging their dollar) and foreign multinational research dollars to fund labs in Canada. Further harmonization of SR&ED requirements and eligibilities should include public entities contributing to a beneficial levelling of the playing field. Reductions to SR&ED have been described in the context of re-directing resources to other support mechanisms such as a new SBIR-like program. While there is support for directed funding ideas, these programs should preserve SR&ED. Further, expansion of IRAP funding programs is seen as more positive than creating new programs. Currently, IRAP tends to fund many, small Seed projects, but the program should be expanded, with a view to being an entry point for successful companies and projects to apply for larger IRAP grants that would truly help build companies and allow them to advance multiple development programs. “Benefits to Canada” clauses (job creation, capacity building, etc.) can attract foreign investors if government first commits a non-equity investment as part of a fund of funds providing venture returns. In order to build the missing pieces of Canada's biotechnology ecosystem, establish sustainable local companies and restore financial networks, Government is encouraged to augment tax incentives (such as tax breaks on capital gains) so that Canadian and foreign investors benefit from building companies in Canada and establishing Canadian company headquarters. Only when companies are domiciled in Response to Department of Finance Consultation July 27, 2012 Page 5 Canada are the types of high quality jobs created here that will build the next generation of Canadian success stories. Respectfully Submitted, Gail Garland President & CEO Ontario Bioscience Innovation Organization 101 College Street, Suite 120-C Toronto, Ontario M5G 1L7 In preparation of this response, OBIO Gratefully Acknowledges the Contribution of OBIO Board of Directors, OBIO Members and OBEST Implementation Team 5: Encourage Long Term Capital. In particular OBIO would like to recognize the contribution of: Brian Adam Jolyon Lisa Stephen Helen Jeremy Rob Stefan Steve Jim Prabah Bob Cathy Niclas Grant David Bloom Buckley Burton Crossley Fanjoy Findlay Grushcow Hall Larson Ottaway Pelot Singh Steiner Stiernholm Tipler Young Bloom Burton Variation Biotechnology Bloom Burton VitalHub Devera Logic Actium Research Norton Rose HTX Tornado Medical Systems GMP Capital ArticDx PwC Nucleus Trillium RBC Actium Research Response to Department of Finance Consultation July 27, 2012 Page 6
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