The availability of research and development and venture capital funding is critical for Canadian life sciences companies. Without available risk capital, Canadian entrepreneurs cannot create and commercialize innovations.

The environment for raising venture capital funding has been very difficult over the last several years, but we are pleased to report some good news from 2011.

According to the Canadian Venture Capital and Private Equity Association and Thomson Reuters, total venture capital market activity in Canada grew to $1.5 billion in 2011, up 34 per cent from the year before.

Specific to venture activity in biopharmaceuticals and other life sciences sectors, financings were up 15 per cent from 2010 at $343 million (2010 life science venture investment was up 38 per cent from 2009).

In the United States, venture capital investment in 2011 increased to US$28.4 billion in 3,673 deals, compared to US$21.8 billion in 3,277 deals in 2010, an increase of 22 per cent in dollars and 4 per cent in number of deals, according to the MoneyTree" Survey Report by PricewaterhouseCoopers LLP and the National Venture Capital Association, and based on data from Thomson Reuters. Coming off modest growth in 2010, biotechnology investing increased 22 per cent in dollars in 2011, but decreased 9 per cent in number of deals, with US$4.7 billion invested in 446 deals.

It is interesting to note that over the past six years, overall venture capital investment in Canada and the United States has moved more or less in tandem. However, the gap between average amounts invested in Canadian companies compared to U.S. companies eroded in 2011, with Canadian companies on average raising only 37 per cent of the amount raised by their counterparts in the United States.

Some of the recent and more notable reported Canadian life sciences venture deals are listed below.

While venture capital investment increased significantly in 2011, venture capital fundraising did not fare as well. New commitments to venture capital funds were almost unchanged between 2010 and 2011 at $1 billion. In contrast, fundraising in the United States increased by almost 32 per cent to more than US$18 billion.

As a partial response to relatively weak fundraising activity over the past few years, the federal government's recently released 2012 budget commits $500 million over five years to stimulate and support venture capital activities in Canada. Although short on details, the government's commitment recognizes the importance of the venture capital industry to the growth of Canada's innovation economy.

By its nature the venture capital model is dependent on successful exit transactions. Venture returns crystallize only when a company makes a public offering or when it is acquired. Successful venture-backed life science IPO and M&A exits are critical to attracting additional capital to Canadian early stage life sciences companies.

M&A activity in the pharmaceutical and biotechnology sectors outside Canada continued to be robust. In Canada however, there were only a handful of notable deals in the past year, including Alexion Pharmaceuticals Inc. US$1.1 billion purchase of Enobia Pharma Corp and Cephalon's (NASDAQ: CEPH) $525M acquisition of biotech Gemin X (followed in November 2011 by the acquisition of Cephalon by Teva Pharmaceutical Industries Ltd. (NASDAQ: TEVA)). In addition to the larger biotech deals, there were also some significant strategic add-on medical device acquisitions involving Canadian targets, such as OraSure Technologies' (Nasdaq: OSUR) acquisition of Ottawa-based DNA Genotek Inc. for $50 million in cash.

These deals represent the latest Canadian biotech buyouts by international pharma companies at a time when biotech IPOs are few and far between (there were zero Canadian life sciences IPOs in 2011). Overall, however, Canadian life sciences companies have been far less involved in M&A activity than their counterparts in the U.S. and other international markets.

In our view, conditions remain conducive to continued life sciences M&A activity in 2012. Pressures on biomedical companies of all sizes to reduce the costs and risks of product development have been and will continue to be a catalyst for mergers and acquisitions activity. Further, major pharmaceutical firms continue to look to fill their product pipelines through the acquisition or licensing of biotech assets. The year 2012 will continue to see large pharmaceutical and device companies search out attractive add-on acquisition targets in Canada and elsewhere to help them address their strategic and competitive challenges.

As one of Canada's largest law firms, Gowlings has been privileged to act as legal counsel in a number of important biotechnology and life science funding and M&A transactions.

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