© biotecanada 2011 a “made in canada” success story: flow-through shares wednesday, october 5...
TRANSCRIPT
© BIOTECanada 2011
A “Made in Canada” Success Story:
Flow-through Shares
Wednesday, October 5th, 2011
Anthony Giovinazzo, President & CEO, Cynapsus TherapeuticsChair, Emerging Companies Advisory Board
Gibril Muddei, Manager, Policy & Research, BIOTECanada
Agenda
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1. Introduction – 5 min
2. The Risk Capital Gap – 5 min
3. Flow-through Shares “101” – 10 min
4. Industry Proposal – 15 min
5. National Advocacy – 5 min
6. Discussion/Questions – 15 min
Introduction
Industry Overview:
• 600+ core biotech companies
• 90%+ of companies are pre-commercial “junior
biotechs”
• 300+ bio-therapeutic drugs in development
• R&D expenditures of $1.7+ billion yearly
• 11% of all business-sector R&D in Canada is
performed by biotech companies
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Introduction (cont’d)
Note: Data based on preliminary 2009 GDP figures.
Sources: Source Data - Statistics Canada, CANSIM Table 379-0027 Methodology - Industrial Biotechnology. December 1, 2008, 4(4): 363-366. doi:10.1089/ind.2008.4.363
Economic Size of Canada’s Leading Industries:
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The Risk Capital Gap
The innovation is here, but the risk capital required to sustain R&D in the long-run is lacking.
Canada’s biotechnology industry requires $1 - $1.5 billion annually to sustain itself. This is capital from all sources:
• Private equity and venture capital • Public markets• Commercial banks• Governments
Sources: Biotech 2010 Life Sciences: Adapting for Success, Burrill & Company, BIOTECanada Research Services
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The Risk Capital Gap (cont’d)
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2006 2007 2008 2009 2010 2011-annualized0
100
200
300
400
500
600
700
224
431
302
376 389
176
613
347 340385 397
516
372
112
386
308
221176
Ontario Quebec Rest of Canada
Source: Thomson Reuters, Canada’s Venture Capital Market in Q1 2011
$ C
AD
(m
illio
ns)
Future of Canada’s VC Market: New Capital Commitments
The Risk Capital Gap (cont’d)
“R&D expenditures and venture capital are among the first to be
cut during recessions,” OECD
In the case of Canada’s biotechnology industry, since 2007:
• venture capital has fallen by 60%;
• one company (Ecosynthetix) has gone public;
and
• SR&ED qualifying R&D, for surviving
companies, has fallen by 35%. Source: OECD Science, Technology and Industry Scoreboard 2009
Flow-through Shares 101
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A flow-through share is: • A type of share allowing corporations to transfer certain
expenses to investors.• Investors can apply them against their personal or
corporate income tax.• Corporations are those involved in exploration,
production, and processing of: • mining;• oil and gas; and• certain renewable energy.
Flow-through Shares 101 (cont’d)
Parameters:
• Transfer: Companies cannot claim expenses passed onto investors on their books.
• Exploration & Development: Companies have two years to use the proceeds from issuing FTSs on qualifying expenses within Canada.
• Premium: Shares are issued at a premium (normally 5-20% above market trading price) on account of the tax benefits.
• Holding period: Usually, shares must be held for 4 months and can last up to 24 months.
• Adjusted cost base: Value of shares are set to 0; capital gains tax is applied on total value of shares realized, even if at a loss.
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Flow-through Shares 101 (cont’d)
Example - $100 raised via FTS:
Company’s Perspective:• Transaction Costs: $6 representing/underwriting fees• Net Proceeds: $94 would be spent company
Investor’s Perspective: • Benefit: $45 investor tax deduction at 45% marginal tax rate • Net Outlay: $55 represents “dollars at risk”
Government Perspective: • Cost: $45 investor deduction• Direct Tax Benefit: $18 (40% of cost recouped as a result of incremental capital
gains)• Net Outlay: $27 ($45 – $18)
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SUMMARY: $1 in foregone revenue to Treasury creates $3.5 in new risk capital that must be spent in Canada.
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
Flow-through Shares 101 (cont’d)
Introduction of 15% Mineral
Exploration Tax Credit
Introduction of flow-through deductions
against other income
Introduction of look-back rule and expansion of flow-through shares to renewable energy sector
(mill
ion
s)
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Economic recession starting with stock market collapse “Black Monday”
October 1987
Mineral and precious metal
commodity price
slowdown
Sub-prime mortgage crisis and
global economic recession
Junior Mining:
Source: Sources: Natural Resources Canada, Gamah
International
Flow-through Shares 101 (cont’d)
Department of Finance (1994) found: • FTS accounted average of 60% of all funding for
mining exploration between 1987 to 1991;• each dollar of federal tax expenditure resulted in
incremental expenditures of on average $3 in mining exploration and $2 in petroleum exploration; and
• one dollar of tax expenditure resulted in $2.6 of new (incremental) exploration spending (multiplier appears to be the same for period 2000-2007).
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Industry Proposal
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Business Characteristics
Junior Biotechnology
Length of Development Cycle
Up to 15 years
Capital Needs Up to $1.5 billion
Risk Profile High-risk, high-failure rates
Operating Losses Carry-forward during long development cycle
Capital Structure Equity financing; minimal leverage
Use of Capital Research and development
Development Outcome
Intellectual property
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Industry Proposal (cont’d)
Striking similarities between junior mining companies and or “junior” biotechs:
No commercialised products/services; little or no revenue generation
Long development cycles Capital intensive; operate on a burn rate Experience difficulty raising capital Highly sensitive to economic swings Valuation based on potential for discovery and
commercialisation Volatile cash positions Raise money by issuing shares (raising debt capital is not a
consideration for low operating cash flow companies)
Bottom line: BOTH ARE EXTREMELY RISKY TO INVESTORS
Industry Proposal (cont’d)
Summary Details: Proposed Eligibility Criteria
Eligible Corporations
Eligible Investors
Eligible Expenditures
EligibleShares
Type of Investments
Tax Deduction
Biotechnology companies
Individuals, corporations, trusts
SR&ED eligible expenses
Regular common shares
Direct and portfolio investments
100% of investment
Definition exists in Ontario legislation
Identical to existing FTS structure
Based on definition of SR&ED in legislation
Identical to existing FTS structure
Identical to existing FTS structure
Identical to existing FTS structure
Industry Proposal (cont’d)
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Direct Investment Model: Public Corporations
Portfolio Investment Model: Private Corporations
Industry Proposal (cont’d)Economic Impact Analysis:
Source: PricewaterhouseCoopers LLP, Economic Impact of Flow-through Shares in Biotechnology Industry
Industry Proposal (cont’d)
Summary
• Administration through existing tax structure (FTS & SR&ED).
• Principal beneficiaries of FTS would junior tech companies who can obtain funds for R&D, partly in exchange for tax deductions that they would not be able to use for years on end.
• R&D is restricted to Canada. Investment in SR&ED qualifying activities alone provides a net economic benefit.
• Full alignment with public policy to support technology commercialization and spur business-sector R&D.
• Direct costs to government are modest.
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National Advocacy
• Biotech/Life Sciences Executives
• Affiliate Organizations/Associations
• Investment Community
• Economic Development Agencies
• Academia & Tech Transfer Offices
• Knowledge and Opinion Leaders
Federal/provincial elected officials and senior public servants.
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National Advocacy (cont’d)
What are we seeking from the C11?
1. Moral support.
2. Development of policy statement from economic
development perspective and subsequent sign-off.
3. Letter of support from C11 to key provincial/federal
officials.
4. Presence in key meetings at the provincial
government level.
5. Communication with colleagues in your industry.
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QUESTIONS?
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