Members of the provincial and national biotechnology sectors lobbied Parliament Hill last week to make flow-through shares available to biotechnology companies and investors to stimulate industry growth.
The investment tools are used widely in the resource industry.
National industry organization BIOTECanada, which led the charge in conjunction with national biotech week, claims that the similarities between development cycles in the biotech and mining sectors justify the introduction of flow-through shares to its members.
Flow-through shares allow companies with little or no taxable income to pass on tax deductions to investors.
They are used largely during the exploration phase in the mining sector.
BIOTECanada brought 50 industry leaders with it to Parliament Hill last week to press the issue.
Among those present from B.C. was Gordon McCauley, president and CEO of Allon Therapeutics Inc. (TSX: NPC).
BIOTECanada says that, similar to junior mining companies, Canada’s junior biotechnology companies require a tremendous amount of time and capital to reach profitability.
It notes that flow-through shares are already available to some companies in the clean-technology sector.
BIOTECanada said that by issuing such shares, research- and development-intensive companies can pass the significant costs accumulated throughout their long development cycle onto investors.
Eric Adams, CEO of Vancouver’s Engene Inc., is chairman of BIOTECanada’s emerging company advisory board.
“We’re really trying to consider all the things that are at our disposal in order to attract funding, because we’ve come through probably the worst two years of funding in the history of biotech,” he said.
But he noted that flow-through shares can be a double-edged sword.
Private investors get to realize some earlier returns in an investment category that has some of the longest exit horizons.
However, for venture capitalists and institutional investors who typically invest further along in the development cycle, flow-through shares are not advantageous because the associated tax credits are used by shareholders earlier in the development cycle.
“So you’re taking that away from the downstream potential of the company,” said Adams.
“But show me a way to help the average investor investing in biotech and I’m probably going to be behind it.”
Hector MacKay-Dunn, a senior partner with Vancouver law firm Farris, Vaughan, Wills & Murphy LLP, said flow-through shares are a tried-and-true model for raising capital in the resource sector.
He has trumpeted having them made available to biotech companies for a decade.
MacKay-Dunn, who represents companies in both the biotech and resource industries, said flow-through shares allow the government to support the industry while avoiding any attempt to pick winners “because it’s the investors who choose which companies to invest in, with the government providing the credit.”
He noted that high-net-worth individuals and angel investors are playing a much larger role in supporting biotechnology and technology companies.
Such biotech investors, said MacKay-Dunn, would ensure there’s no shortage of demand for flow-through shares.
At the provincial level, B.C.’s venture capital corporation (VCC) program provides investors in registered venture capital funds in B.C. with a 30% tax credit – up to a maximum of $60,000 in credits annually – on their investment.
But the program has limited capacity.
In some years, investors consequently find the credits are suddenly unavailable because they’ve all been allocated.
MacKay-Dunn said flow-through shares would complement the VCC program and be particularly valuable to biotechnology investors who can’t always access the program.
Don Enns, incoming president of LifeSciences BC, which advocates for the provincial biotech industry, said flow-through shares would be welcome, but he noted that they’re only one of many tools that companies should be using to raise capital (see BIV Profile, page 33).
He added that savvier companies that have developed genuine value in their pipelines are looking to alternative mechanisms, such as partnerships with other firms, to support their development programs.
“In terms of financial instruments, you have from A to Z that’s available,” said Enns.
“Adding flow-through shares would be another letter in the alphabet that would be a benefit in certain circumstances. But it has to be determined situationally because there are all those other letters that could prove far more beneficial.”