Determinants of venture capital supply in the Canadian biotechnology sector: Financing issues, performance and evaluation

This doctoral dissertation contributes to the existing literature an in-depth analysis of the major financing issues and difficulties of Canadian biotechnology firms, an estimation of the capacity of Canadian suppliers of capital to meet the predicted demand of Canadian firms, and finally, an evaluation of the adequacy of capital supply and demand in the sub-therapeutic segment of the Canadian biotech sector.;Capital supply estimates are obtained using a probabilistic model that we consider the most appropriate to capture the supply generating process that results from the complex interactions between the various relevant factors affecting supply. The estimation involves simulations using initial values of key relevant variables, retained from the existing literature and validated through the interviews, that are expected to affect the flows of funds to biotech companies along with hypotheses about their mean and volatility and on their future behaviour as explicitly modeled by two stochastic processes. The variables used in the model are macroeconomic variables, market and sector variables, firm-specific variables and the global availability of funds in past years. We contribute to the existing literature by identifying the main financing sources, direct and indirect, to the biotech sector and their proportions in the Canadian economy. We also innovate in using a probabilistic model to capture the stochastic nature of the fundamental factors affecting the supply of funds. We believe this can be extended to other areas in the high-tech sector.;In order to evaluate the adequacy of capital supply and demand, we first estimate the capital requirements for the Canadian therapeutics sub-segment which, according to interviewees, shares over 80% of the total capital allocated to biotech activities, and is the only segment with available data about development costs and attrition rates, and a more complete and updated state of the pipeline of molecules for Canadian firms. Initial estimates of aggregate capital requirements are presented in Bergeron, Kryzanowski, Beaulieu, and Zorgati, 2001-b (Bergeron et al. (2001-b) hereafter). We re-estimate total capital requirements using an improved estimation method, new and updated data about development costs and attrition rates, and a more complete and updated state of the pipeline of molecules for therapeutics biotechnology firms. In addition, unlike Bergeron et al. (2001-b), we provide initial estimates of the aggregate external capital requirements of our Canadian sample. Second, we estimate the capacity of Canadian suppliers of capital to meet the predicted demand of Canadian firms, and finally we produce a matching of expected demand and supply of funding and evaluate the volume of external funding likely to come from the U.S. and other financial markets. To our knowledge, it is the first attempt to characterize the adequacy of supply and demand in the biotech sector in Canada. Such an effort is likely to prevent from any wrong effect of a shortfall of supply of capital on reasonable terms and costs that could impede Canadian firms to fully exploit their future growth opportunities.;Analysis of the financing issues and problems encountered by biotech companies is based on in-depth interviews with supply stakeholders operating in Canada (the Montreal, Toronto, and Vancouver areas) and in the U.S. (the Boston, New York, and San Francisco areas). Seventy in-depth interviews were conducted between February and October 2001. The methodology used is similar to that used in Bergeron, Kryzanowski, Gadoum, and Beaulieu, 2001-a (Bergeron et al. (2001-a) hereafter) and identifies the financing issues and difficulties by stage of product and company development for the bio-pharmaceutical, ag-biotech, and bioenvironmental segments of the biotechnology industry. Our study extends the Bergeron et al. (2001-a) study by examining the observations and perceptions of the other primary party to each financial transaction, namely the supplier of funds. We built an interview guide used to collect general supply stakeholders' information and a semi-structured questionnaire in which six main dimensions that are relevant to biotechnology financing, retained from the existing literature, were systematically explored. This is the first study to examine, on the ground, the financing process of a biotech firm and to analyse the issues and problems surrounding it.