November 1, 2011
Interviewed by: David Snow
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‘Exciting Times’ for Life-Science VC

Big pharmaceutical and biotechnology corporations are on the hunt for acquisitions, and this spells opportunity for Lumira Capital, a Toronto-based venture capital firm that backs health and life science companies.

A slowdown in the VC space has meant “we’re actually in probably one of the most exciting times in the venture space in the Canadian marketplace,” according to Lumira’s president and CEO, Peter van der Velden, who adds that there are “a lot fewer managers. The quality of the deals has gone up.”

In an exclusive interview with Privcap, van der Velden discusses the evolving ecosystem for life sciences in Canada, as well as the importance of university research in Lumira’s research, the need for a global strategy among his portfolio companies, the effect that decreasing patent revenue is having on deal flow, and the need for specificity in a good life sciences investor. (On Nov. 21 2011 Gilead announced it would acquire Lumira portfolio company Pharmasset for $11bn).

Big pharmaceutical and biotechnology corporations are on the hunt for acquisitions, and this spells opportunity for Lumira Capital, a Toronto-based venture capital firm that backs health and life science companies.

A slowdown in the VC space has meant “we’re actually in probably one of the most exciting times in the venture space in the Canadian marketplace,” according to Lumira’s president and CEO, Peter van der Velden, who adds that there are “a lot fewer managers. The quality of the deals has gone up.”

In an exclusive interview with Privcap, van der Velden discusses the evolving ecosystem for life sciences in Canada, as well as the importance of university research in Lumira’s research, the need for a global strategy among his portfolio companies, the effect that decreasing patent revenue is having on deal flow, and the need for specificity in a good life sciences investor. (On Nov. 21 2011 Gilead announced it would acquire Lumira portfolio company Pharmasset for $11bn).

Privcap: How has the ecosystem for life science investing developed in Canada?

Peter van der Velden, Lumira Capital: The eco systems actually evolved a lot over the last, I think, 10 to 12 years.  I describe the industry as a fairly nascent business here in Canada even though they were players 20 years ago.  We really saw a big explosion in the business kind of in the ’99 timeframe.  And the amount of capital under management sort of quadrupled in the ’99 to 2002 timeframe.

We’re now seeing the opposite of that. So I think in the U.S. you’re seeing some of this compression, people talking about there being fewer managers.  That process really started here in ‘08.  And we’ve seen the number of manager really get compressed.  We’ve seen the competition among managers for deal quality really go down, so I think we’re actually in probably one of the most exciting times in the venture space in the Canadian marketplace.  It’s a lot fewer managers.  The quality of the deals has gone up.

The quality of those managers has gotten a lot better because they’ve had ten years of growth and sophistication in paring down and focusing other teams.  We’ve seen more specialization, so a lot of the Canadian firms used to be generalist.  Now they’re – they tend to be very specialized.  Our own firm has gone from being quite generalist healthcare to very specific life sciences and biotech all around a team built on operators as opposed to general financial guys so lots of consolidation in evolution over the last ten years.

Privcap: What are your sources of deals?

Van der Velden: In Canada governments and academic institutions are spending about $10 billion annually on what I would call fundamental life sciences innovation.

So that’s the primary source of innovation for us and the companies that we build.  I think if you look within our portfolio, something like 70 or 80 percent of the original innovation comes out of a university or hospital type environment.  So I think there’s been a great feeder system here.  I think the gap in Canada has been a little bit more on the commercialization side.  So I think we’ve been great at developing technology, great at fundamental innovation, less great at the commercial; and building large scale businesses is a function of that.

Privcap: How are you helping life sciences ventures tap a global network?

Van der Velden: For us it starts on day 1.  We for instance won’t invest in a company that has a Canadian strategy.  Our companies have to have as a minimum a North American strategy.  The North American flip word counts for about 30 percent of global spending on healthcare.  If you’re really going to scale your company in a big way, you have to have European and now for sure an Asian strategy.  And Asian used to be just Japan.  Today it’s clearly China, so all of our companies almost from Day 1 are thinking globally.  We are taking a lot of our device companies and actually starting to get revenues out of those companies by going the CE Mark route in countries like Germany and starting to build a footprint and leverage it.  So international from Day 1 is a core focus for our companies.

Privcap: How do you partner with other firms on deals?

Van der Velden: We are always the syndicate investor.  We tend to be a lead or co-lead in a deal.  I don’t think there’s a deal that we’ve done as a sole investor in probably ten years, so we’re always looking for a strong co-lead with us.  And our syndicates might be as large as four or five different players and it’s because our companies are typically going to take down somewhere between 40 and 60 million through the life cycle.  We want to have a good syndicate of really sophisticated guys, and today that means a small group of Canadian guys and a much larger group of U.S. investors who are coming north of the border.

Privcap: What excites you about the life sciences opportunity now?

Van der Velden: We’re really excited about the exit market.  If you look what’s happening in the big biotech or the big pharma sector, you’ve got $100 billion of revenue coming off a patent in the ‘12 kind of timeframe.  So what we’ve seen is those guys now starting to come very actively into the M&A part of the marketplace.  And we’re seeing that bifurcate into a lot of Series A activity as well as a lot of late stage activity.  I think if you look at the top 58 biotechs, they’ve got something like $200 billion in readily deployable cash.  So they’re chasing our kind of companies.

On the flipside, we’ve seen the public markets be really good for top-tier companies.  So we have a company called Pharmasset.  Zero to $3 billion in current market cap. MAKO – we took the company public in ’08. It currently has a $1 billion dollar market cap.  So we’ve been – we found both sides are good, but we’re principally M&A driven now.

Privcap: What makes a good life sciences investor?

Van der Velden: For us it’s all about domain specificity.  Our guys tend to live and breathe the space.  Most of my guys have spent ten years at a lab bench or have ten years of business development experience within that sector.  So for me it’s all about operating experience and domain specificity.

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