Editor's Note: This is part one of a two-part series on trends in Canadian biotech funding. Part two will run in Monday's issue.

As a country with three major biotech regions - Montreal, Toronto and Vancouver - and about 135 public firms, one might think Canada is firmly entrenched in the life sciences game.

And it is. Although it trails the U.S. and Europe in both number of firms and revenue, it has its success stories, such as Vancouver, British Columbia-based firms Angiotech Pharmaceuticals Inc. and QLT Inc. But it has had trouble growing beyond those early triumphs.

"With [success] came a feeling of euphoria that there could be a biotech industry built here," said Dan Giampuzzi, president and CEO of Gemin X Biotechnologies, a cancer drug development company based in Montreal.

The early euphoria led to venture capital funds for the life sciences - many of them supported directly or indirectly by the Canadian government - and the creation of many start-ups, but the funds fell short of supporting growth much beyond the first round.

"There wasn't money to evolve those early stage technologies. A lot of [companies] ended up not being funded, and those that did get funding were undercapitalized," Giampuzzi said.

Those cash-starved firms were forced to seek a listing on the Toronto Stock Exchange or other local market "much earlier than they would have normally."

It became common to see Canadian firms list on the Toronto Stock Exchange just a few years after inception, with the plan to migrate to a larger market - often Nasdaq - after the company's work has progressed to late-stage trials.

The market correction after the genomics boom left many public Canadian firms unable to meet Nasdaq's market capitalization, share price and trading volume requirements. Canada's private companies, after seeing many of their public counterparts languish on the Canadian markets, now are following a business formula already adopted by U.S. and European companies - postponing the IPO.

Companies such as Gemin X and OncoGenex Technologies Inc. are looking to stay private until they are sure to be well received.

"Our plan is to go public, probably in 18 to 24 months," said Gemin X's Giampuzzi, "driven by the right kind of profile, which will include Phase II efficacy data."

Gemin X is set to begin Phase II testing next month of its Bcl-2 inhibitor, GX15-070, in cancer.

Vancouver, British Columbia-based OncoGenex is focusing on "establishing a product pipeline of cancer drugs," said Scott Cormack, president and CEO. "We're also spending a lot of time in the U.S. marketplace, so that when we do [go public], ours will be a familiar story, and that's a key to success."

While there are other ways to build value, using methods straight "out of the CEO playbook," such as partnering or M&A, Cormack said going public "is the most likely direction if you're looking to build a sustainable entity."

IPO Market 'Like The Desert'

"A lot of companies are staying private not because they want to jump to Nasdaq [and can't], but because there's no interest from investors," said Michael Denny, managing director of Westwind Partners Inc. and the chairman of BIOTECanada, adding that the "biotech sector in Canada has had difficulty in financing young, growing companies."

While there were 33 initial public offerings globally in 2005, and 37 the year prior, only a few of those came from Canadian firms.

"It's been just like the desert," Denny said, though the market might be looking up this year. He said there could be as many as nine IPOs in the near future, representing the "most robust IPO market I've seen in Canada in the last few years."

Two of those filings came within the last few weeks. Caprion Pharmaceuticals Inc., of Montreal, and Medicago Inc., of Quebec, both filed for IPOs in Canada.

The main problem, Denny said, is that investors tend to shy away from the life sciences sector in favor of the more popular oil, gas and mining markets in Canada. Speculative investments that "would have gone into biotech companies have gone into those instead," he added.

A large part of that trend has to do with investor perception. It's easier for investors to put money into commodities "because if you want to buy into gold, you buy into gold," he said. "But if you want to buy into biotech, you have to work harder to make the right investments," taking the time to research a company's science, intellectual property and management.

On the venture capital side, Canadian firms typically have to reach outside the country, going into the U.S. or world markets to build an investor base. According to the Canadian Venture Capital Association, investments in Canadian biopharmaceuticals totaled about $344 million in 2005, comprising 19 percent of the $1.8 billion invested overall in Canada.

As a comparison, figures from the 2005 MoneyTree venture capital survey showed that $3.9 billion was put into the biotech industry in the U.S. last year, and overall, about a third of VC investing went into the life sciences.

But things could be changing in Canada. Denny said he's been talking with investors who are starting to express more of an interest in biotech.

"I think Canadian investors are effectively building their shopping lists," he said. "They're kicking the tires now."