Revenues among Canada’s publicly traded biotechnology firms increased by more than 25% in 2005, with net losses dropping by 24%, matching a trend in the global industry where for the first time revenues surpassed US$60 billion, according to a report released today by Ernst & Young LLP.

“Our findings paint, again this year, a good news/bad news picture for the industry in Canada,” says Rod Budd, author of the Canadian chapter in the global report and leader of Ernst & Young’s Life Sciences practice in Canada.

“As Canadian investors shy away from technology and life sciences companies in favour of the financial services and oil & gas industries, the ability of earlier-stage companies to attract investor interest and financing will remain very limited. Most of the interest in Canada’s biotech sector centres around those revenue-generating or near-revenue-generating players with significant market caps. Not surprisingly, investors are attracted to these companies for their potential income growth, versus any desire to gamble on a start-up.”

“The cost of going public continues to rise, with earlier, smaller biotech companies feeling this shift most,” says Claude Bismuth, a senior Life Sciences partner in Ernst & Young’s Montreal office. “We can expect to see companies remain private much longer and succeed only to the extent that they fund their product development with significant rounds of venture financing. A greater presence of venture capitalists and private equity investors is being called upon to shoulder development risks for a longer period of time.”

While the Ernst & Young report identifies major challenges facing the sector, several high points leave room for optimism. Funding for biotechs in 2005 rose 28% over the US$791 million raised in ‘04, exceeding a billion dollars and approaching the US$1.3 billion raised in the banner year of 2003. For the first time since 2000 more than US$100 million in initial public offerings was raised. While only four companies completed IPOs, these totalled a Canadian record of greater than US$160 million. As well, it was the strongest year ever for product approvals-a very positive sign for industry sustainability.

Among the biggest challenges facing the Canadian biotech industry are the continuing predominance of small and early-stage companies, and the fact that 36 of the 81 public biotech firms have less than one year of available cash. And key among the concerns of industry watchers was a decrease in market capitalization of almost half-a-billion dollars in 2005, to US$13.2 billion- quite a distance from the heady US$17.4 billion market cap reached at the end of 2000. Of the 81 public biotech companies in Canada, 55 have market caps of less than US$100 million. Overall, in the past five years, the Canadian industry has performed poorly against the rest of the economy as measured by market capitalization, further reinforcing the industry’s need to attract adequate investor interest, reveals the Ernst & Young report.

Here are the highlights among the Canadian industry findings.

The number of Canadian companies fell by 3%-there was one less public company in 2005 for a total of 81; the number of private companies decreased by 12 to 378.

Revenues were up 26% to over US$2.5 billion.

Losses declined by nearly 24% to US$324 million in 2005 from US$429 million in 2004.

Venture capitalists invested over US$313 million in private biotech firms in 2005; the average VC investment rose from US$2.4 million in ‘04 to US$6.1 million in 2005.

The industry remains clustered around Montreal, Toronto and Vancouver.