© BIOTECanada 2011 A “Made in Canada” Success Story: Flow-through Shares Wednesday, October 5 th, 2011 Anthony Giovinazzo, President & CEO, Cynapsus Therapeutics Chair, Emerging Companies Advisory Board Gibril Muddei, Manager, Policy & Research, BIOTECanada

Agenda © BIOTECanada Introduction – 5 min 2.The Risk Capital Gap – 5 min 3.Flow-through Shares “101” – 10 min 4.Industry Proposal – 15 min 5.National Advocacy – 5 min 6.Discussion/Questions – 15 min

Introduction Industry Overview: 600+ core biotech companies 90%+ of companies are pre-commercial “junior biotechs” 300+ bio-therapeutic drugs in development R&D expenditures of $1.7+ billion yearly 11% of all business-sector R&D in Canada is performed by biotech companies © BIOTECanada 2011

Introduction (cont’d) Note: Data based on preliminary 2009 GDP figures. Sources: Source Data - Statistics Canada, CANSIM Table Methodology - Industrial Biotechnology. December 1, 2008, 4(4): doi: /ind Economic Size of Canada’s Leading Industries: © BIOTECanada 2011

The Risk Capital Gap The innovation is here, but the risk capital required to sustain R&D in the long-run is lacking. Canada’s biotechnology industry requires $1 - $1.5 billion annually to sustain itself. This is capital from all sources: Private equity and venture capital Public markets Commercial banks Governments Sources: Biotech 2010 Life Sciences: Adapting for Success, Burrill & Company, BIOTECanada Research Services © BIOTECanada 2011

The Risk Capital Gap (cont’d) © BIOTECanada 2011 Source: Thomson Reuters, Canada’s Venture Capital Market in Q $ CAD (millions) Future of Canada’s VC Market: New Capital Commitments

The Risk Capital Gap (cont’d) “R&D expenditures and venture capital are among the first to be cut during recessions,” OECD In the case of Canada’s biotechnology industry, since 2007: venture capital has fallen by 60%; one company (Ecosynthetix) has gone public; and SR&ED qualifying R&D, for surviving companies, has fallen by 35%. Source: OECD Science, Technology and Industry Scoreboard 2009

Flow-through Shares 101 © BIOTECanada 2011 A flow-through share is: A type of share allowing corporations to transfer certain expenses to investors. Investors can apply them against their personal or corporate income tax. Corporations are those involved in exploration, production, and processing of: mining; oil and gas; and certain renewable energy.

Flow-through Shares 101 (cont’d) Parameters: Transfer: Companies cannot claim expenses passed onto investors on their books. Exploration & Development: Companies have two years to use the proceeds from issuing FTSs on qualifying expenses within Canada. Premium: Shares are issued at a premium (normally 5-20% above market trading price) on account of the tax benefits. Holding period: Usually, shares must be held for 4 months and can last up to 24 months. Adjusted cost base: Value of shares are set to 0; capital gains tax is applied on total value of shares realized, even if at a loss. © BIOTECanada 2011

Flow-through Shares 101 (cont’d) Example - $100 raised via FTS: Company’s Perspective: Transaction Costs: $6 representing/underwriting fees Net Proceeds: $94 would be spent company Investor’s Perspective: Benefit: $45 investor tax deduction at 45% marginal tax rate Net Outlay: $55 represents “dollars at risk” Government Perspective: Cost: $45 investor deduction Direct Tax Benefit: $18 (40% of cost recouped as a result of incremental capital gains) Net Outlay: $27 ($45 – $18) © BIOTECanada 2011 SUMMARY: $1 in foregone revenue to Treasury creates $3.5 in new risk capital that must be spent in Canada.

Flow-through Shares 101 (cont’d) Introduction of 15% Mineral Exploration Tax Credit Introduction of flow-through deductions against other income Introduction of look-back rule and expansion of flow-through shares to renewable energy sector (millions) © BIOTECanada 2011 Economic recession starting with stock market collapse “Black Monday” October 1987 Mineral and precious metal commodity price slowdown Sub-prime mortgage crisis and global economic recession Junior Mining: Source: Sources: Natural Resources Canada, Gamah International

Flow-through Shares 101 (cont’d) Department of Finance (1994) found: FTS accounted average of 60% of all funding for mining exploration between 1987 to 1991; each dollar of federal tax expenditure resulted in incremental expenditures of on average $3 in mining exploration and $2 in petroleum exploration; and one dollar of tax expenditure resulted in $2.6 of new (incremental) exploration spending (multiplier appears to be the same for period ). © BIOTECanada 2011

Industry Proposal © BIOTECanada 2011 Business CharacteristicsJunior Biotechnology Length of Development Cycle Up to 15 years Capital Needs Up to $1.5 billion Risk Profile High-risk, high-failure rates Operating Losses Carry-forward during long development cycle Capital Structure Equity financing; minimal leverage Use of Capital Research and development Development Outcome Intellectual property

© BIOTECanada 2010 Industry Proposal (cont’d) Striking similarities between junior mining companies and or “ junior ” biotechs:  No commercialised products/services; little or no revenue generation  Long development cycles  Capital intensive; operate on a burn rate  Experience difficulty raising capital  Highly sensitive to economic swings  Valuation based on potential for discovery and commercialisation  Volatile cash positions  Raise money by issuing shares (raising debt capital is not a consideration for low operating cash flow companies) Bottom line: BOTH ARE EXTREMELY RISKY TO INVESTORS

Industry Proposal (cont’d) Summary Details: Proposed Eligibility Criteria Eligible Corporations Eligible Investors Eligible Expenditures Eligible Shares Type of Investments Tax Deduction Biotechnology companies Individuals, corporations, trusts SR&ED eligible expenses Regular common shares Direct and portfolio investments 100% of investment Definition exists in Ontario legislation Identical to existing FTS structure Based on definition of SR&ED in legislation Identical to existing FTS structure

Industry Proposal (cont’d) © BIOTECanada 2011 Direct Investment Model: Public Corporations Portfolio Investment Model: Private Corporations

Industry Proposal (cont’d) Economic Impact Analysis: Source: PricewaterhouseCoopers LLP, Economic Impact of Flow-through Shares in Biotechnology Industry

Industry Proposal (cont’d) Summary Administration through existing tax structure (FTS & SR&ED). Principal beneficiaries of FTS would junior tech companies who can obtain funds for R&D, partly in exchange for tax deductions that they would not be able to use for years on end. R&D is restricted to Canada. Investment in SR&ED qualifying activities alone provides a net economic benefit. Full alignment with public policy to support technology commercialization and spur business-sector R&D. Direct costs to government are modest. © BIOTECanada 2011

National Advocacy Biotech/Life Sciences Executives Affiliate Organizations/Associations Investment Community Economic Development Agencies Academia & Tech Transfer Offices Knowledge and Opinion Leaders Federal/provincial elected officials and senior public servants. © BIOTECanada 2011

National Advocacy (cont’d) What are we seeking from the C11? 1.Moral support. 2.Development of policy statement from economic development perspective and subsequent sign-off. 3.Letter of support from C11 to key provincial/federal officials. 4.Presence in key meetings at the provincial government level. 5.Communication with colleagues in your industry. © BIOTECanada 2011

QUESTIONS? © BIOTECanada 2011