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Toronto's Capital Pool Company Program

Mark C. Rogers, Chairman and Chief Executive Officer, Bradmer Pharmaceuticals Inc.

The investment thesis in Bradmer Pharmaceuticals is that there is enormous economic opportunity in the commercialization of university developed drugs, even if those drugs have market sizes smaller than those which appeal to large pharmaceutical companies.

For a large pharmaceutical company, yearly sales of $1 billion or more are required to impress the stock market. On the other hand, a drug for a rare disease capable of selling $100-200 million per year is an enormous economic success for a small pharmaceutical company. This is particularly true when the company acquires the drug from a university that most often did its research and testing with federal research dollars instead of dilutive investor dollars, and the small pharmaceutical company is also without the huge infrastructure costs associated with "big pharma."

The major challenge to address, however, is the absolute minimum of $15-20 million dollars, and most often several times that amount, required to develop a drug through even the smallest clinical trial. Raising this money in a private company is obviously possible but poses several unique challenges for the entrepreneur. Raising money from angel investors and venture capitalists often entails conditions that protect the investors from lack of liquidity at the expense of harsh terms for the entrepreneur.

One attempt to solve this has been to list companies on the U.S. microcap exchanges, but there is some concern that this is a difficult place from which to grow a company and few companies really make it from the "bulletin board" to the full NASDAQ or AMEX markets. There is a sense that companies taking a microcap exchange route are highly speculative and cash poor.

Just north of the U.S. border, however, is the vibrant Toronto Stock Exchange (TSX) with a completely different image. While much smaller than U.S. markets, TSX is a healthy international market listing billion dollar companies and with relationships for co-listing on the NASDAQ and London Stock Exchange. Requirements for listing on TSX are less stringent than NASDAQ and one way of listing is particularly advantageous for small companies.

The CPC (Capital Pool Company) listing is a micro public listing on the TSX and is convertible, given appropriate growth, to a full TSX listing.

To form a CPC, three to six individuals with an appropriate combination of business and public company experience invest a minimum of CDN$100,000 in seed capital. These founders incorporate a new company and issue shares in exchange for seed capital at a minimum price 50 percent of the price at which the shares are to be sold to the public. The CPC and its advisers prepare a prospectus outlining the company's intention to raise between CDN$200,000 and CDN$1.9 million and use the proceeds to identify an acquisition.

Within twenty-four months, the CPC must identify a business as its "qualifying transaction," issue a news release, and prepare a filing statement providing prospectus level information on the business being acquired. The TSX reviews the information and evaluates the new business to ensure it meets minimum listing requirements. Finally, a vote of shareholders is obtained. Following this, the company is listed on the TSX Venture Exchange and can move up to full exchange status by completing a series of other requirements.

Having done this with Cardiome, originally a very small TSX company with a $30 million market cap that has grown into a $750-900 million dollar company and was able to co-list on NASDAQ (thirty days on TSX as $100 million market cap and $5 average stock price), we repeated this process with Bradmer Pharmaceuticals. From the formation of a CPC to full listing on the TSX (with a full round of fundraising) took three to four months. Existing relationships with lawyers, bankers, and investors from previous successful transactions helped keep this time short. For a first time entrepreneur, it would take somewhat longer.

An additional fact we learned is to organize a company from the beginning as a Sarbanes-Oxley (SOX) compliant entity, which is needed to bring the company to the U.S. markets. Financial record keeping in a SOX compliant fashion keeps the need and time for restating finances on the U.S. markets out of the equation.

Entrepreneurs who want to undertake a CPC should speak at length not only to lawyers and bankers but also to other entrepreneurs who have done this successfully. Key questions are: where to locate the company (United States or Canada ) and which province if Canada. Similar questions have complex effects on taxes, board composition, future sale or M&A activities, and so forth.

None of these issues are insurmountable, but an entrepreneur trying to take advantage of the CPC program must be mindful of the potential pitfalls in running what will be a trans-national enterprise, and prudent preparation is in order. Regardless, this is now my third experience and, so far, it has been a very effective path to company growth.

© 2006 Mark C. Rogers. All rights reserved.

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