I attended the two Canadian healthcare conferences organized by Bloom Burton on May 21st and 22nd, 2013. Other important conferences were also held in May, including BIO, CVCA (Canadian Venture Capital Association) and most recently ASCO. A report on the Canadian sector has been released recently by PwC Canada and Ernst & Young released their 27th annual biotechnology industry report. All of this activity and information has prompted me to review my perspective on the pulse of the Canadian healthcare sector.
For those attending the Technology Transfer Conference, we were treated to presentations on 18 fascinating companies, technologies and business opportunities. These companies were all from Ontario, but I am sure equally excellent early stage companies exist across Canada. Ten years ago, these presentations would likely have been mostly about genomics and proteomics, which were still ‘hot’ despite the collapse of the biotech bubble. The value in these companies would have been based on new genes, new protein targets and maybe monoclonal antibodies targeting those proteins. The financing requests would all have been well over $10 million, with no perspective on what could be accomplished with that funding. The sales pitch would have been ‘look at these fascinating new technologies’ with very little attention paid to the business opportunities. In retrospect, it was a period of ‘irrational exuberance’ in the sector.
The focus of early stage companies has changed dramatically. At the Bloom Burton conference, there was tremendous diversity in the types of products and services being pitched, which included:
- Many therapeutics, including small molecules and peptides;
- Drug discovery or screening technologies and tools, but with an interest in developing their own products;
- Medical devices with very specific applications; and
- One diagnostic product for sample self-collection.
There were some funding requests for over $10 million but most were under $3 million, with the objective of reaching a value creation event which would hopefully trigger the ability to obtain additional funding. The business analyses were usually realistic and most companies expected to be acquired prior to commercialization. Some of the non-therapeutic companies actually mentioned sales and profitability within 5 years.
Key point: early stage companies generally seemed to be more focused and realistic than their counterparts ten years ago.
For the early stage companies and technologies, two questions need to be answered. While I will only look at these questions in the context of the healthcare sector, they should be asked for any sector developing novel technologies and products.
- What is needed to ensure that there is a continually flowing pipeline of new technologies and early stage companies?
- How can the continued development of these early stage companies be financed?
For the first question, I would really like to have some novel words of wisdom, but 98% of the answer is funding, supported by long-term planning and guidance.
The major pipeline of new healthcare technologies will flow from universities, hospitals and their affiliated research institutes. These institutions are largely funded by governments, with additional funding from foundations, philanthropists and industry. Provincial governments have, at best, frozen funding to universities, which means real funding levels are declining. Federal funding agencies are receiving more grant applications (more researchers at more universities) for larger grants (costs more to do the same research).
To paraphrase the conference luncheon panelists, there is no D in R&D unless there is good R, and the best way for government to help fill the pipeline of new technologies and companies is to continue funding basic academic research. If they do not, their short-sighted (to the next election) approach will have a negative long-term impact.
A volatile and difficult economic environment has forced governments to focus on stimulating economic activity and job creation. The complaint about an inability to fill job vacancies has been heard for decades – although the province and the industry may differ. From my perspective, this is a result of either a surprising industry success or poor planning a decade ago by governments and industries. If governments and industries start talking now about the professionals they will need in ten years, this might be enough time for a response from the slow-moving academic institutions, at all levels from high school to graduate school.
The federal government has decided to change NRC from an R&D group to one focused on working with industry. There are many unanswered questions around this move – which industries, what locations, will the government still provide the same level of funding, how much funding is industry expected to provide, will NRC compete with non-government contract research organizations, etc. The healthcare sector has no lack of academic research facilities, CROs, CMOs and other groups to help with R&D. I doubt that this move will help the healthcare sector unless it brings some new funding to the table.
Consumers of healthcare must guide the sector by identifying the most important unmet healthcare needs and clearly state that they will pay for cost-effective solutions – with my personal emphasis on cost-effective. If the large healthcare purchasers in the U.S. and E.U., which still account for up to two-thirds of global healthcare purchasing power, clearly outline what they will and will not pay for, companies of all sizes cannot ask for better commercial guidance. Canadian provincial governments are major consumers of healthcare products and services and should not be afraid to make their needs and wants known.
The pharmaceutical and other healthcare industries also have a role to play in guiding early stage companies. These larger companies need to clearly tell academic institutions and VCs this is what we will fund and this is the stage at which we will consider buying or licensing the resulting products.
Key point: the largest impediment to a continually flowing pipeline of new technologies and early stage companies is insufficient stable research funding for universities, hospitals and their affiliated research institutes.
In Part 2 of this blog series, I will give my perspective on the funding needed for the continued development of early stage companies.
Note: I am on the Business Advisory Board for Bloom Burton. As a reminder, the comments in this and following blogs are my personal views and do not necessarily reflect the views of any of my current or former clients and employers.
[ Ed. As with all commentary on this blog, these comments do not consider the investment objectives, financial situation or particular needs of any particular person, and investors should obtain professional advice based on their own individual circumstances before making any investment decision.]