How Shrinking VC Investment is Hurting the Canadian Medical Device Sector

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By Shawn Lawrence

Employing nearly 35,000 people in approximately 1,500 corporate facilities across the country and drawing on the work conducted in universities, research institutes and hospitals, the Canadian medical-device industry appears on the surface, very healthy. Relative to many countries and in terms of innovation the sector is a very real powerhouse. But scratch below the surface and there could be troubling times ahead.

Tom Walker, president & CEO, Rapid Laboratory Microsystems is a staunch supporter of the latter argument. Part of his reasoning or rationale is a downward trend in the number of Canadian medical device companies that are seeing investment from venture capitalists. A figure quoted by Canada’s Venture Capital & Private Equity Association (CVCA) indicates 600 less companies saw investment during the past six years.

“If you think about it, if only one out of every 10 companies pay off, of those 600 companies we lost out on 60 that could have been successful. To lose that many investment opportunities, that’s a very big number,” said Walker.

Walker maintains that the state of the economy isn’t the culprit behind the downturn; rather it is lack of willingness on the VC’s part to invest in medical devices. Figures quoted by the CVCA seem to agree with Walker’s assertion stating that while $1.14 billion was invested towards Canadian companies by venture capitalists in 2006, just $33 million of that sum was used towards the medical device sector.

“While the industry claims to be growing, the figures obviously suggest a decline and that we’re not actually improving our situation,” stated Walker. “Essentially, we’re going in the wrong direction despite our best efforts and we’re not managing our way out of the problem, we’re managing ourselves into it.”

According to Walker the medical device industry in general isn’t an attractive place for investment from the perspective of both foreign and domestic investors. Part of the problem he says, is the time it takes to move the ideas from the research stages to market, and the effort it takes to get past the regulatory hurdles.

“If you think about software development for non-medical related technology, the process of going to market is much quicker and revenue is often generated before anyone even knows it exists. With medical device investment, even though it might have strong returns if successful, it has that five year risk period with worries of whether the market will still be the same, and will there still be a need for the product. If you look at the way investors are behaving around the world in general, they’re becoming more cautious about this line of thinking and that really doesn’t serve high-risk high return industries such as ours very well.”

Another part of the problem according to Walker is the current attitude of Canadian venture capitalists towards high-risk investment and their reluctance to invest despite Canada’s stellar reputation in the field.

“Even though we have strong research nodes across the country and its reasonable to say that Canada is certainly able and demonstrates it is capable of coming up with clever ideas, we’re just more likely than the US for example to allow those ideas to fail financially because we appear more risk adverse, our investors appear more timid, whether that’s true or not is debatable but the numbers suggest it’s true,” he said.

At the same time the lack of Canadian venture capital investment in the medical device sector has created other barriers and further complications, like scaring off potential American investors.

“American investment is a hard thing to secure on its own, but without a significant Canadian VC taking a lead and then contacting their American prospects, or at least legitimizing the technology in the eyes of US investors it becomes even harder,” stated Walker. “You add in a natural reluctance for whatever reason on the part of American VC’s to invest in Canadian products because they see them as foreign commodities the situation becomes even more dire.”

In this regard, Walker applauds the efforts taken by organizations in Canada trying to bridge the gap, specifically in what they are doing to help Canadian companies get better visibility in American markets. With the support of a number of national and regional associations, including: MEDEC; Alberta Health Industry Alliance; Association of Health Technologies Industry (Quebec); BioNova; BC MedTech; Health Care Products Association of Manitoba; Ottawa Life Sciences Council; and Trillium Medical Technology Association (Ontario) the Canadian medical device industry has accomplished some impressive milestones.

With an aging population demographic in Canada and a growing need for medical devices convincing the government was the easy part, the true trick of it remains convincing the investors to buy into the sector.