In July 2008, Medical Technology Watch Canada spoke with Richard Lockie about investing in the life sciences. Mr. Lockie holds an MBA from the Richard Ivey School of Business, at the University of Western Ontario. He co-founded MDS Capital Corp.—the first Canadian venture-capital company to focus exclusively on health care—and served as its managing director for almost two decades. He has chaired a number of health care companies, and is currently the entrepreneur-in-residence at HTX (http://www.htx.ca/), which you can read about in this issue.
For starters, it’s important to differentiate between the terms “biotech” and “medical devices.” I was a venture capitalist in the health-care space—we called it “life sciences,” as distinct from biotech, which was drug discovery, development, and delivery. However, we kept one foot in biotech, the other in “health care”: devices, diagnostics, bioinformatics, and imaging. These two fields come with different risks, different business models, and different cash requirements.
I was initially attracted to life sciences in Canada about 20 years ago, for two main reasons. First, health care was already a huge part of the Canadian gross domestic product, and the demographics, the “greying” of the population, were already clear. But there was very little capital going into life sciences then, so there were lots of opportunities.
Another plus is that health care industry performance is not necessarily connected to economic cycles: there will always be a demand for health care solutions, so the industry just keeps marching on. While there are more investors available in health care nowadays, demand for new diagnostics and therapeutics has no end in site. Then there is another concern: to deliver what other technologies already do, but more safely and cost-effectively.
In Canada, and to a lesser extent the United States, biotech has garnered more publicity and money than diagnostics and devices. For many years diagnostics was the “poor cousin” of drug discovery. Over the last few years, though, medical devices have made a comeback. For one thing, the business model is less risky than that of drug discovery. Less cash and time are required, and the regulatory process is more predictable.
Life sciences investments have not performed as well as many other sectors, but they have a pretty good share of the market. In the last few years, energy and communications have tended to divert investment money, and there have been a number of disappointments in life sciences in Canada. We need a few more successes to bring investors back to the sector.
Drug discovery requires vastly more funding, and much more time to achieve liquidity, than devices, at least typically. I say “liquidity” as opposed to “sales” because a biotech company will typically achieve this first, while a device or bioinformatics company often generates sales before it’s liquid.
Sources of funding are another point of difference. Drug discovery can usually be funded through pension funds, hedge funds, venture capital, and private equity. These sources are usually involved for multiple rounds of funding with each investor contributing in the range of $5 or 10 million over the cumulative rounds.
Devices, meanwhile, require less capital over fewer rounds, so funding sources can be more eclectic. Investors need not be as knowledgeable or patient, either. Device companies starting up in Canada need to be creative and relentless at tracking down capital sources, often having to make the most out of a few sources, including university and government grants.
Some of the more creative sources for funding medical device companies are shell corporations and Capital Pool Companies (CPCs). While less than ideal, in that these forms of organization tend to have less knowledgeable, less patient, and less-deep-pocketed investors, sometimes you have to do what you have to do. The public is still largely reluctant to invest in medical-device companies because of the risk inherent in them, because of a history of low rates of return in this sector, and because the technology is often complicated.
While high technology might seem like a selling point, it has two drawbacks as compared to other sectors: there’s risk that the technology will fail, and would-be investors might simply not understand the technology, what it can offer, and how it compares to other products. Entrepreneurs who can explain their technology tend to be most successful; even if you have the best invention, if you can’t get word out on what it is and what it does, it’ll be very hard to find backers.
Despite the relatively good long-term outlook of health technology, the economy is in a downturn, and recently, there hasn’t been the venture money for companies that was there as little as a year ago. The pension funds don’t often invest in R&D, so there is typically only grant money from governments to help early-stage start-ups. Private equity has also been moving to other parts of the world, especially Asia. All this poses a challenge for the device inventor in the short-to-medium term.
Further Reading:
For more information, you can contact Richard Lockie here:
rlockie@htx.ca
You can also learn more about Lumira Corp., as MDS Capital Corp. is now called, here:
http://www.lumiracapital.com/portal/server.pt/
You can also learn more about the TSX Venture Exchange’s Capital Pool Companies program:
http://www.tsx.com/en/pdf/CPCBrochure.pdf
