Statistics and some success stories
Recently I gave a talk at Toronto’s Sunnybrook Hospital on The State of Innovation in the Canadian Medical Device Industry. It’s a big topic and I approached it from two main angles. I evaluated the current crop of medtech startups relative to the previous ones, and I looked at patenting trends in the industry. They were both illustrative and cause for optimism.
First it needs to be stated that it’s not a large industry. Out of $463B in total 2012 exports from Canada (Statscan) only $1.8B (0.4%) was medical devices. The three largest categories are reagents ($396M), furniture ($138M), and Instruments and appliances ($125M). By comparison the US market is about $110B and the world market is about $260B. US companies exported $44B in 2012 which is 24X more without even taking the exchange rate into account. (All US figures from commerce.gov in USD) In proportion to our population we’re way behind the US. So despite having a highly educated workforce and entrepreneurial culture we haven’t had a great deal of success in medical devices yet.
Next, let’s address whether the medical device industry generates a return for investors.
To answer the question, I looked at Gary Bantle’s BDC Capital research on Medtech exits. Gary is based out of Calgary. He did a study on the returns from MedTech companies in North America that had exited for at least $250M, (or were at that value two years after IPO). He looked at three categories: Exit before going public, after going public, or go public and stay public? On average, there was between 3.0X and 4.6X return on capital on those companies. And it took roughly a 10 year timeframe to get there.
His conclusion was “if you can get to scale you exit well”, however that doesn’t happen so much in Canada. Steve Arless of CryoCath was one of those exits at $380M. And Alexi Marko is CEO of Neovasc, which is currently valued at $500M. They are a couple of great stories we can all be inspired by. It is a desirable thing to get to scale and we should be picking opportunities that can get to scale.
It’s a complicated task to take on medical device commercialization. Not only do you have to get the technology right, you have to understand reimbursement, intellectual property, the regulatory landscape, build a quality management system infrastructure, and then compete in the business landscape. In a number of cases it doesn’t work out.
Some of the other stories that have happened in Canada in the tens of millions range include Sentinelle Medical (now Hologic), i-STAT (now Abbott), Ultrasonix (now Analogic), Titan Medical, ALI (now McKesson), Xltek (now Natus), MitroFlow (now Sorin), and VisualSonics (now Fujifilm). Note the predominance of exits. Fortunately many of those companies have retained a local presence. Angiotech and QLT were the titans of Vancouver medtech for a while. Their stars have faded somewhat but in the process they trained a generation of people.
Novadaq is now worth over $1B. I think it’s a success story that Novadaq is staying in Canada, staying public and building a big R&D center in Vancouver. It’s important that some of our Canadian successes actually stick and stay independent.
The link between big corporations and medtech entrepreneurs
There are good reasons for optimism that Canada’s medtech industry can grow large and stay independent. Some exciting stories are on the way. Kardium just finished raising money at pre-revenue valuation of hundreds of millions. That is pretty wild for a Canadian pre-revenue medtech company. And they are not alone. Neovasc is currently valued at $500M based on their Tiara mitral valve prosthesis. Perimeter is doing breast biopsy margin assessments and doing well. Profound Medical went public the day of my talk, raising $28M.
What’s interesting about these cases? Firstly, there aren’t hundreds of them. There are dozens at the most. Where did they come from? How do people learn to become medical device entrepreneurs?
I’ve been conducting informal research interviewing fifteen medical device serial entrepreneurs to date and profiling many more. One defining characteristic is that they are usually engineers or have a technical background. It’s rare that they are clinical. The second is that the vast majority of these successful serial medtech entrepreneurs in the United States started their careers in large medical device companies. This is a complicated industry and I think it’s no accident that successful entrepreneurs have generally had to learn the trade and develop credibility before striking out on their own. Watch this space for more information on this research.
In Canada that pattern of corporate career starts doesn’t show up. One obvious reason for that is there haven’t been any large Canadian medical device companies historically. The large Canadian companies have been national distribution branches of large US medtechs like Medtronic and J&J. We’ve been outside the traditional centers of medtech trying to teach ourselves how to create medical device companies. It’s a big disadvantage, but there are reasons for optimism that this situation is changing.
Novadaq had to invent their own company. The company spun out of research in Manitoba by Ian Smith and his lab. Rick Mangat was one of his grad students. These guys had never done anything like that before, yet they managed to scale Novadaq up into $1Bn against all the odds. Now they’re here in Canada and they are training future entrepreneurs. Employees are learning by doing the hard part– once you launch, you have to commercialize and get to scale. This will train a whole new generation and there will be a bunch of spin-offs.
Ultrasonix founder, Laurent Pelissier, was straight out of University from France. He moved to Vancouver and decide to invent a new ultrasound company. It became a worldwide success in a niche market. He was able to exit to Analogic at a good price and he is off doing his next thing. It’s a bigger market and he now has a whole team around him that knows how to build a company. Their chances of success are dramatically better the second time around.
Kardium, a newer company, draws its heritage from Creo, a homegrown Vancouver digital printing company that was sold to Kodak for a $1Bn. After the sale, some of the leaders took their smartest engineers and started the new company. Using a core of people from another industry and migrating to medical they recently raised money at a $300M valuation.
Sentinelle had a great exit to Hologic. Now Cameron Piron is leading a much more ambitious story in Synaptive and has the credibility to attract capital. Boreal Genomics launched, had to retrench, and is now after a vision 10x bigger than the first vision and they have the benefit of lessons from the first attempt.
There are many other examples. These stories all have pedigree. That’s different than it was 5-10 years ago in the Canadian medtech landscape and I believe it bodes very well for continued growth in the sector.
The IP data is also a major leading indicator. In the last five year the number of US patents covering medical devices which were assigned to Canadian organizations has quadrupled.
While the industry is small, I believe that the pedigree of the current startups is stronger than it has been in the past which bodes well. I also believe that the next generation of serial entrepreneurs in this country will learn their trade in successful larger domestic companies which has been the pattern of success in the US. The recent dramatic increase in US patents assigned to Canadian entities is a strong leading indicator of future economic activity. The early indicators of success are there. Hopefully they will translate into Canadian medical device industry revenue numbers soon.
Scott Phillips is President at StarFish Medical. His passions are being a Dad, solving design problems, outdoors adventures, and helping companies be successful.