Canadian startups need more VC funding to stay at forefront of medical technology

Sachin Aggarwal is busy aiming at a moving bullet with another bullet. The chief executive of Toronto-based Think Research is tackling the fast-evolving medical technology market by revolutionizing the way physicians share and consume research. Started in 2006, the firm is among many companies propelling Canada to the forefront of the medical technology space.

“This is a rapidly evolving field where both technology and the knowledge we apply are changing quickly,” Aggarwal said.

Think Research makes Internet-based clinical support tools for physicians. In June, the firm opened its first U.S.-based cloud computing centre in Las Vegas and is planning an expansion into English-speaking Europe.

Medical technology has a lot of potential, based in part on the changing demographic in Canada and elsewhere. “The system is under great pressure and that’s the case no matter where you go in the world,” Aggarwal pointed out. “We have an ageing population, which means that people are living longer, and living with multiple, complex medical conditions.”

The numbers bear this out. In 1971, the median age for Canadians was 26.2 years, Statistics Canada data shows. In 2011, that rose to 39.9 years.

“This means we must focus more on the patient, their experience and quality of life as they age,” Aggarwal said. “We are focused more on ensuring that patient has a bigger hand in their own health.”

Think Research is one of several companies that received funding from Toronto-based boutique investment firm Epic Capital Management. The investment group now has two Epic Healthcare investment funds that have $14 million of assets under management. Average investments range from $100,000 to $1 million.

Epic is now marketing its third fund, to launch next year, and it hopes to bring in $30 million to $50 million of additional money. This will be the first time the company has approached institutional capital to tackle what partner and portfolio manager Scott Kaplanis contends is a $200-million market for its healthcare funds in Canada.

“The biggest gap that we’ve seen in the Canadian market is in what we’ve classified as the series A and maybe the series B round along the chain,” he said.

In Canada, there’s a robust opportunity for doctors to develop an idea for a product, fuelled by angel funding and government research grants. They hit the wall when they go for more than $5 million in funding to scale their product or service, Kaplanis warned.

This is a particular problem in MedTech, Cameron Piron, CEO of Synaptive Medical, said. He scored early seed funding from Epic, which was followed by two more rounds.

He said this money is important given the unique nature of the sector, which relies heavily on regulatory approval. Synaptive sells imaging devices and software designed to help surgeons develop a plan of action in the surgical room. Regulatory approval is one of the biggest challenges for MedTech companies, especially given different procedures on either side of the border, he warned.

“It’s a major milestone for a company when it achieves regulatory approval, and you’re cautious to spend appropriately up to that point,” Piron said.

MedTech startups can sometimes pre-emptively ramp up their marketing and sales teams with the expectation they’ll get regulatory approval. “If that’s delayed at all, you can imagine the kind of situation and the kind of burn that the company is facing,” he warned. The key for companies in this market is to develop and get approval first, and then scale later.

Which market to tackle first is a constant concern for MedTech firms. “While Canadian companies possess a great deal of ingenuity, and our country does offer a highly competitive R&D environment, with our fragmented healthcare system it can be challenging to get innovative technologies adopted,” warned Brian Lewis, CEO of MEDEC, Canada’s national medical technology association.

Piron said the Canadian market is often budget-focused, with far longer sales cycles than he’s seen south of the border, meaning Canadian companies can often be drawn to tackle the U.S. market first.

“In the U.S., if there’s a technology that provides a good clinical and cost advantage and efficiency of care, then you can see people purchasing equipment outside budgetary cycles, even,” he said.

While the sales cycle may be difficult for Canadian MedTech firms, the incentives to innovate are growing. Several government-backed projects have emerged to help these startups commercialize technology. The Health Technology Exchange manages about $30 million in funding on behalf of the Ontario Ministries of Research and Innovation, and Government and Consumer Services. The Ontario Centres of Excellence are also heavily involved in commercializing medical technology.

The challenges for startups vary between subsectors in the MedTech space. For example, Epic’s Kaplanis argued that pharmaceutical technology can be an order of magnitude more expensive to develop, because of the heavy requirements for testing and approval. Medical devices and IT solutions can be less intensive.

“We’re seeing companies that can commercialize on probably $20 million or less of capital to get to market and start generating revenue. That’s what we’ve seen for a lot of firms in our portfolio,” he said, adding these startups are critical to serving the changing needs of the healthcare industry.

“Innovation is going to change the way healthcare is delivered,” he concluded. “All of that improvement is going to make the system more efficient.”

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