Canada Needs to Build a Healthy Domestic Health Innovation Ecosystem

How would you introduce Canada’s health innovation sector?

The beauty of the healthcare space is that if we develop new innovation that works, we fundamentally change patients’ lives. Health technology has really matured in Canada in the last ten years. For the first time ever, academic centers are really thinking about how they are spending their academic dollars. They are trying to look for commercial pathways and networks to link their research to industrial applications. Many of our academic health innovations are truly the best in the world. We also have a series of serial entrepreneurs starting to build their second and perhaps even their third companies in the health space, which has not been the case historically. There is clear evidence that the world wants to buy Canadian innovation, which is considered world class.

“We are at risk of having innovation coming out of Canadian academic centers, the majority of which is directly or indirectly funded by Canadian taxpayers, being value-maximized in the hands of foreign investors.”

However, it is a little bit like Canadian innovation is on sale to foreign buyers. Over the last 5 years, domestic funding for healthcare innovation has reduced at a pretty significant rate just as the global appetite for healthcare innovation has increased. So, foreign buyers are entering the Canadian health space and they are buying control of Canadian innovations with strategies like “option deals”. But, these buyers are not really building any infrastructure in Canada and often the mind and management for these companies ends up residing outside of Canada. The result is these asset are likely to be moved offshore the moment they hit value inflection points. So, via this model we are at risk of having innovation coming out of Canadian academic centers, the majority of which is directly or indirectly funded by Canadian taxpayers, being value-maximized in the hands of foreign investors. As a result, very little value is going to flow back to Canadian stakeholders, in terms of infrastructure development, skillset development and economic return. This phenomena used to be true of IT companies as well but there was a huge push in Canada to ensure the development and later stage commercialization of our IT companies. It is time for healthcare innovation to get the same attention and engagement.

What do you think Canada can do to unlock the potential of our healthcare sector?

Canada lacks a national health innovation strategy, which has led to competition and conflict between the innovation programs of the federal government, which controls things like IP, and provincial governments, that pay for healthcare programs.The government is the biggest funder of healthcare innovation across the country as it provides significant direct and indirect financial support for fundamental research and development (R&D). So, we are spending a lot but not reaping the benefits. We need to leverage our R&D funding for our own benefit. As countries around the world are developing their healthcare visions and strategies, they recognize that Canada does not have one. They are taking advantage of our innovation and resources just like what has happened with the oil and gas sector. They are taking all of our fundamental resources as raw materials, developing them offshore, and selling them back to us as finished products. We have a great resource today, which is fundamental excellence in academic institutions and hospitals, and great innovations in the pipeline. But, because we do not have the depth and continuity of capital to commercialize our own health innovations, the result is that foreign investors are funding these companies, and building and harvesting their value. Ultimately this means we as Canadian are “buying back” this innovation, now in the form of products 10 years later with huge mark-ups. 

“Canada lacks a national health innovation strategy, which has led to competition and conflict between the innovation programs of the federal government, which controls things like IP, and provincial governments, that pay for healthcare programs.”

Secondly, we are educating out all kinds of university graduates via science, technology, engineering and mathematics (STEM) programs, and engineers are being absorbed into our growing IT economy. But, very few of our fundamental life sciences graduates have any jobs in their chosen field. When I lectured in 4^th year life sciences classes at universities, 90% of students thought they were going to be doctors. But, less than 5% of them are going to get into medicine, which means that the residual 95% of those students do not really have a future plan. When I was in school, life science students could enter academia, do research or join the pharmaceutical industry. For the most part, those jobs that existed within the Canadian ecosystem do not exist anymore. When life science graduates cannot find a job after graduation, many of them try getting a PhD, so they become cheap labour for the R&D ecosystem. During those 3 to 4 years, they incur more debt, but their job prospects do not improve much because we have no uptake.

So, we need a national strategy to align our educational and business ecosystems in the health sector. We also have an opportunity to build more sustainability into our academic institutions, whether they are hospital or university based, by commercializing and monetizing the value of their fundamental innovations. One of the challenges in healthcare innovation is that it is still looked at as an expense to taxpayers. Battles between big pharmaceuticals, medtech and the government over the “pay side” of the model are misaligned with the  innovation side of the model. I can’t think of another segment of our economy that is going through a similar conflict. Healthcare innovation should not just be feared because of its cost to Canadians. Rather, it should be viewed in the context of benefits to Canadian patients, benefits to the ecosystem – such as the employment of STEM students and a funding alternative for academic R&D – and the potential to be a “value added export” that we we can sell to the world.

“No healthcare innovation ecosystem has been created without meaningful government intervention.”

I think one of the other challenges is that Canada’s healthcare system has too many silos. The large payer systems in the US, effectively manage exactly the same things under one CEO, one board and one leadership structure. That is why Kaiser Permanente is an efficient provider of healthcare and deeply engaged in the innovation ecosystem. They have 38 hospitals and 16,000 physicians under their umbrella, which is not dissimilar to Ontario, which has 32,000 physicians. They are highly incented and aligned to facilitate and adopt innovation as a way to enhance patient outcomes and drive efficiency. Similar incentives do not exist for our healthcare system. Similarly, we should not build redundant assets and hospitals. We must instead try to figure out the best way to deliver community care or hospital care. Instead of only thinking about cost, we should focus on building innovation in healthcare. In this respect, the beauty of a one-payer healthcare system like we have in this country is that we have so much data to leverage and that can be used to improve the system. If we can integrate and anonymize national health data, we will be able to provide greater insights into drug outcomes and personalized care.

How would you assess heath startups’ access to capital in Canada?

There has been a lot of focus on building IT innovation all the way through to full value. However, we have not prioritized healthcare in comparison. I am a huge supporter of programs like Venture Capital Catalyst Initiative (VCCI) and Venture Capital Action Plan (VCAP), the funds that have played a role in revitalizing the Canadian venture capital (VC) ecosystem. But, they have only invested 15% of their capital in health innovations. Even 6 or 7 years ago, IT venture financing accounted for about 46% of all financing, but all financing in healthcare accounted for something like 24-27%. Since then, funding for IT has grown from 46% to over 60%. That level of funding has resulted in the emergence and growth of IT-related sectors like AI, blockchain and Fintech, all of which barely existed 5 years ago. We have done exactly the opposite in healthcare; the funds have not had the breadth of capital to fund new innovation as it emerges. The challenge in Canada today is that promising health startups get funded by the domestic angel and VC ecosystem in their early stages, and then we need to appeal to foreign financiers for the capital scale up. So, some portion of health startups, particularly those carving out new and innovative ground, may find it a challenge to attract domestic capital if those funds don’t have the breath to have both “core” and “evolving” enveloppes of capital. As a result, very early on, these companies will need to appeal to foreign financiers. So, very early on there is a stronger pull for these entities to move south of the border and derive commercial value, build teams, skillsets and infrastructure there.

What advice would you give to emerging Canadian entrepreneurs in the health space?

In healthcare, domain expertise, experience and networks really matter. You cannot succeed by sitting in your garage and developing software. You need to raise somewhere between $15 million and $100 million to build these companies to value, so you have to have the skillsets and networks to be able to source that capital. If I was giving a young entrepreneur advice, I would say, “Go figure out how you build networks and skillsets that leverage the experience of others.” A lot of IT entrepreneurs have tried to enter the health space, but most have failed abysmally because they do not understand how the healthcare system works.

One of the other challenges has been the lack of a culture of entrepreneurialism in the health space. The fundamental innovation in health often comes from large academic institutions, whether they are hospitals or universities, where most people are not entrepreneurs at their core. So, the challenge is to marry great innovation with great entrepreneurial vision and passion. Canadian government entities often argue that there is no roll for government intervention and that they can’t be in the business of picking winners. There is a propensity in Canada for people to think that government intervention isn’t fundament to ecosystem building, but the simple reality is whether it is the US, Israel, Europe or now in a huge way China, no healthcare innovation ecosystem has been created without meaningful government intervention. For instance, the City of Boston has committed billions of dollars to make Boston the healthcare hub it is today. The government also needs to understand that business goes in cycles. So, a lot of foreign money is coming into Canada right now but if the economy falters or ties between Canada and China worsen, all that capital might well vanish. Without a domestic ecosystem, Canadian health innovation will take a huge hit if that happens.

“The challenge in Canada today is that promising health startups get funded by the domestic angel and VC ecosystem in their early stages, and then we need to appeal to foreign financiers for the capital scale up.”

In this respect, I would pitch to the federal and provincial governments to stress that Canada has all the resources in terms of fundamental innovation, strong science and good infrastructure to support development. But, we are at risk of selling ourselves short and letting others fund, develop and commercialize our health innovation. We need to have a healthcare strategy and integrate innovation with financing here in Canada.

If you were to start a healthtech company right now, which segments would you focus on?

I think this is the mistake we are making in healthcare right now. Our AI, blockchain and Fintech sectors have not grown because five years ago someone said that they are areas we should focus on. Access to capital, expertise and the ability to understand the potential of the technology helped open new doors for these next generation companies. At no time in the IT sector have people recommended narrowing their focus to win. Experts actually recommended building segmented depth around different verticals by having lots of different players. This creates a continuum of innovation engagement. How can you pick today what you do not know? Instead, we need to allow people to have the infrastructure and resources so that they can be responsive to new opportunities as they develop and emerge. I think we have all the foundational pieces of the puzzle, we just have to be better at identifying opportunities and supporting them through that entire continuum of development.