Finance Committee on Oct. 27th, 2011

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Mai.

We will go to Mr. Hoback, please.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Mr. Chair.

I would like to thank all of the witnesses today for coming to my home province of Saskatchewan. If you drive around the city today, you'll see exactly what's going on in this province, with potash expanding, the oil and gas sector expanding, and of course our mining sector expanding, all at the same time. It is like an economy on steroids right now. I have to compliment the government we have in place right now for managing it very diligently.

There are so many questions I would like to ask all of you, but five minutes isn't enough time, so I'm going to go into an area I have a lot of passion for, and that is the biotech area. I look at that sector and I see so much potential that it is actually scary. In fact, in listening to some of your colleagues, I think you're underselling the potential in some ways.

One of the things we noticed when we were doing a biotech study in the agriculture committee was the lack of knowledge of biotechnology and of the definition itself. The first thing that most committee members would go to was genetically modified organisms, which I found really interesting. When you look at the stack, that's just one tool in the tool kit.

Do we have an issue that we need to work on with the biotech sector in raising awareness of it so that we can attract this venture capital? Is there something the industry is doing that we could also be helping with?

[John Hyshka]

I do use the word “biotechnology”, but I'm trying to switch over to saying “life sciences” because people can understand it better. You're right: in biotechnology, people think of genetic modification.

There probably is some awareness issue in regard to the general investor, but in regard to what we would consider sophisticated venture capitalists or investors, they're well aware of the life sciences sector. It is a lot like the mining sector with regard to the junior mining sector, because there is a lot of risk.

For people who invest in biotechnology or the life sciences, you have to understand that there's a lot of risk. That's due to a long product development cycle and a lot of risks in development. There are a lot of regulatory hurdles. Just as it is in the mining sector, we have to get a number of different approvals, both in the medical device arena and the therapeutic arena, so it's a very risky investment, as opposed to going into oil and gas or investing in banking or going into a number of things.

I really think the Canadian government has to look at how it can encourage investors to build the agricultural science sector—for example, to develop new seed companies in Canada. I am a proud Canadian, and one of the reasons my partner and I still have the company in Saskatoon is that we have a dream of building a multinational corporation in life science in Saskatoon. We think we have the tools to do it, but I'll tell you that we're fighting every day.

It's as if we're going against the current. When we meet with investment bankers, they continually tell us that it would be easier for us to just be in San Francisco or in the New York, Boston, and New Jersey area.

[Randy Hoback, Conservative, Prince Albert, SK]

So what is it that the San Francisco and Boston and New York areas have? Are there regulatory advantages? Is it—

[John Hyshka]

No, they don't have a regulatory advantage. In some regards, the FDA is worse than Health Canada. Actually, Americans are starting to see innovative products get developed in Europe and Asia instead of North America because of the FDA. Health Canada has been actually quite reasonable whenever we've dealt with it.

[Randy Hoback, Conservative, Prince Albert, SK]

How come those funds have gravitated to those three areas, though?

[John Hyshka]

It's just that the historical development of the industry was in San Francisco and on the east coast of the United States. I think Americans have a bigger appetite for risk, and they've developed that expertise over a number of decades, which has been encouraged by tax incentives. We see a number of reasons why investors have done that. So what has happened over the last 30 or 35 years is that all the big funds are based in New York, San Francisco, and Boston, and they want you close to them.

They also have their systems of doing it. There are a lot more people working in those sectors, so if you're looking for senior management or for certain particular scientists, there's a huge labour force pool. Your customers are right there. If you're located in the New York–New Jersey area, you're talking to all the big pharmas. So if you're trying to license your drug or your diagnostics, they're a mile away from your facility, as opposed to taking a day, flying there, spending a couple of days, and coming back.

Basically, the clusters have developed in those areas. Toronto doesn't have that cluster. Vancouver doesn't have that cluster. Montreal was trying to develop the cluster.

I am very worried about the life science sector in this country, because when I talk to the entrepreneurs who are in our SME group, they are all talking about how they can stay here.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Hoback.

We'll go to Ms. Block, please.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you very much, Mr. Chair.

Thank you so much for being here. This is not only my home province but my home city. I have the privilege of representing Saskatoon—Rosetown—Biggar, which we are not in right now, but you could just go a few blocks west and we would be there.

Again, thanks to all of you for being here. I was fortunate enough that one of the committee members offered to let me sub for him so that I could be here today.

Again, as my colleague said, there are so many questions one could ask in five minutes, but that doesn't hardly give us time.

I, too, am very interested in the presentation by Mr. Hyshka.

I picked up on something you spoke about, which was angel capital. I sit on another committee, the government operations and estimates committee, and we just heard about angel capital earlier this week. I'm wondering if you could explain the difference between angel capital and venture capital.

[John Hyshka]

Angel capital comes in a lot earlier than venture capital. In regard to developing a technology, it costs money to just actually validate a technology so that you can get sophisticated investors. I should exclude the word “sophisticated”. What I mean is investors who look at it as a larger investment.

When you look at angels, people usually think of your rich uncle or your parents or your close associates as your angels, and it expands from there. I think angels can invest from a minimum amount of $20,000 to millions.

In regard to encouraging the angel sector, not just in the life sciences sector but in the knowledge-based industries, I personally believe, because I deal with a lot of these angels, that the capital gains should be eliminated for those particular sectors because the risk is so great. This is the big joke when you go to knowledge-based conferences: “You know how you become a millionaire in life science? Start with a billion”.

[Voices]

Oh, oh!

[John Hyshka]

It's a sad joke, but luckily we can laugh among ourselves.

I really believe that there are people who would love to invest in a company that's preventing Alzheimer's or Parkinson's or ovarian cancer because these might have impacted their families, but the risk of success is so low, and where the risk of failure is so high, you need to reduce that risk so people will invest. If you can eliminate the capital gains for those particular sectors, I think you would get angels to invest a lot more, and you would start to see a lot of SMEs start to develop.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Last month, the Minister of Finance spoke at the Perimeter Institute and noted that Canada has an unacceptable level of private sector support for R and D and innovation. Specifically, he pointed out that between 2000 and 2006, spending increased from government, but it was down for Canadian businesses.

I am wondering if you agree. Also, what changes would you recommend to better incent private sector spending on research and development?

[John Hyshka]

I agree with you totally. I can tell you from Phenomenome's experience that every dollar we generate from contract research, SR and ED, and equity, we put right back into R and D. Like the small companies, we're putting everything back in.

The reason you're seeing such a drop in private sector R and D is that the venture capital industry disappeared. That was about the time that venture capital disappeared.

What you also have to look at is whether we have any major multinationals headquartered in Canada, because I find that when I'm flying to promote our contract research work, I'm usually going to Germany, Switzerland, and the United States, and guess what? Those companies still invest in their main regions.

We just don't have a Pfizer. We don't have a Merck. We don't have a Novartis that is headquartered here and is investing. That's what Phenomenome wants to become, and I can tell you that other entrepreneurs would love to be able to do that as well.

But I think it all goes back to when venture capital disappeared. The Business Development Bank does a good job, but everyone is syndicating deals, and the BDC needs Canadian partners to syndicate.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Block.

We'll go to Mr. Marston, please.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you, Mr. Chair, and...[Inaudible--Editor]

[The Chair, Conservative, James Rajotte]

Your mike, Mr. Marston.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you. I'm so used to these guys taking good care of us, as they always do....

As for my excitement, normally in the five minutes I don't have enough time to ask questions of all the people I want to, but I'm going to get a second round, so brace yourselves.

Ms. Kozak, I found your presentation dead-on in many ways. New Democrats have believed for a long time that it's time for our government to invest, and in the exact areas you're talking about: in things that will lift people out of poverty but also will give hope to our young people.

I have to quibble a little bit with you, though. You were talking about modulizing training, or in other words, lifting out a particular component of a craftsperson's job and training young people to do it. I think it's really important for our training of young people that they get fully trained to the journeyman's status. If we can get apprenticeship programs going so they do a certain portion in the beginning and then become valuable to the company, then the government can help take them all the way to being a full journeyman.

We've spoken here many times about what they call the Red Seal program, where from coast to coast you can say that a tradesman from Newfoundland will be as qualified as anyone anywhere in the country. To get our workforce to that level is an advantage both for the people, obviously, but for business, because we have a very serious problem of employment coming and I think that matches up with what you were saying.

We've talked, too, about the need for the government to invest in infrastructure now, but I'll leave that.

Would you like to comment?

[Carla Kozak]

Yes. There may be some misunderstanding of what I was trying to get at. In talking about upgrading training, I'm talking about not taking people out of high school and saying, “Okay, now take this little module of training so you can get this job”.

We're talking about people who are looking for a job that.... Maybe they're in a company that is looking for someone who can do their job plus one other bit. Maybe the company needs someone who is knowledgeable in one particular and very advanced computer program, for instance.

Let's say you're an electronics technician. You're working for a company and they need someone who is knowledgeable in this particular brand new application. They can't find someone. If they could take that employee and send them someplace for, say, one week of upgrading training, that employee could get into that job and then the company could ease someone else into the job that the first employee had. You're creating a better job, plus you're getting someone else into the first job.

We're talking about finding ways to help people to improve themselves. As I said, in many cases, it's just one little bit that's needed, one little bit extra. In many cases, the companies just cannot quite manage the financing for training this employee, so--

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Well, that's understandable for small businesses.

[Carla Kozak]

We were thinking that especially in the case of small and medium-sized businesses, which are the engine of our Canadian economy, this would go a long way in helping a lot of these companies to be much more competitive in the world market and to get more people into better jobs.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you. I have to try to move on.

Mr. Pekrul, what you said struck a chord with me, because I've been the party's critic for seniors and pensions for the last number of years, and one of the things I've noticed is the idea of giving priority to low-income and moderate-income women. We've been calling for an increase to the guaranteed income supplement.

We targeted that at 300,000 people, mostly women, who were below the poverty line, and we said that the government had to increase this by $750 million, which is roughly $200 a month. The response from the government was $50 a month. Not only that, but they spread it across 680,000 seniors, which didn't really scratch the surface of the problem.

My time is up, I see, so I'll stop right there and give you time to respond.

[The Chair, Conservative, James Rajotte]

Just a brief response, please.

[Ray Pekrul]

Yes, we're aware that the infusion of about $300 million a year ago wasn't sufficient, based on the Caledon Institute of Social Policy research showing that $700 million would have lifted that group of women above the poverty line.