A Ray of Light for Fledging Companies: Mass. Life Sciences Center Announces First Accelerator Loans.

On April 29, 2009, the Massachusetts Life Science Center (MLSC), the focal institutional face of Governor Deval Patrick’s much-vaunted $ billion Life Sciences Initiative, announced its first Accelerator Program loans. As reported in Mass High Tech and the Boston Globe, seven firms received a total of $3.4 million in State funds designed to assist them in moving toward product commercialization.

The victorious seven, chosen from a pool of 88 applicants for the first round of Accelerator funding, represent a diverse cross-section of the Massachusetts life sciences industry cluster:

• Oncology drug company Eutropics Pharmaceuticals;
• Tissue engineering biotech InVivo Therapeutics;
• Molecular diagnostics company Good Start Genetics (a prize winner in Harvard Business School’s 2008 business plan competition;
• Device companies Pluromed and Wadsworth Technologies; and
• Biotech/pharma tools and services companies Spectra Analysis and Wolfe Laboratories.

Accelerator Program loans are limited to $500,000, and MLSC anticipates several rounds of loan announcements annually. The loans are intended to help companies move forward to the point where they can attract required private sector funding. Of the loan recipients announced on April 29th, none appears to have yet received venture funding (although Pluromed last year announced closing of a $4 million Series B financing from “private investors, including 7 current and former CEOs of U.S. medical device companies.”

The good news here is that the Life Sciences Initiative is actually beginning to put money directly into the hands of deserving startups. Governor Patrick’s announcement of the initiative, made at the 2007 Bio International convention in Boston, had inspired a high level of excitement in the startup community, excitement that gradually dissipated and turned, in some quarters, into cynicism as the actual composition and distribution of the $ billion “pot” began to take shape: too little truly new money (fully half was repackaging of existing programs); too much for pure research rather than enterprise development; too much locked into State university structures and too little in the hands of early stage entrepreneurs. Most importantly, it was unclear how any of the monies would be used to meet a problem acknowledged by the Governor and weighing heavily on startups – how to navigate the “valley of death” between academic grants and private sector investment.

The Accelerator Program loans are an imperfect solution to bridging the structural funding gap that so bedevils so many life science startups. They’d be “less imperfect” if there were more of them, if they were larger, and if they could be made earlier in the enterprise life cycle. But I think it is essential to acknowledge both the positive contribution the current loans can make, and the considerations that direct program monies to well-established startups – while maintaining the search for tools to address the still unmet needs of potentially valuable but still fragile very early stage enterprises.

Among the defensible reasons for MLSC not making grants or loans to the earliest stage companies, I’d focus first on the fact that MLSC lacks competence to make objective and intelligent decisions about the relative worth/potential of the earliest stage applicants. That is not a knock on the MLSC staff, and it is not something that can be fixed. No public agency will have the resources to evaluate the fundamental scientific underpinnings of a nascent life sciences enterprise – that’s the NIH’s bailiwick; no public agency can have the broad analytical capability to evaluate the market potential of a wide range of product concepts – that’s what VCs do, and if they could do it for the earliest stage companies they would be making more early stage investments; and no public agency can evaluate the capabilities of an untried and unproven management team – VCs know how to do that, and they do it by assuming that untried means not competent.

Second, I’d remember that MLSC is looking to leverage the funding it provides into economic growth – i.e. it needs to show a return on investment for the state economy. While a successful very early stage investment will have a higher rate of return than a later stage investment, that higher rate of return needs to be discounted by the markedly lower chances of success for the earliest stage investments. MLSC’s responsibility to the taxpayers demands that it do what it can to minimize its investment risk while remaining true to its mission. Avoiding the earliest and least predictable investment opportunities is one tool to accomplish this; partnering with private sector investors with proven track records for making good choices is another.

Third, there is something to be said for allowing natural selection to thin the enterprise herd before placing a financial bet. We want to support new enterprises lead by first-time entrepreneurs if their ideas are sound and they have the ability to execute. Trial by fire isn’t kind, or pretty, but it can be effective. An entrepreneur who has the commitment and competence to get his/her fledgling company far enough along to allow objective analysis of its chances for success, who is able to take the first critical steps into and across the funding valley of death, is actively demonstrating the most critical qualities required to gain private funding and take the company to the next stage.

I’m not advocating abandoning all efforts to support the earliest stage entrepreneurs. There are many things other than direct financial grants that can be done, and/or are already being done, to assist them. State initiatives like M2D2 at the University of Massachusetts (technical component at U. Mass. Lowell, clinical component at U. Mass. Worcester) and the Mass Technology Transfer Center (MTTC), multi-institutional cooperatives like CIMIT, university-based programs like MIT’s Venture Mentoring Service and Boston University’s Office of Technology Development, as well as private industry initiatives like MassMEDIC’s MedTech IGNITE program are part of an extraordinarily rich Massachusetts ecosystem of support for new enterprises in the life sciences.

Will Healthcare Reform Stifle Technology Innovation?

At CIMIT's Innovation Grand Rounds yesterday, an audience member posed an intriguing question (paraphraphed as follows): "Since almost all the real health technology innovation we see is generated in the U.S., will our move toward a more European-style, single-payer system destroy our ability to innovate?".

Let's ignore, for the moment, that the question greatly overstates domestic hegemony in the innovation department; even as we ought to be aware of centers of health technology innovation developing and growing elsewhere around the world, it remains true that the U.S. continues to produce a disproportionate share of new diagnostics, therapeutics and healthcare management technologies. And let's not get sidetracked by the observation that we are today no closer to a single-payer system than we ever have been (you need only refer to congressional resistance to a publicly administered health insurance plan that would compete with private plans), or the fact that most European health care systems are moving toward diversification of payers, not unification. A real question remains: Will the reforms currently in the works weaken the ability of U.S. life sciences companies to develop and commercialize innovative technologies?

The CIMIT panelists (moderator Michael Greeley of Flybridge Capital Partners, Dr. Marsha Moses of Predictive Biosciences and Children's Hospital Boston, Dr. Elazar Edelman of the Harvard - MIT Health Sciences and Technology Program and Harvard Medical School, Dr. Joe Smith of Johnson & Johnson's Corporate Office of Science and Technology, and Zen Chu of Accelerated Medical Ventures), all viscerally entrepreneurial, thought not. The consensus: We'll continue to innovate - it's cutural, part of our national DNA; but there will be a turn toward innovations that generate cost-savings rather than enhanced capabilities regardless of cost. One panelist even opined that he wished that Medicare would just come out and formally adopt cost-effectiveness standards so that we could unambiguously get on with the job. And no one even flinched at the heresy.

I don't think our desire or our ability to innovate in the life sciences are at risk from any reforms that are likely to receive serious consideration in the current administration - and certainly not fom any current proposals. And I agree that there is likely to be a turn toward innovations that can lower the cost of high quality care - Christensen's disruptive innovations. But I also think it would be foolish to believe that our innovation rate cannot be affected by our healthcare reimbursement system - most particularly, by the ability of that system to allow returns to life sciences capital investments commensurate with that available to investments in other sectors. The entrepreneurial spirit needs to be fed.

I'm also impressed by the disjunction between the CIMIT panel's easy acceptance of the possibility of formal cost-effectiveness standards and the continued industry doubts about relatively benign initiatives toward Comparative Effectiveness Research. The ECRI Institute provides a rich compendium of background materials on CER, including a comprehensive catalogue of trade association and professional society position papers, for those who might be interested in digging deeply into the subject. An April 14 Wall Street journal report is characteristic: "A $1.1 billion infusion for research that compares the effectiveness of differing treatments raises thorny issues on how that research might be used, including the possibility of denying patient access to treatment options, according to some members of Congress and drug and medical-device companies." This despite the fact that it is very clear from multiple sources that current law forbids such use of CER, that current legislative proposals are all designed to reinforce rather than undermine the prohibition, and that testimony from administration officials, including a letter to concerned Senators from DHHS Secretary-designate Sibelius as reported in the Pink Sheet Daily on April 13, is consistent: no intent or desire to use CER to make national coverage policy.

Comparative Effectiveness Research - The Emerging Opportunity

Industry's initial response to the health care system reform plans being talked about (a lot in public) and worked on (largely out of the public eye) in Washington has been, on the whole, cautious. No one really wants to defend the status quo, but there is widespread fear that whatever changes are made will have a negative effect on the commercial viability of life science companies. This should not be surprising - change is always threatening, and the threat seems greatest when, as is the case for health reform right now, the nature and extent of the change is uncertain.

Much of industry's current concern is focused, as I discussed in my last post, on the potential threats associated with increased funding for and utilization of Comparative Effectiveness Research (CER). It is easy to image CER being used to prevent market entry for some new technologies, or to stop payment or require market withdrawal for established products when new and better alternatives emerge. At the same time, the fundamental conceptual virtue of CER is so clear that it would be silly to flatly oppose conducting the research. Industry is reduced, because it is so focused on the potential threat of CER, to supporting the principle while opposing the use of CER findings by regulators and/or payers - i.e. trying to stuff the genie back into the bottle.

This is a losing strategy; CER studies are going to be conducted in increasing numbers, funded by private payers as well as government agencies. This would have been true independent of the Obama initiatives, but will certainly be accelerated by current reform efforts. The information CER studies generate is going to inform emerging clinical practice patterns and, ultimately, public and private insurer coverage policies. And there are substantial commercial opportunities to be exploited by companies that understand, embrace, and plan for the coming changes.

The most important thing to understand about CER is that it is a critical element in a larger ongoing systemic change - the move toward what is commonly referred to as Personalized Medicine (the right treatment for the right patient at the right time), and what Clayton Christensen has conceptualized as the evolution from "intuitive medicine" toward "precision medicine"(see The Innovator's Prescription: A Disruptive Solution for Health Care). Christensen's formulation is instructive because he provides a framework for identifying the opportunities that will be generated - indeed, required - by the health care system that will emerge, whether gradually on account of natural change processes or rapidly because of government-driven reforms, in the coming years.

I won't try to reconstruct Christensen's entire analytic schema; his book is too good, and his argument too subtle, for effective summarizing in this space. But I can point out a short list of the changes he sees as inevitable and the opportunities implied by those changes:

• The move toward precision medicine will be driven by the development of increasingly accurate and refined diagnostic technologies - diagnostics that allow assignment of a particular patient to a therapy that is virtually certain to be successful; these diagnostics will include genetic and molecular clinical laboratory tests, but also increasingly refined imaging technologies and other diagnostic tools. Overall, opportunities in the diagnostic sector will be greatly enhanced by the system changes that are coming.
• Realization of the promise of new and more discriminating diagnostic tools requires better and more comprehensive information exchange between and among institutions and practitioners; CER findings need to be incorporated into clinical decision support tools that can interface with individual electronic health records and that are accessible to practitioners but secure within the framework of loose organizations that Christensen refers to as "value networks". There is, therefore, an enormous emerging opportunity in health information technology (HIT).
• Implicit in the growing commitment to CER is an opportunity in clinical research management and evaluation. Recent years have seen the emergence of innovative clinical research data management and evaluation technologies or systems, typically as the proprietary solutions offered by contract research organizations. FDA's (tentative?) embrace of adaptive clinical trial designs is the leading edge of a broader class of innovative tools or extracting meaningful information from clinical experience. As examples, look at the value propositions offered by PharmaPros, Cytel, and others.
• For therapeutic technologies, the emerging opportunity is inextricably tied to embracing the CER paradigm - proactively identifying the patient subsets and/or circumstances for which the technology is most likely to be effective, accepting a smaller target market in order to achieve a higher efficacy rate. This dynamic is well understood by biopharmaceutical companies adapting to the business model implications of genetic "companion diagnostics"; broader CER initiatives will extend the dynamic more explicitly to device technologies. As a practical matter, this will frequently mean designing research studies that allow adequately powered comparison of outcomes across different clearly defined diagnostic subcategories. At the end of the day, companies that get out in front of the CER wave will prosper, and those that lag behind will not.