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3 Application of Matching Authority Key Messagesa · M atching requirements provide funding agencies with opportunities to leverage their resources and receive input from third-party investors. · Matching requirements can create incentives to engage companies early in the development process and help to ensure their commitment to follow-on financing in later stages of development. · Agreed-upon milestones can provide structure to partnerships and maintain the focus on progress. · Funding agencies could use a matching authority to proactively encourage collaboration between academics and industry. a Identified by individual speakers. The section of the CAN authorizing legislation establishing the Cures Acceleration Partnership Awards states: "An eligible entity shall con- tribute to the project non-Federal funds in the amount of $1 for every $3 awarded . . . except that the Director of the Center may waive or modify such matching requirement in any case where the Director determines that the goals and objectives of [the awards] cannot adequately be carried out unless such requirement is waived" (see Appendix B). This matching authority was the subject of a session at the work- 29
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30 MAXIMIZING THE IMPACT OF THE CURES ACCELERATION NETWORK shop. Three speakers explored existing efforts across other federal and state agencies in which a matching authority or a similar requirement is applied. The session also featured speakers representing different organi- zations that could be called upon to provide a match, including venture capital and the pharmaceutical industry. Together, the speakers examined the benefits and advances that have been achieved through current appli- cations of matching authority and the steps that have been taken to over- come barriers. As the moderator of the session, Nancy Sung, Burroughs Wellcome Fund, said, "We want to milk as much as we can from those examples so that we can incorporate their lessons learned into the early planning stages for CAN." THE SMALL BUSINESS INNOVATION RESEARCH PROGRAM AT THE NATIONAL CANCER INSTITUTE1 The National Cancer Institute (NCI) Small Business Innovation Research (SBIR) program is not set up exactly like the matching authority given to CAN, but it offers lessons that apply, said Michael Weingarten, Director, SBIR Development Center, NCI. The SBIR program is a congressionally mandated set-aside program for small business concerns to engage in fed- eral R&D with the potential for commercialization. In FY 2012, 2.6 per- cent of the overall NIH budget is required to be set aside for the program. The similar Small Business Technology Transfer (STTR) program, which is designed to facilitate cooperative R&D between small business concerns and U.S. research institutions, has a set-aside of 0.35 percent of the overall NIH budget. Together, these programs represent $115 million at NCI. The programs are divided into three phases. In the SBIR program, Phase I is a feasibility study, typically 9 to 12 months long, with an aver- age budget at NCI of about $150,000. If successful, this is followed by a Phase II SBIR, which requires a commercialization plan and is typically about $1 million over 2 years, though projects at NCI can be as much as $2 million in total award size. Phase III is the commercialization stage. It is expected to be done by companies using funds separate from the SBIR programs, whether from venture capital, another company, or some other strategic partner. The Importance to NCI The SBIR and STTR programs are the primary resource at NCI for enabling the commercialization of high-impact technologies that can ben- 1 This section, including subsection, is based on the presentation by Michael Weingarten, Director, SBIR Development Center, National Cancer Institute (NCI).
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APPLICATION OF MATCHING AUTHORITY 31 efit patients, said Weingarten. Examples of these technologies involve small molecules and biologics, cancer diagnostics, cancer imaging, and electronic health and education tools. Projects undergo NIH's rigorous scientific peer review. These programs are also important to small business, especially with the decline in venture capital in the life sciences since 2008. They are a stable and predictable source of funding and currently are one of the larg- est sources of early-stage life sciences funding in the United States. Intel- lectual property rights are retained by the small business concern. It is not a loan; therefore, no repayment is required. NCI does not take any kind of equity position in the business, so the federal funding is non dilutive capital and can be a leveraging tool to attract other funding. Weingarten concentrated specifically on the part of the SBIR program at NCI known as a Phase II Bridge Award, which addresses the gap, or valley of death, between Phase II and commercialization. The Bridge Awards are intended to help companies that were getting promising results from SBIR funds in Phase II but find that they are running out of capital before they are able to commercialize those results. Companies can apply for up to $3 million in additional NCI funding over a 3-year period, with an additional peer-review cycle to evaluate progress and future plans. The objective is to accelerate commercialization by encouraging third-party investors and strategic partners to form partnerships earlier in the development process. NCI deploys a "match-like" mechanism in that it gives competitive preference and funding priority to applicants that can raise substantial third-party funds (i.e., greater than the amount received from NCI). The preferred types of third-party funds include cash, liquid assets, or convertible debt. Third-party investors can be other companies, venture capital firms, angel investors, universities, state or local government, or any combination of these and other investors. The program was initiated 3 years ago, and 12 projects have been funded to date. Three are in the area of therapeutics, six involve imaging technologies, and three involve molecular diagnostics. NCI is investing a total of $31 million in these projects across its portfolio. The companies, in turn, have raised more than $72 million in funds from third-party investors. Approximately one-third of this funding is from venture capital, one-third from strategic partners, and one-third from individuals, primarily angel investors. "That means that the NCI is getting more than a two-to-one leverage out of the funds that we are put- ting into each of these different projects," Weingarten noted. The benefit of this competitive funding preference is that it pro- vides NCI with an opportunity to leverage millions of dollars in external resources. It also produces valuable input from third-party investors. If
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32 MAXIMIZING THE IMPACT OF THE CURES ACCELERATION NETWORK venture capitalists or companies are evaluating whether to invest jointly in a project, they will submit a company to rigorous commercializa- tion due diligence prior to the award. They also are likely to be heavily involved in providing commercialization guidance over the course of the award. And they are likely to be involved for longer than the Bridge Award project period. The third-party investor benefits through the opportunity to partner with small businesses to develop and commercialize projects that have been vetted by NIH peer review and for which substantial proof-of- concept data already exist. The portfolio for the program is structured so as to focus on projects that require FDA approval. Of the 350 to 400 ongoing projects at any time, the Bridge Awards program has the potential to influence about three- quarters of the Phase II projects in NCI's SBIR portfolio, said Weingarten. Weingarten pointed to the special review potential Bridge Award projects undergo as a key to the program's success. Review panels include venture capitalists, clinicians, pharmaceutical industry professionals, and academics. The review also emphasizes important commercialization con- siderations such as intellectual property positions and strategies for gain- ing FDA approval. THE MATCHING REQUIREMENT AT THE CANCER PREVENTION AND RESEARCH INSTITUTE OF TEXAS2 The Cancer Prevention and Research Institute of Texas (CPRIT) was created by a statewide vote in 2007. Funded by general obligation bonds, CPRIT is investing $3 billion in cancer prevention and research through 2021. At the time of the workshop, it had funded 387 awards totaling $670 million. The goals of CPRIT are to expedite innovation and commercializa- tion in cancer research, enhance access to evidence-based prevention programs and services throughout the state, and attract top talent and create high-quality new jobs in the state. Funds have gone to community organizations, academic institutions, and companies. About 20 percent of funding has gone to companies or private-sector incubators, with a par- ticular emphasis on helping companies traverse the valley of death. The remainder of the funding goes to academic institutions. For example, one of the biggest awards to date has been to the Statewide Clinical Trial Net- work of Texas, which is seeking to establish a clinical trial network across Texas run through local communities rather than just through big cities. 2 This section is based on the presentation by Kristen Doyle, General Counsel, Cancer Prevention and Research Institute of Texas (CPRIT).
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APPLICATION OF MATCHING AUTHORITY 33 Kristen Doyle, General Counsel, CPRIT, stated that the matching requirement written into the legislation provides the following: "Before the Cancer Prevention and Research Institute of Texas may make a grant of any proceeds of the bonds issued under this section, the recipient of the grant must have an amount of funds equal to one-half of the amount of the grant dedicated to the research that is the subject of the grant request." The provision applies only to the cancer research and commercializa- tion grants, not any prevention grants awarded by CPRIT.3 The match- ing funds can come from any source, not just the institution or company receiving the award. In some cases, awards have been delayed while awardees arrange for the match, but in no case has a company or uni- versity not been able to receive funds from CPRIT because they did not have a match, Doyle said. Matches also can be made on an institutional or organizational level rather than project by project, because some institu- tions receive multiple awards from CPRIT. As part of applying for a CPRIT grant, proposals receive a scientific review, a commercialization review, and an intellectual property review. These reviews can help awardees find matching grants in subsequent applications, said Doyle. CPRIT also has an acceleration program that can facilitate relationships to acquire matches. Doyle characterized her program as intended to be a "one-stop shop" for companies interested in working with universities. Matches are certified through the contracting process. They can be certified for the total award amount or on a year-by-year basis. The annual reporting process requires an audit if an institution receives more than $500,000 from CPRIT. Some of the flexibility built into other matching programs is not pres- ent in CPRIT, Doyle said. The match cannot be waived by the director, and the match has to be of funds and not in-kind costs (though she noted that this provision will be reviewed in the future). All CPRIT contracts are public, as are deliverables, timelines, and metrics of progress. Strategic plans and progress reports are made to the state legislature. THE MATCHING REQUIREMENT AT THE CALIFORNIA INSTITUTE FOR REGENERATIVE MEDICINE4 The California Institute for Regenerative Medicine (CIRM) is a taxpayer-supported research institute approved by California voters in 3The legislation provides that up to 10 percent of the award can go to cancer prevention. 4This section, including subsections, is based on the presentation by Ellen Feigal, Senior Vice President, R&D, California Institute for Regenerative Medicine (CIRM).
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34 MAXIMIZING THE IMPACT OF THE CURES ACCELERATION NETWORK 2004. It is funded through $3 billion of state obligation bonds for research in California at a maximum level of $300 million per year. The overall goal of CIRM is to create an environment that supports both public- and private-sector research into life-saving and life-improving therapies for patients based on stem cell science. "This was really to provide a safe haven to work on this innovative technology," said Ellen Feigal, Senior Vice President, R&D, CIRM. CIRM is designed to build research excellence and encourage the translation of discoveries to clinical opportunity. Prominent emphases for CIRM have been partnerships and facilitating pathways into the clinic. It has received great support from the public, industry, universities, and patients, according to Feigal, who also noted that it is an unusually trans- parent institution, with review decisions, project summaries, and many other sources of information posted on its website. At the time of the workshop, CIRM had awarded more than 450 research and facilities awards to 59 different institutes and companies. It had contributed to 12 new state-of-the-art research centers of regenerative medicine and had supported 62 translational programs across a spectrum of disease areas. Fourteen disease teams had received awards of up to $20 million aimed at first-in-human trials within 4 years. A new set of dis- ease teams and strategic partnerships are being funded in 2012. Projects extend from basic research to Phase 2 clinical research, and CIRM has partnered with other agencies and organizations worldwide. CIRM has so far allocated $1.3 billion of its $3 billion total budget. Matching Requirements at CIRM Feigal discussed CIRM's use of a matching authority in four areas: facilities; translational and developmental research programs; collabora- tive funding programs; and leveraging initiatives with public and private institutions, foundations, industry, and other government agencies. CIRM has devoted approximately $270 million to 12 state-of-the-art facilities, and institutional and private donors have put in the remainder of up to $1 billion. These funds have covered one-time space develop- ment and renovation costs for capital project proposals in each of three categories--basic and discovery, preclinical, and preclinical development and clinical. CIRM required matching funds in cash of at least 20 percent of the grant amount for facilities. Funding from other sources above the cash match was considered project leverage, and this was part of the basis for the competitive evaluation. CIRM is funding 14 multidisciplinary translational and developmen- tal research disease teams. Matching is not required, but matching has been provided by one company, and five other disease teams have lever-
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APPLICATION OF MATCHING AUTHORITY 35 aged money through their collaborative funding partners for partnered research in other countries. These awards all have mutually agreed-upon milestones that must be met before CIRM dollars are released, with evalu- ation by CIRM staff and external experts. The CIRM oversight board is determining a new set of disease teams in 2012, which will do preclinical development or conduct and complete clinical trials. While raising matching funds is not required, it is a review criterion, so that proposals that incorporate a match will be more competi- tive than those without matching. Matching funds are expected to come from the biotechnology and pharmaceutical industries and should be at least one-to-one. CIRM is recommending that nonprofits partner with industry or other investors to obtain matching funds. CIRM's newest initiative is a targeted clinical development program aimed at completion of clinical trials. It requires at least a one-to-one match up to $25 million over 3 years. As with the other programs, mutu- ally agreed-upon milestones and evaluation processes are built into the program. In addition, CIRM is supporting a strategic partnership fund that covers the valley of death--or, as Feigal recast it, the "bridge to cures." The goal of this program is to attract industry engagement and investment in CIRM-funded research so that industry is involved early and provides reg- ulatory, scientific, technical, and business expertise. The program requires evidence of commercial validation, based either on the financial strength of the applicant or on co-funding from an industrial or venture capital partner. It also has a one-to-one match requirement, up to $10 million over 4 years, with all of the industry dollars going to direct costs. To date, CIRM has $138 million in total commitments in response to its request for applications by collaborative funding partners. Twenty col- laborative research teams have successfully competed, and $60 million has been provided by collaborative funding partners. About $200 million in collaborative funding partner and CIRM awards has been made to date. Advantages and Opportunities of Matching Feigal listed several considerations that went into the application of matching requirement. Matching has the advantage of leveraging CIRM's investments and sharing risk. It enables critical early development pro- grams for therapies, especially with financial disbursements linked to progress on mutually agreed-upon milestones. It engages industry early in the development process, which helps to ensure industry commitment to follow-on financing of later-stage clinical development if milestones are met. "We don't want to do these things just as research experiments," said Feigal. "We want there to be a full development path toward approval." A matching requirement facilitates collaborative work with the best inves-
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36 MAXIMIZING THE IMPACT OF THE CURES ACCELERATION NETWORK tigators in the world, with partnerships structured primarily through state or national government funding agencies using memoranda of understanding. CIRM helps prospective grantees find potential matches. Indeed, companies occasionally approach CIRM to inquire about research they could sponsor. Feigal also listed several lessons learned. Academic researchers and nonprofit organizations may not be able to compete, or at least are chal- lenged, in meeting match requirements for early-stage research. Similarly, small biotechnology companies and start-ups can be challenged in a very difficult economic environment for innovative technologies. In these cir- cumstances, funding agencies need to be proactive in encouraging col- laboration between academics and industry. Academics need help with resources and skill sets that can attract industry partners and other forms of investment. And industry needs to be engaged through initiatives that take into account the timeframes conducive to development and com- mercialization. "What we are trying to do as much as possible is position our teams for success." Another lesson Feigal emphasized is the value of agreed-upon mile- stones in maintaining focus. During the conduct of research, CIRM scien- tists and funded research teams have ongoing discussions, and updates on progress are made on a quarterly, biannual, and annual basis. CIRM also has publicly available 1-year and 5-year goals, with metrics to deter- mine whether those goals are being met. Finally, Feigal cited the importance of a collegial and professional relationship with FDA. FDA personnel participate in educational webi- nars and roundtables and see such interactions as a two-way street, such that FDA staff can also learn from CIRM-funded investigators. PERSPECTIVES OF MATCHERS Three representatives of organizations that would be called upon to provide matching funds under CAN provided their perspective on matching requirements for biomedical research. Jens Eckstein, President, SR One, which is the corporate venture arm of GlaxoSmithKline, said that his organization looks for breakthrough innovations in application of the belief that breakthrough innovation will become strategy. He and his colleagues are interested in therapeutics, imaging, diagnostics, technology, software--"anything that will change the way medicine is done." SR One has been one of the most active venture groups in recent years in early-stage investing, and it is one of few companies that will start companies. SR One also has a $1 million fund to support what Eckstein called "killer experiments" even before a company is formed. The company has relatively deep pockets, trying to
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APPLICATION OF MATCHING AUTHORITY 37 spend $30 million to $50 million per year and staying with companies for protracted periods. Eckstein argued that there are actually two valleys of death. One is the valley of death perceived by entrepreneurs and principal investiga- tors who want to start companies and feel that they cannot get early-stage funding. The problem with early-stage funding, said Eckstein, is that 8 out of 10 academic experiments do not reproduce, either because experiments can succeed only when done by one person, or because proper controls are lacking. If an early-stage idea leads to a killer experiment that repro- duces, the probability of getting funding is good. The second valley of death is perceived by investors who fear that an early-stage idea will not get to "proof of relevance." Eckstein noted that he uses the term "proof of relevance" instead of "proof of principle" because "scientific efficacy is no longer good enough." An innovation "has to be relevant for the patient, for the payer systems, for the whole health care system. Whatever the result is, it needs to fit into the whole equation." Martin Lehr, Associate, Osage University Partners, said that his fund partners exclusively with U.S. universities. It works closely with technol- ogy transfer offices at 44 private and public research institutions to find up-and-coming technologies in the physical and life sciences. The fund believes that universities are very good at creating technologies that lead to start-up companies that make money for investors, and "a select assort- ment of schools do it at an incredibly high velocity." Lehr looks for three things when choosing academic technologies in which to invest. Is the technology in an attractive area? Is it sufficiently de-risked? And is it of strategic value? He noted that people associated with universities typically are unable to answer these three questions, because they have not been trained to do so. Academic researchers have been trained to do experiments that are relevant to themselves and to their colleagues, Lehr said. They generally do not have incentives to think outside the box about the wider value of a technology. Finally, Michael Gutch, Managing Director, MedImmune Ventures, which is the corporate venture arm of the AstraZeneca Group, said that his organization seeks to build relationships not only with the companies in which it invests but with the companies in which it chooses not to invest. "In the course of a year, we may see 500 deals. We may invest in three or four, but we try to build relationships across many of the com- panies that we do see." MedImmune Ventures is expanding its investments beyond therapeu- tics to technologies that affect the discovery, development, or commer- cialization of therapeutics such as diagnostics, imaging, and information technology. But the reality of the venture capital environment is that investments in health care are shrinking. Private venture capital firms in
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38 MAXIMIZING THE IMPACT OF THE CURES ACCELERATION NETWORK particular have had trouble generating financial returns and have been leaving the field to corporate venture capital. In such an environment, partnerships among groups will be critical for early-stage technologies and companies, said Gutch. In some sense, venture capitalists are risk averse, in that they try to minimize both finan- cial and regulatory risk by syndicating their investments--that is, invest- ing alongside others to put less of their capital at risk. Venture capitalists want to partner with foundations, governments, and other organiza- tions, even though those organizations tend to have different agendas. For example, MedImmune had a relationship with CPRIT through an Austin-based medical device company, "and that was a very productive relationship. So it can work." The individual panelists offered the following suggestions and oppor- tunities for CAN: · Eckstein said that CAN could educate the participants in poten- tial partnerships about what information is confidential and what information is not confidential. He said that much more can be treated nonconfidentially than is the case today, which would encourage "great conversations." · The greatest opportunities today are in new areas of convergence, Eckstein said. These convergences may be between and among technical areas, diagnostics, imaging, biomarkers, drug discovery, and so on. For example, one especially promising convergence is between outcomes, the strategy of clinical trials, and research, where patient data and clinical outcomes can inform early-stage investments. · Lehr suggested that a valuable role for CAN would be to provide funding for academic researchers to work with people in industry. For example, academic researchers could be supported to interact with people in the pharmaceutical industry to get insights into what is valuable to them, so when new technologies are developed, industry will be ready to fund them. · According to several panelists, CAN could offer a "one-stop shopping" matchmaking function to help centralize and streamline the partnering of scientists and funders from all sectors and set- tings. Several panelists also added that CAN could contribute by supporting or facilitating training opportunities to clarify boundar- ies for appropriate nonconfidential interactions that do not require continual legal analysis and are not hindered by overconservative interpretation.