SBIR/STTR at the National Institutes of Health (2015)

Appendix E

Case Studies¹

To complement our review of program data, we commissioned case studies of 15 companies that received Phase II awards from the National Institutes of Health (NIH). Case studies were an important part of data collection for this study, in conjunction with other sources such as agency data, the survey, meetings with agency staff and other experts, and workshops on selected topics. The impact of SBIR/STTR funding is complex and often multifaceted, and although these other data sources provide important insights, case studies allow for an understanding of the narrative and history of recipient firms—in essence, providing context for the data collected elsewhere.

Overall, this portfolio sought to capture many of the types of companies that participate in the program. Given the multiple variables at play, the case studies are not presented as any kind of quantitative record. Rather, they provide qualitative evidence about the individual companies selected, which are, within the limited resources available, as representative as possible of the different components of the awardee population. The featured companies have verified the case studies presented in this appendix (see Box E-1) and have permitted their use and identification in this report.

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¹Each of the companies profiled in this case study appendix was contacted in the second half of 2015 with a request to verify and update its information. Two draft case studies included provisionally in the prepublication version of this report have been deleted from the final version, at the request of the companies, Biomedica Management Corporation and Vical, Inc.

23andMe²

Meeting with
Anne Wojcicki, CEO and co-founder
Joyce Tung, PhD, Vice President of Research
Interviewed June 18, 2014
Mountain View, California

23andMe, Inc. is a privately held business headquartered in Mountain View, California. Founded in April 2006 by Linda Avey, Paul Cusenza, and Anne Wojcicki, the company’s mission is to help people access, understand, and benefit from the human genome. The company offers a direct-to-consumer personal genome service and conducts research that aims to make meaningful discoveries that can lead to successful treatment of disease. 23andMe enables the company’s more than 1 million customers to consent to research if they so choose. 23andMe researchers and its collaborators are able to then cross reference genetic data against information gathered through surveys administered to those individuals who have consented to participate in research. Understanding the relationship between human genetics and the incidence of disease could improve preventative, acute, and long-term care of patients while saving consumers, insurers, and medical institutions billions of dollars per year. 23andMe provides customers with personalized genetic reports using recent advances in DNA analysis technologies. (More accurate description would be genotyping.)

23andMe also offers their customers the opportunity to opt-in to participate in research using an institutional review board (IRB)-approved consent. They may also volunteer to answer survey questions on a variety of health and lifestyle topics.

PRODUCTS

At present, 23andMe’s commercial sales are concentrated on the provision of personal genetic information to consumers.

23andMe® Personal Genome Service

The 23andMe Personal Genome Service (PGS) provides information and tools for individuals to learn about their DNA. Customers order the PGS kit on the 23andMe website. Using the kit, the customer sends a saliva sample to 23andMe’s laboratories where lab technicians extract DNA from the cells in the saliva and replicate the DNA until there is enough to be genotyped. The DNA is analyzed using a fully custom chip based on the Illumina HumanOmniExpress-24 chip.

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²Primary sources for this case study are the meeting with 23andMe executives and a review of the 23andMe website (http://www.23andme.com) and related company documents.

Human genomes are nearly identical from person to person. There are, however, specific positions on the genome that differ. These differences can mark ethnicity as well as predisposition to certain diseases. Customized by 23andMe, the Illumina chip used by 23andMe is sensitive to DNA at those locations that 23andMe scientists have determined are important in mapping ancestry, traits, and health.³

23andMe provides its US-based customers with both the un-interpreted raw genetic data and a genetic ancestry report. Due to an FDA warning letter received by the 23andMe in November of 2013, 23andMe currently does not provide genetic health reports. 23andMe is working with the FDA in order to be able to provide health reports to its customers. In February 2015, 23andMe’s Bloom Syndrome Carrier Status Test report was given marketing authorization by the FDA through the de novo pathway—making the test the first direct-to-consumer genetic test granted marketing authorization by the agency. In addition to the authorization to market the Bloom Syndrome Carrier Status test report, the U.S. Food and Drug Administration (FDA) stated that it intended to classify autosomal recessive carrier screening tests as class II and exempt such carrier status tests from premarket review under special controls. 23andMe expects to launch a new user experience that includes carrier status reports in the US, as well as enhanced tools and functionality for all customers globally before the end of the 2015.

BUSINESS MODEL

23andMe provides a personal genotyping service directly to consumers. Individual customers purchase the 23andMe PGS because they want to know their own genetic makeup, to understand either their ancestry or the genetic risk for certain diseases. With 80 percent of its more than 1 million customers consenting to participate in 23andMe’s research, 23andMe is also using this data set to better understand the underlying genetics behind certain diseases, and eventually to develop therapies to help treat disease.

Thus 23andMe is building a unique pair of businesses:

1. The consumer business which delivers information directly to customers and allows customers to participate in research.
2. Research services for researchers in both public and private sectors. Currently, 23andMe has more than 14 active collaborations with companies in the pharmaceutical industry, and more than 30 ongoing collaborations with academic and nonprofit institutions.

23andMe’s direct-to-consumer PGS revenue outweighs revenue generated by 23andMe research collaborations with pharmaceutical companies, and, according to Ms. Wojcicki, 23andMe’s consumer business will remain its primary focus.

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³The techniques used are discussed at https://www.23andme.com/ancestry/techniques/.

The majority of 23andMe customers who contribute data to research are based in the United States. Long-term success is dependent on maintaining an engaged customer base to acquire new research data and test hypothesis. After setting a goal of reaching 1 million customers by the end of 2013, 23andMe sales slowed following receipt of the FDA warning letter in November of 2013. Customer growth in 2014 was slightly lower than 2013, due to the FDA warning letter.

The consumer business provides two sets of information: the data derived from genomic analysis of submitted samples and—equally critical—health outcomes and lifestyle data from surveys of the customer base of those consented to participate in research. According to Ms. Wojcicki, customers understand the need to provide this information—known as phenotypic information—as a basis for improved treatments, and participation in 23andMe surveys has been very high. More than 80 percent of 23andMe customers consent to participate in research.

23andMe currently has two revenue streams—revenue from providing individual consumers with reports profiling and interpreting their genes and revenue generated from research collaborations. In 2015, the company also established an internal therapeutics group led by 23andMe Chief Science Officer Dr. Richard Scheller, former head of R&D and early stage therapeutics development at Genentech. Industry observers widely believe the consumer business is not yet profitable and is being sustained by the approximately $126 million in Series AD venture funding rounds that 23andMe has received.⁴ 23andMe has not disclosed revenue generated by its collaborations with industry researchers.

So far as its research business is concerned, 23andMe will continue to collaborate with the pharmaceutical industry, and invest in its own therapeutics group to develop drugs. For example, the database could help drug companies understand better how medicines affect specific populations, and what role genetics may play in triggering certain side effects.⁵ So far, although 23andMe has produced some useful genetic insights, there is not yet clear evidence that they will find the health care breakthroughs that the company needs for the success of the research business.⁶

Competitors include Pathway Genomics in the United States; deCODE (acquired by Amgen), bio-logis, and i-gene in Europe; and AncestryDNA™ and MapMyGenome in Asia.⁷ However, compared to its competition in the direct-to-

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⁴Katie Brenner, “23andMe Wants to Change the Face of Health Care,” Fortune, December 12, 2012

⁵Matthew Herper, “For 23andMe, The Real Value Could Be In Its Data,” http://www.forbes.com/sites/matthewherper/2013/06/13/expect-to-see-23andme-ads-as-the-company-tries-to-take-genetic-testsmainstream/.

⁶Jonathan Latham, “23andMe Disproves its Own Business Model,” http://www.independentsciencenews.org/news/23andme-disproves-its-own-business-model/.

⁷Alex Khomenko, “Who are 23andMe’s Competitors?” (2012) http://www.quora.com/23andMe/Who-are-23andMes-competitors. Alex was the Director of Engineering for 23andMe; for an older list, see http://www.dnapolicy.org/resources/DTCTableAug2011Alphabydisease.pdf.

consumer genomic market, 23andMe is much better capitalized and has a larger database of individual genomic data.

For long-term success, 23andMe must reduce the cost of processing an individual genome to make the data acquisition business self-sustaining and further develop its research services and therapeutics group to monetize the database that the company is creating. In December 2013, 23andMe adopted a new version of the custom chip from Illumina, which increases processing speed substantially.

FDA AND PRODUCT REGULATION

In July 2010, FDA contacted 23andMe. It asserted that direct-to-consumer genomics companies were offering services that constituted a medical device for their customers. Consequently, these services should be regulated. As part of this process, 23andMe would need to demonstrate that the PGS accurately predicts disease risk. This regulatory process affected only one component of the PGS—the provision of personalized health risk assessments based on assigning risk factors to specific genetic markers.

Initially, 23andMe responded by starting the 510k process for FDA approval of the PGS. According to FDA, 23andMe abruptly ceased communicating with it in July 2012 and hence dropped out of the process. In November 2013, FDA sent a Warning Letter indicating that it had still not received sufficient proof that 23andMe’s service accurately predicts disease risk. Consequently, it asked 23andMe to cease marketing its PGS as a health diagnostic. 23andMe has complied and now provides only raw, un-interpreted genetic data and ancestry analysis in its service for U.S. customers.⁸ In February of 2015 the FDA authorized for marketing the 23andMe Bloom Syndrome Carrier Status Test report—the first direct-to-consumer genetic test to be authorized for marketing by the FDA.

Not being able to offer health-related reports as part of its U.S. product has slowed the acquisition of new customers. According to Ms. Wojcicki, 23andMe is continuing to seek FDA authorization and expects to offer a product with health-related reports to U.S. customers by the end of 2015.

PATENTS AND OTHER INTELLECTUAL PROPERTY

The efficient and low-cost processing for the PGS underlies the business model and rests on a partnership with another company, Illumina, to customize the genomic analysis chip at the core of 23andMe’s offering, Illumina’s HumanOmniExpress-24 (recently superseded by a fourth generation chip).⁹

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⁸Robert C. Green, Nita A. Farahany, “Regulation: The FDA is Overcautious on Consumer Genomics,” Nature, http://www.nature.com/news/regulation-the-fda-is-overcautious-on-consumer-genomics-1.14527.

⁹“23andMe and Illumina Forge Consumer Genomics Goliath,” BioIT World, http://www.bio-itworld.com/newsitems/2007/august/08-16-07-consumer-genotyping.

TABLE E-1 23andMe Patents

SOURCE: U.S. Government Patent Office.

23andMe has made a concerted effort to engage with the scientific community. Its website lists more than 30 peer-reviewed papers based on its data or coauthored by 23andMe staff. It has published a number of white papers covering its analytic methods, as well as statements covering its efforts to eliminate bias in its funded research.¹⁰ (See Table E-1 for 23 andMe’s Patents.)

Interestingly—perhaps drawn from the company’s close relationships with the information technology (IT) community in Silicon Valley—23andMe appears to be adopting something of an open source approach to the identification of health traits related to genetic markers. In its open letter to the scientific community, 23andMe states, “We invite you to review both the standards we use to determine whether a particular genetic association is robust enough to include in our service and the statistical methods we use to illustrate for customers how their particular genotypes relate to the incidence of a disease, condition, or trait. You can also see a list of the associations we currently report in Health and Traits, along with excerpts from the scientific content that will be provided to our customers. . . . To that end, we hope you will contact us with your thoughts and suggestions about our genotyping technology, statistical methods and association study review process.”¹¹

23andMe comes from a culture that values speed of action and transparency. It is not yet clear how this will mesh with the much slower and more careful cultures that dominate both FDA and the medical community more generally.

FUNDING

23andMe has relied mostly on venture capital to fund its development.

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¹⁰23andMe website, https://www.23andme.com/for/scientists/.

¹¹https://23andme.https.internapcdn.net/res/pdf/9us590NqjJHqGnp_KSpl4w_23andMe_scientific_community.pdf.

Equity Investment

In May 2007, 23andMe successfully closed on $8.95 million in Series A funding. In three succeeding rounds, 23andMe closed on increasingly larger and larger financings, totaling $27.8 million in the Series B round, $31.2 million in the Series C round, and $58.4 million in its Series D round. (See Table E-2.)

Following its Series D round of financing, 23andMe announced that it would seek to accelerate the acquisition of customers in its database by reducing the cost of its PGS from $299 to $99. It planned to use this expanded data set to help researchers develop new treatments for disease and, at the individual level, help people improve personal health and disease prevention.

Non-Dilutive Grants: SBIR

Since 2010, 23andMe has received NIH SBIR funding to help improve the effectiveness of its data collection and analytics. 23andMe has received five NIH SBIR grants (mostly for the development of tools for evaluating the genetic information database that it is collecting). The total commitment from the NIH SBIR program has been $2.1 million through 2014, according to the company.

USES AND ROLE OF SBIR AT 23ANDME

It is perhaps surprising that 23andMe has sought SBIR funding at all. Companies with access to sufficient capital do not typically seek SBIR funding because grant success is highly uncertain and because the lags in the process mean that reliance on SBIR can imply delays in the project, especially in very fast-moving sectors.

TABLE E-2 Equity Investors for 23andMe

SOURCE: Venture Deal. Accessed February 24, 2014.

23andMe is also deeply immersed in the Silicon Valley culture, where the speed of change means that relatively few companies seek SBIR funding; the standard funding routes even for very early stage startups focus on accelerators, angels, and venture capital (VC) funding, not SBIR awards.

23andMe has used SBIR funding to develop tools to improve its research platform and to investigate new [products]. Four of the five projects are intended to improve data quality, reduce errors, and demonstrate the accuracy of the 23andMe approach. 23and Me has also had grants for allergy research, Exome research, and pharmacogenomics.

According to Ms. Wojcicki, there were other reasons for seeking SBIR funding as well. SBIR also has had a powerful validating effect for the company, underscoring its efforts to present itself as a research organization as well as a direct-to-consumer genomics company. Ms. Wojcicki observed that while this had not affected funding, it had supported efforts to start the non-consumer components of the business. SBIR funding has had the effect of de-risking the technical approach adopted by 23andMe, making further investment more attractive.

In addition, Ms. Wojcicki observed that NIH SBIR funding has helped balance perspectives on the two components of the business within the investment community; much of the VC investment in 23andMe has come from investors focused on the IT/Internet/digital sector, which tends to prioritize the direct-to-consumer component, rather than biomedical investors with a longer-term perspective. NIH funding has underscored the potential importance of the biomedical information business.

RECOMMENDATIONS

23andMe has relatively limited experience with the NIH SBIR program and had few comments about program operations. However, 23andMe executives said that the current process took so long that in the very fast-paced innovation environment in which they operated, SBIR was not a primary option.

They recommended that NIH explore two core concepts:

1. an increased focus on smaller grants of approximately $50,000 for true feasibility testing for very early-stage highly innovative ideas
2. development of an entirely different award and monitoring model that could provide extremely rapid funding for smaller awards, with limited application requirements and limited initial reporting

Although the executives acknowledged that government funding required some safeguards, they argued that supporting the rapid testing of many more ideas could be a valuable approach that could support projects that otherwise could not attract funding.

Advantagene, Inc.¹²

Meeting with
Dr. Estuardo Aguilar-Cordova, CEO and founder
December 3, 2014

Advantagene, Inc. is a private company founded in 1999 by Dr. Estuardo Aguilar-Cordova. The company is developing cancer immunotherapy drugs that stimulate the body’s immune system to destroy various types of solid tumors. Advantagene is headquartered in Auburndale, Massachusetts.

At the time of company formation, Dr. Aguilar-Cordova was on the faculty first at Baylor and then at Harvard, where he was involved in some important clinical trials. At the time, Harvard had a rigid policy requiring complete divestment from all for-profit enterprises or exclusion from all work on studies affiliated with the products of such enterprises. Dr. Aguilar-Cordova chose to leave Harvard and work full time at Advantagene.

In his view, options for commercializing the science were limited. He had been an advisor to other small companies and thought their product development processes could be substantially improved. Initially, the technology was licensed to a large pharmaceutical company, but after a series of mergers and changes in corporate strategy, the company relinquished control of the technology back to Baylor College of Medicine. In turn, Advantagene was able to license the technology from Baylor, first on a non-exclusive basis and then in 2007 exclusively.¹³

The core innovation that supports Advantagene’s product portfolio is a technique called Gene Mediated Cytotoxic Immunotherapy (GMCI™). GMCI™ is a platform for developing tumor-specific vaccines that use widely available antiviral drugs to attack cancer and stimulate a systemic anti-tumor response in the body.

Advantagene has applied GMCI™ to develop clinical trials in various solid tumors, including currently active programs in prostate cancer, adult and pediatric brain cancer, pancreatic cancer, pleural effusion, and mesothelioma. It has also done studies in other indications, including ovarian cancer and esophageal cancer.

Advantagene’s lead product is ProstAtak®. Having entered Phase 3 clinical trials in 2012, ProstAtak™ is a product designed to stimulate the immune system to attack the tumor and help reduce the recurrence of prostate cancer in patients with localized cancers following early detection. Advantagene is also developing other GMCI™-based applications. The most advanced product candidate targets malignant glioma, an aggressive and usually fatal cancer of the brain. It has completed Phase II clinical trials with very encouraging overall survival results. The company is planning to follow those studies with definitive Phase 3 trials.

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¹²Primary sources for this case study are the meeting with Dr. Estuardo Aguilar-Cordova, and a review of the Advantagene website (http://www.advantagene.com) and related company documents.

¹³https://www.bcm.edu/research/office-of-research/baylor-licensing-group/search/advantagene.htm.

Advantagene has approximately 10 employees. It has relationships with a number of universities and research institutions such as Johns Hopkins University, the University of Pennsylvania, Dana-Farber Cancer Institute, Memorial Sloan Kettering Cancer Center, and Lurie Children’s Hospital (Chicago).¹⁴

TECHNOLOGY PLATFORM (GMCI™)

GMCI™ is a platform for developing tumor-specific vaccines. With over 650 courses of treatment already administered through multiple clinical trials, GMCI™-based vaccines are demonstrably safe and lack the grueling side effects associated with many current cancer therapies. GMCI™ therapies are adjuvant, combining with current surgical, radiation, and chemotherapeutic treatments to improve patient outcomes.

GMCI™ uses gene transfer technology combined with traditional cancer therapies and widely available antiviral drugs to stimulate the immune system to destroy solid tumors. Injection into a tumor of a replication defective adenovirus, which typically causes cold symptoms, containing inactive genetic material from the herpes virus (called AdV-tk™) followed by an anti-herpetic prodrug (such as valacyclovir) causes rapid cell death in cancer cells already weakened by radiation or chemotherapy. Through a complex set of immunological reactions, the body’s immune system becomes sensitized to the cancer and attacks the residual tumor cells and micrometastases that become the origins of a recurrence.

Local anticancer therapies, such as surgery and radiation, often fail to eradicate every tumor cell and cannot be used in the treatment of metastasis. If the natural immune response does not eradicate the leftover cells, the therapy fails. GMCI™ does not replace the current standard of care, but instead works with current therapies to stimulate the immune system so it better targets potentially lethal tumor cells not eliminated in the initial treatment.

PRODUCTS

Advantagene is developing therapies that create a systemic resistance to prostate cancer and malignant glioma and block recurrence or metastases of cancers treated with surgery, radiation, or chemotherapy. Applications for other types of cancer are at earlier stages in the product pipeline.

Localized Prostate Cancer—PROSTATAK™

Each year, approximately 240,000 men are diagnosed with prostate cancer and 30,000 will die. Approximately 50 percent are at significant risk for recur-

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¹⁴Hoovers, “Advantagene, Inc.—Sales Preparation,” http://www.hoovers.com/company-information/cs/sales-preparation.Advantagene_Inc.0d367be3909fccae.html.

rence, and in approximately 30 percent of cases, prostate cancer will recur. Standard therapies for newly diagnosed prostate cancer are primarily surgery or radiation. After recurrence it is androgen deprivation (medical castration), chemotherapy or radio-chemotherapy. These treatments are not curative and have very significant economic, societal, and quality-of-life costs.

Advantagene developed ProstAtak® as an immunotherapy to prevent recurrence of prostate cancer. In conjunction with standard therapies, the ProstAtak® approach kills tumor cells and stimulates a cancer vaccine effect. Clinicians administer ProstAtak® through a series of three injections into the prostate followed by 14 days of valacyclovir pills.

Malignant Glioma

Brain cancers respond poorly to treatment. According to the American Cancer Society, in the U.S. brain cancer is diagnosed approximately 22,000 times each year and approximately 13,000 people die from this disease. Malignant glioma accounts for the majority of these deaths. Despite aggressive new therapies, the average survival time following diagnosis is still less than 15 months.

Malignant glioma is particular likely to recur due to infiltration by cancer cells from the main tumor mass into the surrounding brain tissue. A GMCI™enabled response that stimulates an immune reaction against residual cells and small metastases is particularly well-suited to this type of malignancy.

Advantagene has completed a Phase 2 study for malignant glioma with very encouraging overall survival results presented at the most recent ASCO meeting. It is currently further analyzing the results in preparation for a Phase 3 study.

Product Pipeline

Advantagene is also developing therapies to stimulate immune responses for pancreatic cancer, pleural effusion/mesothelioma, and pediatric gliomas. These are all conditions with poor prognoses and limited therapeutic alternatives. (See Table E-3.)

TABLE E-3 Advantagene Therapies in Development

BUSINESS MODEL

Advantagene’s business proposition for its primary prostate product is based on the avoidance of future medical costs through the prevention of cancer recurrence. Pharmaco-economic analysis has been completed using a Markoff model. This established that about 30 percent of patients undergoing radiation therapy for prostate cancer later suffer a recurrence. Excluding the effects on quality of life and productivity, each recurrence averages a cost of more than $100,000 annually for treatment. There are currently about 230,000 new prostate cancer diagnoses annually, and of these about 70,000 recur. Thus over the entire health care system, the steadystate cost of recurrence is more than $7 billion annually.

If successful, Advantagene’s technology could substantially reduce these costs. Based on clinical evidence, the cost could be reduced by about one-half. However, while the financial benefits are clear, payment mechanisms are much less so. Early-stage prostate cancer is a slow-growing disease, with patients surviving for long periods. As a result, for most patients, the costs avoided from recurrence are saved by Medicare and Medicaid. The payer and savings are aligned for patients undergoing first-treatment after turning 65years of age—however for younger patients, the costs for ProstAtak® is mostly paid by private insurance companies, and they would not likely benefit from the cost savings.

There is therefore a disconnect between the ultimate beneficiaries—government programs—and potential sources of funding—insurance companies. The Centers for Medicare & Medicaid Services (CMS), which manages Medicare and Medicaid, is unwilling or unable to spend money now on drug development in an effort to save money later; insurance companies are equally unwilling to spend now to benefit CMS later.

PROGRESS WITH FDA

Advantagene has already made groundbreaking progress in the course of its regulatory filings. After 7 years of discussions, additional data submissions, resubmissions, and support from the academic community, the company was granted an SPA for a completely novel end-point for newly diagnosed prostate cancer. In great part, it was able to accomplish this because of SBIR funding. Grant funding afforded the company the ability to invest the necessary time to let the data mature, most VC or institutional investors could not afford the patience for such a long development time according to Dr. Aguilar-Cordova. The new protocol allows for evaluation of study results within 2 years for newly diagnosed prostate cancer cases—something never previously approved despite the effort of large pharmaceutical companies such as Eli Lilly and Abbott Laboratories.

Advantagene is now focused on raising money for the Phase 3 clinical trial for ProstAtak™. which will require 711 patients and will cost tens of millions of dollars, according to Dr. Aguilar-Cordova. This will require additional resources from institutional investors.

Advantagene has also received an NIH award to help fund a clinical trial for addressing malignant gliomas. Initial data are highly encouraging. The 2-year survival rate is up from 27 percent to 52 percent, and researchers are very excited. The principal investigator is the chair of neurosurgery at Brigham and Women’s Hospital in Boston.

FUNDING

Advantagene has received support from SBIR, other grant providers, and private investors.

Non-Dilutive Grants

Between 2003 and 2014, SBIR funded six projects with Advantagene. Advantagene received 15 SBIR awards amounting to $11.41 million from the Department of Health and Human Services (HHS). Sixty-four percent of SBIR funding has supported clinical and immunological evaluation for ProstAtak™. Most of the remainder has funded research on the application of a GMCI™-based vaccine to malignant glioma.

In 2011, the Massachusetts Life Sciences Center provided a $500,000 matching grant through its Small Business Matching Grant Program to support further corporate development.

Equity Funding

In addition to grants from NIH, Advantagene has received private investment. The presence on the Board of Directors of a partner from Leviathan Biopharma Group, an investment vehicle for successful entrepreneurs and senior business executives in the pharmaceutical and biotechnology industry, suggests one of the sources. Leviathan does not, however, advertise its investments, and Advantagene does not report its investors.

SBIR

Product development is of course very expensive, and although Advantagene began with funding from angel investors, by 2004-2005 money was running out. Reluctantly, Advantagene entered discussions with a venture capital group which demanded the company drop all research and development except one indication, which was not prostate cancer. Dr. Aguilar-Cordova said this completely missed the potential of Advantagene’s technology as a platform for addressing multiple diseases and the opportunity for multiple products, any one of which might be successful. At that point, SBIR Phase II funding was received, and the company decided to develop its platform technology instead of accepting VC funding at that stage.

According to Dr. Aguilar-Cordova, SBIR does not suffer from the same limitations as VC funding; the latter requires both a tight focus on a specific product and a very specific timeline to a funding event that will allow for an exit. SBIR permits companies to take more risks, for example in developing an approach to prostate cancer, which is both high risk and long cycle. SBIR supports high-risk and longer-term projects and also in particular supports problems that may not be interesting to venture firms, such as newly diagnosed prostate cancer, which is not attractive for several reasons from a venture perspective. Similarly, SBIR supports research in smaller or less remunerative markets, for example cervical cancer, which is primarily a problem in developing countries. SBIR thus provides an alternative to venture funding and is quite different from private sector investment, with different goals and different timelines.

Advantagene has been partially supported by a Fast-track Phase I-Phase II award from NIH and later received additional time to complete its work because of the regulatory requirements that it faced (the existing grant eventually spread out over 7 years).

The SBIR awards process at NIH is however very slow, especially in comparison with industry timelines. An application made in May might eventually be funded in May of the following year. Assuming resubmission is not required, 12 months is a very long lead time in industry.

Dr. Aguilar-Cordova noted that he had been a reviewer multiple times and that the review process had changed significantly in recent years. Reviews used to be conducted primarily in person, with one primary reviewer per project, one secondary reviewer, and one reader. The whole review panel would primarily listen to the discussion between the reviewers. More recently, the process has shifted and is now primarily an asynchronous review via the web. Reviewers now only see the comments of the primary and secondary reviewers, followed by a vote in which the group almost always follows the primary and secondary reviewer. Dr. Aguilar-Cordova believes that the overall quality of reviews has significantly declined as a result.

Dr. Aguilar-Cordova also observed that while SBIR is funding for small business, the majority of reviewers are academics. This sometimes results in a misunderstanding of R&D as conducted in the private sector. For example, one recent review criticized a proposal because “two key people were from the same company,” an absurd comment for private sector research programs.

At a wider level, SBIR reviewers often misunderstand the relationship between innovation and novelty and product development. The long process of product development is sometimes criticized by academic reviewers who see it as insufficiently innovative. The fact is that the innovation has occurred earlier, and the development stage is about bringing the product to market. He observed that the entire project may be an innovative solution—as are Advantagene’s—but that the grind of proving out the concepts may in itself not look much like innovative research.

RECOMMENDATIONS

Dr. Aguilar-Cordova offered several suggestions for improving the program:

• Reviewers need better guidance. In particular, they should be given better instructions defining product development as part of innovation. This would help reduce the pro-academic bias of the current review process.
• Selection should be an iterative process. Reviews are already uploaded into the system a week or two in advance of the review panel meeting; it would be minimal additional effort to permit companies to see preliminary reviews and to offer additional information—perhaps only a page—to be added to the record. This would be a “fantastic way to improve things,” according to Dr. Aguilar-Cordova and would make the review process more like the peer review process for scholarly publications.
• Resubmission currently causes a 2-year delay because comments are returned too late to meet the next submission cycle. Speeding up the delivery of comments by just a few weeks would save companies a year of time and cost.
• There is a need to support investigatorinitiated proposals. This is one of the hallmarks of the NIH program, but in his view it is being steadily eroded by a push toward program initiatives (contracts) defined in advance by the Centers.
• Economic analysis of very large projects is necessary. Dr. AguilarCordova believed that the $5 million in funding provided by NIH allowed Advantagene to complete work that would have cost more than $100 million in a large pharmaceutical company, but he also noted that large funding decisions should be based in part on a better understanding of the project’s likely economic and social impact if it were to be successful.
• It would be most productive to fund programs to proven need, not to artificial caps.

ArmaGen Technologies¹⁵

Meeting with
Dr. William Pardridge, founder
June 24, 2014
Calabasas, California

ArmaGen Technologies is a privately held business headquartered in Calabasas, California. Founded in 2004 by Dr. William Pardridge, the company owns technology to transport various therapeutic molecules (such as recombinant proteins, therapeutic monoclonal antibodies, and siRNA) across the blood-brain barrier (BBB).

Dr. Pardridge has been working on overcoming the BBB to deliver therapeutic molecules into the brain since the 1970s. He argues that this issue represents a huge and rapidly growing societal challenge: he estimates the cost of caring for Alzheimer’s disease and stroke victims at more than $500 billion by 2025, because the 65 and older population will grow by 50 percent during that period.

THE NEED FOR TOOLS TO CROSS THE BLOOD-BRAIN BARRIER

Currently, there is no effective therapy for Alzheimer’s disease, Parkinson’s, and stroke aside from L-Dopa which came into use almost 60 years ago for Parkinson’s. Dr. Pardridge said that the primary problem is that 98 percent of small molecule and 100 percent of biologic drugs do not cross the BBB. Drug delivery across the BBB is the mechanism of choice for therapeutic drugs today.

The BBB problem has remained unaddressed despite huge and growing R&D expenditures aimed at these diseases. Until recently, large pharmaceutical companies saw the BBB as essentially an insoluble problem, and according to Dr. Pardridge there is still not a single academic neuroscience program focused on the blood-brain barrier. Instead, companies and drugs have been focused on the diseases that do respond to standard drug treatments: affective disorders, epilepsy, insomnia, and chronic pain. He observed that drugs for depression alone accounted for 30 percent of the world’s drug market for the brain. These standard treatments for the brain are the classical lipid soluble small molecule drugs that were the focus of the chemistry-based R&D drug effort in the 20th century. A small fraction of these small molecule drugs do cross the BBB. However, today, the focus is increasingly a biology-based R&D effort at the discovery of large molecule drugs such as recombinant proteins, therapeutic antibodies, and nucleic acid drugs. None of these large molecule drugs produced by biotechnology cross the BBB.

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¹⁵ Primary sources for this case study are the meeting with Dr. William Pardridge and a review of the ArmaGen Technologies website and related company documents. http://www.armagen.com.

Efforts to deliver treatment and brain delivery technologies over the past 20 years have been ineffective. Primarily employing subcutaneous injections and then direct delivery into the brain, these treatments have failed. Although treatment sometimes works in mouse or rat models, Dr. Pardridge explained that the failure of expensive Phase 3 clinical trials was to be expected, because diffusion in a mouse brain is much easier than in the massively larger human brain. So efforts to deliver neurotrophins by direct injection into the brain and into the spinal cord have not been successful. In the most recent trials, a consortium of the largest pharmaceutical companies had an expensive failure of an Alzheimer’s disease treatment based on monoclonal antibodies, again because they could not cross the BBB.

Dr. Pardridge founded ArmaGen while working as a professor at the University of California, Los Angeles (UCLA), in part because experience in dealing with pharmaceutical companies had convinced him that they were not interested in the BBB problem and that it would have to be solved elsewhere. He had successfully maintained an unbroken stream of academic research grants for 35 years before retiring from academia, and indeed the commercial work on ArmaGen grew directly out of the academic research funded during the 1980s and 1990s.

THE SEARCH FOR FUNDING

The company depended primarily on SBIR funding for about a decade, while Dr. Pardridge sought venture funding. Initial efforts in this area in 2002 were discouraging. Dr. Pardridge noted that, working with a well-connected Silicone Valley lawyer, he initially approached 25 venture firms for funding and received one interview and no further responses.

SBIR funding permitted the company to open its first 3,000-square-foot research facility in Santa Monica in 2003, and to hire a team of five researchers. The period after the initial awards, from 2003 to 2007, was in Dr. Pardridge’s words, “the flat part of the learning curve.” The company had to learn to do for itself many of the functions routinely performed at existing drug companies, but many of the research techniques that were known in the private sector had not been necessary in academia.

Starting in 2007, progress at ArmaGen accelerated, and from 2007 to 2012, ArmaGen published more than 40 peer-reviewed papers describing some of its research, covering ways in which its approach to the BBB could be used to deliver to the brain very well-known drugs such as Aldurazyme®, Enbrel®, or Humira®.

In 2010, ArmaGen again sought VC funding, armed this time with the numerous papers explaining and validating its approach, as well as a growing track record of research funded by the NIH SBIR program. However, none of the VCs approached showed any interest. ArmaGen then adopted a different strategy, focused on identifying more strategic partners from the pharmaceutical industry. Dr. Pardridge approached the newly formed Boehringer Ingelheim Venture Fund (BIVF), and this partnership led in 2012 to a series A round for $17 million.

BIVF was jointed by three other potential strategic partners: Shire plc, Takeda Ventures, Inc., and Mitsui & Co. Global Investment, Inc. Dr. Pardridge noted that none of the investors acquired any additional rights to license or utilize ArmaGen technology as a result of this equity investment.

After its first round of venture funding in November 2012, ArmaGen brought in professional management and, in December 2012, hired as CEO James Callaway, a biotech executive with nearly 30 years of experience in biotechnology R&D with both ties to big pharma and experience running venture-backed biotech start-ups.

ArmaGen is currently working to validate its core technology in clinical trials. Under an orphan drug designation—which allows both accelerated approval and various R&D tax credits—ArmaGen is moving toward clinical trials for enzyme replacement therapies targeting Hunter and Hurler syndromes.

Although these conditions represent very small markets, FDA approval would demonstrate the value of the core technology, supporting either an exit or follow-on funding for other indications with much larger market value (such as Alzheimer’s disease, Parkinson’s disease, neuroinflammation, stroke, or brain cancer). These are all indications for which ArmaGen has undertaken extensive research using SBIR funding.¹⁶

TECHNOLOGY

Because of the BBB, effective therapeutics have not been developed for most brain disorders. The BBB protects the central nervous system and prevents most molecules from passing from blood into the brain. Lipid soluble small molecules can diffuse through the barrier, but all other molecules that enter the brain must pass through transport systems that exist in the brain’s endothelial wall.

The ArmaGen technology uses basic molecular biology techniques to fuse protein-based therapeutics of interest (i.e., recombinant proteins, therapeutic monoclonal antibodies, and even, indirectly, siRNA) to an antibody designed to bind to a receptor on the BBB. The antibody transports the therapeutic drug of interest across the barrier. ArmaGen describes this antibody metaphorically as a “molecular Trojan Horse.”

After crossing the BBB, the antibody does not appear to interfere with the efficacy of the therapeutic molecules. ArmaGen has demonstrated that the therapeutic molecules can act in four different ways:

• binding to other proteins (e.g., inflammatory cytokines such as TNF)
• binding to protein receptors on the surface of a neuron to transmit a message (such as neuroprotective neurotrophin receptors)

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¹⁶“ArmaGen Technologies, Inc.” Los Angeles Business Journal, <http://www.labusinessjournal.com/news/2013/aug/12/special-report-innovation-tech-transfer-ucla-armag/>.

• binding to surface receptors on brain cells and delivering the therapeutic payload to the neuron (such as in enzyme replacement therapy)
• binding to surface receptors on brain cells and delivering the therapeutic payload to the neuron for absorption by the nucleus (such as in siRNA-based therapies)

PRODUCTS

Using SBIR funding, ArmaGen has improved its technology platform and investigated application of the technology for different medical indications.

Hurler and Hunter Syndromes

As an initial demonstration of this technology, ArmaGen is developing enzyme replacement therapies that can cross the BBB for a pair of lysosomal storage diseases called Hurler syndrome and Hunter syndrome.

Fewer than 10,000 people have these diseases in the United States. They are metabolic disorders caused by different malfunctions in the process by which the body’s lysosomes break down glycosaminoglycans. Over time, these molecules accumulate in the cells, causing progressive cellular damage that affects appearance, abilities, organ function, and mental development of patients.

Although enzyme replacement therapy appears both safe and effective in treating the peripheral symptoms of the disease, the BBB has blocked delivery of these enzymes into the central nervous system, causing mental development to continue mostly unimpeded.¹⁷

Since 2003 ArmaGen has received $5.12 million from NIH to fund research on these two lysosomal storage diseases. Also, ArmaGen has received an additional $1.15 million to study a third lysosomal storage disease called Metachromatic Leukodystrophy (MLD), and an additional $1.15 million to study a fourth lysosomal storage disease called Sanfillipo Type A.

Under an orphan drug designation to accelerate the approval process and get additional tax credits, ArmaGen is using its Trojan Horse technology to enable enzyme replacement therapeutics to enter the central nervous system. These have been code-named AGT-181 and AGT-182. Both drugs received an Investigational New Drug (IND) designation from FDA.

Dr. Pardridge said that two clinical trials were now, or would soon be, under way for Hurler Syndrome and Hunter Syndrome, with the first Phase 1 trial to be completed in 2014 and the second in early 2015. Dr. Pardridge anticipates that the small-scale Phase 2 clinical trial, which will be a test of safety and initial efficacy on a population of approximately 24 children, should follow shortly and will require only a limited period of time.

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¹⁷“Lysosomal Storage Disease,” http://emedicine.medscape.com/article/1182830-overview.

Other Indications

On the basis of SBIR research, therapies targeting other conditions are in the company’s product pipeline. These include various treatments for Alzheimer’s disease, Parkinson’s disease, neuroinflammation, stroke, brain cancer, and even nerve gas exposure.

Despite its recent round of venture funding, ArmaGen still lacks resources to pursue all development opportunities and is looking for collaborations with pharmaceutical companies either to accelerate development and commercialization of the products in their pipeline or co-develop additional products by using ArmaGen’s technology to enable delivery of its partner’s drugs across the BBB.

Since 2003 ArmaGen has received $10.21 million to fund research examining applications of its technology for indications other than lysosomal storage diseases.

PATENTS AND OTHER INTELLECTUAL PROPERTY

ArmaGen owns eight issued patents on compositions and methods to enable therapeutic drugs to cross the BBB and treat conditions of the central nervous system. (See Table E-4.) Additional patent applications are pending.

FUNDING

During its first 10 years of operation, ArmaGen relied on SBIR and other grants to support its research. With new management and venture funding, it is

TABLE E-4 ArmaGen Patents

SOURCE: U.S. Patent and Trademark Office.

now positioned to begin clinical trials on the two most promising drug candidates in its pipeline.

Non-Dilutive Grants

Between 2003 and 2009, ArmaGen received 11 Phase I and 5 Phase II SBIR grants from HHS to develop its core technology and its application in treating various conditions of the central nervous system. In total, SBIR funding has amounted to 16 grants for $13.38 million, $3.79 million in Phase I and $9.59 million in Phase II. From 2010 to 2013, SBIR initiated four additional projects with ArmaGen (most of which are related to lysosomal storage diseases) for $3.60 million while continuing to fund ongoing projects. Total SBIR funding from 2003 to 2013 totaled $16.81 million.

Equity Investment

In April 2013, ArmaGen successfully closed on $17 million in Series A funding; participants included Boehringer Ingelheim Venture Fund; Shire plc; Takeda Ventures, Inc.; and Mitsui & Co. Global Investment, Inc. Shire and Takeda Ventures are the corporate venture funds of large pharmaceutical companies and reflect a current trend by corporate VCs to take equity positions in early rounds.¹⁸

ARMAGEN AND SBIR

SBIR was the lifeblood of ArmaGen from it foundation in 2004 until the series A round closed in late 2012. Dr. Pardridge observed that “ArmaGen has traversed the valley of death and our horse was SBIR.” He has also served on SBIR study sections and has a number of comments and suggestions related to SBIR.

1. Support for clinical trials. Dr. Pardridge said that the $1 million annually for 3 years potentially available for clinical trial support was simply insufficient to accomplish its goals. ArmaGen had received such an award but had quickly realized that the funding would be insufficient and had been forced to hold off on filing the IND. Overall costs for a small trial were on the order of $5 million minimum, when the company has to first execute GMP manufacturing of a novel biologic and perform extensive GLP safety pharmacology of the biologic agent in primates before filing the IND.
2. Study section composition. Dr. Pardridge said that he did not see a significant difference between RO1 and SBIR study sections. He had served

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¹⁸Mark Lennon, “Corporate Venture Investors Starting To Look A Lot More Like Private VCs,” http://techcrunch.com/2013/11/05/corporate-venture-investors-starting-to-look-a-lot-more-like-private-vcs/.

3. on both for many years, and both were dominated primarily by academic scientists. He wondered whether an entirely separate organization to help select small business awards might be a better approach.

4. Long timelines. If a $3 million continuation award supported early stage trials, including toxicology studies and perhaps manufacturability, the absence of additional funding thereafter risked delays that could break the project, as drugs developed for Phase 1 had at best a 2-year shelf life.
5. Rebuttal. Dr. Pardridge said that he thought the idea of an ability to respond to initial reviewer comments was highly promising, but he was concerned that it might not be practical.
6. Eliminate Phase I altogether. Although this represented a radical change in the program, Dr. Pardridge was convinced that its existence means that any project effectively requires 2 years before it can find significant funding from SBIR. This is too long in the current (and accelerating) environment. In his experience, reviewers were very reluctant to support FastTrack applications, and he was skeptical that direct to Phase II would be widely adopted. He noted that the need for Phase I feasibility stage grants was not a feature of academic RO1 and similar awards.
7. Patent costs. Dr. Pardridge said that patent costs represented part of the outcome from the grants and that protecting intellectual property (IP) was likely to generate better commercial outcomes. It was therefore in the interests of the taxpayer to permit some use of SBIR funding for prosecution costs of specific patent applications.

High-quality program officers. Dr. Pardridge noted that almost uniformly and across several institutes the program officers with whom he had worked were highly engaged and committed to successful translational research. Indeed, they were much more committed than most academics working in the field for whom success had other metrics.

Auritec Pharmaceuticals: SBIR Case Study¹⁹

Meeting with
Dr. Thomas Swift
June 24, 2014
Pasadena, California

Auritec Pharmaceuticals is a privately held business headquartered in Pasadena, California. Founded in 2002 by Dr. Thomas Smith, it owns two platform technologies for extended-release drug delivery and has tested them to improve treatment for a broad range of medical indications.

Dr. Smith has spent the past 25 years working on extended-release drug delivery. In 1990, he co-founded Control Delivery Systems, Inc. (CDS). Over the following decades, CDS developed 38 patents and a close research partnership with Chiron and Bausch & Lomb which led to the development of Vitrasert™ (Food and Drug Administration [FDA] approval in 1996) and Retisert™ (FDA approval in 2005). In 2006, CDS merged with pSivida Corporation, an Australian firm, to form pSivida Inc., a publicly traded U.S. company (NASDQ:PSDV). pSivida has licensed extended-release implant technology for several indications to Auritec.

Auritec’s strategy is to choose diseases with unmet medical need where its technologies can lead to medically and commercially important products. Internal R&D is meant to lead to “proof of concept,” at which point the product is licensed to a larger corporation that will take it through FDA approval and marketing. For example, Auritec has a partnered with an arthritis company. Similar efforts are at various stages of development for other areas such as endometriosis, breast cancer, and HIV/AIDS. In each case, the core concept was the focus on drug delivery technology: the remedial drug was known to work, but there were problems with effective delivery that Auritec could help solve.

In pursuit of this strategy, in the first years of Auritec’s existence Dr. Smith invested a substantial amount of his own money to allow the company to function. Since about 2007 however, the company has primarily relied on SBIR funding to continue its research and development program. According to Dr. Smith, he received his first SBIR award 25 years ago and has been deeply involved in the program since then. In order to highlight the success of his companies, he observed that there is a huge mismatch between the number of small biotech firms and the number of drugs originating from that that are actually approved by the FDA: he pointed out that 5,200 small biotech companies received funding from the recent discovery tax credit, while only 1-2 related drugs are approved each

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¹⁹Primary sources for this case study are the interview with Dr. Smith and a review of the Auritec Pharmaceuticals website (http://www.auritecpharma.com) and related company documents.

year by companies of that size. Companies founded by Dr. Smith have achieved approval of 3 NDAs.

With SBIR funding, Auritec has investigated application of the implant technology licensed from pSivida to other medical indications (Versa). Over the past couple of years, it has received multiple SBIR grants to support research and clinical trials for FDA approval of its Versaring™ products: implant-based product intravaginal rings designed to provide women protection from infection with HIV and genital herpes. Auritec expects to license Versaring™—as CDS did with Vitrasert™ and Retisert™—to a pharmaceutical company with the production, marketing, and distribution capabilities for successful commercialization.

Auritec shares space and equipment with the Oak Crest Institute of Science in a 7,000 square foot open-plan laboratory.

TECHNOLOGY

Auritec Pharmaceuticals owns two platform technologies for the sustained release of drugs.

Versa™

The Versa™ platform is an implant-based delivery system in which a solid implant is placed in the patient. Versa™ implants consist of a solid drug core coated with a semi-permeable polymer envelope. Water from surrounding tissues diffuses through the coating and dissolves the drug, creating a saturated solution within the polymer envelope. The drug in the solution diffuses out of the envelope. Because the solution inside the envelope remains saturated until nearly all of the drug is dissolved, the diffusion of the therapeutic effects out of the implant remains roughly constant over the entire release period.

The technology licensed from pSivida for the Retisert™ and Vitrasert™ products is the basis for the Versa™ platform. By varying drug load and coating characteristics, Auritec can create sustained-release implants with timescales ranging up to several months or even years.

Plexis™

The Plexis™ platform is a depot injection-based delivery system that miniaturizes the Versa™ implants as polymer-coated drug particles. Particle size and coatings are selected to enable high drug load, predictable and continuous release, and intramuscular or subcutaneous depot injection.

Auritec has investigated application of the Plexis™ platform in various indications including schizophrenia, Parkinson’s disease, graft rejection, arthritis, macular edema, and HIV/AIDS.

Between 2002 and 2008, 95 percent of Auritec’s SBIR funding went to study potential applications of the Plexis™ platform. Since 2008, Auritec’s research focus has been more balanced, with 55 percent of SBIR funding going to applications of the Versa™ platform, mostly for commercialization of the Versaring™ intravaginal ring.

PRODUCTS

With SBIR funding, Auritec has investigated different ways to broaden the application of its implant-based Versa™ technology (paralleling Retisert™ and Vitrasert™) and identify initial applications for its depot injection-based Plexis™ platform.

Versaring™ Intravaginal Ring

Globally, each year 1.2 million women are infected with HIV and a further 10.2 million are infected with Herpes Simplex Virus (HSV).²⁰ Improved prophylaxis against HIV and HSV using a topical microbicide, a tenofovir gel, has been demonstrated in a population of sexually active women.²¹ Because protection increases with increased adherence and because intravaginal rings (IVRs) may increase adherence, Auritec is developing an intravaginal ring for the long-term delivery of tenofovir, acyclovir and other microbicides for HIV/HSV prophylaxis.

The Versaring™ intravaginal ring is a silicone ring embedded with drug “pods.” Based on the technology licensed from pSivida, the drug pellets are coated with first a permeable polymer and then a semi-permeable layer. Each ring can hold up to 10 pods, and each pod can be identical or composed of different drugs. Furthermore, the release rate for each pod can be tuned independently.

Since 2009 NIH has invested $4.03 million through SBIR in Versaring™. These grants have supported basic research, development of manufacturing capability, and the performance of preclinical trials.

Other Indications

Since its founding in 2002, Auritec has used a series of SBIR Phase I and Phase II grants to evaluate various medical conditions for potential application

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²⁰“Women and HIV/AIDS,” AVERT, http://www.avert.org/women-and-hiv-aids.htm; “Worldwide HIV & AIDS Statistics,” AVERT, accessed at http://www.avert.org/worldwide-hiv-aids-statistics.htm. Looker, et. al. “An estimate of the global prevalence and incidence of herpes simplex virus type 2 infection,” Bulletin of the World Health Organization, accessed at http://www.who.int/bulletin/volumes/86/10/07-046128/en/.

²¹Use of tenofovir gel reduced incidence of new HIV infections by 40 percent in sexually active Sub-Saharan women; for women who adhered strongly to the regimen, the reduction in the incidence of new infections was 50 percent. Paul Sax, “CAPRISA Study: First Vaginal Gel Microbicide to Prevent HIV and HSV,” Medscape, accessed athttp://www.medscape.com/viewarticle/726159.

of its extended-release technologies. Specifically, these conditions have been arthritis, Parkinson’s disease, schizophrenia, macular degeneration, transplant rejection, mother-to-child HIV transmission, and chronic ear disease. Since 2002 Auritec has received $5.32 million through NIH’s SBIR program to support investigation of other indications.

Most of these projects appear to have been dead ends from the perspective of product development. The exception was a 2007 study investigating ways to use extended release with corticosteroids to treat inflammatory diseases of the inner ear. This work was undertaken in partnership with the company O-Ray Pharma, which Auritec spun off in 2005. Auritec retains an equity interest in O-Ray, which has received three SBIR grants and is investigating the use of four different drugs in extended-release formulations for inner ear disease.²²

RESEARCH PARTNERSHIPS

Auritec partners with numerous research organizations. These partners have included the University of Southern California; Albert Einstein College of Medicine; Oak Crest Institute of Science; International Partnership for Microbicides; CONRAD; Centers for Disease Control and Prevention; The University of North Carolina; University of California, Irvine; Emory University; North Carolina State University; and The University of Massachusetts.

In 2011, Auritec worked with a major pharmaceutical company to study the performance of Auritec’s technology in a proprietary molecule produced by the company. Auritec developed a sustained release formulation of the molecule and tested it in animal models.

PATENTS AND OTHER INTELLECTUAL PROPERTY

PSivida has assigned exclusive rights for the implant-based technology for the Retisert™ and Vitrasert™ products to Faber Research for indications related to the inner ear, malaria, HIV/AIDS, influenza, tuberculosis, and osteomyelitis. In addition Auritec has a broad patent issued in Australia and Canada and pending in the United States, Europe, and Japan for Plexis technology. In addition the company has a broad patent application pending for its Versa technology ring and implant program.

SBIR AND OTHER FUNDING

According to the SBA TECH-Net database, between 2004 and 2010 Auritec received eight Phase I and four Phase II SBIR grants from the Department of Health and Human Services to investigate the development of extended drug

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²²“About Us,” O-Ray Pharma, accessed at http://oraypharma.squarespace.com/about-us/.

release technologies. In total, SBIR funding has amounted to 12 grants for $4.9 million total—$0.91 million in Phase I and $3.88 million in Phase II.²³

The NIH RePORT database indicates that Auritec has received funding for seven additional grants (mostly related to development of intravaginal ring technology) and shows a total commitment through SBIR by HHS of $9.45 million between 2004 and 2013.²⁴

AURITEC AND SBIR

Dr. Smith offers multiple perspectives on the SBIR program. Aside from the awards he has received from NIH over the past 25 years, he has been a study section reviewer and a chairman.

SBIR funding provides the critical bridge funding that allows small companies to reach the end of Phase 2 clinical trials, which Dr. Smith sees as the key point at which strategic partnerships with larger companies or direct investments from financial sources become feasible.

Currently, Auritec depends on SBIR for ongoing funding. However, with two projects in clinical trials and another open investigational new drug (IND), Dr. Smith believes that the necessary Phase 2 clinical trials data will soon provide support that will allow outside funding sources to become available.

SBIR COMMENTS AND RECOMMENDATIONS

Dr. Smith’s experience with study sections provides a valuable perspective on their operations. He made a number of comments.

Institutionally, Dr. Smith believes that NIH is heavily focused on novelty at the expense of innovation. He observed that “if research is the transformation of money into knowledge, innovation is the translation of knowledge into money.”²⁵

At NIH, the focus is almost exclusively on research. This is in part a result of the academic preponderance on study sections and on the importance of novelty in academic research. As a result, there is insufficient emphasis on the practical aspects of innovation—the likelihood that knowledge will indeed be transformed into practical treatment that improves lives.

Dr. Smith observed that novelty comes very early in the discovery process. Once a possibly therapeutic approach is identified, subsequent work to prove the concept and then to adapt it to a range of different circumstances constitutes the critical innovation that turns an idea into reality, but this process does not always require novelty. In his view, not only is NIH institutionally over-focused

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²³TECH-Net, http://web.sba.gov/tech-net/public/dsp_search.cfm, accessed June 12, 2014.

²⁴NIH RePORT database, http://report.nih.gov/index.aspx, accessed June 12, 2014.

²⁵Attributed to Geoffrey Nicholson, 3M. See Patrick Barkham, “Happy 30^th birthday, post-it notes,” The Guardian, April 25, 2010.

on novelty, SBIR study sections strongly reflect this bias. Most are dominated by academic scientists.

Further, he observed that Scientific Research Officers (SROs) who manage study sections in general subscribe to and support the focus on novelty. He identified a number of cases in which potentially important innovations were rejected by study sections on the grounds that they were insufficiently novel.

Dr. Smith recommended that NIH work to refocus the role of SROs so that they become defenders of innovation. This could be accomplished in his view relatively easily if NIH decided that this shift was appropriate. SROs could provide detailed instruction on the definition of innovation at the start of the study section and could also provide ongoing direction to ensure instructions were followed.

Dr. Smith noted that the members of study sections were, by design, not experts in the subject matter of proposals under review. As a result, in some cases it was clear that there were significant misunderstandings, and in others, reviews were rejected for relatively minor or easily resolved questions. In many cases, these minor difficulties or misunderstandings resulted in a long delay (8 months) before a proposal could be resubmitted.

Dr. Smith said that a very brief rebuttal process could accelerate this process sharply, reducing costs for companies and improving the efficiency of the review process for NIH. He said that a response of less than one page could easily be generated before a study section met—or indeed in the course of the meeting itself. Dr. Smith also noted that this kind of interactive approach was standard at the FDA, where IND applications were generally subject to a number of rounds of correction and improvement.

Rebuttals could also help mitigate the impact of a single study section member who had strong views. Providing companies with an opportunity to address criticisms and concerns should limit these impacts and improve the quality of the overall process.

Dr. Smith observed that in his experience a majority of applications were very poor quality and that a white paper process in which applicants were required to submit a brief summary for review by program officers could lead to a sharp reduction in the number of eventual applications, which would reduce the workload for both companies and reviewers. He cautioned, however, that this process should not be used as a hard filter and that projects that got negative responses to the white paper should still be permitted to apply.

Dr. Smith noted that debriefings which provide the basis for a resubmission are delivered too late for the next submission deadline, imposing an 8-month delay. He observed that this was not the case for HIV/AIDS proposals and suggested that NIH should work to make this more rapid process available to all applicants; for small companies, this kind of delay could be very serious.

He approved the recent changes to award size and stressed in particular that the shift of Phase I awards at NIH to $225,000250,000 had been very positive; rather than a loss leader undertaken in the hope of Phase II funding, Phase I was

now funded appropriately. However, he saw the move toward large awards at Phase II as reflecting institutional pressures within NIH to reduce the average pay line as increasing the funding for lower scoring projects results directly in a lower average pay line.

Dr. Smith also approved of the recent NIH decision to pilot direct-to-Phase II awards: he noted that many companies already had feasibility data for projects and could therefore move forward without the need for Phase I. This pilot would also have the effect of substantially accelerating the overall project by providing more funding more quickly. Dr. Smith noted, however, that this might also tend to squeeze out startups that relied on Phase I funding for early data.

Dr. Smith strongly supported the development of mechanisms that helped to provide funding for clinical trials. He observed that while a full-scale clinical trial could cost many millions of dollars, it was possible to find ways to reduce the cost, and NIH funding could make the difference for many projects.

Avanti Polar Lipids, Inc.²⁶

Meeting with
Dr. Walter Shaw, President
September 5, 2014
Alabaster, Alabama

Avanti Polar Lipids (“Avanti”) is a private company founded in 1969 by Dr. Walter Shaw. It is a contract manufacturing organization that produces ingredients and end products for biotech and pharmaceutical companies developing products based on lipids and hydrophobic small molecules. Its production facilities are certified by FDA to conform to current Good Manufacturing Practice (cGMP). Avanti can produce small-scale batches for research, preclinical, and clinical trials; at the same time, it can scale up production to support commercial launch of FDA-approved drugs.

At present, Avanti operates a 25-acre campus in Alabaster, Alabama, and employs approximately 103 people. Manufacturing and quality assurance are performed in a series of five FDA-inspected and -approved laboratories covering 50,000 square feet and spread across five buildings at Avanti’s headquarter complex in Alabaster, Alabama.

COMPANY HISTORY

Avanti was founded in 1969 by Walter Shaw when he was a lab director at the Medical College of Virginia, which at the time had a large group studying lipid-lipid and lipid-protein interactions. While working on a study on the absence of adipose tissue enzyme and its impacts, he found that important work was being done by a team at UC San Diego, which he joined on a temporary basis. This team determined that some patients were in fact missing this enzyme.

The move from Virginia to Alabama was fortuitous. The director of the research team in Virginia sought to deliver services to a more rural population, and moved to Alabama to do so. Dr. Shaw moved with the team, and thus took his own company to Alabama where he pursued a doctorate at the University of Alabama at Birmingham. Initially, the company rented a 700-square-foot garage as a lab.

At the time, Dr. Shaw saw an opportunity in making enzyme substrates for the lipid research market, and the company originally focused on meeting the need of analytical lipid standards. However, as his first year revenues were only $12,000 he also relied on teaching and research posts at the University for funding.

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²⁶Primary sources for this case study are the meeting with Walt Shaw, President and founder of Avanti Polar Lipids, and a review of the Avanti website (http://www.avantilipids.com) and related company documents.

Soon afterward, major breakthroughs in this area followed the discovery of liposomes by Alex Bangham in the late 1960s, and the subsequent work of other researchers following this new research pathway. This expanding new research field required products and services that could be generated by Avanti, and the company moved rapidly to address these new opportunities.

Avanti was perfectly positioned to meet the new market. There were, according to Dr. Shaw, no competitors who could meet the very high quality demands of the research labs: commercial providers of lipids such as egg lecithin did not see this as a major market.

As a result, the higher quality products provided by Avanti allowed it to dominate its market niche of providing lipids to the research community, where it quickly became the preferred provider. As biomedical research on the liposome and lipids has grown over the past 40 years, Avanti has expanded and now provides a broad range of products and services to organizations requiring research-grade lipids.²⁷ Dr. Shaw’s view is that this niche market is large enough to support one company the size of Avanti but not much more, and its well-established position makes market entry difficult for potential competitors.

Developing a Manufacturing Capability

In 1985 Avanti developed important new capabilities when it became a major partner in developing and manufacturing Exosurf, a lung surfactant product developed by Burroughs, a major pharmaceutical company. This product changed health care and outcomes for neonates almost overnight. Prior to Exosurf, neonates were served via a hypobaric chamber, which often resulted in brain and kidney damage. Exosurf (which is no longer on market) is partly composed of phospholipid. It was delivered by eyedrop into the lungs of a baby. After spreading through the lungs, the effect was remarkable: within 20 minutes a blue baby turned pink and was breathing.

This partnership put Avanti into the pharmaceutical manufacturing business (Exosurf was approved in 1990 after FDA stopped the Phase 3 trial to allow immediate delivery to the market). In becoming a manufacturer, Avanti moved into a former abattoir completely renovated into a high-quality manufacturing and research center that is state of the art for lipid production.

Avanti now sells more than 2,000 products, the majority of which are sold to researchers. It has more than 100 employees and 11 buildings.

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²⁷Rajendrani Mukhopadhyay, “How Walter and Rowena Shaw grew Avanti Polar Lipids into the Company It Is Today,” ASBMB today, http://www.asbmb.org/asbmbtoday/asbmbtoday_article.aspx?id=17821&page_id=1.

BUSINESS MODEL

Avanti Polar Lipids provides various products and services to researchers and entrepreneurs working with lipids in the biotech industry. As an investigator’s needs change across the R&D process, Avanti can provide various different types of manufacturing support.

Standard Lipids: Avanti’s catalog presents a range of more than 2,000 lipids used generally by laboratories and biotech companies studying activity in the liposome. In its laboratories, Avanti can produce basic inputs (such as synthetic cholesterol or various widely used monoclonal antibodies) for use in biomedical research or as ingredients in other manufacturers’ processes. Avanti provides these products through a network of domestic and international distributors in North America, Europe, and Asia.

Custom Lipids: As a contract manufacturer, Avanti also develops new production and assurance processes to support its clients’ development and commercialization of the new lipid-based molecules. In developing a custom product, Avanti assigns a development team of organic chemists and analysts to oversee process development and scale up as product volume increases from supporting FDA preclinical trials to enabling commercial launch. A typical development path might include:

Definition of process for product synthesis:

• Scaleup of process for product synthesis (both noncGMP and cGMP)
• Analytic validation of product
• Scaled manufacturing of product with quality assurance process/analytics
• Regulatory support with FDA (IND, NDA) across commercialization process
• Supply chain management

Avanti also offers these different activities independently as services (i.e., lipid analytics, supply chain management, regulatory process management) to clients that do not require the full service package.

PRODUCTS AND SERVICES

In its product catalog, Avanti offers the following types of standard lipids:

• Sphingolipids
• Phospholipids
• Sterols
• Bioactive Lipids
• Coenzyme A & Derivatives
• Neutral Lipids
• Fatty Acid Modified Lipids

• Headgroup Modified Lipids
• Cationic Lipids (Transfection)
• Detergents
• Fluorescent Lipids
• Polymers & Polymerizable Lipids

As part of its analytic services package, Avanti offers these capabilities:

• Extraction and Characterization of Lipids
• Thin Layer Chromatography
• Fourier Transform InfraRed Spectroscopy
• Wet Chemistry Methods
• High Performance Liquid Chromatography
• NMR and Electrospray Mass Spectrometry
• Capillary Gas Chromatography
• Fatty Acid Methyl Ester (FAME) Analysis
• Elemental Analysis
• Stability Testing of Lipidrelated Products

Avanti also offers probes and other lipid-related equipment.

PATENTS AND OTHER INTELLECTUAL PROPERTY

To support its manufacturing and quality control processes, Avanti has substantial technical competence in the production and characterization of lipids. At present Avanti does not own a U.S. patent, but it does have several patents pending.

AVANTI AND SBIR

Unlike many SBIR recipients, Avanti is a mature company with a 45-year history of profitability. It has not received angel or venture funding and has grown to its current size based on the profitability and quality of its core manufacturing processes.

Non-Dilutive Grants

Between 1997 and 2009, SBIR funded six projects with Avanti. Avanti received eight SBIR awards amounting to more than $6.89 million from HHS. These grants were not intended to develop manufacturing capability. Rather they investigated the application of lipids to various different medical indications (such as cystic fibrosis, pancreatic insufficiency, cancer, and acute respiratory distress syndrome) to therapies directed at symptoms (such as coagulation) and to improvement of the efficiency of therapeutic techniques (such as gene transfection).

Avanti’s entrance into SBIR was unplanned and not part of the mainstream of the business. Dr. David Yesair, a client and professional contact of Dr. Shaw, had developed a unique approach to solve the problems of cystic fibrosis (CF) patients: development of a fat that was essentially pre-digested and hence could be tolerated by CF patients, through which they could absorb essential fatty acids.

After developing the concept, Dr. Yesair sought to test the approach prior to developing a commercial scale product. He partnered with Dr. Shaw who became interested in the product, and with staff at Children’s Hospital in Philadelphia to develop a plan for a clinical trial.

Such a trial was too expensive for any of the participants, so the team turned to SBIR. Dr. Shaw had some previous experience with SBIR, having received some earlier Phase I awards for research related to lipids. The team developed a proposal for the National Institute of Diabetes and Digestive and Kidney Diseases (NIDDK) and received a $100,000 Phase I award to examine the physical properties of the new complex the team had developed.

The Phase I results were encouraging but Phase II would need to cover the clinical trials. The original budget submitted was for $2 million, which included a before and after study of patients. NIH rejected this methodology in favor of a classic, doubleblind, placebocontrolled study but this required a budget of $6 million. After considerable discussion, NIH agreed to provide the entire $6 million in Phase II SBIR funding for the clinical trial at Children’s Hospital. In the end, the study came in under budget, and some funding was left unspent.

Avanti not only provided some of the inputs into the new complex, but also undertook the blood analysis of the patients needed to establish results.

The trial has concluded, and results are now being compiled into papers that will be available shortly. The study showed success in making the product, feeding the patients, and deploying the analytical framework. Preliminary indications are that there were no adverse effects on patients, and that for some patients at least there were weight gains. Further detailed results will be available shortly.

Although the SBIR project provided critical funding, Dr. Shaw indicated that the level of paperwork required, and the need to provide detailed tracking of time and material (which is not usually required in a product-oriented company like Avanti) meant that he was not eager to undertake additional SBIR projects. He preferred to work as a subcontractor to other research groups—for example, Avanti is working with a Louisville research group on a wound-healing product that the Department of Defense (DoD) is seeking to fund.

Avaxia Biologics, Inc.²⁸

Meeting with
Dr. Barbara Fox, CEO
October 29, 2013
Waltham, Massachusetts

Avaxia Biologics, Inc. is a privately held business headquartered in Lexington, Massachusetts. It was founded in 2005 by Dr. Barbara Fox, an experienced entrepreneur and scientist, and David Poorvin, a senior executive with Schering-Plough and Pfizer Pharmaceutical. The company has developed an oral delivery platform for antibodies to address disease processes either occurring or influenced by receptors located in the gastrointestinal tract.

The company products focus on developing gut-targeted therapeutics that work against serious diseases that can be treated locally via the gastrointestinal tract. In order to keep the company organization as lean as possible, it uses contract research organizations (CROs) to address its research goals. The overall strategy is to commercialize by developing its products through early clinical trials (up to Phase 2) and exiting either by selling or licensing its IP or by selling the company outright. In a discussion, Dr. Fox indicated that the latter was the primary likely outcome for Avaxia.

Avaxia accepted its first and second rounds of venture funding in February 2012 and June 2013, and has since then expanded its management team, adding vice presidents for research, technical operations, corporate development, and finance and administration. As a result of this influx of venture funding, Avaxia no longer qualifies as a woman-owned company.

TECHNOLOGY

Avaxia’s key technology is a proprietary oral antibody platform, on which it plans to develop specific gut-targeted therapeutics that address serious diseases such as inflammatory bowel disease, Type 2 diabetes, celiac disease, gastrointestinal acute radiation syndrome, and oral mucositis. These are large-scale diseases with very substantial potential markets.

Gut-targeted therapeutics are drugs that are administered orally and act locally in the GI tract. Possible targets include many diseases of the mouth, throat, and intestines. This approach has several advantages:

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²⁸Primary sources for this case study are the meeting with Dr. Fox and a review of the Avaxia website and related company documents.

• Direct connection to new receptors
• Delivery of existing drugs through new modalities and potentially at higher doses
• Reduced side effects, and localization of side effects to the gut

The intestines are lined with receptor proteins. Recent research has shown that these receptors can influence disease processes even for those that manifest outside the gut such as Type 2 diabetes and hypertension. Because these receptors are only accessible from the interior of the intestines, drugs designed to access such targets offer opportunities for new therapeutic interventions and for delivery of preexisting therapeutics at high dosages. Both approaches could improve efficacy and outcomes. Furthermore, because gut-targeted therapeutics remain in the GI tract rather than being transported throughout the body, they should minimize potential side effects in other parts of the body. This is especially important for drugs that suppress the immune system.

Avaxia has to date focused much of its research on inflammatory disease processes. Three of its projects use oral anti-tumor necrosis factor (TNF) antibodies. TNF is a component in the body’s inflammatory response, and dysfunction can produce a wide range of inflammatory diseases such as rheumatoid arthritis, Crohn’s disease, psoriasis, and asthma.

Such antibody-based drugs are a proven therapy. The current market for such products exceeds $50 billion annually. Adalimumab and Infliximab are recent successes in the anti-inflammatory market. Antibody drugs, however, cannot be administered orally. All currently marketed antibody drugs are susceptible to the digestive processes of the mouth, stomach, and intestines and cannot survive delivery through the GI tract. Thus, such drugs are administered by injection or infusion and usually travel throughout the body with the accompanying risk of unwanted side effects.

Because Avaxia’s proprietary oral delivery platform resists digestion of antibodies, it is well suited for use in gut-targeted therapeutics. Avaxia’s oral antibodies can target any receptor sites accessible via the digestive tract, including the mouth, throat, and intestines. Potential targets include the following:

• Targets present within the intestine such as gluten and other food antigens
• Targets present on the interior surfaces of the intestines such as sugar transporters and receptors
• Targets present below the mucosal barrier that defines the interior surface of the intestine such as inflammatory factors like TNF. Disease processes cause the mucosal barrier to leak and expose such targets.

Bovine colostral antibodies resist digestion naturally, making them potentially ideal for use as gut-targeted therapeutics. Using a proprietary process, Avaxia immunizes pregnant cows with an engineered form of human TNF and

isolates antibodies from the milk (colostrum) produced by the cows just after they give birth. According to Dr. Fox, this approach is readily scalable and does not present any significant barrier to business expansion.

Avaxia is pursuing related products in five areas: inflammatory bowel disease, celiac disease, gastrointestinal acute radiation syndrome (GI-ARS), diabetes, and oral mucositis. In addition, Avaxia has identified many additional targets potentially accessible to oral antibody treatments.

PATENTS AND OTHER INTELLECTUAL PROPERTY

Avaxia has three issued patents and numerous other applications under review in the United States and other major market countries. Avaxia owns all its patent rights. (See Table E-5.)

Interestingly, Avaxia does not own patents for the use of anti-TNF antibodies to treat inflammatory bowel disease. Avaxia’s lead product (AVX-470) targets inflammatory bowel disease.

PRODUCTS

Inflammatory Bowel Disease

Avaxia’s most advanced product is an oral antibody treatment for inflammatory bowel disease (IBD). The treatment is currently in a Phase 1B clinical trial for patients with ulcerative colitis.

IBD includes two types of chronic inflammation of the intestines: ulcerative colitis and Crohn’s disease. Ulcerative colitis affects only the colon in the large intestine; Crohn’s disease primarily affects the small intestine. The primary symptoms are abdominal pain and diarrhea. Other symptoms can include vomiting, bleeding, and weight loss. These symptoms can significantly reduce the quality of life and increase the risk of life-threatening complications and diseases including cancer. Approximately 2.5 million people suffer from IBD globally.²⁹

“TNF is an inflammatory cytokine that has been linked to IBD. To date, some of the most effective treatments for IBD are injectable anti-TNF antibodies. These antibodies bind to and neutralize TNF, which reduces inflammation.”³⁰ Such injections may have “serious side effects from untargeted immuno-suppression—for example, lymphoma or reactivation of tuberculosis. Because of these side effects,

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²⁹According to the Centers for Disease Control and Prevention, “Each year in the United States, IBD accounts for more than 700,000 physician visits, 100,000 hospitalizations, and disability in 119,000 patients. Over the long term, up to 75 percent of patients with Crohn’s disease and 25 percent of those with ulcerative colitis will require surgery.” http://www.cdc.gov/ibd/, accessed December 18, 2013.

³⁰Avaxia Biologics, Inc. website, <http://www.avarx.com>. Accessed September 14, 2015.

TABLE E-5 Avaxia Patents

SOURCE: U.S. Patent and Trademark Office.

anti-TNF antibodies are most often used only as a second- or third-line therapy for IBD despite evidence that earlier use could improve patient outcomes.”³¹

Avaxia Biologics has developed AVX-470, an orally administered anti-TNF antibody that accesses and neutralizes TNF from within the intestine. Preclinical studies showed that the “TNF-specific antibodies in AVX-470 were comparable to the existing anti-TNF drug Remicade® (infliximab) in terms of binding, functional activity, and some other characteristics. The initial preclinical work has been completed and has shown IBD efficacy. A 28-day GLP toxicology study showed no drug-related adverse effects up to the highest levels tested.”³²

Avaxia initiated a Phase 1B clinical trial of AVX-470 in ulcerative colitis patients in February 2013 after FDA cleared an IND for this trial in late November 2012. The results of this trial should be available by December 2013.

AVX-470 could transform IBD therapy by allowing an antibody-based therapeutic as a first-line therapy for IBD. Wider and earlier use would expand the antiTNF market well beyond its current size of $2.5 billion annually.

In 2010, Avaxia received a Phase I SBIR grant for $213,589 from HHS to study oral anti-TNF antibody for inflammatory bowel disease. This was extended in 2012 with a Phase II grant for approximately $1.5 million.

Celiac Disease

Celiac disease is an autoimmune disease caused by an inappropriate immune response to gluten in ingested grains. The disease has a variety of clinical manifestations, including diarrhea, abdominal pain, osteoporosis, anemia, and an increased risk of diabetes and malignancies. The overall prevalence of celiac disease in the United States is approximately 1 in 133 for healthy people; incidence

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³¹Ibid.

³²Ibid.

is higher for less healthy individuals.³³ At present, no products on the market target celiac disease, and the only available treatment is a strict gluten-free diet.

Avaxia is developing orally administered anti-gluten antibodies for celiac disease. The antibodies will neutralize low levels of gluten in the small intestine and are designed for use with a gluten-free diet. The Avaxia product will primarily be taken with meals when low levels of gluten cannot be avoided (e.g., during travel, social, and business functions).

In 2011, Avaxia received a Phase I SBIR grant from HHS to further develop its 2006 patent for an oral antibody-based therapeutic for celiac disease.

Gastro-intestinal Acute Radiation Syndrome (Gi-ARS)

Damage to the gastrointestinal tract is one of the primary causes of morbidity and mortality following radiation exposure. Whether resulting from industrial mishap or a national security breach, a safe and effective treatment for damage to the GI tract is a crucial element of treatment for individuals exposed to high levels of ionizing radiation.

Avaxia’s GI-ARS product will be a polyclonal anti-TNF antibody formulated as a dried powder sachet that is stable at room temperature and is reconstituted immediately before use. It could be stockpiled for use following a nuclear accident, attack, or explosion.

In 2012, Avaxia contracted with HHS’s Biomedical Advanced Research and Development Authority (BARDA) to develop an orally delivered, anti-TNF antibody as a nuclear threat medical countermeasure for GI-ARS. This is a 2-year, $2.9 million contract that expands Avaxia’s research on oral mucositis, a common side effect of radiation and chemotherapy treatments for cancer (see below). It also potentially opens the door to a radical expansion of Avaxia’s business, as much larger contracts appear possible, according to Dr. Fox.

Oral Mucositis

Oral mucositis is a common and often debilitating side effect of cancer chemotherapy and radiation therapy. Patients experience painful inflammation and ulceration of the mucous membranes lining the mouth, and this problem is associated with increased mortality and morbidity. Current treatment involves systemic narcotics and the insertion of a feeding tube for nutrition. It also requires reduction in the dose and frequency of cancer treatment, which in turn leads to a significant decrease in both short-term efficacy and long-term disease-free survival.

Avaxia is developing a polyclonal anti-TNF antibody therapeutic to block the inflammatory cascade that is central to the development and worsening of oral

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³³Celiac Disease Facts and Figures, University of Chicago Celiac Disease Center, n.d., http://www.uchospitals.edu/pdf/uch_007937.pdf, accessed December 18, 2013.

mucositis. In 2009, Avaxia received a Phase I SBIR grant for $125,242 from HHS to develop an anti-TNF antibody for oral mucositis, and in 2010 Avaxia received a related patent for the use of anti-TNF antibodies for treating radiation damage to the digestive tract.

FUNDING

Early in its history, Avaxia relied upon SBIR grants to advance development of its research antibody delivery platform. Recently, however, it has successfully engaged angel and early-stage venture investors.

Non-Dilutive Grants

Avaxia has received about $6.0 million in nondilutive grants to support its research activities. It reports $2.9 million from a single 2-year grant from BARDA and $2.0 million from a series of four SBIR grants from HHS. The balance, around $1.0 million, included a loan from the Massachusetts Life Sciences Center.

Dr. Fox said that the BARDA award is expected to be the precursor of much larger awards as the technology proves out: the BARDA contract supports the R&D of an oral antibody therapy to mitigate the GI damage that follows potential radiation exposure after a nuclear incident. Should Avaxia’s approach prove successful, BARDA is in a position to make awards at least an order of magnitude greater than the initial grant.

The connection to BARDA has reduced Avaxia’s current interest in pursuing SBIR awards. Dr. Fox noted that the opportunities embedded in the BARDA program were very attractive and demanded a high degree of focus to execute. There was accordingly neither time nor resources available to pursue further SBIR awards outside the scope of the BARDA-funded project.

Equity Investment

In February 2012, Avaxia successfully closed on $4.1 million in Series A investment. These funds were used to manufacture oral anti-TNF antibody therapy for the Phase 1B clinical trial and to conduct final preclinical studies in advance of the trial. Building on this success, Avaxia successfully closed on $11.4 million in Series B funding in June 2013, adding venture and institutional investors to its capital table. (See Table E-6 for details.) The B round will enable Avaxia to complete its early-stage trial for AVX-470, manufacture sufficient drugs for its Phase 2 clinical trial, and provide some resources to design that study.

The B round of funding is particularly marked by the presence of corporate venture fund, AbbVie Biotech Ventures (ABVI). ABVI is a subsidiary of AbbVie pharmaceutical company and invests strategically to support AbbVie’s business

TABLE E-6 Equity Investors for Avaxia Biologics, Inc.

SOURCE: Avaxia Biologics, Inc.

goals. AbbVie was spun out of Abbott Laboratories early in 2013 and includes Abbott’s proprietary pharmaceutical business. It owns Adalimumab, which is the most successful IBD drug currently on the market.

Although this early institutional presence speaks to the strength of Avaxia’s technology, ABVI did not receive any product rights from the investment, leaving Avaxia free to find other development partners. Nor does AbbVie have any first claim rights toward a potential acquisition of Avaxia. Avaxia management sees the investment primarily at least initially as an access point into AbbVie’s expertise in gastroenterology. Dr. Fox observed, “We’re pleased to have AbbVie join our board and engage their expertise in gastroenterology as we advance the development of innovative, gut-targeted therapeutics like AVX-470.”³⁴

Following the Series B, senior management is looking for a partner to license or co-develop the drug and to, in particular, help design a strong Phase 2 clinical trial and stabilize production of AVX-470. Such a partnership could provide a future pipeline into trials and then the market for other drugs in the portfolio.

AVAXIA AND SBIR

Dr. Fox has a strongly positive view of the SBIR program at NIH. She noted that it offered critical non-dilutive funding at an early stage, and also that it provided an important stamp of approval with potential investors.

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³⁴Business Wire, “Avaxia Biologics Closes Series B Financing with Total Proceeds of $11.4 Million,” June 7, 2013.

One important and often ignored element of the SBIR program was in her view the need for persistence. Dr. Fox had applied for a number of NIH SBIR awards before receiving her first Phase I in 2009. She noted that many potential applicants become discouraged when they do not receive awards early on, and she thought that perhaps the agency could find ways to convey the need to persist to potential applicants.

As noted above, although SBIR played an important role in the first years of the company, Avaxia is now focused on its work with BARDA and consequently is not focused on pursuing further SBIR awards at this point.

It would perhaps be fair to conclude that unlike many SBIR awardee companies, Avaxia fits into a linear model of development: on the basis of a single Phase II award and two Phase I awards, it has attracted sufficient external funding to advance its technology and is now working on much bigger projects than can be supported through SBIR. It is of course too early to tell whether Avaxia will be a commercial success, but it has moved a substantial distance down that path.

UPDATE

Avaxia successfully completed the Phase 1B clinical trial of AVX-470 in ulcerative colitis and is currently pursuing private funding to advance the product into Phase 2. The company has been granted multiple patents in both the United States and foreign markets that cover the product for IBD. Since this summary was written, BARDA has discontinued its early-stage research activities, returning to its focus on late-stage development, and Avaxia was unable to secure additional funding from this source. Should Avaxia decide to continue to work on GI-ARS, it will likely apply to the National Institute for Allergy and Infectious Diseases for support through the SBIR program.

Conversion Energy Enterprises³⁵

Meeting with
Barbara Soltz, CEO
January 31, 2014

Conversion Energy Enterprises (CEE) is a privately held business headquartered in Spring Valley, New York. In 1993, Barbara and Robert Soltz co-founded Conversion Energy as a consulting firm to develop design concepts for diode-based therapies. The company is currently developing products that use its proprietary light-activated collagen technology both to cause tissue adhesion and kill microorganisms.

According to Dr. Barbara Soltz, CEE began as a consulting firm focused on the design of lasers especially for the medical sector, after the closure of a McDonnell Douglass division ended her previous employment. In the early 2000s, CEE made a strategic decision to move into research and development, starting with the design of lasers. The company then decided to focus on a laser-related biological application, and determined that the best available market would be for a laser activated tissue adhesive. This eventually transitioned into a collagen-based light activated biologic that provides rapid wound closure, wound dressing, and repair, and attachment of surgical meshes or prostheses.

Most recently, CEE has improved and enhanced its technology to create a second product that added antimicrobial characteristics to its base product.

Conversion Energy currently operates two sites, its headquarters in Spring Valley, New York, and its laboratory facilities on the campus of the New York Medical College, Valhalla, New York.

PRODUCTS

Conversion Energy is developing two products. The first is a biological adhesive system to close and seal wounds, and the second a new product that builds on the adhesive system to provide a light-activated antimicrobial dressing with a significant bioburden reduction and low susceptibility of developing microbial resistance.

Tissue Adhesion System (TAS)

There are approximately 50 million surgeries annually in the United States, each requiring some form of wound closure.³⁶ Conversion Energy has developed

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³⁵Primary sources for this case study are the meeting with Barbara Soltz and a review of the Conversion Energy website and related company documents. http://www.conversionenergy.com.

³⁶CDC FastStats, http://www.cdc.gov/nchs/fastats/insurg.htm.

a biological adhesive system based on light curing of a biological composite fabricated from collagen. Such biological adhesives reduce infection by eliminating foreign matter at the wound site. They also accelerate wound repair and reduce scarring of the healed tissue.

Conversion Energy’s tissue adhesion system has been proven to reliably join large vasculature, skeletal, and gastrointestinal tissue. The collagen-based adhesive shows high strength (at least 10 times that of other sealants on the market or in clinical trials), is resorbable, and is non-toxic. Laser activation enables more precise placement of tissue welds.

The tissue adhesion system comprises four components: (1) a miniature laser, (2) an optical probe, (3) a surgical tool, and (4) the biological adhesive.

According to Dr. Soltz, the company has completed a series of preclinical trials to determine efficacy and safety including an expensive trial in pigs. These studies provided clear evidence of repair strength when compared to sutures and staples.

Antimicrobials

Approximately 2 million U.S. patients annually develop an infection at the incision site of a surgery, resulting in approximately 100,000 deaths annually.³⁷ The development of microbial resistance to antibiotics is limiting medicines capacity to treat such infections. CEE is presently developing light-activated collagen dressings that exhibit bactericidal effects with low toxicity and low susceptibility to microbial resistance.

In-vitro and in-vivo experiments have successfully demonstrated significant inhibition of bacterial growth for infections from microbes such as Staphylococcus aureus, MRSA, Pseudomonas aeruginosa, and Escherichia coli. Current research is intended to optimize CEE’s technology to encourage wound closure and further reduce infection rates as a precursor to clinical trials and FDA approval.

The antimicrobial product has some significant differences to the original tissue adhesive system: it uses visible wavelength lasers that, according to Dr. Soltz, do not require expensive sensors needed to protect patients against laser burns at other wavelengths. The final commercial cost will be approximately the same for the two products.

Dr. Soltz noted that there are potentially different markets for the two products: for example, one large medical equipment company is interested in using the TAS for attaching electrical leads for pain management or monitoring; in this case antimicrobial effects would be unimportant.

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³⁷CDC, “Estimating HC Associated Infections,” <http://www.cdc.gov/hai/pdfs/hai/infections_deaths.pdf>. These incidence and mortality figures are reported on the Conversion Energy website but are from a widely cited 2002 CDC report. It is likely that these numbers have increased. They are reported here to provide a rough order of magnitude.

BUSINESS STRATEGY AND ACTIVITIES

CEE has now largely completed its strategic transition into an R&D company, and is now working further to bring its two potential products to market. It has developed and patented systems that demonstrate the effectiveness of its light activated collagen-based technology for tissue adhesion and antimicrobial uses. The goal now is to obtain FDA approval for these applications and complete commercialization of these applications of its core technology.

The company faces some significant challenges in moving through the next phases. In order to prepare materials for Phase 1 clinical trials, CEE must find a materials provider experienced in collagen-based materials willing to provide batch level quantities from within an ISO 9000 certified environment, which the company’s current location in a New York incubator cannot meet.

However, some funding has been provided by a potential partner, a large medical device manufacturer, and CEE is in discussions with two manufacturers to develop partnerships that will see the projects through the next stage of development. Ms. Soltz anticipated that these steps were likely to bear fruit in 2016.

CEE conducts R&D both in house and also with universities. Animals or in vitro tests tend to require collaboration with universities or research groups that have doctors on staff who can do the necessary surgeries. All processing of material, quality testing, and assembly of light devices is done in-house.

The company current faces two key challenges: (1) Finding a trusted source to manufacture low volumes of material under ISO 9000 conditions and (2) Funding expensive Phase 1 clinical trials.

The company anticipates that preliminary testing by a commercial partner will be completed by the end of March 2016 and that subsequent further partnerships will provide funding for the necessary clinical trials.

PATENTS AND OTHER INTELLECTUAL PROPERTY

At present, Conversion Energy is the assignee for the more recent patented technologies. The early patents (four) are assigned to TATI which is a holding company for CEE. A summary of CEE patent status is shown in Table E-7, Barbara Soltz et. al. have authored various patents for different elements of Conversion Energy’s tissue adhesion system. Two patents related to its research on antimicrobials are listed in Table E-7 and were issued in April 2015.

SBIR AND OTHER FUNDING

The NIH RePORT database reports seven Phase 1 and three Phase 2 awards for a total commitment through SBIR by HHS of $3.16 million between 1997 and 2013.

Dr. Soltz stated that the SBIR program (along with STTR) had been a life saver for the company. Without SBIR funding, the business could not have been

TABLE E-7 Conversion Energy Patents

^aAssigned to TATI, a holding company for Conversion Energy Enterprises.

^bAssigned to Conversion Energy Enterprises.

launched. Instead, her group would have relied on consulting income, with products as a hobby at best. She remains very grateful for the opportunities it opened.

At the same time, Dr. Soltz said that there was one significant and growing problem with the program: the increasing tendency to make awards to university researchers rather than small operating companies. She participated in some NIH review panels, and was very concerned about this tendency. She believes that the heavy preponderance of academic reviewers tended to tilt the playing field toward university-based applicants (her most recent panel had two small business participants out of a total of eight). Not only did these researchers have significant advantages through access to the huge base of university resources (including low cost labor in the form of graduate students, facilities, and sometime university IP), but also they were in general much less prepared to turn good ideas into commercially successful projects.

Dr. Soltz also sees this new development as driving cost inflation in NIH SBIR projects. University overhead is, according to Dr. Soltz, an allowable cost and at rates of 50-60 percent or more can add very substantially to the overall cost of projects.

Dr. Soltz identified further potential sources of inflation generated from university-based projects. For example, some tended to load projects with additional (and expensive) consultants. One recent (approved) project included 10 consultants. And although animal studies are always expensive, they can become much more so when applicants insist on using premier providers. Dr. Soltz noted that there seemed to be little appetite inside selection reviewers to examine these types of costs and to push for more cost effective approaches. On the basis of participation in several review panels, she has concluded that most reviewers glanced at commercialization plans to primarily consider the potential of the project, but did not analyze commercial plans in depth. Reviewers have not been educated on this topic.

Danya International, Inc.³⁸

Meeting with
Dr. Jeffrey Hoffman, CEO
October 30, 2014
Silver Spring, Maryland

Danya International is a private company founded in 1996 by Jeffrey Hoffman. Dr. Hoffman said that SBIR was key to funding the company, because Danya won four SBIR awards during its first year, which provided immediate revenue. The company designs, implements, and evaluates programs that address social issues. To manage such programs, the company has developed strengths in program management, communications, monitoring and evaluation, training and technical assistance, and information technology solutions and services.

The company focuses on public health communications, although as it has grown it has extended the types of services it offers. At present, it manages programs in health, education, and food security.

Danya has both government agencies and commercial businesses as clients. Among its public sector clients, Danya has served the U.S. Agency for International Development (USAID), U.S. Department of Defense (DoD), U.S. Department of Education (ED), U.S. Department of Health and Human Services (HHS), U.S. Department of Housing and Urban Development (HUD), U.S. Department of State (DOS), U.S. Department of Transport (DOT), and various state-level government agencies.

Danya is headquartered in Silver Spring, Maryland, and has other offices in Atlanta, Georgia, and Nairobi, Kenya. It currently has approximately 150 full-time employees and has access to a network of 400 consultants. Danya is affiliated with the Danya Institute (a nonprofit seeking to promote the health and well-being of individuals and communities) and the Danya Learning Center (an online continuing education resource for health care professionals).

Dr. Hoffman noted that although company size peaked at about 260 employees immediately before the financial crisis of 2008-2009, his company faces a changing economic and contracting environment. Over the past 2-4 years, government contracting has become much more competitive, and Danya is generally not eligible for set asides for small firms, which means that Danya now competes directly with firms such as Booz Allen and IBM. At the same time, SBIR awards are becoming more competitive in general and much more difficult to acquire for companies with limited commercialization records.

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³⁸Primary sources for this case study are the meeting with Dr. Hoffman, and a review of the Danya International website (http://www.danya.com) and related company documents.

CORE CAPABILITIES

Danya has developed broad competencies in program management, communications, monitoring and evaluation, training and technical assistance, and information solutions and services. Most of the company’s revenue comes from government contracts.

Dr. Hoffman said that Danya’s strategy was to use SBIR to develop new products and services, and then to find ways to commercialize them. However, the latter had provided to be an extremely difficult challenge. Danya had tried a number of strategies and had put significant resources into commercialization. Danya did have one significant commercial success, according to Dr. Hoffman. The company licensed its Living in Balance curriculum for publication by Hazelden, a publisher of health and education materials with a particular emphasis on support for addiction recovery.³⁹ This offering was very successful, with more than $4 million sold.

However, this success has not been replicated despite ongoing efforts to commercialize. Danya invested in new sales channels, and in an extensive overhaul of the website to encourage e-commerce, but none of this was very successful. At one point, Danya bought an existing website focused on autism, according to Dr. Hoffman, but the company soon determined that generating substantial sales would require a very significant upfront investment, and decided that this investment would be too risky. Danya then tried an ad-based model providing free resources, but this too failed to generate sufficient market traction. In addition, Danya worked with some interested associations to provide materials to their members, but this too failed to generate sufficient scale to be viable, again experiencing what Dr. Hoffman terms a “glut of free materials” in the market.

Dr. Hoffman believes that there are fundamental difficulties which essentially preclude commercialization of educational and support materials in the health care sector: competition from free sources is simply too great, particularly as other parts of the government (e.g., the Centers for Disease Control and Prevention) continue to publish high-quality resources at no cost to the user. The Substance Abuse and Mental Health Services Administration (SAMSA) is another major Federal source of free-to-the-user materials.⁴⁰ Thus while many SBIR projects are successful in terms of delivering as promised, they face an insurmountable barrier to commercial success.

In some cases, these materials can be sold if they meet detailed and specific federal requirements, but Dr. Hoffman noted that this has not been the case for Danya products. He also observed that being a federal contractor (such as Danya) can make it difficult to commercialize products. Not only are personnel attuned to the needs and rhythms of federal agencies rather than the market, but also there are significant compliance costs to federal contracting that require company

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³⁹See http://www.hazelden.org/web/public/storerecovery.page.

⁴⁰See http://www.samhsa.gov/.

resources that could otherwise be devoted to commercial activities, and at the same time indirect costs can be used for writing further proposals, but cannot be used for sales and marketing. So it is not surprising that few small- to mid-sized federal contractors are also commercially successful.

Overall, Dr. Hoffman concluded that even generating substantial take-up when materials are provided free was a problem. Unless a product was adopted by a large organization, it was simply not feasible to expect that it would generate traction among users. In its early years, Danya developed a curriculum around phases of treatment for substance abuse. This approach was picked up by SAMHSA as a model, and was also now widely used in other countries. For example, it had been incorporated into legislation in Bulgaria. However, although the model was innovative there was no defensible IP (Danya has no U.S. patents on file), so in the long run Danya’s own products did not benefit from substantial additional take-up.

Dr. Hoffman noted that a further core challenge was the need to develop a comprehensive product line if sales and marketing expenses were to be recouped.

Program Management

Danya has extensive experience managing large, complex multi-year programs for the federal government. It develops a custom management system for each program that emphasizes accountability and impact as the basis for program sustainability. Danya augments its cadre of experienced program managers with understanding of its program areas; competence in communications, monitoring, training, and IT; and knowledge of emerging methodologies that improve project outcomes.

Communications

Danya develops research-driven communications strategies to motivate behavior change (primarily around health) in target audiences. Potential barriers to behavior change can include infrastructure, geography, level of education, economic status, language, and culture.

Danya’s methodology is an end-to-end marketing-based solution involving developing a segmentation, identifying messaging to target key segments, identifying multiple channels to deliver the message, and finally developing metrics that allow ongoing improvement of the overall communication strategy.

Monitoring and Evaluation

Designing data collection and monitoring into program implementation, Danya facilitates both ongoing and overall evaluation of program impact. The data collected through a mix of remote instrumentation, surveys, and interviews

is evaluated to improve program performance. Resulting findings are used to improve program performance and are integrated with findings from other programs to identify best practices and model processes.

Training and Technical Assistance

Danya has a strong capacity for training and technical assistance. Danya develops curricula to build local capacity. Danya delivers this content through a broad range of delivery methods. It can manage the meetings, materials, evaluations, and logistics of face-to-face training both domestically and internationally. With the rise of the Internet, Danya has also developed extensive competence providing online training through webcasts, e-briefings, distance learning, and collaborative portals.

Information Technology Solutions and Services

Danya is committed to using technology as a basis for its communications, monitoring, and training activities. The company develops content (e.g., websites, interactive databases, e-learning modules, dashboards, 3D animation, and interactive games) and uses a broad range of technologies to deliver and monitor this content (e.g., mobile phones, the Internet, radio, television, and traditional publishing). Maintaining these technical capabilities is crucial to Danya’s continued success.

SBIR

Danya International has received support from SBIR. Overall, the company has received 70 Phase I awards and 33 Phase IIs, starting in 1997 and concluding in 2010, providing a total of $45 million in SBIR funding.⁴¹

In fact, during the early stage of the company, SBIR funding around public health communications from National Institute on Drug Abuse (NIDA) was a crucial source of support for the first year of Danya’s existence. Dr. Hoffman said that even after winning initial awards in its first year, Danya experienced a serious liquidity problem, and that the acquisitions of three Phase II awards constituted a major turning point for the company. Overall, SBIR provided critical funding to grow the company to acquire the skills needed to expand the company as a government contractor.

Danya also leveraged its SBIR awards effectively in some cases. For example, SBIR awards on HIV and STD prevention for youth translated into a major long-term contract worth about $13 million annually (under a small business set-aside). This was recently broken into a series of small contracts, and

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⁴¹NIH RePORTER awards database, accessed December 10, 2014.

although Danya did win the health communications component, this is worth only $1.7 million annually.

Similarly, Danya leveraged its expertise to experiment with work in development, and opened an office in East Africa. Once again, though, while the project itself was reasonably successful, this effort to diversify has yet to succeed to get to sufficient scale.

Danya is, according to Dr. Hoffman, now effectively blocked from further SBIR grants at NIH because it has not successfully commercialized previous awards.

RECOMMENDATIONS

Dr. Hoffman had a number of suggestions and recommendations for the program:

• Focus on fewer larger projects. Scale is so critical to commercial success that efforts should be focused on projects that may get to scale. Currently, the SBIR program is not designed to address this issue. He welcomed the eligibility of venture-funded companies as another source of commercial discipline for SBIR firms.
• Bias toward science. At the same time that SBIR has become much more competitive and selective, the selection process has tilted further toward science rather than commerce. Commercialization reviews at NIH are “fairly generic,” not a careful return on investment (ROI) analysis of the potential for a product. This helped Danya acquire a considerable number of awards but in the long term the company might have benefited from more rigorous commercial review.
• Investment in sales and marketing. SBIR awards need to include more commercial activities. Even great products need marketing: Danya’s autism products are highly reviewed, but an extensive outreach campaign for example through Google would cost $100,000, and all of that would be unallowable under SBIR awards.
• Program managers. Program managers generally come from research programs, and although they encourage commercialization they add little value toward it. A different kind of manager, or additional support, would be helpful.

GMS Biotech⁴²

Meeting with
Dr. Michael Hogan, CSO and Co- founder
September 30, 2014

GMS Biotech (formerly trading as Genomics USA⁴³) is a privately held business headquartered in Austin, Texas, with laboratories in Tucson, Arizona. Co-founded in 2004 by Drs. Krishna Jayaraman and Michael Hogan, the company owns technology to support scalable, high throughput microarray technology for testing bio-samples for Human Leukocyte Antigens (HLA).

This GMS Biotech technology turns high-resolution DNA analysis into a benchtop test that can be performed with simple equipment and little training. The technology is protected by multiple patents.

In addition, GMS Biotech has—with SBIR funding—developed a novel “Raw Sample Genotyping” technology that allows raw blood or buccal swabs and saliva or dried blood spots to be genotyped directly without the need for DNA purification. This eliminates both DNA purification and DNA quantitation from the sample preparation workflow.”⁴⁴

Dr. Hogan described the company’s technology as potentially engaging multiple markets and opportunities. Initially, the company aims to sell into ASHI-certified⁴⁵ transplant center labs while undertaking the FDA 510k certification process. Once that is completed, the company expects HLA testing to become a core component of personalized medicine with HLA analysis enabling custom design of vaccines, antimicrobial treatments, and therapies for autoimmune diseases.

In a success story published on the NIH website, the company noted that beyond organ transplantation and vaccine response, there is now very strong evidence that personal variation in the HLA genes is also directly related to personal variation in the risk of viral infection; the risk of inflammatory joint disease; drug sensitivity such as Abacavir in HIV-infected patients. Some experts argue that HLA testing should be performed as part of routine childhood and adult vaccination, and for that reason, HLA-testing could become the first complex genetic test to be given routinely at birth, as part of the standard neonatal screening panel. The HLA-Chip product was developed, from its inception, to meet

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⁴²Primary sources for this case study are a meeting with Dr. Michael Hogan and a review of the GMS Biotech website (http://www.gmsbiotech.com), the legacy Genomics USA website (http://www.gencomicsusa.com), and related company documents.

⁴³In July 2010, Genomics USA rebranded itself as GMS Biotech.

⁴⁴NIH Self-Reported Success Stories, http://http://archives.nih.gov/asites/SBIR/08-19-2015/statistics/self-reported-success.html/.

⁴⁵The ASHI certification is owned and managed by the American Society for Histocompatibility and Immunogenetics (which despite its name is an international organization). The European Federation for Immunogenetics performs a similar function, but has fewer members.

such large-scale clinical and public health needs, and consequently, we view the entire 12,000 test per day neonatal screening market to be a realistic sales goal within the next 5 years.”⁴⁶

The technology provides potentially substantial time and cost savings. The company claims that pre-test DNA processing can cost as much in time and labor as the genetic test itself, and that its technology offers savings on the order of 80 percent of cost and 50 percent of time.

To date, the company has depended primarily on SBIR funding to support development of its microchip technology. It received SBIR funding to initiate FDA’s 510(k) premarket approval process in 2009, and hopes to have a microarray testing product in the market by 2016. According to Dr. Hogan the current phase of FDA testing should be completed for the first products by the mid-2016.

Dr. Hogan noted that market strategy had evolved to focus on ASHI-certified transplant center labs. These labs (he noted that the overall number shifts but is about 4,000 worldwide) meet a strict international standard for their operations, which is independent of FDA certification. This market is therefore not as dependent on FDA certification and processes, and substantial sales can occur before FDA certification is complete.

In addition to SBIR funding, external investment has come from a variety of sources, including the Arizona Technology Investor Forum, an organization for angel investors.

TECHNOLOGY

HLAs are a set of genes that encode for the proteins responsible for control of the immune system in humans. At present, HLA testing is predominantly limited to identifying recipients that are likely to be successful matches for organ transplants. However, HLAs figure importantly in triggering the immune response to both disease and cancer and in the process of certain autoimmune diseases. Given the importance of HLA in understanding the human disease process, HLA testing will likely become an important element in the development of individually customized medicine.

Unfortunately, current techniques are complicated—most require DNA purification of samples as an intermediate step—and consequently do not scale well at a reasonable cost.

GMS Biotech has developed a microarray technology for detecting variations in the HLA genetic sequence. Although other HLA-based microarray tests do exist, Dr. Hogan noted that these are research tools not suited for clinical or public health screening. GMS Biotech technology in contrast provides a high-resolution, low-cost micro-array platform for performing HLA DNA testing at scale.

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⁴⁶NIH, “SBIR and STTR Success Story for Genomics USA,” 5/12/2011. http://grants1.nih.gov/grants/funding/sbir_successes/3140.htm, accessed August 29, 2014.

PRODUCTS

Using SBIR funding, GMS Biotech is developing products based on its HLA microchip technology plus associated sample image analysis tools, which together support population-scale HLA-typing.

GMS Biotech HLA Microarray

A DNA microarray is a collection of DNA spots attached to a solid surface. Each DNA spot contains a small amount of a DNA sequence called probes. In the presence of a target DNA sequence, the spot luminesces; the more light produced, the higher the concentration of the target string. Light sensors detect the variation in bioluminescence.

GMS Biotech specific products targeting the transplant market include EZMatch™—a microarray supporting identification of possible solid organ and bone marrow transplant candidates—and EZScreen™—a microarray enabling identification of specific donor antibodies that may cause rejection. This is a highly sensitive native state antibody screening and monitoring assay for the accurate detection of Donor Specific Antibodies (DSA), for use both before and after a transplant, and is expected to be much more cost-effective than current approaches. EZScreen™ is currently in development, and is expected be available for ASHI lab use in late 2016.

SBIR has provided $9.2 million in funding to support development of the GMS Biotech core probe technology and the development of microarrays. In addition to HLA, GMS Biotech has developed microarray technologies both for determining the progression and therapeutic response for different patients with HIV/AIDS and also for performing blood typing.

Software Tools

GMS Biotech offers a software visualization tool called “Ricimer™”—which is a Data Analysis Software package—to interpret information captured from the microarray. The output for an entire microarray can be viewed with color coding, indicating the intensity of photoluminescence for each probe in the microarray. The software interprets the pattern, providing the HLA type of a sample even to an operator with minimal training.

PATENTS AND OTHER INTELLECTUAL PROPERTY

GMS Biotech owns five patents on the core microarray sensing technology and its scaled application to HLA typing. (See Table E-8.)

TABLE E-8 GMS Biotech Patents

SOURCE: U.S. Patent and Trademark Office. Accessed August 15, 2014.

FUNDING

Since 2004, GMS Biotech has relied mostly on SBIR and other grants to support its research. It has also received sporadic equity investments.

Non-Dilutive Grants

Between 2004 and 2015, SBIR funded six projects with GMS Biotech. GMS Biotech received 14 awards amounting to $9.20 million from HHS to develop scalable microarray technology for performing HLA typing.

Equity Investments

GMS Biotech has sporadically received equity funding from both corporate and individual investors. It has not been a major source of support for operations. Most recently, in June 2013, GMS Biotech offered $3.29 million in equity; it raised $1.2 million in seed funding from a group of 24 earlystage investors.⁴⁷

Prior to that, in May 2006, GMS Biotech received $200,000 from Quantrx Biomedical—a developer of genomics-based diagnostic products—in exchange for 144,000 in shares (roughly 10 percent of the shares then outstanding). In January 2007, Quantrx provided GMS Biotech an additional $200,000 through an 8 percent promissory note. QuantRx was interested in acquiring GMSBiotech and had presented a term-sheet, however, QuantRx could not raise sufficient capital and the acquisition was not completed. Quantrx sued GMS Biotech to recover the loan capital. In May 2013, both parties agreed to a monthly payment plan

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⁴⁷Genomics USA, Form D, Notice of Exempt Offering of Securities, (June 11, 2013), http://www.sec.gov/Archives/edgar/data/1577606/000157760613000001/xslFormDX01/primary_doc.xml.

stretching over the next 18 months.⁴⁸ In 2014 GMS Biotech had paid in full any remaining outstanding payments owed to Quantrx under the agreement.

SBIR

Dr. Hogan said that SBIR was critical for the progress made at GMS Biotech: “We would never have made it otherwise.” All of the company’s initial R&D was based on SBIR, funding that continued through Phase IIB. The company only sought series A funding after that research was completed.

In looking at grant funding more generally, Dr. Hogan is a strong supporter of the gated approach that underpins SBIR. He believed that current practice at NIH of funding large multi-year RO1 awards for academic investigators would be much improved by the adoption of such a gated, milestone-based approach. Early high-risk work could be funded initially with subsequent implementation and testing funded only after initial milestones were met. He believed that the traditional RO1 structure had made NIH too conservative, as large investments were being made at a very early stage in the process. He noted a recent RO1 for $10 million at NCI as an example of the decision pressures incurred in the traditional approach.

Dr. Hogan said that Phase I awards (with the possible exception of the AT program at NAIAD) were still too small, and that he would prefer to see NIH fund fewer, larger Phase I awards. He believed this was necessary to attract higher quality proposals given the risks incurred in revealing IP during the application process. An average of $200,000 per award or even $300,000 per award would be appropriate.

Dr. Hogan was concerned about the likelihood that potential competitors would see proprietary information in the course of review. However, he noted that he “preferred competitors to incompetents.”

To improve the quality of reviewed applications, Dr. Hogan said that he thought NIH should explore the adoption of a white paper approach that could draw on the experience at NSF and the Department of Energy (DoE).

Dr. Hogan noted that the quality of reviews and management were both excellent at DARPA, which did an excellent job of organizing and vetting high-tech advanced ideas. At NIH, the quality of management varied. His experience with staff at NCI, NIAID, and NHLBI was very positive: in general they took personal ownership of projects and uses study sections as expert consultants whose reviews could be folded in the program manager’s understanding of programmatic needs, which they would then present strongly to the Institute’s governing Council.

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⁴⁸Quantrx Biomedical Corporation, FORM 10-K/A, (December 31, 2011), Minority Investments, http://www.sec.gov/Archives/edgar/data/820608/000141588912001711/qtxb10ka12312011.htm; Quantrx Biomedical Corporation, FORM 10-Q, (March 31, 2014), Legal Proceedings, http://www.sec.gov/Archives/edgar/data/820608/000141588914001649/qtxb10qa_march312014.htm.

This approach reflects Dr. Hogan’ strong belief that the “study section reviewers should not be king—they should be viewed as important high level consultants, not decision-makers.” On the other hand, he noted that the lack of a time limit on the program manager positions meant that programs could get stuck in specific technological tracks and that there were also risks of the emergence of an old boy’s network of persistent winners.

The Phase IIB program is in Dr. Hogan’s view an excellent idea. He noted that the valley of death is a large and growing problem, and that such a program is critical given the absence of other NIH funding and declining interest in early-stage investments from venture capitalists and large pharmaceutical companies. In the current environment, he believes it is extremely difficult to attract outside funding if the company did not have a product ready to sell: it was not necessary to have substantial sales, but some sales did have to be at least imminent.

However, Dr. Hogan believes that at least on the personnel side, the 10-page proposals required for Phase IIB are little better than polite fiction: Phase IIB does not fund any commercial or marketing personnel, but these are of course absolutely necessary for a commercial venture which is what Phase IIB is designed to help fund. He recommended that either NIH or Congress consider changing these limitations to permit a more realistic approach, in which some limited amount of Phase IIB funding—perhaps 30 percent—could be used for commercial activities. He thought this could be a transformative change for Phase IIB companies: Phase IIB should not just be funding for FDA review but also for the shift toward commercial activities.

Dr. Hogan also observes that Phase IIB did not provide sufficient funding to complete FDA review. Although $3 million was not insignificant, it was still considerably less than required to meet the program’s goals (he estimated that completion of FDA review would cost about $6-9 million). Currently, Phase IIB provided enough money to enter the regulatory structure, hire consultants, put quality systems in place, and begin to pay for the start of studies. He therefore recommended that the maximum size of Phase IIB awards should be increased to $5 million, and should permit funding of business personnel to perform functions mandated by the required business plan.

Dr. Hogan also noted that the timeframe of the Phase IIB is somewhat unrealistic: moving from the end of Phase II to marketing a product (as a medical device or a drug) in 3 years would be extremely fast track to get market. He suggested that perhaps NIH should add optional additional years of support. It should also expand allowances for indirect costs.

Lpath Therapeutics, Inc.: SBIR Case Study⁴⁹

Meeting with
Dr. Roger Sabbadini, Founder
June 17, 2014
San Diego, California

Over the past 10 years, bioactive lipids have been implicated in numerous disease processes. This new field, called lipidomics, examines how, within biological systems, lipids provide signaling pathways between various biological processes. Bioactive lipids have a crucial role in the regulation of a wide range of important cellular phenomena such as cell growth, death, senescence, adhesion, migration, and inflammation.⁵⁰

Lpath, Inc. is a publicly traded company (NASDAQ: LPTN) headquartered in San Diego, California. Founder Professor Roger Sabbadini spun Lpath out of San Diego State University in 1997. Lpath is developing monoclonal antibody based therapeutics that neutralize bioactive lipids involved in regulating a whole range of disease processes such as cancer, cardiovascular disease, diabetes, neurological disorders, immune function, pain, and inflammation. At present Lpath has one product candidate in clinical trials and several in pre-clinical evaluation.

Researchers believe there are at least 1,000 bioactive lipids in the human body that become dysregulated in disease and can be potential drug targets. As important to the long-term success of Lpath as its product pipeline is the ImmuneY2™ drug-discovery engine. Having defined a target lipid, Lpath uses the ImmuneY2™ process to develop antibody product candidates for that lipid.

Lpath did not accept venture capital, as many biotech companies do, to fund its clinical trials. Instead, it has paid for the Phase 1b/2a trials of its lead product candidates by selling exclusive rights to pharmaceutical companies such as Pfizer and Merck-Serono and by raising additional capital through the sale of stock on the public markets. In addition to developing and patenting its own technical capabilities, Lpath has acquired patents to enhance its own capabilities.

Lpath outsources manufacturing and clinical development activities to contract research organizations and contract manufacturing organizations. Retaining such third-party specialists is common within the biotech industry.

Lpath leases an 11,960-square-foot laboratory and office facility in San Diego, California. It currently has 15 employees, of which 10 have advanced degrees.

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⁴⁹Primary sources for this case study are the meeting with Dr. Roger Sabbadini and a review of the Lpath, Inc. website (http://www.lapth.com) and related company documents and SEC filings.

⁵⁰Yusuf Hannun and Lina Obeid, “Principles of Bioactive Lipid Signaling: Lessons from Sphingolipids,” Nature Reviews Molecular Cell Biology 9:139-150 (February 2008).

EVOLUTION OF RELATIONSHIP WITH SAN DIEGO STATE UNIVERSITY (SDSU)

SDSU let Dr. Sabbadini incubate a company on campus in an academic lab, renting academic lab space at above market rate to ensure that there was no question of university subsidies for Lpath activities. The company also reimbursed the university for Dr. Sabbadini’s time and fully supported all the work of graduate students engaged in company projects. It was designed in part as a biotech incubator, training students in academic and applied science related to biotech. Some students got joint MBAs.

As a faculty member, Dr. Sabbadini was required to assign all IP to SDSU. However, after 2 years of waiting, it became clear that SDSU had no intention of filing any patents related to the work, and SDSU eventually reassigned the rights back to Dr. Sabbadini. He started the company immediately, using $7,000 of his own money to file the first patent.

Dr. Sabbadini has remained engaged in academia at SDSU, where he has excellent relationships with the administration; a number of the students have also become Lpath employees. The company’s first spinoff (Vaxiion) is run by a former PhD/MBA student, Matt Giacalone, who received his degrees at SDSU under company sponsorship.

TECHNOLOGY

Lpath describes its ImmuneY2™ technology platform as a crucial part of its business strategy. ImmuneY2™ is a series of proprietary processes developed by the company to allow development of other monoclonal antibody therapeutics for any given bioactive lipid.

PRODUCTS

Currently Lpath has three products in its pipeline. One began passage through the FDA’s regulatory process and early clinical development is being conducted under an approved Investigational New Drug (IND) designation for clinical trials. Two other products have already completed Phase 2 clinical trials.

iSONEP™

iSONEP™ is the lead product in Lpath’s product portfolio. It is a humanized monoclonal antibody (mAb) effective against sphingosine-1-phosphate (S1P) and formulated for use in the treatment of eye disease. iSONEP™ is administered by intravitreal injection and has demonstrated multiple mechanisms of action relevant to diseases of the eye. Potential applications include “wet” age-related macular degeneration (wet AMD), dry AMD, diabetic retinopathy, and glaucoma-related surgery.

In 2009, Lpath completed a Phase 1 clinical trial for iSONEP™, which showed that all patients in the trial could tolerate it. Positive biological effects were also observed, with the most common being regression of the disease process that leads to degeneration of the macula.

Large pharmaceutical companies were apparently impressed. “In December 2010, Lpath entered into an agreement with Pfizer” to provide an “exclusive option for a worldwide license to develop and commercialize iSONEP.”⁵¹ Under the agreement, Pfizer provided Lpath with an upfront payment of $14.0 million and agreed to fund the costs of the planned Phase 2a clinical trials, bringing additional Pfizer’s payments to Lpath of $23.0 million for the codevelopment of iSONEP. Through SBIR, Lpath received $4.70 million in funding to develop the iSONEP™ monoclonal antibody to neutralize the S1P lipid for ocular indications and it is the results of this funding that led to the completion of the Phase 1 safety trial in wet-AMD patients and the resulting Pfizer deal. The Pfizer supported trial was a multicenter, Phase 2 “Nexus” clinical trial evaluating iSONEP™ in patients with wet AMD patients who had not responded adequately to existing anti-vascular endothelial growth factor (VEGF) therapies including Lucentis®, Avastin® and Eylea, The Nexus Trial was a prospective, randomized, double-masked, positive control, Phase 2 clinical trial conducted in the United States that enrolled 158 patients with wet AMD. All enrolled patients had been sub-responsive to treatment with anti-VEGF drugs, and had received at least three previous injections of an anti-VEGF drug. Nexus study patients each received four intravitreal injections over the 90-day dosing period. There were approximately 39 patients in each of the four treatment arms. The pre-specified primary endpoint of the study was mean change in best corrected visual acuity (BCVA) by Early Treatment Diabetic Retinopathy Study (ETDRS) from Day 0 to Day 120. At day 120, patients who received intravitreal injections of (i) 4.0 mg iSONEP alone lost a mean of 3.17 letters on the ETDRS, (ii) a combination of 0.5 mg iSONEP and anti-VEGF therapy gained a mean of 4.22 letters, (iii) a combination of 4.0 mg iSONEP and anti-VEGF therapy gained a mean of 3.63 letters, and (iv) an anti-VEGF therapy alone gained a mean of 4.34 letters.

BCVA and anatomical endpoints were collected throughout the 9-month period. The data collected suggests that in this study iSONEP was safe and well tolerated across all dose levels when administered alone or in combination with anti-VEGF therapy. Thus, patients in this trial did not show any statistically significant improvement in visual acuity when treated with iSONEP as an adjunctive or monotherapy. Full study results will be presented during the Retina Subspecialty Days in conjunction with the American Academy of Ophthalmology in Las Vegas, Nevada, in November 2015.

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⁵¹PR Newswire, http://www.prnewswire.com/news-releases/lpath-provides-update-on-plans-forisonep-option-226956521.html.

ASONEP™

Between 2008 and 2010, ASONEP™ was the lead product in Lpath’s product pipeline. Like iSONEP™, it is a humanized monoclonal antibody (mAb) effective against sphingosine-1-phosphate (S1P), but it has a systemic formulation designed to target S1P’s role in the cancer.

Like iSONEP™, ASONEP™ was developed in collaboration with a large pharmaceutical company as a partner after demonstrating preclinical efficacy with SBIR support from the National Cancer Institute. In October 2008, Lpath entered into a licensing agreement with Merck-Serono to develop and commercialize ASONEP™. Lpath provided Merck-Serono exclusive worldwide rights to ASONEP™ across all non-ocular indications. In early 2010, Lpath completed a Phase 1 clinical trial in which ASONEP™ was shown to be well tolerated at all dose levels. Moreover, more than half the patients that completed the treatment showed positive biological effects.

Even though the technical partners at Merck-Serono remained highly positive about Lpath and about the partnership, changes at a more senior level undermined the relationship. Problems arose before Phase 2 clinical trials focused on cancer. Senior management at Merck-Serono was faced with budgetary difficulties as more internal projects than expected had come successfully through initial clinical trials and hence required more funding than anticipated. As a result, funding for external partnerships was reduced and the Lpath agreement unraveled.

Merck-Serono sought to renegotiate the terms to reduce its commitment, but the Board of Lpath rejected this offer. The Board contains a number of financial investors who preferred for Lpath to retain all rights to what was seen as exciting technology; as a result, Lpath had to develop several new capabilities of its own—for example, hiring an entire group of oncology researchers. Merck relinquished all rights to the ASONEP™ development program. Lpath received $17.0 million from Merck-Serono over the course of the licensing agreement. Lpath is collaborating with researchers at various medical research institutions and with continued SBIR support undertook a small Phase 2 study for ASONEP™ in the treatment of renal cell carcinoma in patients who have failed up to three standard-of-care treatments such as mTOR and/or VEGF tyrosine kinase receptor inhibitors. This trial recently completed enrollment of 40 mRCC patients (37 net). There was some evidence of biological activity in some patients with progression free survival (PFS) as the primary efficacy endpoint as 14 of 40 patients (~35 percent) showed PFS at 4 months, 8 of whom were progression-free for at least 6 months, of which 3 patients remain progression-free for over 20 months. Four patients exhibited partial responses (PR) at some point during the study.

Lpath has received $4.26 million in funding from SBIR and the National Cancer Institute to develop ASONEP™, a monoclonal antibody to neutralize the S1P lipid for cancer indications.

Lpathomab™

Lysophosphatidic acid is a bioactive lipid that plays a major role in cancer-cell growth and metastasis in a broad range of tumor types. It has also been linked to neuropathic pain, traumatic brain injury, and pulmonary fibrosis. Lpathomab™ neutralizes lysophosphatidic acid.

Lpath has developed methods to reliably produce this antibody for clinical trials. Lpathomab™ received Investigational New Drug (IND) designation in mid-2015. The first cohort of subjects have been dosed in the Phase 1 clinical study with Lpathomab^™. This is a double-blind, placebo-controlled, single ascending dose study designed to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of Lpathomab in healthy volunteers. The study also aims to establish a maximum tolerated dose for future clinical studies in patients with neuropathic pain. Lpathomab is an antibody targeting lysophosphatidic acid, or LPA, a bioactive lipid that has been characterized in the scientific literature as playing a key role in nerve injury and neuropathic pain. Lpath’s preclinical studies showed strong in vivo results with Lpathomab in several different pain models, which suggest that LPA may be an attractive target across a variety of chronic pain conditions, including diabetic peripheral neuropathy, post-herpetic neuralgia, chemotherapy-induced neuropathic pain and pain associated with lumbosacral radiculopathy. Other preclinical studies have also demonstrated the potential for Lpathomab as a treatment for traumatic brain injury.

Lpath is looking for a partner to defray the cost of commercializing Lpathomab™.

Lpath has received $0.51 million in funding from SBIR to develop Lpathomab™ as a therapeutic treatment for traumatic brain injury and diabetic nerve damage.

Other Indications

Lpath also has a pair of other products named Altepan™ and Nextomabs against various other bioactive lipid targets. Altepan™ targets a class of cysteinyl leukotrienes involved in asthma and inflammation. Altepan is is being studied in models of inflammatory bowel disease, respiratory disease, and inflammation. These therapeutic antibodies are in the research stage, and although mentioned on the website they are not reported as material in any financial filings made by the company.

PATENTS AND OTHER INTELLECTUAL PROPERTY

For a small company, Lpath has invested substantially in its patent estate and believes that this portfolio “will provide broad, commercially significant coverage

of antibodies, receptors, enzymes, or other moieties that bind to a lysolipid . . . for diagnostic, therapeutic, or screening purposes.”⁵²

In its most recent SEC filings, the company reports 55 U.S. patents and patents pending and 141 patents and patents pending internationally. Lpath has received 16 U.S. patents covering the development of its iSONEP™, ASONEP™, and Lpathomab™ products. Also, when Atairgin Technologies, Inc. bankrupted, Lpath acquired eight of its patents related to cancer diagnostics.⁵³

FUNDING

Since 2004, Lpath has utilized various sources of funding, totaling roughly $74 million. SBIR has provided $10.2 million, the public markets an additional $26.0 million, licensing agreements $37.0 million, and royalties $0.4 million.

Non-Dilutive Grants

Between 2004 and 2014, NIH funded 11 SBIR projects with Lpath, providing 16 awards amounting to $10.2 million to develop monoclonal antibodies for neutralizing bioactive lipids. These covered 11 projects including three Phase II awards and one bridge commercialization award.⁵⁴

Equity Investment

Lpath, Inc. was founded in September 1997 as Medlyte Diagnostics, Inc. Management changed the name to Medlyte, Inc. in July 2001 and to Lpath Therapeutics, Inc. in July 2004. Dr. Sabbadini said that early-stage research and company development was mostly about proving the technology and thus creating a clear path to commercialization. Once that stage was completed, the company could become a real business venture rather than an idea or concept, and should, he believed, be run by professional management. In 2005, Dr. Sabbadini gave up the management role and hired Scott Pancoast, a Harvard MBA, as CEO and president. Gary Atkinson is Lpath’s current chief executive.

Shortly after, Lpath successfully engineered a reverse merger that allowed it to merge into a shell company with a NASDAQ listing. This in turn allowed the company direct access to capital markets which it has utilized five times, raising a total of $4050 million starting in 2008.⁵⁵

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⁵²“Patent Portfolio,” http://www.Lpath.com/about-Lpath/patents/.

⁵³U.S. Patent and Trademark Office, accessed June 27, 2014.

⁵⁴NIH RePORTER, accessed June 27, 2014.

⁵⁵LPATH INC (LPTN) SPO, http://www.nasdaq.com/markets/spos/company/Lpath-inc-417990-55184.

LPATH AND SBIR

Dr. Sabbadini has extensive experience with SBIR, both as a grantee and as a member of study sections for both SBIR and RO1 awards. He offered a number of observations with regard to the program at NIH.

SBIR was a critical source of funding during the company’s early years when little funding was available. SBIR truly helped Lpath bridge the valley of death when it was not possible to get outside financing or corporate partnerships. Lpath proved that it was possible to make real steps forward with relatively small amounts of money.

After access to capital markets became available, SBIR was used for different purposes. Although Lpath was very successful at tapping capital markets, some projects were seen as simply too risky by the investment community: for example, work on traumatic brain injury (TBI). There have been more failures in this area than almost any other biomedical problem, but it is a huge potential market where there are no FDA-approved products. In most cases, investment money is also “herd money,” and investors will not fund such a high-risk proposition. Neither will big pharmaceutical companies for the same reason. And although small biotech companies like Lpath can take the chance on a risky activity, investors like to share the risk, because they prefer a clear path where there are already products in the market. SBIR funding shares the risk and provides not just the risk share but also the peer review and the validation that NIH is funding the project.

Dr. Sabbadini used SBIR to pursue TBI in part because there was resistance to using internal funding for such a speculative project. He said that the recent NINDS grant funded the most exciting project he had ever worked on, with the most long-term potential for commercial success.

Overall, Dr. Sabbadini was a strong supporter for the NIH SBIR program: “I love the SBIR program—would still review and support it even if I never got another SBIR. It is critical to innovation in this country; without SBIR lots of innovation would die on the vine.” He also offered two recommendations for improving the program:

More flexibility in the application process. Dr. Sabbadini said that the application process is onerous, dysfunctional, and stifling, and applicants are punished for minor errors. One Lpath application was rejected because one word in an import data field was in lower not upper case. Another revised application was rejected for using a font of the original, amended application which had since been disallowed in the interim. While the revised application was submitted well in advance of the grant deadline, the error was identified only after the grant deadline had passed. Administrative review should be used to fix minor errors, not reject small companies because of them.

NCI Phase II Bridge awards. Dr. Sabbadini believes that other institutes should follow NCI’s example. He now sits as reviewer on bridge awards. He also participates in partnering conferences which link up awardees with pharmaceutical companies and venture capital. His experience is that these are very effective.

NOVA Research Company⁵⁶

Meeting with
Paul Young, Executive Vice-President and Co-Founder
January 23, 2014
Bethesda, Maryland

NOVA Research Company (NOVA) is a privately held woman-owned small business headquartered in Silver Spring, Maryland. NOVA was founded in 1986 by Ms. Peggy Young, a research biochemist with a strong marketing background, and her husband, Mr. Paul Young. The company provides research support services to a broad range of government, industry, not-for-profit, and university research organizations. Of particular importance to NOVA as clients are NIH and the Centers for Disease Control and Prevention (CDC).

According to Mr. Young, the company’s first major client in 1987 was the National Institute on Drug Abuse (NIDA), for whom NOVA served as national data coordination and evaluation center on a multidisciplinary research project focused on HIV/AIDS. The project—focusing on prevention in hard-to-reach populations—started with 6 grantees and later expanded to 24 grantees. A subsequent NIDA contract focused on community-oriented HIV/AIDS prevention interventions across 61 sites. These projects were large and complex. They required a broad spectrum of services, including design of questionnaires, quantitative (survey) and qualitative (interview) data collection, data management and analysis, and training for interviewers.

NOVA found that there were inadequate electronic tools available to support this effort (which occurred early in the era of laptops). At that time (late 1980s) interviewers typically used paper-and-pencil questionnaires, because interviews took place in the field and laptops were generally bulky to carry or not available. NOVA adapted a touch screen for use with desktops and laptops, and this was used to generate self-interview electronic records for interviewees who were not computer literate or comfortable with keyboards.

These interviews probed in very sensitive areas related to drugs used, sexual behavior, and other personal topics. NOVA found through analysis of answers that responses were biased by gender and other factors; researchers also found that using computer-generated audio prompts instead of live interviewers generated more truthful responses.

In order to communicate activities across 64 sites, NOVA developed communications capacities, including a quasi-journal through which new researchers could publish material that was peer-reviewed by senior researchers on the projects. NOVA also developed the capacity to run a considerable number of

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⁵⁶Primary sources for this case study are the meeting with Mr. Young and a review of the NOVA Research website and related company documents.

meetings, which included semi-annual all-team meetings as well as numerous subgroup meetings.

With demand for better electronic tools generated (and guaranteed) by long-term (5-year) federal contracts, NOVA was well positioned to seek SBIR funding for developing what eventually became the Questionnaire Development System (QDS™) survey design, data collection, and data management system (http://www.novaresearch.com/QDS/).

Initially focused on health research among special populations—women and children at risk for HIV/AIDS, and substance abusers as examples—NOVA has broadened its emphasis to include research in the behavioral sciences, software tool development to support survey research studies and evaluations, and community outreach and information dissemination.

SERVICE OFFERING

NOVA now provides a complete set of professional services to clinical, biomedical, and behavioral scientists. It supports their research programs, which in turn generate scientific findings, as well as field programs that test those findings. It offers IT services for survey design and implementation in all modes of questionnaire administration to systematically collect and analyze data related to research programs and field tests. And, finally, if research findings warrant, then NOVA provides services for marketing/communications and organizational meetings and conferences necessary to publish and promote findings both for professional advancement (as scientists) and public awareness (as policy makers).

NOVA provides services in five broad but related categories:

• Research and Research Support Services
• Program Planning and Evaluation
• Health Information Technology
• Health and Scientific Communications
• Meetings, Conferences, and Exhibits

Research and Research Support Services

NOVA Research Company provides a complete range of support services to help researchers undertake research studies. These services include developing initial research protocols, performing research, collecting data, performing analyses, developing findings, and disseminating results.

NOVA can manage, monitor, and/or analyze data for an organization’s research; provide program management; and conduct project evaluations as part of its services. Basic data services include database design, implementation, and maintenance; survey instrument design and implementation using NOVA’s

SBIR-developed QDS software suite or custom programming; data collection in multiple modes of survey administration; and data processing and analysis.

Examples include applied research such as an NIH R01 grant to develop and validate an adolescent-appropriate screening instrument for HIV/STD risk, and research program support as in the case of data collection and analysis through interviews and surveys of community intervention programs to reduce cancer burden among underserved and minority populations.

Program Planning and Evaluation

NOVA also partners to implement and evaluate programs. Again, NOVA provides assistance at any stage in development, implementation, monitoring, and evaluation of program impact. NOVA can design program protocols, conduct program implementation, monitor research client/patient accruals, perform data collection processes, and monitor adherence to protocols. Evaluation includes planning, metric selection, focus group and survey administration, and preparation of findings and recommendations.

Examples of NOVA’s experience as program manager to test research findings include NIDA’s Five-City Women’s Health Research Study contract to pilot the National AIDS Prevention Model and the National AIDS Demonstration Research Project to evaluate efficacy of research-based community interventions to reduce risky behaviors for HIV transmission.

Health Information Technology

Over its 28 years of operation, NOVA has developed and expanded its capabilities in data management, processing, and analysis. Some of the technology within NOVA’s Health Information Technology offering—for example, survey instrument development and administration using its QDS—has been funded and developed through SBIR grants.

QDS is NOVA’s primary product generated via the SBIR program. Funded through a series of awards (see SBIR Funding section below) that advanced the technology, QDS development was driven by the need for better tools for NOVA’s internal project support operations. QDS was developed and is maintained and enhanced/updated by a small in-house information technology and research staff at NOVA.

Today, QDS is used worldwide to help researchers design, implement, and deploy complex questionnaires related to health information topics, although it can be used for any type of survey topic. It is used extensively by the CDC HIV/AIDS Behavioral Surveillance Branch, which maintains QDS capabilities in each of the 50 states plus Washington, DC, and Puerto Rico, for HIV/AIDS risk behavior monitoring. While NIH itself was an early supporter, it undertakes relatively low levels of in-house research: most NIH-funded re-

search is conducted by university- and hospital-based researchers, many of whom use QDS.

According to Mr. Young, QDS is used today by about 3,000 researchers worldwide with about 13,000 QDS modules having been sold. Many medical research institutions maintain multiple users—University of California, San Francisco, for example, currently has about 60 registered users. This extensive reach results, in Mr. Young’s view, from a combination of advanced features, ease of use for complex research surveys, and low cost. The latter is especially noteworthy: in a world of per-seat annual fees, NOVA sells its various QDS modules outright to researchers, who are free to use them indefinitely—one license per user/computer—in an unlimited manner. Mr. Young noted that the average cost of a QDS package is about $2,500, which compares very favorably with competing packages (e.g., its closest competitor from The Netherlands, which charges approximately $25,000).

QDS is designed to allow easy transition to new languages and has, as a result, been used widely in non-English environments, including Russian, Chinese, Polish, Vietnamese, and Korean as well as all European languages.

With further SBIR funding, NOVA recently implemented a web-based survey option, which can be used in conjunction with all other QDS modules, and which should, according to Mr. Young, allow it to maintain market share in the face of new market entrants from outside the medical sector (such as Qualtrics and Survey Monkey). Sales remain dominated by word-of-mouth marketing, although NOVA has tried a modest amount of marketing at selected health conferences.

Examples of NOVA’s technological support include its work for the National HIV/AIDS Behavioral Surveillance Survey (NHBS), a CDC study to understand behaviors in populations at high risk of HIV infection, such as men who have sex with men, injection drug users, and high-risk heterosexuals. For the NHBS, NOVA programmed and tested the English and Spanish versions of the data collection software as well as provided training and administrative and technical support.

Health and Scientific Communications

NOVA provides clinical, biomedical, and behavioral scientists with assistance in the writing, editing, graphic design, layout, production, and distribution of their findings. NOVA has specialist teams for both health and science communications who understand how to communicate technical findings effectively to both public and professional audiences.

In September 2012, NOVA was selected to work with the NIH Office of Communications and Public Liaison (OCPL) to collect information to develop strategies and messages for improving stakeholder understanding of NIH’s mission, goals, and accomplishments. NOVA used a mixed-mode of qualitative interviews and quantitative surveys using QDS to collect information about a variety

of important audiences, including the general public, the interested public, the media, advocacy organizations, the grantee researcher community, and federal partners. Based on analysis of the various types of data collected, NOVA prepared recommended strategies, tactics, and tools for OCPL to use with each audience.

Meetings, Conferences, and Exhibits

NOVA provides staff to manage government and nongovernment meetings and conferences. In addition to site selection, NOVA can organize the entire logistics of a meeting. Since its founding in 1986, NOVA has managed more than 1,000 conferences for its clients, ranging in size from 10 to 1,500 participants. Using its in-house graphic designers, NOVA can produce exhibits or posters for individual scientists to display at conferences.

For example, since 1993 NOVA has supported the prestigious President’s Cancer Panel, holding meetings around the country and internationally to examine barriers and make recommendations to improve our National Cancer Program. In 2011, for the Center to Reduce Cancer Health Disparities, NOVA provided all pre-meeting, onsite, and post-meeting logistics (including a web-based participant registration and pre-meeting information site) for the Center’s national meeting to discuss and promote methods to reduce the unequal burden of cancer across different segments of our society.

CLIENTS

NOVA’s client list is a broad cross-section of the government; academic; and, to a lesser extent, commercial organizations undertaking clinical, biomedical, and behavioral research (see Table E-9).

In the past 10 years, while participating in trade missions with the Department of Commerce, NOVA has expanded its business activities internationally. Representative international clients are Max-Planck-Institut für Biochemie (Germany), Niigata University (Japan), Universidad Nacional Autónoma de México (Mexico), University of Cape Town (South Africa), Groote Schuur Hospital (South Africa), Instituto de Salud Carlos III (Spain), London School of Hygiene and Tropical Medicine (UK), and The Whittington Hospital Trust (UK). Unlike NOVA’s domestic clientele, its international business has few government clients and is mostly academic and commercial.

SBIR FUNDING

Between 1994 and 2007, NOVA Research Company received 13 Phase I and Phase II SBIR grants from HHS for various technology-related projects. In total, SBIR funding has amounted to $5.78 million, $1.51 million in Phase I and $4.27 million in Phase II.

TABLE E-9 Representative Domestic Clients for NOVA Research Company

SOURCE: NOVA Research Company.

NOVA used much of its SBIR funding to build a software product for managing surveys. NOVA offers the QDS as a means to facilitate design, deployment, and warehousing of survey data generated by researchers.

Using QDS, a research program manager can produce all materials needed to administer a questionnaire, in multiple modes of administration (Computer-Assisted Personal Interview, Audio Computer-Assisted Self-Interview, paper/pencil, and web) from a single set of specifications and manage all data generated by those materials in a single Warehouse Manager module.

NOVA offers QDS modules for between $300 and $500 per user per computer depending on the module type. With the exception of a book on methodologies for research on drug abuse in Hispanic communities, QDS is the only product offering in the NOVA business model. However, NOVA currently is developing an educational game under SBIR contract to inform children about clinical trials, which eventually will be provided free on an NIH-maintained website and sold as an educational game foundation for other health topics.

SBIR

Although NOVA has received what it views as important support from NIH, its experience with CDC SBIR awards has been different. Unlike NIH, where awards are determined largely by priority scores from peer-review panels, the primary driver of awards at CDC is, in Mr. Young’s view, the numerous layers of prioritization, starting with the sponsoring office and continuing up to the level of CDC itself. In effect, he believes that this ensures that regardless of technical merit (assuming that applications receive an acceptable priority score), awards are made based almost entirely on agency need. Thus, even though NOVA has worked closely with CDC in the past, and its recent proposal received an acceptable priority score from the NIH review panel, it did not fit the needs profile that was eventually determined by CDC.

More broadly, the SBIR program at NIH has, in Mr. Young’s view, changed substantially over the years. There has been a shift at many Institutes away from projects that are behaviorally focused and toward medical devices and applied biomedical research. Funding is more oriented today toward biomedical product-oriented research firms. Despite the substantial and ongoing impact on research of the awards made to NOVA, Mr. Young does not believe that any of the NOVA proposals would be funded in today’s research climate. By his analysis less than 10 percent of NIH SBIR funding goes to behavioral and information technology support topics.

Mr. Young noted that his primary contact is with the SBIR topic manager and is related to seeking further feedback on proposals. NOVA has found that resubmission is now more or less expected for every application, and, hence, feedback is especially important.

Mr. Young also observed that reviewers often seem to lack a deep commercialization awareness. This is an area where review could be strengthened, although in his view the selection process generally seems fair and appropriate. (He participated as a peer reviewer on an SBIR review panel in the 1990s, although he noted that the focus on PhD reviewers today means that he is not likely to be asked again.)

Sanaria, Inc.⁵⁷

Meeting with
Dr. Stephen L. Hoffman, CEO and co-founder
January 29, 2015
Rockville, Maryland

Sanaria, Inc. is a private company founded in 2003 by Stephen Hoffman and Kim Lee Sim. The company is commercializing whole-parasite sporozoite vaccines that confer long-lasting protection against Plasmodium falciparum, the malaria parasite responsible for more than 95 percent of malaria-associated severe illness and death worldwide. Sanaria is headquartered in Rockville, Maryland.

Dr. Hoffman founded the company after a substantial clinical career and a period as senior vice president for biologics at Celera Genomics. This followed 21 years in the U.S. Navy, where he had worked on tropical disease programs. He founded Sanaria after determining that the approaches to development of cancer vaccines and other immunotherapeutics he wanted to pursue would not fit with Celera’s priorities, and when he came to the conclusion that there was an approach to a malaria vaccine that would work.

Dr. Hoffman had at about this time come to the conclusion that the research data he and colleagues had generated in the 1990s and that they had published in the first half of 2002 included the technical basis for an effective vaccine against malaria and possibly against other infectious diseases as well. More than half the vaccines currently in use are based on a weakened (attenuated) form of the microorganism that causes the disease. Indeed, since the 1960s, researchers have known that attenuated Plasmodium falciparum parasites provide immunity to malaria. However, because of the requirement of producing the parasites in mosquitoes, development of a vaccine that met regulatory standards had not seemed possible.

Discussions with senior staff at NIAID indicated that a SBIR would likely be the most effective way to approach NIH funding to address the numerous existing obstacles between the theory and the practical implementation of this approach. Dr. Hoffman was also able to utilize the experience of his wife, Dr. Kim Lee Sim, who had successfully utilized NIH SBIR awards at EntreMed, Inc., to fund anti-angiogenesis (Endostatin and Angiostatin) and malaria vaccine (PfEBA-175) R&D.

From the outset Sanaria took a scientific approach quite different from that of other entities working in this space: its primary focus was high-level efficacy, while the ease of vaccine delivery was initially a secondary objective. This contrasted with strategies espoused by many major drug companies (e.g., GSK, Sanofi) as well as the Gates Foundation, who considered ease of delivery as important as efficacy.

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⁵⁷Primary sources for this case study are the meeting with Dr. Hoffman, and a review of the Sanaria website (http://www.sanaria.com) and related company documents.

The initial awards from NIH came from NIAID, where Phase I awards were, according to Dr. Hoffman, running at about $600,000 during 2 years. Dr. Hoffman filed his first NIH applications in August 2002, immediately after leaving Celera. Funding from the first grant came in July 2003, and provided the initial seed money through which to found the company and rent 800 square feet of space. A positive response to two more Phase I grant proposals allowed the company to hire its first two research associates in August 2003. The company’s first facilities were located in a rundown strip mall in Rockville, which was gradually upgraded to enable to FDA compliant manufacture of pre-clinical quantities of the PfSPZ vaccine.

Sanaria currently employs approximately 50 people at its Maryland facilities. This facility, which includes a clinical manufacturing facility (CMF) was opened in 2007 with funding from the Bill and Melinda Gates Foundation; as the company now plans to scale vaccine production, Sanaria is looking for investors to expand these facilities to reach its goal of producing 2 million regimens of PfSPZ vaccine in the year after licensure.⁵⁸

Sanaria has received substantial recognition for this important work. Recently, in 2013 it received the Montgomery County Emerging Business of the Year award. In 2014, the Sanaria® PfSPZ Malaria Vaccine won the 2014 Vaccine Industry Excellence Award for “Best Prophylactic Vaccine.” Other competitors for this award included major biopharmaceutical companies such as Sanofi Pasteur, GSK, and Novartis.⁵⁹

Sanaria maintains research relationships with a broad range of government, corporate, and nonprofit organizations including, but not limited to, multiple branches of NIH/NIAID, the Naval Medical Research Center, the Walter Reed Army Institute of Research, the Military Infectious Disease Research Program (MIDRP), the Centers for Disease Control, the National Institute of Standards and Technology, the University of Maryland Baltimore, the University of Tübingen, Swiss Tropical Public Health Institute, Radboud University Medical Center, Leiden University Medical Center, the PATH-Malaria Vaccine Initiative, the Ifakara Health Institute, University of Bamako, Ministry of Health Equatorial Guinea, the Kenya Medical Research Institute, and the Kintampo Health Research Center.

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⁵⁸“Addressing A Global Imperative: Malaria Eradication through Vaccination,” https://sbir.nih.gov/statistics/success-stories/sanaria.

⁵⁹“Sanaria wins Very Zanders Award,” http://www.choosemontgomerymd.com/features/sanarianamed-verl-zanders-emerging-company-of-the-year-by-mccc#.VMTv2P7F_94; Sanaria PfSPZ Malaria Vaccine Wins 2014 Vaccine Industry Excellence Award for “Best Prophylactic Vaccine,” http://www.vaccinenation.org/2014/04/04/sanaria-pfspz-malaria-vaccine-wins-2014-vaccine-industry-excellenceaward-best-prophylactic-vaccine/.

A NEW BUSINESS MODEL FOR FUNDING CLINICAL RESEARCH

Dr. Hoffman pointed out that a malaria vaccine, and in particular the kind of path-breaking vaccine developed by Sanaria, faced difficult business challenges. To begin with, large pharmaceutical companies are in general not especially interested in vaccines: they prefer solutions that involve the delivery of multiple doses of medication over a long period of time. Moreover, the vast majority of end users are poor people in poor countries, where margins are thin and delivery is difficult.

In addition, according to Dr. Hoffman, there is no precedent for the technical solutions developed by Sanaria—there are no previous examples of successful vaccines for diseases caused by eukaryotic pathogens and utilizing live attenuated organisms. This requires preservation and storage in vapor phase liquid nitrogen, again, no precedent. The delivery system is direct venous injection (DVI), a safe, easy and painless procedure, again, no precedent. This increased the apparent risk of the project substantially. The amount of funding needed to complete and deliver the solution is now also much larger than venture firms can provide—he estimated that eventually the company and its partners would need to raise approximately $400 million; more than half that amount has been raised.

From a business perspective, Sanaria has three distinct challenges. First, it needs to continue to improve the technology underpinning its solution and to develop sufficient manufacturing capabilities so that it can address its initial markets. This is the area where continuing SBIR funding has underpinned success in the past and will continue to be needed in the future.

Second, the company needs to fund clinical trials in a variety of settings. Here it is pioneering an innovative approach in which it provides support for entities seeking to trial its technology, but without providing the bulk of funding. Sanaria simply provides the vaccines, while others raise money to pay for the trials (see below).

This approach has been very successful. A wide range of partners in the United States, Africa, Asia, and Europe are currently undertaking clinical trials with Sanaria. These in turn have been undertaken by a number of different stakeholders, including African governments, energy companies, nonprofit foundations, universities and research labs, and private companies (see Table E-10). This includes the first clinical trials in Africa sponsored by African governments. Recently a path-breaking agreement was signed by Marathon Oil, Noble Energy, and AMPCO and the government of Equatorial Guinea to completely fund clinical trials of Sanaria’s PfSPZ vaccines through Phase 3 clinical trials through $48.5 million in support. In each case, the sponsor is responsible for funding the actual trial. Sanaria raises the much more modest amounts needed to pay for the vaccine itself. It currently has trials under way in the United States, Europe, and Africa.

Because Sanaria directly manufactures its own vaccines, clinical trials are not delayed by manufacturing bottlenecks, which Dr. Hoffman regards as a significant competitive advantage.

TABLE E-10 PfSPZ Vaccine Consortium

SOURCE: Sanaria, Inc.

Third, the company will need to raise money to reach scale, which will involve building entirely new manufacturing facilities, automating some aspects of the manufacturing process, and most likely expanding internationally. This will require substantial investment, and the company has been in discussions with investment banks and other large-scale investors on a preliminary basis.

Thus, as Dr. Hoffman observed, the traditional paradigm of SBIR use does not apply to Sanaria. There is no direct linear path between Phase I, Phase II, and commercialization. Yet he also noted that if the company is successful, then SBIR will have played a critical role in addressing one of the most significant diseases in the developing world—a globally transformative impact which, aside from immediate disease-related benefits, is likely to boost the gross national product (GNP) of poor countries significantly every year.

As a result, Sanaria has developed a new model for funding clinical trials. It is partnering with a wide range of organizations (See Table E-10).

Markets for Sanaria

Dr. Hoffman sees two core markets for Sanaria’s malaria vaccine. Sanaria is focusing on the “traveler” market—visitors from richer countries entering malarial regions. These include business people, military, government workers, and nonprofits, as well as companies with substantial operations in these areas. He regards this market as lower-volume/high margin and estimates that the overall market is worth at least $1 billion annually.

In parallel with its efforts to license the vaccine for travelers and military, the company is focusing on licensing the vaccine for use in geographically focused, mass administration campaigns in malaria endemic areas to halt transmission

of the infection and eliminate the malaria-causing parasites. This will be a high volume/low margin market in less developed countries where malaria is endemic.

THE SANARIA VACCINE

Sanaria is working to solve a major development problem. One-half of the world’s population lives in areas at risk for transmission of malaria. Approximately 200,000,000 cases of malaria occur annually with about 600,000 deaths. In the period 1965-1990, all other things being equal, the economies of countries afflicted with intensive malaria grew 1.3 percent less per person per year. Furthermore, a 10 percent reduction in malaria incidence has been shown to be associated with 0.3 percent higher growth.⁶⁰

Since the 1970s, researchers have known that humans could be immunized using attenuated whole-parasite sporozoites, an immature form of the Plasmodium parasite. However, because the parasites do not survive outside mosquitoes and because attenuation using irradiation blocks the parasite’s ability to reproduce, vaccination required exposing volunteers to bites by up to 1,000 mosquitoes carrying the attenuated parasite.⁶¹

Sanaria has overcome these problems and has developed a vaccine based on the sporozoites of the P. falciparum parasite. Sanaria makes its vaccine by irradiating aseptic (bacteria free) mosquitoes that have fed on malaria-infected blood and removing their salivary glands manually. The vaccine is stored cryogenically in the vapor phase of liquid nitrogen. Although originally intended for dermal or subcutaneous injection, clinical trials showed that the vaccine did not generate sufficiently strong immunological responses when administered this way. This is primarily because the vaccine parasites must reach the liver to initiate the next stage of development, and this is best achieved by DVI injection, not injection in the skin.⁶²

In 2011, Sanaria initiated a clinical trial of multiple doses (two to five over the course of the trial) administered by DVI through a standard temporary DVI catheter. Volunteers were subsequently exposed to malaria. Of the six volunteers receiving five doses of the PfSPZ vaccine, none developed malaria, and of the nine volunteers who received four doses, only three developed malaria. Among

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⁶⁰John Luke Gallup, Jeffrey Sachs, “The Economic Burden of Malaria,” American Journal of Tropical Medicine and Hygiene, Supplement, Volume 64, no. 1, http://www.ncbi.nlm.nih.gov/books/NBK2624/.

⁶¹Donald McNeil, “The Soul of a New Vaccine,” The New York Times, December 11, 2007, http://www.nytimes.com/2007/12/11/health/research/11mala.html?pagewanted=all.

⁶²Donald McNeil, “A Malaria Vaccine Works, With Limits,” The New York Times, August 12, 2013, http://www.nytimes.com/2013/08/13/health/a-malaria-vaccine-works-with-limits.html?_r=1&; Epstein, et. al. “Live Attenuated Malaria Vaccine Designed to Protect Through Hepatic CD8-T Cell Immunity,” Science Volume 334, no. 6055 (October 28, 2011), 475-80, http://www.ncbi.nlm.nih.gov/pubmed/21903775?dopt=Abstract; Declan Butler, “Zapped Malaria Parasite Raises Vaccine Hopes,” Nature (August 8, 2013) http://www.sanaria.com/pdf/Nature2013.pdf.

the controls, 11 of 12 volunteers developed malaria, as did 16 of 17 volunteers receiving low-dosage vaccination.⁶³

As an effective means of immunizing people with an FDA-compliant vaccine, the PfSPZ Vaccine is an important step forward.

In addition to enabling additional clinical trials, SBIR funding is being used to establish ways to improve the vaccine. Because radiation disrupts the parasite’s ability to reproduce in the liver, Sanaria is using SBIR funding to investigate genetic attenuation that does not render the parasite sterile. By increasing the amount of active parasites in the body, this could reduce the number of doses required and even eliminate the need for intravenous injection. Sanaria is also investigating ways to scale production of the PfSPZ vaccine. Other potential lines of research include revising the protocol for cryogenically storing the sporozoites.

Challenges

Sanaria is attempting to develop the first highly effective vaccine against a eukaryotic organism. The vaccine will also be the first vaccine composed of a live attenuated eukaryotic organism. This would therefore represent a substantial technical breakthrough, and preliminary results from safety and efficacy clinical trials indicate that the vaccine is both safe and effective at three to five doses per vaccinee. According to Dr. Hoffman, not only are there no vaccines against eukaryotic organisms, there are no major research programs addressing using eukaryotic organisms as vaccines at the major pharmaceutical companies.

However, major challenges do remain. The vaccine is designed to be stored and deployed in cold storage provided through liquid nitrogen technology. Although this does not require electricity to provide constant cooling, it does add some challenges to distribution. Dr. Hoffman notes that other products have been delivered successfully in developing countries using this technology, and does not regard it is a substantial problem, and in fact considers it an advantage for mass administration campaigns.

The parasites are also currently extracted from mosquitos manually. Dr. Hoffman said that each technician can remove about 200 pairs of salivary glands per hour, and that on this basis the current manual approach has adequate capacity for all clinical trials and for initial sales. However, he acknowledged that once the company ramps up sales, it will need to switch to a more automated manufacturing process. Again, though, he said this did not present major technical challenges; it was simply engineering and investment. Perhaps most exciting is that an SBIR grant is now funding the development of methods to produce the sporozoites without mosquitoes.

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⁶³Nailing Padmanabhan, “Investigational Malaria Vaccine Found Safe and Effective,” http://www.niaid.nih.gov/news/newsreleases/2013/Pages/PfSPZ.aspx; “Experimental PfSPZ Vaccine in Adults Without Malaria,” https://www.clinicaltrials.gov/ct2/show/record/NCT01441167?term=sanaria&rank=15; Seder et. al. p. 1359.

There have also been questions about the likelihood that the market will accept vaccines that require injection by DVI. Dr. Hoffman observed that the needles used are extremely small and are largely pain free, and also that more than 20 million people have their blood drawn every month in the United States alone. He believes the benefits of the vaccine will so clearly outweigh the administration innovation that this too will not be a substantial problem.

The most substantial challenge will be to raise the large sums of money needed to move the vaccine into mass production. This will cost tens of millions of dollars, but Dr. Hoffman is confident that once a finalized immunization regimen has been established in the upcoming clinical trials, much more funding will become available.

PRODUCTS

In creating its vaccine, Sanaria has developed capabilities to manufacture and assay malaria parasites and mosquitoes in a highly regulated, cGMP-compliant environment. Sanaria offers these parasites, mosquitoes, and assay services to the general research community to advance malaria research.

Reagents and Antibodies

In developing its vaccine, Sanaria has successfully developed techniques for isolating and preserving the P. falciparum parasite across its different life stages. Sanaria offers these different forms of purified, vialed, and cryopreserved for laboratory research. Sanaria can provide the parasite either in attenuated or non-attenuated form. Sanaria also offers a broad range of purified recombinant proteins and antibodies related to the P. falciparum parasite that are used in its assays to detect antibodies against the different stages of the parasite.

Mosquitoes

To produce FDA Good Manufacturing Practice (GMP) compliant vaccines from the salivary gland of mosquitoes, Sanaria has bred mosquitoes free of bacteria. Sanaria offers these aseptic mosquitoes either infected with P. falciparum or not for research and other work by biomedical scientists.

Services

Although most of Sanaria’s research has focused on P. falciparum and Plasmodium vivax as the principal vectors for malaria transmission, over 100 other varieties of Plasmodium exist which infect humans, other mammals, reptiles, and birds. Sanaria can produce reagents and assays customized to these different varieties of Plasmodium.

TABLE E-11 Sanaria Inc. Assigned Patents

SOURCE: U.S. Patent and Trademark Office. Accessed June 27, 2014.

PATENTS AND OTHER INTELLECTUAL PROPERTY

Sanaria is the assignee for the U.S. patents shown in Table E-11. These patents cover the actual materials used to make the vaccine, so Dr. Hoffman sees the company as well protected in this area.

Sanaria also publishes it work in leading peer-reviewed journals. The results of the first two clinical trials of PfSPZ Vaccine were published as research articles in the prestigious journal Science.

FUNDING

Non-Dilutive Funding

Between 2003 and 2015, SBIR funded 30 projects with Sanaria (18 Phase I and 12 Phase II). Sanaria has received 67 annual SBIR awards amounting to nearly $40.5 million from the Department of Health and Human Services (HHS). Including future years the number increases to $46.2 million. In addition Sanaria received $1.9 million in ARRA supplements against two of the Phase II awards in 2011. Of this amount, 42 percent targeted research on vaccine development, 22 percent on vaccine manufacture, 20 percent on vaccine delivery, and 13 percent on vaccine storage. In total, Sanaria has received approximately $200 mil-

TABLE E-12 Sanaria Sources of Non-dilutive Funding

SOURCE: Sanaria Inc.

lion directly or indirectly since it was founded.⁶⁴ Other non-dilutive funding are shown in Table E-12.⁶⁵

Sanaria has also been innovative in raising capital, even using an only partially successful crowdsourcing campaign on Indiegogo to raise $45,000 in funding to develop a robot to automate mosquito dissection and scale vaccine production.⁶⁶

Equity Funding

To date, Sanaria has received no significant equity investment. Following its recent successful clinical trials, senior management has indicated that it may partially fund upcoming trials through investments. It is focusing on socially conscious investors and possibly an initial public offering.⁶⁷

Operations

Sanaria generates significant income from the sale of aseptic mosquitoes, reagents, including sporozoites, and various services to the malaria research

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⁶⁴“Addressing a Global Imperative: Malaria Eradication through Vaccination,” https://sbir.nih.gov/statistics/success-stories/sanaria.

⁶⁵Steve Berberich, “$29.3M Gates Grant Boosts Sanaria,” Washington Business Journal, December 15, 2006, http://www.sanaria.com/pdf/Press-7-Gazette-Gates_grant_12-15-06.pdf; Neil Adler, “Sanaria Gets $4M in Gov’t Funds for Malaria Vaccine,” Washington Business Journal, June 6, 2005, http://www.bizjournals.com/washington/stories/2005/06/06/story7.html.

⁶⁶“Malaria Vaccine Robot – Robot vs. Mosquito Sanaria – SporoBot,” Set goal of $250K on May 6, 2014; closed campaigne at ~$45K on June 5, 2014, https://www.indiegogo.com/projects/malaria-vaccine-robot-robot-vs-mosquito-sanaria-sporobot#home.

⁶⁷Bill Flook, “With the World Watching, Sanaria Maps Out its Future,” Washington Business Journal, August 30, 2013; http://www.bizjournals.com/washington/blog/techflash/2013/08/with-theworld-watching-sanaria-maps.html?page=all.

community. This has been dwarfed by government and foundation support for Sanaria’s work.

SBIR AND SANARIA

According to Dr. Hoffman, “SBIR is the lifeblood of the company.” Competitive SBIR awards allowed the company to develop every single aspect of its manufacturing process. Dr. Hoffman said that while the Gates Foundation had been a generous funder of the company, it would never have given money to develop the technology in the first place. SBIR funding was the only conceivable way in which the company could have been founded and the technology perfected to the point of successful clinical trials. In fact, SBIR was the primary reason the company was not formed as a nonprofit entity, as these are not permitted to receive SBIR funding.

Dr. Hoffman was emphatic about the importance of SBIR for Sanaria and also more generally for small innovative companies. He said that without SBIR there was no possible source of funding for the work done by Sanaria: that private sector funding would—for reasons described earlier in this case study—never fund high-risk investments in areas where potential rewards were both uncertain and likely to be much lower than for chronic diseases. And within the government, SBIR provided the only source of funding for private companies to engage in high-risk, high-reward research. He noted that Dr. Anthony Fauci, director of NAIAD, had specifically advised Sanaria to work through SBIR as the only likely initial source of funding from NIH.

SBIR funding had both supported the initial founding of Sanaria, paying the salaries of the founding staff, and had consistently paid for much of the technology development, manufacturing capacity, and preparation for clinical trials.

Sanaria has had a range of SBIR awards. These include:

• Phase I awards at NIAID, which can be as high as $300,000/year for 2 years.
• Phase II awards, which can be as high as $1 million/year for 3 years. The initial Phase I award, which was converted to Phase II award from NIAID eventually reached $9 million.
• American Recovery and Reinvestment Act (ARRA)-derived supplementary funding.

SBIR RECOMMENDATIONS

Dr. Hoffman said that in his view—and as a recipient of many kinds of awards at NIH—SBIR was far more effective than RO1 grants in delivering new approaches that could make a real difference. Accordingly, he believed that NIH should add considerably more funding to the SBIR program, beyond the amounts mandated by Congress.

Proposal review panels (e.g. study sections) were a real challenge for NIH, Dr. Hoffman observed. They often included academic scientists who did not have an extensive understanding of translational research. On the other hand, some of these scientists were also potential competitors, and Sanaria had in several instances asked for specific reviewers to be removed from panels addressing its proposals. Overall, the quality of reviews—and especially of business reviews—was quite variable.

Dr. Hoffman strongly supported any changes that would allow proposers to add a rebuttal to draft reviews prepared by the lead reviewer. He believed this would substantially improve the overall quality of review, at minimal cost to NIH. He felt this might also help to address reviews that went outside the expertise of the reviewer. For example, a recent review of a very successful Phase I effort modifying an oral typhoid fever vaccine for use with anthrax had been rejected in part because the lead reviewer said that the government did not need an anthrax vaccine.

Dr. Hoffman also observed that in the past reviews did not arrive in time to be able to resubmit the grant in the next cycle (4 months from the previous submission). However, in the last year NIAID has actually been getting reviews back in time for a re-submission. He urged NIH to continue to adjust its schedules to ensure that debriefings arrived in time for resubmission to occur on the next deadline, 4 months after the previous deadline.

Finally, Dr. Hoffman is concerned that the quality of staff working for companies on SBIR awards will suffer because the maximum permitted salaries have declined recently and are now well below market levels. Although there are good reasons to prevent excessive payments, it does seem that allowing the market to work will in almost all cases be more efficient, and there is now a real danger that senior researchers will simply be priced out of working on SBIR grants.

Stratatech Corporation: SBIR Case Study⁶⁸

Meeting with
Dr. Barbara Allen-Hoffman, CEO and Founder
April 8, 2015

Stratatech Corporation is a private company founded in 2000 by B. Lynn Allen-Hoffmann. The company is developing novel skin regeneration and repair products for therapeutic use, drawing on what Dr. Allen-Hoffmann described as a serendipitous discovery in her lab at the University of Wisconsin that offered entirely new technical opportunities in cell-based therapy for human skin replacement and treatment of complex skin defects.

Working together with the University of Wisconsin and the Wisconsin Advanced Research Foundation (WARF), Dr. Allen-Hoffmann used an STTR award to begin the transition from university lab to the private sector. In conjunction with WARF, she determined that a small private biotechnology company was the appropriate legal structure to house the work, and provided access to the SBIR program.

Stratatech started operations in a small space provided by Mirus Corporation, another small spin-off of the university located in the University Research Park in Madison, Wisconsin. The company soon started to attract angel funding, which Dr. Allen-Hoffmann attributes to the understandable nature of the technology for skin replacement. While business advisors recommended that she avoid applying for grants due to the lengthy time required to generate the application and administer the grants if awarded, Dr. Allen-Hoffmann decided that the best path to funding lay through the SBIR/STTR programs.

Based on the discovery of a human keratinocyte cell line, NIKS® cells, that produces tissue nearly identical to human skin, Stratatech has used the cells as a platform technology for the development of a pipeline of cell-based products. Stratatech is developing StrataGraft® as it’s flagship product based on the core technology. StrataGraft® is a living skin-tissue therapeutic for the treatment of severe burns and other complex skin defects, the use of which may reduce or possibly avoid the need for painful skin harvest and transplantation (autografting). The ExpressGraft™ lineage is comprised of skin tissues that have been genetically enhanced to encourage wound closure by providing elevated levels of human wound healing or antimicrobial factors that may be underrepresented in some wound environments. Both the core technology, Stratagraft®, and the world’s first genetically enhanced human skin, Expressgraft™, are being evaluated in late-stage and early-stage clinical trials, respectively. The late-stage clinical development supporting the StrataGraft® product is in part funded by a

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⁶⁸Primary sources for this case study are the meeting with Barbara-Allen Hoffman April 9 2015 and a review of the Avanti website (http://www.acousticmed.com) and related company documents.

$247 million contract with Biomedical Advanced Research and Development Authority (BARDA) awarded in September 2015. Results to date have supported the safety and initial efficacy of the company’s flagship product, StrataGraft®.

By late 2013, Stratatech had thirty-eight full-time employees and expected to add ten to twenty additional employees over the next 5 years. Currently, the company has approximately 50 full-time employees. It has research relationships with various universities and research institutions including the University of Wisconsin-Madison, Wake Forest University, The Arizona Burn Center, the U.S. Army Institute of Surgical Research, Harvard Medical School, and an unnamed Fortune 200 consumer products company.⁶⁹ However, even with a large support contract in hand from HHS/BARDA and continuing support from NIH, funding for later stage clinical trials and manufacturing infrastructure remains an ongoing challenge. Dr. Allen-Hoffmann observed that there had been no new products available for burn patients in decades, in large part because the market was perceived as too small to interest large biomedical companies. In 2012, StrataGraft® received orphan drug designation from the FDA to expedite treatment for severely burned patients.

TECHNOLOGY

Unlike other cultured human cell lines, the NIKS® progenitor line at the heart of Stratatech’s core technology is a consistent source of pathogen-free, non-tumor-producing, long-lived adult keratinocyte progenitor cells. Keratinocytes are the cells that make up approximately 90 percent of the outer layer of human skin known as the epidermis. The value of the NIKS® cell line lies in its ability to regenerate the epidermal component within a fully stratified human skin tissue. The resulting multi-layered tissue has the physical strength and biological characteristics of intact human skin. When handled appropriately, this cell line grows new human skin and—as important—ceases growth when these cells abut neighboring mature skin cells. The NIKS® cell line can be utilized indefinitely to produce cultured skin, avoiding the costly need to recreate and requalify new cell lines that restricts other technologies.

Having a well characterized, pathogen-free, continuous source of epidermal progenitor cells serves as a foundation for the company’s products and allows Stratatech to pursue strategies to improve the cell line’s performance genetically. Stratatech is introducing new genetic characteristics without using viral vectors or other delivery technologies that could impart unwanted safety risks to the transgenic tissue and, most importantly, the patient. This approach supports the creation of custom cell-based therapeutics with enhanced antimicrobial properties and improved vascular function and that may lead to faster healing.

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⁶⁹“Company Profile: Stratatech,” http://inwisconsin.com/insource-newsletter/Stratatech-companyprofile/.

PRODUCTS

StrataGraft® and the ExpressGraft™ line of genetically enhanced tissues are the principal products under development from the NIKS® cell line. Currently, the company has created six ExpressGraft™ pipeline products, each genetically augmented to address the underlying pathophysiology of complex skin defects. All pipeline products have been successfully developed from hypothesis to completed cGMP manufactured master cell banks with support from the SBIR/STTR Program.

StrataGraft® Regenerative Skin Tissue

Each year in the United States, about 40,000 hospitalizations occur for burns.⁷⁰ At present, patients with severe burns must endure autografting, a procedure requiring the harvest of healthy skin from another part of the body for transplantation to the site of the wound. StrataGraft® tissue has the potential to provide a safe, effective, and less painful alternative that avoids the creation of donor site wounds.

StrataGraft® skin tissue is a cellular therapeutic for use as a treatment for severe burns and other complex skin defects. It mimics natural human skin, with both dermal and fully-differentiated epidermal layers. StrataGraft® skin tissue is easily sutured to a wound bed, provides barrier function, and is anticipated to serve as a source of factors promoting the natural skin regeneration process.

In October 2014, StrataGraft® completed a Phase Ib clinical trial in patients with deep partial-thickness burns. By 90 days after treatment, 27 of 28 patients achieved complete wound closure after a single application of StrataGraft® tissue. By this time, no StrataGraft® DNA was detectable, confirming regeneration of the patients’ own skin.

If successful, StrataGraft® could revolutionize treatment for burns by providing an alternative to autografting and its associated donor site pain, infection risk, and possible poor cosmetic outcome. These advantages may lead to shorter hospital stays and reduced after-care costs.

ExpressGraft™ Genetically Enhanced Regenerated Tissue

Approximately 50 million surgeries occur annually in the United States, each requiring some form of wound closure.⁷¹ Stratatech is developing genetically enhanced tissues that produce elevated levels of natural wound healing and antimicrobial factors. Delivered as skin grafts, ExpressGrafts™ create a

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⁷⁰American Burn Association, “Burn Incidence and Treatment in the United States: 2013 Fact Sheet,” http://www.ameriburn.org/resources_factsheet.php.

⁷¹CDC FastStats, http://www.cdc.gov/nchs/fastats/insurg.htm.

controlled wound microenvironment in which to fight infection or promote vascularization while accelerating healing.

In one ExpressGraft™ product, the NIKS® cell line has been genetically modified to produce higher levels of cathelicidin, a peptide with antimicrobial properties that plays an active role in wound healing. These tissues produce 140-fold greater levels of cathelicidin protein in vitro, and in an in vivo animal wound model showed a 100-fold reduction in the presence of a multidrugresistant strain of Acinetobacter baumannii.

Clinical development of ExpressGraft™ will start in 2015 with a Phase I/II trial focused on non-healing diabetic foot ulcers. An IND was submitted to the FDA in spring 2015 and received clearance from CBER to enter a first-in-human safety trial. Dr. Allen-Hoffmann observed that this project has been supported from “hypothesis to translation into the clinic” by NIH through the STTR and SBIR programs.

StrataTest® Human Skin Research Model

Many of today’s animal- and cell-based toxicity testing models are burdened by significant accuracy, reproducibility, cost, and ethical concerns. The European Union, for example, has banned the sale of animal-tested cosmetic and consumer products.

Based on the NIKS® cell line, StrataTest® is a human skin model for in vitro consumer product testing, drug discovery and toxicity screening. Like StrataGraft®, StrataTest® tissue is composed of both epidermal and dermal layers, and displays the same physical, chemical and histological characteristics of human skin, enabling better prediction of in vivo biological responses than mono-layer skin culture technologies.

Dr. Allen-Hoffmann said that while StrataTest® has shown considerable technical promise and the company regularly fields inquiries from larger potential customers, the decision was made to focus efforts on the therapeutic flagship StrataGraft® product and the ExpressGraft™ pipeline of products for the time being.

Other Potential Products

Other ExpressGraft™ potential products are in the pipeline. Like the cathelicidin-expressing variant of ExpressGraft™, some product candidates produce elevated levels of other naturally-produced human wound healing factors. For example, one proposed product expresses VEGF, a protein that plays a central role in blood vessel growth (angiogenesis). Because many chronic wounds are associated with insufficient tissue oxygenation, boosting local levels of VEGF may improve wound healing and closure. Clinical development will target the need for underserved markets in chronic, non-healing ulcers.

Additional potential products target different classes of skin trauma. For example, by creating tissues that express Interleukin-12 (IL-12), a human anticancer protein, Stratatech hopes to develop a product that surgeons could apply after surgical excision of solid skin tumors. Locally produced IL-12 from the genetically modified tissue could facilitate the patient’s own immune surveillance of residual tumor cells remaining after the surgery, reducing the potential for recurrence.

PATENTS AND OTHER INTELLECTUAL PROPERTY

Stratatech is the assignee for 20 issued patents listed in Table E-13.

TABLE E-13 Stratatech Assigned Patents

SOURCE: U.S. Patent and Trademark Office.

FUNDING

Stratatech Corporation has received grant support from SBIR (mostly from NIH but also from DoD), other grants from non-SBIR sources, a major contract from HHS’s Biomedical Advanced Research and Development Authority (BARDA), and investment from independent investors.

Non-Dilutive Grants

Between 2001 and 2013, SBIR funded 21 projects with Stratatech. From 2001 to 2003, it received Phase I SBIR awards from four NIH centers—National Institute of Arthritis and Musculoskeletal and Skin Diseases, National Institute of General Medical Sciences, National Cancer Institute, and National Institute of Environmental Health Sciences—followed in 2004 by the first Phase II award from NIGMS. Subsequently, Stratatech also received awards from NIDDK and NIA.

STTR grants funded three projects aimed at completing the scientific work that, according to Dr. Allen-Hoffmann, needed to be done within her lab at the University of Wisconsin because that provided access to otherwise unaffordable equipment.

Stratatech has also applied for and received Fast Track awards from NIH. Dr. Allen-Hoffmann observed that these had been especially helpful as they reduced the time from initial idea to clinical trials by many months. One Fast Track provided by NIDDK is supporting Phase I clinical trials for an anti-infective human skin tissue that can be used to treat ulcerated skins from diabetic skin ulcers.

Stratatech has received grants from other sources to support commercialization of its StrataGraft® product. In July 2013, Stratatech received a grant for up to $47.2 million from BARDA. The award supports the preclinical, clinical, regulatory, and technology development activities needed to complete FDA approval for StrataGraft®. Also, the contract funds manufacturing process development and scale-up to enable large-scale production in case of a mass casualty event.⁷² In September 2015 Stratatech received a second BARDA contract through Project BioShield that replaced the first contract. This most recent BARDA contract enables expansion of the company’s clinical program to include pediatric patients and aging adults and positions StrataGraft for use under a pre-Emergency Use Authorization, provided the clinical findings support continued development of the product. Importantly, the new BARDA contract included the procurement of StrataGraft by the U.S. government in the event of a mass casualty caused by a natural disaster or an act of terrorism.

In 2010 the Defense Department’s Armed Forces Institute of Regenerative Medicine (operating in conjunction with Wake Forest University) funded the

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⁷²Stratatech, “Stratatech Awarded BARDA Contract Valued up to $47.2 Million for Advanced Development of StrataGraft® Skin Tissue for Thermal Burns,” Press Release, July 31, 2013, accessed at http://www.stratatechcorp.com/news/20130731.php.

proof of concept Phase IIB clinical trial of StrataGraft®. In 2015 Stratatech received approval from the FDA to continue with a Phase 3 clinical trial, based on results from the Phase IIB. The Phase 3 trial will start in early 2016, to be funded by BARDA’s Project BioShield.

Equity Funding and Operations

Stratatech has received ongoing support from Wisconsin’s angel investor community and from the Wisconsin Advanced Research Foundation. For example, in May 2010 it announced $3.0 million in funding comprised of convertible notes from its current investors.

Strategic Partnership

In 2010 Stratatech entered into a collaborative agreement with a Fortune 200 consumer products company to develop an advanced skin care product. Dr. Allen-Hoffmann said that the objective was to develop the capability to provide testing kits for skin care products. The announced goal was to use extracts from the NIKS cell line to prevent wounds or ulceration by enhancing the resiliency of compromised or susceptible skin.

SBIR/STTR AT STRATATECH

Dr. Allen-Hoffmann stressed that the SBIR/STTR program at NIH had provided absolutely critical funding for Stratatech. She said that she had no doubt that her company and its associated products would not be in existence without SBIR/STTR funding. She also observed that the funding was especially important for a woman-owned company: other sources of capital were, in her view, even more inaccessible for a woman-owned small high-tech firm than they were for small high-tech firms in general.

In her view, STTR was particularly important. Some of the initial work—such as work on genetically enhanced tissues—had to be completed in the university lab as necessary equipment was not available at the University Research Park. Once Stratatech was established as a functioning company and the basic research had been completed, other sources of funding became more available.

Today, academic institutions continue to view STTR more favorably than SBIR, particularly with regard to issues related to the allegiance of faculty. University departments take a different view of projects where more of the work and most of the PI’s time is committed to the university as opposed to the private sector. Dr. Allen-Hoffmann observed that despite some changes, tenure decision committees were still very conservative about the activities of junior faculty outside academia, and STTR provided an important mechanism for helping to resolve that tension.

Dr. Allen-Hoffmann said that Stratatech had participated in the Fast Track program in the early 2000s when working on developing cell-based ExpressGraft clones. The company feared that the Phase I-Phase II gap would kill the project. Fast Track had worked perfectly from the company’s perspective. It had provided a seamless transition from Phase I to Phase II; in her view the company would have lost key people without it. Continuity of staffing remains a key issue for small companies.

RECOMMENDATIONS

Dr. Allen-Hoffmann observed that the SBIR program coordinators at each of the Institutes and Centers played a critical role. Although program officers in general have a strong commitment to the SBIR/STTR program, the SBIR program coordinators possess specific knowledge and can be extremely helpful in guiding investigators. She recommended that small companies make sure that they established contact with the program coordinators.

She also noted that the alignment between topics and awards had changed significantly over the past ten years. During her early years with the program, Dr. Allen-Hoffmann said that she was confident that a strong project would receive consideration and perhaps funding regardless of its connection to a topic described in the Omnibus Solicitation. That has changed over the years, and Stratatech now only applies for awards where there was a clear alignment between the topic and the proposal. In her view this was not a positive development for identifying and supporting innovation.

In addition, Dr. Allen-Hoffmann noted that contracting had become more complex because it was no longer possible to interact routinely with specific financial management officers at NIH. As a result, the advice received started to lack continuity. Continuity is especially important to a small firm trying to budget accurately.

Overall, Dr. Allen-Hoffmann said that she remains truly grateful for the support provided by the NIH SBIR/STTR program and that the technology could not have been developed without that support. The value of this program is immeasurable in helping patients and their families benefit from the world-class research conducted in the United States.

Targeson, Inc.: SBIR Case Study⁷³

Meeting with
Jack DeFranco, CEO
June 18, 2014
San Diego, California

Targeson develops, manufactures, and markets acoustically active microspheres for the medical research market. Its research tools include ultrasound contrast agents for molecular imaging and targetable gene transfection agents.

Targeson was initially founded as a Limited Liability Corporation (LLC) based on the dissertation work of Joshua Rychak, PhD, at the University of Virginia, which was funded by a Phase I SBIR award. In 2009, Targeson, Inc. was formed as a merger of the assets of Targeson LLC and some key assets and technology from a previous company run by Mr. DeFranco. At the time of the merger Mr. DeFranco became President and CEO of Targeson, Inc. and established the company in San Diego.

Targeson provides targeted microspheres to the research community for use in animal models. Targeted microspheres are coated with molecules, called targeting ligands, that bind to another molecule of interest in the vascular system. Targeson offers microspheres that will target various types of vascular tissue markers, including angiogenic tissues (related to various cancers) and inflamed tissues (related to atherosclerosis and Crohn’s disease).

TECHNOLOGY

Targeson’s core platform technology is targeted microspheres. These microspheres are flexible, compressible, buoyant, have a high surface area to mass ratio, and are biocompatible—all characteristics to enable ultrasound imaging, gene transfection, and cell separation applications.

Microspheres are a mature technology when used to enhance image contrast in performing ultrasound imaging. Microspheres reflect sound waves much more efficiently than tissue and are used to heighten definition in blood perfusion studies. Targeson has augmented this technology by coating its microspheres with targeting molecules that adhere to receptors known to characterize particular markers in the endovasculature. This enables noninvasive visualization of intravascular disease structure with sonography. As an example, Targeson is producing imaging agents that target angiogenesis, the development of new blood vessels. Because angiogenic tissue is produced by cancer, researchers evaluating cancer

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⁷³Primary sources for this case study are the interview with Jack DeFranco and a review of the Targeson website http://www.targeson.com, and related company documents.

therapeutics in animal models can monitor tumor growth without sacrificing as many animals.⁷⁴

Transfection is the deliberate introduction of nucleic acids and other genetic materials into cells. Targeson offers targeted microspheres as gene delivery vehicles for intravascular disease. Following injection into the bloodstream, transfection is enabled as microspheres attach to the target tissues—for example, the targeting ligands might attach to new blood vessel tissue. After sufficient microspheres have collected, the ultrasound technician initiates a pulse of sound waves. The acoustic waves cause the microspheres to disintegrate and deliver their genetic payload on target to the targeted tissue. This phenomenon, known as sonoporation, has been shown for the transfer of DNA and other macromolecules.⁷⁵

PRODUCTS

Using SBIR funding, Targeson has improved both its imaging and transfection technologies. It offers these products as research tools for use in animal models.

Targeson, according to Mr. DeFranco, has had to reinvent itself as market and financing circumstances changed. It began as a company aiming to address the research ultrasound imaging market. However, as the preclinical market began to consolidate and financial market remained tight, Targeson shifted development into cell biology opportunities such as transfection and cell separation. This was possible because of the versatility of the microbubble platform.

Imaging Agents

Targeson offers three classes of imaging agents for medical research:

• Targeted Agents: Targeson’s Visistar® line comes pre-loaded with widely used ligands already attached to the microsphere surface. Visistar Integrin and Visistar VEGFR2 target angiogenesis. Visistar VCAM1 and Visistar Selectin target inflammation.
• Labeling Agents: Targeson offers Targestar® SA that can accept any biotinylated ligand (such as an antibody or peptide⁷⁶) on the microsphere’s surface. Targestar provides a kit that explains how to attach the user’s ligand of choice to the microsphere. Perfusion Agents: Targeson’s

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⁷⁴Flordeliza Villanueva and William Wagner, “Ultrasound Molecular Imaging of Cardiovascular Disease,” Cardiovascular Medicine, 2008, 5:S26-S32, http://www.readcube.com/articles/10.1038/ncpcardio1246.

⁷⁵Joshua J. Rychak, et. al. “Analysis of In Vitro Transfection by Sonoporation Using Cationic and Neutral Microbubbles,” Ultrasound in Medicine and Biology, Nov. 2010, 36(11):1907–1918. http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2996233/.

⁷⁶Biotinylation is the covalent bonding of biotin to a protein, nucleic acid, or other molecule. In general, it does not affect the function of the bonded molecule.

Since 2007 Targeson has received $2.79 million from NIH SBIR awards to examine the use of microspheres for imaging different disease processes such as angiogenesis, inflammation, and acute myocardial syndromes. Related to a patent pending, Targeson also received SBIR funding to investigate the use of microspheres for optical imaging in the near infrared spectrum.

Transfection Agents

The Targeson product line offers a pair of microsphere products for cell transfection. Targesphere® is used for general purpose transfection. Targesphere SA offers the capability for the user to label the microsphere with biotinylated ligand for specific molecular targeted transfection. The genetic payload is coupled to the microsphere by incubation and activated using sonography. Since 2007 Targeson has received $1.63 million from SBIR to examine the use of microspheres for the transfective treatment of kidney disease.

In either transfection or imaging applications, the agent is injected into the animal and allowed to accumulate at the target site for 5-10 minutes. This allows clearance of any unbound agent, leaving only target-bound microspheres in the tissue which can then be activated or imaged with ultrasound.

According to Mr. DeFranco, Targeson currently has a database of more than 5,000 potential customers, including all the major pharmaceutical companies, all the larger contract research organizations, and many academics and academic laboratories. It has developed a web-based sales and marketing capability to serve its clients.

PATENTS AND OTHER INTELLECTUAL PROPERTY

Targeson’s research has focused principally on the problem of targeting, transfection, and optical imaging using microspheres. Targeson has a patent pending for optical imaging.

Targeson owns over 20 patent families related to the use of microspheres. These patents were transferred to Targeson as part of the company’s formation. They were previously owned by IMCOR Pharmaceuticals Inc. and Alliance Pharmaceutical Corp., both companies for which the current CEO of Targeson, Jack DeFranco, had worked.

FUNDING

Between 2010 and 2012, Targeson raised limited funds through individual investors and developing a strategic relationship with a Chinese pharmaceutical

company. In the absence of large equity or strategic investors, Targeson focused on producing and selling products for research use. However, Mr. DeFranco noted that all of these research products are relevant to Targeson’s long-term goal of creating diagnostics for human use and that he anticipates that as the company grows, it will attract interest from a strategic partner for its technology.

Non-Dilutive Grants

Between 2007 and 2014, SBIR funded nine projects with Targeson. Targeson received 14 awards amounting to $4.25 million from the Department of Health and Human Services (HHS) to develop targeted microsphere technology for imaging and transfection applications.

TARGESON AND SBIR

Mr. DeFranco said that the SBIR program has been critical for Targeson. It provided initial support for the company’s formation and since then had supported Targeson as it adjusted its tools and technologies to market realities.

Regarding major aspects of the program, Mr. DeFranco had few concerns. Broadly, he thought the program worked very well. He had comments about the NCI Bridge program, which offered $3 million over 3 years in support of clinical trials. He believed this was an important program given the difficulties in funding clinical trials, but also that it could be improved. In his experience, both venture firms and strategic investors did not see that the program met their needs. It required matching funds (minimum $1 million annually) be fully upfront committed before the award was made. Potential investors were reluctant to commit before the award was made. Targeson, for example, has an imaging agent for prostate cancer, but venture investors were apparently discouraged by Targeson’s initial plans to apply for Bridge funding. Mr. DeFranco believed that take-up of these opportunities had, as a result of these difficulties, been low and strongly recommended that NIH find a way to make a preliminary commitment pending the completion of matching fund arrangements.

Mr. DeFranco was also a strong supporter of a new program at NHLBI—Science Moving towards Research Translation and Therapy (SMARTT). The program provides services for awards and seems particularly useful for SBIR companies. Available services include the following:

• Preclinical study planning and regulatory support
• Pharmacology and toxicology services
• Manufacturing of small molecules and nonbiologics
• Manufacturing of biologics

Mr. DeFranco expected that SMARTT would be very helpful in connecting Targeson to the FDA and to support for toxicological studies via NHLBI’s specialist contracts in the Research Triangle.

JULY 2015 UPDATE

Targeson has leveraged its imaging technology and recently progressed one of its ultrasound imaging agents into early preclinical developed. TS-07-009 as an ultrasound imaging diagnostic agent developed for the detection of the P-selectin adhesion molecule. P-selectin is a biomarker of myocardial ischemia in the context of Acute Coronary Syndrome. This progress was funded by Phase I and Phase II SBIR programs. In addition, Targeson received 2 non-monetary grants through the NIH/LARTA Commercial Assistance Program (CAP). These two grants led to obtaining a successful pre-IND meeting with the FDA for TS-07-009. This development may lead to interest from strategic and financial partners to move the product through clinical development. Targeson has applied and is eligible for the SMARTT program. Mr. DeFranco expects that, if awarded, it will be very helpful for the preclinical development of its lead clinical product TS-07-009.

Targeson was also issued its patent for the use of microspheres for optical imaging. It has also filed a patent application for the proprietary ligand used in TS-07-009.

TissueTech, Inc. and Bio-Tissue Inc.⁷⁷

Meeting with
Dr. Scheffer Tseng, CEO
January 21, 2015

TissueTech, Inc. is a private company founded in 1997 by Amy Tseng and Scheffer Tseng. The company is developing amniotic tissue-based products to use in ophthalmology, optometry, orthopedics, and wound care. TissueTech is headquartered in Doral, Florida, where it recently opened a 10,000-square-foot state-of-the-art biotechnology manufacturing clean room. The company is part of a broader corporate structure that also includes two wholly-owned companies, Bio-Tissue Inc. and Amniox Medical Inc., through which it commercializes its technology in different markets (for the purposes of this case study, the group is collectively described as “TissueTech”).

Dr. Tseng said that he had been moved to start TissueTech by the need to bring new techniques to many more people. While an employee of the University of Miami in the mid-late 1990s, he developed new tissue-based approaches for ocular surface problems in humans. This technology was in its infancy at the time, and the university had no interest in pursuing the technology through its technology transfer office. Ownership of the technology was returned to Dr. Tseng.

There was at the time demand from doctors for his innovative tissues, but he was concerned about liability issues and also wanted to see whether it might be possible to scale the technology sufficiently to provide services to many more patients. This led to the formation of the first company and to Dr. Tseng’s decision to leave his Chair at the University of Miami in 2001. The company was formed with one part-time employee, based on a personal bank loan.

The company was initially challenged just to break even. According to Dr. Tseng, it faced difficulties because there were as yet no FDA regulations governing its products and potential products; so no reimbursement was available for its products from Medicare or the Centers for Medicare and Medicaid Services (formerly the Healthcare Financing Administration). And the company itself was still learning to operate effectively.

Dr. Tseng identified a number of key turning points in the path that led to the company’s current annual revenues of about $55 million in 2015.

In 2001, the FDA initially issued guidance in relation to human cell products (HCP). This specifically noted that amniotic use in eyes was not to be included under the guidance. TissueTech discussed this issue at length with FDA, which eventually reversed its ruling and agreed that TissueTech products should be included under HCP guidance. This was, according to Dr. Tseng, a key change

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⁷⁷Primary sources for this case study are the meeting with Dr. Scheffer Tseng, and a review of the Bio-Tech and Amniox Medical websites (http://www.bio-tissue.com and http://www.amnioxmedical.com) and related company documents. TissueTech does not have its own website.

which made it possible to consider this could be the basis for a sustainable and even growing business.

In the same year, Dr. Tseng decided to leave his full-time position at the university, backed by the remaining 2 years of NIH RO1 grant support which moved with him out of the university.

The company was then confronted with a core strategic decision: whether to remain a pure R&D company, develop by licensing and manufacturing for other companies, or become a vertically integrated company which included sales activities directly to doctors and hospitals. Experts consulted at this time unanimously recommended that the company remain focused on R&D and avoid sales, as the latter was likely to be too expensive and risky. TissueTech in the end, however, decided to take on the additional risk. Dr. Tseng said that the key factor in the decision had been the need for direct feedback from patients to improve the product. He was clear that the profits were initially of limited interest—the company was focused on improving its products and finding customers.

Today, the company employs almost 40 direct full-time sales representatives in ophthalmology and an additional 15 representatives working on wound care. Overall the company has almost 225 employees and operates several facilities.

In 2013, the company received $10 million in the form of a private investment from two equity investors, which was used to expand the sales force and to support expansion into lines of business, notably wounds and orthopedic procedures, as well as international expansion. The investors are providing an additional $15 million in 2015 for further expansion.

The company is now working to move the product line to a biologics base. This is both costly and time-consuming, but will, according to Dr. Tseng, provide long-term protection against potential competitors. He predicts average annual growth of 30 percent of revenues in the coming years. Amniotic membrane has demonstrated capacity to enhance wound healing and tissue regeneration.

The core innovation owned by TissueTech is a cryogenic method called CryoTek™, which preserves this regenerative capacity of the amniotic membrane for long-term storage. Unlike other methods, the CryoTek™ process maintains the tissue in a hydrated (if frozen) state. This improves retention of the functional and structural integrity of the tissue and improves outcomes when used to heal wounds.

TissueTech is using amniotic tissues preserved using CryoTek™ to develop treatments for the ocular, orthopedic, and wound care markets. It is productizing this technology through two wholly-owned subsidiaries, Bio-Tissue, Inc. and Amniox Medical, Inc.

Bio-Tissue develops amniotic membrane–based products to treat ocular surface disorders and now provides three products based on this amniotic membrane technology: AmnioGraft®, an ocular transplantation graft; AmnioGuard®, a glaucoma shunt tube graft; and PROKERA®, a range of corneal bandage devices. Both PROKERA® and AmnioGuard® are in clinical trials to measure efficacy.

Amniox Medical, Inc. was founded in 2011 in Atlanta, Georgia, by Amy Tseng, Scheffer Tseng, and Aaron Smith to develop amniotic membrane–based products to accelerate wound healing. Amniox Medical has two products: CLARIX®, a general surgical wound covering or barrier, and NEOX®, a wound covering for dermal ulcers and other defects. Both CLARIX® and NEOX® are in clinical trials to measure efficacy.

Bio-Tissue employs more than 150 people. Much of this expansion occurred in 2013 following TissueTech’s Series A funding. The company’s workforce is diverse with about 80 percent drawn from minorities, and in 2014 Bio-Tissue received the annual Top Minority Business Award from the Greater Miami Chamber of Commerce awarded.⁷⁸ In 2015, the company received the Tibbetts Award from Small Business Administration/NIH for their successful commercialization of their innovative technology.

TissueTech maintains research relationships with institutions such as Bascom Palmer Eye Institute, the New York Eye and Ear Institute, Walter Reed National Medical Center, and Columbia University.

PRODUCTS—BIO-TISSUE

CryoTek™

Amniotic membrane has various innate regenerative properties that can be preserved and transplanted to other environments. Amniotic membranes have also been shown to have multiple clinical uses for ocular disorders, open wounds, skin burns, and leg ulcers. Numerous studies have shown the capacity of amniotic membranes to promote healing with minimal inflammation and scarring, similar to the healing processes seen in fetal tissues.⁷⁹

Although desirable, the use of fresh amniotic membrane tissue for clinical applications is both impractical in a clinical setting and can pose a serious risk of disease. The CryoTek™ process is designed to enable long-term, safe storage of amniotic tissues, because it permits human placenta from a caesarian section to be stored for up to a year at -80°C prior to processing. The frozen placenta gradually thaws over 24 hours and is cleaned of blood clots using phosphate buffered solution (PBS). The amniotic membrane is separated by blunt dissection and rinsed with PBS until all blood discoloration disappears. The membrane is cut and packaged in a pouch containing medium and glycerol before storage

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⁷⁸“Top Entrepreneurial Awards,” https://www.miamichamber.com/events/awards-programs/topentrepreneurial-awards.

⁷⁹For example, M. R. Kesting, et. al., “The Role of Allogenic Amniotic Membrane in Burn Treatment,” Journal of Burn Care Resources, Vol. 29, 907 (2008); J. P. Bennett et. al., “Treatment of Chronic Ulceration of the Legs with Human Amnion,” Lancet 1, 1153 (1980); or H. S. Dua, et al., “The Amniotic Membrane in Ophthalmology.” Survey of Ophthalmology Vol. 49, 51 (2004).

at -80°C for up to 2 years. All TissueTech placental materials are harvested and prepared according to FDA regulation for Good Tissue Practices.

Most techniques for preserving amniotic membranes—dehydration and lyophilization, for example—substantially affect the characteristics of the membrane. With SBIR funding, TissueTech compared fresh and amniotic membranes preserved using CryoTek™. TissueTech found that there was no difference in the histological or biochemical features between the two sample types. Furthermore, although total protein and albumin levels were lower in cryogenically preserved tissues, the levels of hyaluronic acid (HA), heavy chain hyaluronic acid (HC-HA), and other anti-inflammatory, regenerative factors were similar.⁸⁰

Ocular Inflammation—PROKERA®

The PROKERA® family of corneal bandages is designed to treat and heal a broad variety of inflammatory eye disease. By introducing amniotic membrane preserved using the CryoTek™ process, the ocular surface is exposed to a fetal microenvironment, which reduces inflammation, pain, and scarring of the eye. Depending on the intensity of the infection, the ophthalmologist can select from three contact lens–like devices, PROKERA Slim®, PROKERA®, and PROKERA Plus®. Each carries a different load of amniotic material. With local anesthetic, the device is inserted over the diseased eye and left in place for 24 hours.

In collaboration with Walter Reed National Medical Center, TissueTech is undertaking a study to demonstrate the effect of PROKERA® on corneal healing in terms of pain, visual recovery, and corneal clarity following photorefractive keratectomy, a common eye surgery used to improve nearsightedness, farsightedness, and astigmatism.⁸¹ TissueTech used 23 percent of its SBIR funding in the development of its PROKERA® product line.

Ocular Transplantation Graft—AmnioGraft®

Inflammatory surface diseases of the eye are painful, lead to scaring, and can result in vision loss. AmnioGraft® is a biologic ocular transplantation graft used by eye doctors to treat ocular surface disorders. Indications include a variety of conditions such as keratitis, corneal ulcers, SPK, pterygium, conjunctivochalasis (CCh) dry eye, and Stevens-Johnson Syndrome. Surgical application of the amniotic tissues preserved in AmnioGraft® promotes regenerative healing of

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⁸⁰Ek Kia Tan, et. al., “Structural and Biological Comparison of Cryopreserved and Fresh Amniotic Membrane Tissues,” Journal of Biomaterials and Tissue Engineering, Vol. 4, 2014, pp. 379-388. http://www.amnioxmedical.com/2ec733a07c_sites/www.amnioxmedical.com/files/PUBLISHED_Comparison_between_Cryopreserved_and_Fresh_Amniotic_Membrane.pdf.

⁸¹Samantha Rogers, “Sutureless Cryopreserved Amniotic Membrane Graft (ProKera) and Wound Healing After Photorefractive Keratectomy,” https://clinicaltrials.gov/ct2/show/NCT00915759?term=prokera.

the ocular surface. TissueTech used about 30 percent of its SBIR funding in the development of the AmnioGraft® product.

Ocular Glaucoma Drainage Graft—AmnioGuard®

For many cases of glaucoma, surgeons install drainage devices to manage intraocular pressure. AmnioGuard® is a biologic glaucoma shunt tube graft used to cover and position tube shunts from glaucoma drainage devices. Because of its high tensile strength and because it does not require hydration, AmnioGuard® is easy to handle and suture during surgery. TissueTech used 21 percent of its SBIR funding in the development of the AmnioGraft® product. The company received an NIH SBIR grant to support conducting a prospective randomized control study to compare AmnioGuard® to pericardium to protect the glaucoma drainage shunt tube.

Facial Cleanser—Cliradex®

Cliradex® is a lid, lash, and face cleanser that helps manage symptoms associated with blepharitis, meibomian gland dysfunction (MGD), rosacea, dry eye, demodex, chalazia, and other lid margin diseases. Cliradex® is derived from Tea Tree Oil, which has a demonstrated effect as a cleanser on such diseases. Research by TissueTech isolated Terpinen-4-ol as the most active ingredient against demodex mites believed to cause many of these conditions.⁸² TissueTech used 24 percent of its SBIR funding in the development of the Cliradex® product. Cliradex is the only Bio-Tissue product not based on CryoTek®. The company has received an NIH SBIR grant to conduct Phase I FDA safety study using Cliradex® for treating demodex mite infestation in patients with blepharoconjunctivitis.

PRODUCTS—AMNIOX MEDICAL

Amniox Medical is using cryogenically preserved amniotic tissues to improve healing of wounds created by surgery or disease. Because of its products’ capacities to improve outcomes in various podiatric interventions, the company recently received the American Podiatric Medical Association Seal of Approval in recognition of its products’ value as part of a podiatric wound care regimen.⁸³

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⁸²Sean Tighe, et. al., “Terpinen-4-ol is the Most Active Ingredient of Tea Tree Oil to Kill Demodex Mites,” Translational Vision, Science and Technology, Vol. 2, No. 7 (November 2013), 2. http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3860352/.

⁸³“AMNIOX® Medical’s NEOX® and CLARIX® Product Lines Receive American Podiatric Medical Association (APMA) Seal of Approval,” BusinessWire, July 24, 2014, http://www.businesswire.com/news/home/20140724005070/en/AMNIOX%C2%AE-Medical%E2%80%99s-NEOX%C2%AE-CLARIX%C2%AE-Product-Lines-Receive#.VL7SGdLF_Tq.

Wound Covering—CLARIX®

CLARIX® is a surgical covering, wrap, or barrier. CLARIX® modulates a wound environment, emulating the environment seen in utero and stimulating a fetal healing process. Case studies on the Amniox Medical website show CLARIX® being used for aftercare following a bunionectomy, repair of the peroneal tendon, and surgery for MTP joint pain.

Ulcer Covering—Neox®

NEOX® is a wound covering for dermal ulcers and defects. Case studies on the Amniox Medical website show NEOX® used to promote healing of various types of diabetic ulcers and a wound to the ankle. A significant application of NEOX® is on hard-to-heal ulcers on the feet and lower extremities for diabetics. Podiatry Today recognized NEOX® as one the top 10 podiatric innovations of 2012.⁸⁴

PATENTS AND OTHER INTELLECTUAL PROPERTY

TissueTech is the assignee for the U.S. patents listed in Table E-14.

FUNDING

TissueTech has received support from both SBIR funding and private investors. NIH has also funded Dr. Tseng directly through the RO1 grant program.

Non-Dilutive Grants

Between 2003 and 2014, SBIR funded 10 projects with TissueTech. TissueTech received 17 SBIR awards amounting to nearly $5.50 million from the Department of Health and Human Services (HHS).

NIH grant support has been and remains critical to TissueTech’s programs. The company started on the basis of an RO1 which continues today and has provided direct research support for Dr. Tseng for more than 30 years, on a continuous basis.

Soon after its formation, the company started to win SBIR awards at NIH. This funding was especially important, according to Dr. Tseng, during the early 2000s when the company was still small and had very limited resources. At the time, SBIR funding paid for almost all of the development costs for TissueTech products. The company used a small amount of angel funding to provide a cushion, while operating to a considerable extent on the basis of SBIR funding.

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⁸⁴Brian McCurdy, “The Top Ten Innovations in Podiatry,” Podiatry Today, Vol. 25, No. 8 (August 2012), http://www.podiatrytoday.com/top-10-innovations-podiatry.

TABLE E-14 TissueTech Patents

SOURCE: U.S. Patent and Trademark Office

In 2001, the company brought its first FDA-approved products to market. Immediately after, CMS approved its products as reimbursable for Medicare and Medicaid, and private sector companies followed. Cash flow from product sales started to ease direct dependence on SBIR, but the company still largely relied on SBIR to fund the development of additional products. SBIR funding has since been used to develop two additional products.

The second additional product, PROKERA®, was approved as a Type II medical device, which had the effect of providing additional barriers to entry for potential customers. CMS then approved reimbursements for products approved under the new regulatory approach.

Equity Funding

In addition to grants from NIH, TissueTech has received Series A investment from a pair of venture funds.⁸⁵ (See Table E-15.)

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⁸⁵https://www.crunchbase.com/organization/tissuetech.

TABLE E-15 Equity investments in TissueTech

SOURCE: Crunchbase Equity Investment Database. Accessed February 14, 2015.

Operations

Although TissueTech does not generate income from operations, TissueTech’s subsidiary, Bio-Tissue, has shipped more than 200,000 units of amniotic membrane–based products and enabled over 150,000 transplants. Since 2007, its compound annual ground rate is 35 percent. DoD has proven a reliable customer with nearly $300,000 in procurement from BioTissue between 2007 and 2014.⁸⁶

ROLE OF SBIR

Dr. Tseng said that SBIR was critical for the period when the company was newly established. It would not have been possible to build a successful company without SBIR, which funded the technical development and hence allowed all commercial revenue to be used to fund commercial expansion. SBIR had also funded the subsequent development of the technology and would continue to be an important supporter as the company moved toward a biologics base for its technology.

Since its inception, TissueTech had spent 20 percent of top-line revenues on R&D. Originally, almost all of this was funded through SBIR. Today, with much expanded revenues, the share of SBIR in overall R&D expenditures is declining—in 2014, it was about 20 percent of the total: SBIR contributed about $1 million in 2014, while TissueTech invested an additional $5 million.

Dr. Tseng observed that the company had successfully developed one product for each of its SBIR-supported lines of research. Today, the company is receiving SBIR funding for its work on cell-based solutions. It planned to be the first biologics company in ophthalmology.

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⁸⁶“Bio-Tissue Announces 35% Compound Growth,” January 28, 2014, http://www.healio.com/optometry/business-of-optometry/news/online/%7B522a7d5d-c425-4c9a-a74d-cebd699e8f70%7D/bio-tissue-announces-35-compound-growth; “2013 Government Contracts Awarded,” http://www.governmentcontractswon.com/department/defense/bio-tissue-965469885.asp?yr=13.

SBIR RECOMMENDATIONS

Dr. Tseng said that his main concern was about bridge funding while the company took a product through the FDA regulatory pathway. This was of declining importance for his own company, which now had other resources available for this purpose, but he believed it would be a critical problem for other companies.

Currently, SBIR funding was available for Phase I clinical trials, and it was just possible—if resources were used very carefully—to use SBIR Phase II awards to complete Phase 2 clinical trials. However, in most cases that was not possible—and many companies faced huge challenges in finding that funding.