The Evolving Regenerative Medicine Business Model; Concept and Funding

The fast-paced, vibrant world of stem cell science has more than its fair share of brilliant minds. Many probably have at one time or another considered striking out on their own to market some new invention from their lab. Most never get beyond that initial daydream stage. But a few do decide to leave the academic nest.

If you count yourself among that number, be warned: Every venture cannot possibly be successful. For one thing, not every idea is commercially viable; maybe it has no market, or the market is already crowded with competitors. Academic researchers also are, well, researchers, and not MBAs; though they know the science, they need help putting together a business plan, keeping that business on the rails, and shepherding their ideas from the drawing board into commercial products. Finally, unless the researcher is independently wealthy, he or she will require help attracting people willing to invest in their vision – the angel investors and venture capitalists that provide the grease to keep a startup business running smoothly.

“Great science does not necessarily generate great business,” says Gregory Bonfiglio, managing partner at Proteus Venture Partners, a venture capital and advisory firm that focuses exclusively on regenerative medicine. “The roadside is littered with scientists who have done brilliant work in their labs and been unable to find a commercial product for it.”

Yet if you have the drive, the science, and the partners, the door to commercialization is open. Witness iPierian, an induced pluripotent stem cell (iPSC) company that has “raised more than $50 million” since its founding in 2009, according to a report in Xconomy.com. “Many startups say, if I had money, I would have a great business,” says Robert Palay, an investor, via the Tactics II Group he founded with his brother Thomas, as well as CEO and Chairman of the Board in Cellular Dynamics Inc. (CDI). “But the reality is just the opposite: If you have a great business, money is available.”

On a basic level, regenerative medicine businesses are no harder to set up than any other. Yet stem cell companies do pose additional challenges, as the field is so new and the science and regulatory landscape still so uncertain. Like many scientific discoveries that end up in commercial products, stem cell biology was originally developed in taxpayer-financed academic labs and is a relative newcomer to the business world. “There are no success stories yet to provide guidance for entrepreneurs in the area,” says Brad Webb, a venture partner in Claremont Creek Ventures.

Stem cell therapeutics development is likely to be costlier than some other branches of biotech, Webb adds, at least initially, because FDA will be wanting to dot their i's and cross their t’s as companies navigate the regulatory approval process. “This will be a very expensive and difficult business to make any money in, given the risk-averse nature at FDA and the many unknowns involved with the application of stem cells to humans.”

Still the critical factors to stem cell success would be familiar to any would-be entrepreneur in information technology or biotechnology. According to Bonfiglio, these include a “solid intellectual property position,” “large market opportunity,” a “strong management team,” a reasonable “exit strategy,” and an “acceptable risk/return profile,” among others. “But it starts fundamentally with good technology that can be commercialized,” he says – a technology upon which a product portfolio may be built.

Portfolio is the key word. One product does not a company make, says Palay. An idea that can lead to just a single drug or kit, or even a small handful, will not be attractive to investors, he explains; “We want a platform technology that has multiple products and can solve multiple needs.”

According Palay, a successful business requires three elements: “a world-class technology that lends itself to a number of product opportunities and addresses a very large market,” “a proven and capable high-quality management team,” and “sufficient capital to take advantage of the potential of the first two [elements].”

CDI, Palay says, met those criteria. Founded by James Thomson of the University of Wisconsin, Madison, CDI focuses on human induced pluripotent stem cells, a technology Thomson discovered in 2007. As Palay tells it, Thomson wanted him and his brother (both of whom previously founded and ran microarray firm NimbleGen Systems until its sale to Roche) to help him commercialize the technology, to build a company that could manufacture and sell high-quality iPSC-derived cells to researchers in both business and academia.

“That was an exciting idea,” Palay says, “because it creates a really compelling product matrix.”

For one thing, Palay says, the technology could in theory produce “literally billions of products,” basically any cell type from any individual with any genetic condition. For another, iPSCs offer numerous market opportunities -- in basic research and drug development, and as therapeutics and in tissue engineering. “We felt this would be a very big end use, if you could somehow manufacture [the cells],” Palay says.

With a management team including the experienced Palays at the helm, plus Thomson’s as a pioneer of human stem cells, the brothers decided to skip the “middle men” of venture capitalist firms and recruit investors directly. To date, Palay says, the company has raised over $100 million, and has over 100 employees.

In any business venture, the management team is critical, says Bonfiglio. “A poorly designed clinical program can ruin your chances to successfully commercialize a good technology,” he says. Perhaps just as troublesome is a management team with a particularly “rigid, intransigent, or entrenched” personality, one who is not open to other ways of improving the product or business plan, Bonfiglio says. “If you bring a technology that’s very compelling but there’s a guy with a personality that says, this individual is going to be very hard to work with, then I’m not going to invest,” he says. “Life is too short.”

Yet even if all the elements are in place, VCs can still be squeamish, says Ken Haas, a venture partner with Abingworth Management in Menlo Park, Calif. Though the company looks at probably 20 deals a week, Abingworth is not currently focusing on regenerative medicine, Haas says, and that situation is unlikely to change for at least a year, he says.

That’s because the market has been none too friendly to stem cells of late. Venture capitalists make money via their exit strategies – if a company goes public or is bought by a larger company. Yet stem cell companies have not, as a group, performed that well in either respect, he says.

Haas attributes that to a combination of factors including scientific risk, clinical risk, regulatory risk, and financial risk. Scientific risk – concern that the science won’t work as expected – has decreased over the past few years, Haas says. But clinical risk remains high, both from a safety perspective, as researchers don’t yet know how stem cells will behave in vivo, particularly longer term, and a pipeline perspective, in that therapies are moving to the clinic more slowly than anticipated. “That’s a worry,” Haas says: “Why are they being that cautious?”

Yet those risks are dwarfed, Haas says, by the concern that potential therapies will get entangled in regulatory red tape before they can even work their way through clinical trials. “The FDA has gotten more strict about safety,” he says. “I would say the clinical risk for stem cells has actually improved a bit over the last few years, but the regulatory risk has gone up disproportionately.”

Couple that with the increased re-financing risk caused by the dot-com bubble and the market collapse of 2008, says Haas, and many venture capitalists are “in a show-me mode.”

According to data compiled by PricewaterhouseCoopers, venture capital investments spiked in 2000 at $99 billion per year, up from $55 billion in 1999 and $20 billion the year before. By 2003, VC spending had plunged to $19 billion, then crept up to peak again in 2007 at about $30 billion. But in 2009, in the heart of the Great Recession, investment dipped again to $19 billion, and is “very low” so far in 2011, Webb says.

As a result, it behooves would-be entrepreneurs to be creative in establishing, running, and promoting their businesses.

Haas advises those looking to branch out into business to collect as much human proof-of-concept and safety data as possible under grants and other funding sources before approaching investors. “The further you can get on your own before you go commercial, the better off you are,” he says.

But, he notes “the venture model is not for everyone.” Researchers looking to commercialize kits and reagents, for instance, as opposed to therapeutics, might be better off trying to make a go of it themselves through family and bank loans without selling off the bulk of their company to VCs. That can be a more profitable option, he says, because VCs take a huge chunk of a company as they invest – up to 90% over time.

“If you end up being the sole owner of a business and you’re doing $10 million in revenue, you could probably sell that for $25 million,” Haas says. But after bringing in VCs and fully funding the company to an exit, a researcher might have to sell their company for $250 million to take home the same amount.

For scientists that are set on trying to secure venture funding, Palay suggests finding an experienced business partner to advise them. “Business has its own language, knowledge base, and metrics, and generally speaking scientists don’t understand that.”

It never hurts to talk to investors, says Webb. Most venture capital groups are keenly interested in helping entrepreneurs develop their ideas into companies. If you don’t know any VCs, start by approaching a university’s technology transfer office; they often have resources, seminars, and connections with local investors to get budding entrepreneurs on the right track. “To start out, keep [the business plan] short and simple,” Webb says. And remember, he adds: “The academic is not alone. If they need help and it’s a great idea, we’ll help.”

Also, remember that it is possible to farm out a piece of the business, rather than the entire operation, says Webb. “The recent history of pharma involves big reductions in their internal R&D,” he explains, “and so they use small biotech startups as their outsourced development groups.” In such a deal, the company essentially invests in a particular project or application of a drug platform rather than buying the company outright. The process is complicated, Webb says. But such deals “can be quite valuable for small biotech, as VC financing can be very difficult to come by these days.”

Finally, recognize that the world has changed since the heady days of the late 1990s, and capital efficiency matters. “The old model is broken,” Bonfiglio says. If there are ways to cut costs, do it, for instance by working virtually, sharing resources, finding collaborators, and defending only the critical intellectual property.

“You have to do more with less,” Bonfiglio says. “If that’s one of your guiding principles, that’s the kind of team I would like to invest in.”