Greg Bonfiglio is the founder and managing partner of Proteus, LLC, an investment and advisory firm that provides fund management and consulting services to the regenerative medicine industry. Proteus works with regenerative medicine companies across all stages of development from early stage to large pharma, as well as governmental entities pursuing regenerative medicine initiatives
Phacilitate: Proteus identifies and funds the most compelling opportunities in regenerative medicine. What decision parameters do you use to decide whether an interesting idea or product will develop into a high value, differentiated brand?
Greg Bonfiglio: Embedded in that question is an assumption that we would invest in only opportunities that are going to be home-run technologies. That’s not how we’ve structured our fund. We’re only going to invest in compelling technologies that have commercial potential that we think will be successes in the market, but there are singles, doubles, triples, and home-runs. We are open to investing in that entire range of opportunities.
A practical example of that would mean we would be interested in investing in a compelling drug for a small market, perhaps an orphan drug, if the regulatory path and the commercial parameters are such that it models out to be a commercial success. We’re not necessarily trying to fund only blockbuster technologies. We would certainly be interested in funding blockbuster technologies, as I think any venture fund would, but we think there’s real value in bringing technologies to smaller markets where there is a pretty straightforward regulatory path.
The challenges to commercialising that technology might be a little bit lower. There are a number of companies that have worked on orphan drugs as their way of entering a market, for a number of reasons, for example, the regulatory path is more straightforward, you can do clinical trials that are on a smaller scale and you often get accelerated treatment through the regulatory agencies. There are a number of reasons why you might want to pursue a product or technology that addressed the market that wasn’t a blockbuster market, and we certainly would be interested in that.
Having said that, we pursue a very thorough and rigorous diligence process. Our due diligence criteria are quite extensive; we look at all of the major diligence criteria that any biotech venture fund would examine, plus we have a very deep and detailed set of criteria specific to regenerative medicines. The initial driver is really around technology; the technology itself has to be very compelling, unique, and protectable.
We’re looking for technologies that will provide a fundamental change in the way things are done, as opposed to a stepwise increase or an incremental improvement over an existing technology. We’re looking for things that really fundamentally change the treatment paradigms for different diseases.
Technology is the initial driver, and then a close second would be looking at the management of the company, who’s behind the company; are they folks that are experienced in commercialising technologies? Are they leaders in the field? If they’re coming out of an academic setting, do they command respect in the community? Because that’s going to be important downstream as you try to enter the market. Credibility and respect in the community are also important when working with regulators.
It’s not absolutely essential to us that a management team have already done three, four, five companies. One of the things that I think we bring to the table is a good sense of the challenges inherent in commercialising regenerative medicine technologies. We can work with management teams that are a little more junior but it certainly is nice to have a team in place that has the experience to address the major issues that come up.
We also look at the intellectual property portfolio that protects the technology. We have a somewhat unusual view there in that we don’t insist on freedom-to-operate opinions from IP counsel. It’s nice to have a freedom to operate opinion, but frankly, I’m not sure they provide significant value. The patent landscape in regenerative medicine technologies is quite complex -- many have called it a patent thicket. In that context, freedom to operate opinions are challenging. What I’m looking for is a strong enough intellectual property portfolio to give the company a meaningful seat at the table to negotiate effectively, and from a position of strength, when a challenge to the intellectual property portfolio is pursued by a third party.
It’s unlikely that you would get a clean freedom-to-operate opinion from IP counsel in a broad therapeutic in regenerative medicine unless it is absolutely unique. There have been so many patents filed and, as many others have noted, we’re kind of in a patent thicket. The rate at which patents are filed is something like 25% a year compound annual growth. So, you’ve got a very complicated IP landscape that you’re working in. It’s not realistic to expect to get a clean freedom-to-operate opinion or to expect that you’re going to have absolute blocking rights over others.
This complicated IP landscape invites litigation. If we all conduct ourselves intelligently we won’t end up here, but one scenario when you’re in a patent ticket is for everybody who holds a patent to start suing each other. Then you end up enriching a lot of lawyers, not advancing your technology and wasting a lot of time and money. Ultimately, those lawsuits are typically settled through cross-licence agreements.
A more intelligent way to approach that is to skip the litigation part altogether and to sit down at the table and negotiate a licence that respects everybody’s rights and offers each IP holder an opportunity to pursue the market that they’re interested in. I don’t want to be too Pollyanna about it, but I think that is a more efficient and effective way to move forward.
It’s certainly happened in other fields around, for instance, semiconductors. There was a lot of competition in IP patents in the semiconductor industry in the early stages. Ultimately, some significant cross-licensing agreements were put in place that really advanced the field as a whole. There are just some fundamental things in the structure of a chip that everybody needs to be building in the same way so that they can work together.
There are some parallels there for our field, and I would hope that at some point there will end up being some broad-scale cross-licences as opposed to litigation. We haven’t seen a lot of litigation. We have seen some; in the early days of the hESC technologies there was a big battle between Geron and Advanced Cell Technologies, and WARF has been involved in some litigation as well. Fortunately, we haven’t seen a lot of that in recent times; I think people are behaving more appropriately.
Then the next thing we look at is the regulatory path; what is your strategy for regulatory approval? Are you going to go to Japan, for instance? Do you have a strategy for pursuing a regulatory path in Japan as your first market because it’s a little easier path to take and more accelerated? They have a set of regulations that are specifically tailored to regenerative medicine technologies. Or are you going to take on the FDA? If you are, then what is your strategy there? So, we look at the regulatory path and the challenges.
Then, of course, we’re looking ultimately at the market. If you are successful running the gauntlet of the regulatory path, etc., then what is the size of the market that you’re going to address? What does the competition out there look like?
We look closely at not just the current standard of care, but we look at what other technologies are in development, because, as you know, this is a long development cycle. It’s going to take somewhere between five and ten years to get your technology to market if you’re at an early stage. We’re an early-stage fund, so what is the world going to look like five to ten years from now? What is the competition then? Then, of course, we also look at reimbursement.
Then back under the technology heading, we look at the core technology: what is the underlying technology on which the therapeutic is based? As a part of that technology diligence, we look at how are you going to be able to commercialise this technology? How are you going to be able to manufacture your tissue or your product at scale?
One of the real challenges for the field has been that, since it is an emerging field, most of the underlying technology – the process in developing the underlying technology, the manufacture of the cells – has been at very small scales, academic-level stuff. It’s not typically optimised to manufacture at a larger scale, so scale up and scale out are both big issues and serious challenges.
We’ve seen a number of large commercial efforts fail because of that. Dendreon is probably the best example recently. They achieved a $5bn market cap and ultimately went bankrupt because they couldn’t manufacture their cells at a commercial scale in a cost-effective way.
That’s just an overview of the diligence process that we go through. It’s a fairly lengthy process, and we’re fortunate to work with people who are very experienced in the field and can dig in quite deeply on each of those issues.
Phacilitate: For the investment community, what are the major hesitations today in investing in the advanced therapy field?
Greg Bonfiglio: If you’d asked me this question five years ago before the Kite, Juno, Bluebird immunotherapies broke onto the market, I would have said that one of the major problems is there hasn’t been a major commercial success yet. Dendreon came close, Advanced Tissue Sciences came close years ago, but they both went bankrupt.
In the last four or five years, there has been a huge upsurge of interest in cell therapies & gene therapies, the core technologies in regenerative medicine. That’s in large part due to the really remarkable results, the dramatic results that have been demonstrated by cancer immunotherapies. They’ve shown response rates 70 - 80% in some of their clinical trials. These are truly remarkable results, and they offer hope that in the near term we’ll have cures for some forms of cancer.
That, of course, has generated large market caps for companies at very early stages in their technology development. Some immunotherapy companies have garnered billion-dollar market caps for technologies that are still fairly early in the development cycle.
That got the attention of a lot of folks in the investment community. Venture capital, private equity, investment bankers, everybody started paying attention when these early-stage companies were achieving market caps in the multi-billion dollars.
Right now I would say there is a very high interest in investing in cancer immunotherapies, in gene therapies, in engineered cells. There is a lot of money available right now, in venture funds and other investment vehicles, to fund those technologies.
There still are some concerns from the investment community about investing in primary or native cells – on simple, straightforward cells. If you are a mesenchymal stem cell company – you’re Mesoblast, or you’re Athersys, or another company trying to commercialise mesenchymal style cells – or you’re a company trying to commercialise hematopoietic cells - and you’re bringing the technology forward using those native cells, as opposed to an engineered cell, you’re probably going to have a much more challenging time to raise capital than you would if you were bringing an engineered cell forward. Again, the reason is that we haven’t had a major commercial success around a native cell yet. I think we’re going to see those in the near term, but we haven’t yet.
The field is bifurcated in some ways. If you’re in gene therapy or you’re working with engineered cells or a cancer immunotherapy, you’re probably going to find ready access to a number of willing investors – at least folks who’d be willing to talk with you. If you’ve got a compelling technology, you may likely have people bidding to get into your deal. If you’re working with native cells, it’s going to be more challenging. Again, it’s all about whether or not we’ve seen in the market commercial successes. Unfortunately, we haven’t yet seen a major commercial success based on a native cell.
Phacilitate: What should early-stage biotechs be doing to improve their chances of investment?
That’s a pretty easy answer for me, and that is: demonstrate that you have a compelling value proposition. That means demonstrating you’ve got an underlying technology that is truly unique and is going to change a particular part of the field. You also should be prepared to demonstrate that you are pursuing a rational regulatory path and that your manufacturing program is scalable.
The first two things you’ve got to focus on is one is your underlying technology. You wouldn’t be in business if you didn’t believe your technology had some value, but you need to take a hard look at that technology and make sure that it’s more than interesting science. Interesting science doesn’t necessarily make great business; good science doesn’t necessarily make a great business. So, you’ve got to look at the core technology and make sure that this technology is unique and it is really going to provide a fundamental change in the treatment of diseases.
Then, two, take a very hard look at your regulatory path and be realistic about how you’re going to structure your regulatory path, because for early-stage companies value is created – from the investor perspective, and I hope from the company perspective as well – value is created in only one way. That is moving your technology through the regulatory path towards the market.
You will create value in your business as you move your technology successfully through phase one, phase two, and phase three, and into the market. So, if you’re an early-stage company looking for funding, you want to demonstrate that you have a compelling technology that is going to create real value because it can bring a new approach to therapies for whatever disease you’re targeting – one. Two, you’ve got a regulatory path that is straightforward that you can execute on and is not going to cost a fortune to get through it.
The good news is in these days we now have a number of options as to how you can move forward with your regulatory path. You can focus on the US and try and beat the doors down at the FDA, or you can go to a jurisdiction that might be a little bit easier to deal with – Japan or Canada, for instance.
If you can do those, those can be parallel paths; you can begin a regulatory programme in Japan at the same time you’re working with the FDA. You’re probably likely to get through the regulatory cycle in Japan to the commercial market years before you would in the US, but at least you’re in the market. You’re generating revenue; you’re gathering data or producing additional data that may help you with the US.
You could follow that same kind of strategy, starting your regulatory cycle in Canada. The Canadian government and the Canadian Health Authority have a regulatory regime for cell and gene therapies that is largely equivalent to what’s in Japan. Unfortunately, it is not formalised in guidelines and rules the way it is in Japan, but Canada was the first country to approve a cell therapy. So, the Canadian Regulatory Authority looks very favourably on cell and gene therapies. They’re easy to work with, they’re intelligent, they know the field, and so there are a lot of reasons to think about starting there.
Then the third thing would be to demonstrate that the management team has the ability to manage the business from an academic project, which is really what it is when it comes out of academia, through to commercialisation – from bench to bedside. That means you typically need to have somebody on the team who has some experience in business that’s not only the academic founders.
Phacilitate: Proteus has a non-profit regenerative medicine fund. Why is this important for the development of this research field?
Greg Bonfiglio: It’s important for a number of reasons, even though primarily it is to provide the capital to do the very early-stage technology development.
As I said earlier, there’s been a renewed interest in the field of regenerative medicines, and cell therapies, and gene therapies. That has attracted a lot of new capital to the field. That’s great news for companies – early-stage companies – trying to commercialise their technologies. It’s great news for any company working in cell and gene therapy. But we still have a valley of death; the valley of death has just moved back a little bit and it’s narrowed. Again, that’s very good news, but there is a valley of death between grant funding, when you do your proof of concept work, and developing the kind of data that wouldn’t get a venture group interested.
Even in these days, if you’re pursuing a cell or gene therapy, you’re probably not going to get a lot of interest from a venture fund until you have some human data or you’re very close to getting your IND filed. That means there’s still a gap between the data that you typically develop when you’re doing your grant work – work that is funded by grants. You’re developing your proof-of-concept data, and there is a gap between proof-of-concept data and the data that’s required to get an approval of an IND.
You’re typically doing your proof-of-concept data in mice, and very often you have to go to larger animals and develop large-animal data in order to get your IND approved. If you’re lucky enough to be able to do your work all in mice or rat models, very often there are a number of studies that need to be done beyond proof of concept to get your IND. So, there’s a gap there and that gap is one that right now there just isn’t funding available for.
That valley of death still exists, so our notion in creating a philanthropic fund was we would tap into folks, typically high-net-worth individuals who are interested in the field and are interested in philanthropy. What we’ve done is created a vehicle for those folks – those kinds of folks who have resources, and are interested in philanthropy, and are interested in the field – to donate to the fund. They make a donation, they get a tax deduction for that donation, and then that money goes into the fund.
It is an evergreen fund, so meaning that the money that is invested stays in the fund, in the sense that we deploy it out; we give it to folks to help do their early-stage development. We take an equity piece in their business, but, unlike venture guys, who have to have a return within typically 5 to 7 years of the time they make their investments, we’re able to let that money sit with the company for 10, even 15, years. Then, when the company is successful and we are able to get an exit, we take the profits that we’ve made from that investment and put it back into the fund and use it to fund the next vehicle.
We’re only able to do that because the fund is not measured and dependent on an ROI. We don’t have to show a particular return on investment at 5 years and 7 years or 10 years, as you do in a venture fund. If you’re running a venture fund and you can’t make your investors 20/25% over the life of the fund, compound and annually, you’re not going to be able to raise your next fund. Financial investors are driven by returns; philanthropic investors are looking to accelerate the development of the technology and try to have an impact on the field of healthcare as a whole.
There are a number of folks, there are a number of individuals and foundations like that, and they’re very interested in moving the technology forward. Having a philanthropic fund is an excellent vehicle to allow them to participate in the field. It also helps us bridge the gap between that academic work and the commercialisation.
Typically, what we’re doing is coming in and meeting with the professors, develop their proof of concept data, and providing them with the funding necessary to do the things I described that would interest a venture guy: put your business plan together; put your regulatory path together. Develop that other data that are necessary to get your IND into mouse, rat or pig data that you need in order to get your IND approved.
Then it doesn’t typically take huge amounts of capital; typically, the philanthropic fund would be investing no more than a million, maybe two, in any technology trying to get that technology teed up for a venture investment. The fund size that we’re targeting is in the order 25m.