*If you live under a rock and don’t know what The Terrible, Horrible, No Good, Very Bad Pharma Day is, please see:

• USA Today, September 18, 2015: Company hikes price 5,000% for drug that fights complication of AIDS, cancer
• Forbes, September 23, 2015: A Timeline of the Turing Pharma Controversy

While we are seeing significant interest now, this phenomenon didn’t actually start on a single day. For example, here is an article from the Wall St Journal from April 2015  Pharmaceutical Companies Buy Rivals’ Drugs, Then Jack Up the Prices

Biotech venture funding metrics continue at historic highs, highlighting that the robust financing environment in the public markets continues to fuel the private markets as well.

 – Bruce Booth, partner Atlas Venture in Data Snapshot: Venture-Backed Biotech Financing Riding High, April 2015

Here in Madison, Wisconsin, you might not know that was true if you didn’t read the news. The equity funding environment in smaller hubs (e.g. Madison) is different that in major centers of biotech (e.g. Boston, San Francisco). There are both old and new dynamics that make building the next big thing (quickly) a significant challenge outside the coasts. Today I wanted to look at one of the old dynamics that remains true today.

When out looking for venture funding, one of the early questions a biotech company located in a smaller hub will get is about their local VC – are they in on the deal? (This query may be before or after another common question: is the company willing to relocate?) The answer seems like a clear yes or no but in practice is much more nuanced. To explore, let’s look at the typical life cycle for a venture fund. I’ll break down the issues using a hypothetical venture capital firm that is the only institutional biotech investor in the state during the course of the funds. Because I am not feeling creative, I am loosely basing the numbers on our single WI-based fund, whose internal dynamics are completely unknown to me other than their website and related news stories. (I know the people at the firm from various community efforts.) Therefore, I’ll make a large number of assumptions, noting when/if there is actual support for them.

Lifetime of a Fund

Venture funds historically have a ten year life cycle. The funds are generally invested in the first three to five years with the goal of an exit by the end of the ten years. (In practice, many funds last longer.) Due to the finances of running a fund, most firms will try to raise a new fund that begins as the previous investing ends (3-5 years into a fund). For our purposes, we’ll consider an initial $120M fund followed after five years with an $80M fund (similar to the local fund). While in theory, a fund would running out of money at the end of year five, a fund will be holding on to money for follow on rounds for their portfolio companies (even if the target number of companies was reached). As you have likely guessed, my explanation about getting local VC on board is more nuanced than cash in the bank.

The greater challenge here is to determine the number of companies each fund will support. For the assumptions, we will use 25 companies with the $120 million fund ($4-6 million/company) and 30 companies with the $80 million fund ($2-4 million/ company in part to reflect change from mostly biotech). (The local fund indicates “Seed rounds starting at $50,000 up to $8.0M over time.”)

Business Type

While a fund may invest in a single sector, the one fund headquartered here in Wisconsin invests across sectors, so we’ll use that approach. We are going to assume that the first fund was weighted towards biotech and that the second fund will be more equally weighted with sectors such as energy and technology (similar to description of local fund). A poor assumption that will make this exercise easier is that the fund will view all companies/markets in a sector equally, without considering what is already in their portfolio. While there are a handful (e.g. in oncology are Aglaia and Nextech), most biotech venture firms have a broader view than a single therapeutic area.

So perhaps in Wisconsin we would see four new biotech companies per year getting funded from our hypothetical fund, so where is the problem? Bruce Booth, partner at Atlas Venture, suggests that ~100 new biotechs are formed each year, which would mean little ol’ Wisconsin was seeing a disproportionate share of the early stage biotech investment. But there is another stop on this assumption trail…

Geography

There are two factors to consider: 1) Funding rounds happen in syndicates (multiple firms in each round) and sometimes you have to give not take. 2) Some funds have to make geography-specific investments. (Our local fund has a Michigan office and needs to make certain investment targets there.) Here, we carry over our assumption about number of companies and add that the first fund is more heavily weighted to Wisconsin while the second is more evenly distributed across Rest of Midwest (namely Michigan) and US. Rather than our theoretical high of 5 new Wisconsin companies per year, geography issues scale our numbers back to a total of 2-3 new companies in Wisconsin raising money from the fund each year.

Net Result?

Given the constraints on funds, perhaps the surprise should be when the timing and needs of companies in small hubs overlaps with the local funds. I could say let’s double down on funds for Wisconsin but my limited exposure to that solution suggests we would see more local/regional syndication rather than attracting coastal capital.

There is a bigger issue underlying the question about local investors; it is a proxy for whether a trusted source has vetted a team, technology, and product (and passed). A couple of years ago, I suggested that management needs to invest in long distance relationships to solve the capital problem, and I still believe that is the case. Stronger relationships with coastal funders and partners will help close the credibility gap that exists. I will write more about this topic later, but success in this area will require not just the entrepreneurs and biotech companies but also support from community players. As a mini-preview, here is an example that Bruce Booth from Atlas recently shared about a “regional” fund of funds out of Ohio that has an interesting approach.

“Mo Money, Mo Problems” – Notorius B.I.G

This post was prompted by this report on the status of Dane County’s (includes Madison) biotech industry in In Business magazine. Beth Donley, CEO of Madison-based Stemina Biomarker Discovery, noted this issue related to the practice of both the Wisconsin Alumni Research Foundation (WARF) and State of Wisconsin Investment Board (SWIB) to invest only alongside institutional investors rather than individuals. Since there is only one local VC firm investing in biotech, these supplemental funds are limited to a small portion of local companies. But it is very easy to get caught up in the local investment dynamics. Here is a table of recent biotech investments in Madison. You see a lot of angels and very few venture capital funds. One shining example is Propeller Health, which I hear has raised only a small proportion of their funding from an early Wisconsin angel and the remainder from coastal VCs. The bigger challenge is how to we position ourselves to participate in the “historic highs” that the rest of the biotech community is seeing? Doing so allows us to tap into capital at a scale that will allow our businesses to thrive.

From In Business magazine, May 2015 (http://www.ibmadison.com/In-Business-Madison/May-2015/Market-Report-Dane-Countys-Biotech-Industry/)

You may have seen some recent editorials about the necessary frequency of blood tests for healthy individuals, many of them prompted by a series of tweets from Mark Cuban:

Although there are certainly potential dangers in expecting any and all test results to be immediately informative and/or actionable, there are benefits in disrupting the status quo of how and when we collect information. A potential parallel is the “wearables” market, which has seeped from the “enthusiasts” (so-called quantified self-ers) to being used in trials of new drugs as well as disease research.

Blood Testing: Cost

One significant area of potential benefit to increased attention is cost. Generally when your physician prescribes a drug, you are asked what pharmacy to send the prescription. When told to get blood tests or imaging services, patients (in my experience) are sent to the affiliated providers. The burden is on the patient to ensure that the affiliate is covered by insurance. Even when they are, patients with high deductible plans (a growing number) are likely to become price sensitive IF there are straightforward ways to comparison shop and buy. Having gone through this exercise more than once myself, determining prices for medical services can be time consuming and frustrating, often at a time when money is the last thing you want to be worried about.

Although they have pushed their technological innovation as what allow it, pricing is apparently one of the main differentiators for biotech company Theranos (Forbes article; Theranos test/price list):

Its prices are often a half to a quarter of what independent labs charge, and a quarter to a 10th of what hospital labs bill, with still greater savings for expensive procedures. – Forbes

Theranos provides their tests through partnership with Walgreens, but there are companies that offer online blood tests directly to consumers, including WellnessFX, Direct Labs and most recently publicly traded Lab Corp (overview of the market from Bloomberg).

Blood Testing: Access

The players above are currently not available in all geographies as all require you to show up somewhere for the blood draw. In addition, in some areas, patients need a doctor to have blood work done. Theranos has also been vocal about the right of individuals to get blood tests without a doctor, for example supporting a recent change in Arizona law.

These companies aren’t the only ones looking to increase access to expensive blood tests. A much smaller company, Cue, is developing a system for at home testing of a small number of factors, such as testosterone or C reactive protein, using either saliva or blood droplets. The system is currently projected to ship to the first customers later this year. (Their FAQ has some additional information about their approach, including that the initial sales were done using an Investigational Device Exemption.)

Although Cue is focused on the consumer market, another medical trend, point of care testing in resource-limited environments, is driving progress in this space. Over the last few years, multiple research groups have described smartphone-based tools to run a lab test (specifically an Enzyme-linked immunosorbent assay or ELISA) that can be used for a wide range of diagnostic tests on blood. Some examples include research on infectious disease and cancer (here, here).

Quantified Self and Drug Dosing

I am not particularly interested in quantifying myself, but as a cancer drug developer and someone who has seen loved ones before, during and after chemotherapy, the possibility of (relatively) inexpensive and easily accessible blood tests is really exciting. Why? Because the way we determine the dose of cancer drugs a patient will receive has little to no relationship to “precision medicine”.

Dose is a straightforward way to refer to how much drug is given to a patient. However, the dose is not the only factor that contributes to how much drug a patient is actually exposed to. The same dose of drug may result in different exposure levels in the same person on different days and/or in different patients. There are a variety of common examples and two are provided.

For many calcium channel blockers (used to treat high blood pressure), the addition of grapefruit juice to a patient’s diet can increase the amount of the drug in the patient’s bloodstream. Grapefruit juice can have the opposite effect for other drugs, such as the cancer drug etoposide. In this case, a cancer patient might take a dose of drug shown to have benefit but the amount of drug in their body may be too low.

Some differences between patients can be traced to their genes. Some individuals have subtle changes in their genetic codes that alter the way their body breaks down drugs. The most common of these differences is in a family of proteins called the cytochrome P450 enzymes (CYP450). The dose of certain drugs, such as the cancer drug tamoxifen, may be modified based on genetic testing to determine how a patient metabolizes (breaks down) such drugs.

Coming back to cancer drugs specifically, getting the dose right is important because the therapeutic window (the difference between benefit and toxicity) tends to be much smaller than for other diseases. In the figure, you can see that as more patients have a benefit from the drug (traveling up the blue line), more patients are experiencing toxicity (traveling up the red line).

For oral cancer medications, the drugs are generally given in set doses (for example 100 mg of drug). Given what we talked about above, you probably aren’t surprised to hear that there is variability in the amount of drug patients “see”. (You can read more here if you have access.) A more opaque issue is that doses of many drugs (particularly chemotherapies given by intravenous infusion) are determined using something called body surface area (BSA), which is a formula based on a person’s height and weight. You can see that it is an attempt to “personalize” dosing. Unfortunately, the evidence suggests dosing by BSA is not the best way to achieve that goal. (You can read more here and if you have access here.)

Determining the amount of drug in the blood over time is called a pharmacokinetic assay and requires multiple blood draws as well as a way to detect the specific drug. While these tests are done during clinical trials, they are rarely a part of regular treatment regimens. There is a company called Saladax working to change that and bring cancer drug dosing into the era of personalized medicine with their MyCare tests. (I have no relationship with them but think it is very exciting.)

Although Saladax is working to bring these tests to health care providers, imagine an option down the road where you are able to test your cancer drug levels at home, accounting for all those variables of what you ate, the delay in taking the previous dose, etc. When we are working on the edges of benefit and toxicity, the ability to personalize doses could make a significant difference in quality of life for patients.

Knowing drug levels could also be helpful outside of oncology. Theranos can currently test for a handful of drugs, including tricyclic antidepressants. These drugs are an interesting example as going off of these antidepressants requires tapering, which is done using general timelines as opposed to actual blood levels.

Other Cool Things We Could Do With Blood

Expecting every test, every time to yield informative and actionable information is not the goal here. BUT driving down cost and increasing access to blood tests will allow scientists and clinicians to ask and answer questions we haven’t been able to before.

Monitor Nutrient Levels Remember Cue, the company that plans to let people test vitamin D levels at home? There are suggestions in the clinical literature that vitamin D deficiency lowers the efficacy of rituximab when given as part of a regimen for Diffuse Large B-Cell Lymphoma as well as worse survival in general for

patients with Follicular Lymphoma. Allowing patients to test various measures at home rather than only when at the hospital could lead to additional insights about improving diet during treatment or for overall health.

Optimize New Immunooncology Treatments One of the exciting new areas of cancer treatment involves getting the immune system to go after the cancer cells. Currently, blood work includes measuring a subset of immune cells called white blood cells, which includes the broad categories such as “lymphocytes” that counts all B cells and T cells. As our understanding of immunotherapy has developed, these populations of lymphocytes have been split into smaller groups and their impact on the response to therapy has been appreciated. Many immunooncology drugs are being explored in combination with drugs that can stimulate a good population of immune system cells. However, measuring these more defined cell populations, such as the regulatory T cells or the myeloid derived suppressor cells, is a much more complicated endeavor than a traditional blood panel. As a variety of companies are working on new instruments, pushing the cost of traditional blood testing down could help create room in the market for these newer, higher value tests.

Expecting every test, every time to yield informative and actionable information is not the goal here. BUT driving down cost and increasing access to blood tests will allow scientists and clinicians to ask and answer questions we haven’t been able to before. AND hopefully that will lead to better outcomes for patients in the short and long terms.

https://twitter.com/megancgraham/status/575327753295298561

At Quintessence, we licensed multiple technologies discovered at the University of Wisconsin Madison (WARF). It took us some time and money but we developed a compelling program from one in cancer drug development.

When “selling” your science/technology, you should be able to articulate what problem your product solves for your customer. While this tidbit sounds like sales 101, I spend a lot of time figuring out whether and how my product fits into the pipeline of a potential pharma partners or the portfolio of a venture capital company. In oncology, this exercise has become more challenging as our industry has brought a number of great drugs to market over the last decade. But funders/partners see too many stories to do the heavy lifting of figuring out market fit to understand if they should buy your product. I’ll post more on this topic soon.

I didn’t mean to say that on stage but there it is. I recently wrote another post that applies here: We All Need a Risk Framework, which is based on a book by Howard Marks, Chairman and cofounder of Oaktree Capital Management. (To hook you into reading the post, the end is a quote from Bruce Booth at Atlas Ventures about cancer drug targets.)

Thanks to MedCity News for the opportunity. Looking forward to next year’s event.

The following tweet came through my stream during the Miami Breast Cancer Conference last weekend.

https://twitter.com/DrAttai/status/571672383439937536

Dr. Sledge, a Professor of Oncology at Stanford, was giving a talk called “Tumor Heterogeneity: What it Means for Patient Care and Research”, which is summarized here (video). One of the key takeaways is that each patient with cancer can have different cancerous cells in the main tumor as well as at each metastatic site.

Perhaps that is why a few stories this week that caught my eye about “macroscopic” approaches to improve selectivity (and outcomes) of cancer treatment. Here is a small sampling:

• Could location of a colon cancer be a factor in survival? From researchers at University of Southern California Norris Comprehensive Cancer Center in Los Angeles.
• Does the pattern of immune system cells in a breast cancer biopsy better measure immune response than number of cells? From researchers at the Institute of Cancer Research in London.
• Determining sequence of treatment (surgery vs. chemotherapy) by a score from laparoscopy is highly predictive of optimal tumor resection for ovarian cancer patients, which is significant as residual disease is a strong indicator of overall survival. From researchers at The University of Texas MD Anderson Cancer Center in Houston.

While apparently less glamorous than the genomics that seemed to capture media attention, the NIH’s Precision Medicine Initiative Workshop had sessions on informatics, EHRs and data access (see the white papers and presentations). Of note, the EHR section demonstrated the pitfalls of finding genetic data in the EHRs. Capturing results from surgical descriptions or scans is likely to be similarly challenging. Given the biological complexity of cancer, the macroscopic data should be a prominent part of the development of precision medicine in oncology.

UW Madison MS Biotech Program – Advanced Biotechnology: Global Perspectives – Session 5 Panel Topic:  

Case study on how and when “technology” becomes a medical device for patients with diabetes.

Subtopics Related to Session Topic:
Please consider these perspectives in your presentations:

• Technical overview of glucose monitoring devices and their use by diabetic patients
• Regulatory explanation of when a technology is a device and the level of risk the new product entails
• Ethical exploration of patients developing (and potentially sharing) their own technology solutions
• Business model for device makers in providing new technology, including the potential need for (and cost of) FDA review

References Related to Panel Topic:

• Patient “Hackers” and Diabetes
  • Wall Street Journal article 
  • The Nightscout project
  • Wired story 
• Dexcom Continuous Glucose Monitoring (CGM)
  • Dexcom Mobile Apps
  • Dexcom SHARE
• FDA recently “permitted marketing” of Dexcom SHARE.
  • FDA announcement
  • News report with additional context 
• National Medical Device Curriculum is a series of fictional case studies designed to help academic institutions and science and technology innovators understand FDA’s medical device regulatory processes
  • Regulatory Pathways for Medical Devices: Choosing the Right One
    • Case Study
    • Instructor’s Guide

I was late to the conversation, but my answer is…it depends. Here are a few questions to consider about “optimal” burn rates.

• What kind of company are you building? The others made this point as well (single asset vs. platform) This issue is important because your potential exit will impact how much you should raise (and thus how much you can spend).
• Do you need to do the benchwork yourself? This one is related to the question above, but there are situations where building out a key technical competency for a single asset makes sense (e.g. when the methods aren’t common/available at contract research organizations).
• What milestones are you working towards? Your specific activities will drive your burn. Discovery to lead entails different costs than taking a candidate you in-license into IND-enabling studies. The goal is to  get to your milestones (on time) with the money you raised.
• What is the competitive situation? (aka should you spend more cash to potentially save time?) A recent example is DNA editing technology CRISPR. Here is a recent overview of the intellectual property in this area from MIT Technology Review.

David Grainger, Index Ventures

Grainger has shared his thoughts on his blog, including this post The Zero Person Biotech Company that focuses on the virtual model.

Katrine Bosley, Editas Medicine 

This comment is great but short (darn 140 character limit!), so here is a longer post on capital efficiency from Booth at Atlas.

Additional Stories…From Entrepreneurs 

At Atlas Venture, the entrepreneurs in their portfolio companies contribute to a blog series called From the Trenches. Jonathan Montagu, the CBO at Nimbus, has written about their virtual experience. Kevin Pojasek, CEO at Quartet Medicine, provided an overview of the portfolio companies that includes some of their lean experience.

Marks’ Three Steps of Risk

Marks provides three chapters on dealing with risk in investing, each with a specific focus.

The first step consists of understanding it. The second step is recognizing when it’s high. The critical final step is controlling it.

Probability Distributions and Risk

This graph should be on the cover of this (or another) book. The relationship between risk and reward (sort of like return) is often discussed as though it is linear – more of one leads to more of the other. But in this straightforward visual, Marks demonstrates the fallacy of that idea. (One could quibble about the use of normal distribution for the curves but the takeaway is still important.)

What is Risk?

Our next major task is to define risk. What exactly does it involve? We can get an idea from its synonyms: danger, hazard, jeopardy, peril. They all sound like reasonable candidates, and pretty undesirable. And yet, finance theory…defines risk very precisely as volatility (or variability or deviation). None of these conveys the necessary sense of “peril.”

This paragraph really resonated for me personally. The finance definition has no emotional connation – there is volatility in being a new parent as well as in losing a loved one. This definition is more meaningful once Marks adds to the equation (see below: Risk + Adversity = Loss).

Kinds of Risk

There are two kinds of risk conversations I tend to have with other entrepreneurs. One uses adjectives such as inherent and acceptable to describe action related to the risk. The second is more common in biotech/pharma and revolves around separating risk into two buckets: business vs. technical. Marks moves beyond the more concrete areas and enumerates a number of psychological risks in investing, including:

• Falling short of one’s goal
• Underperformance
• Career risk
• Unconventionality
• Illiquidity

While the risks taken are different for investors and entrepreneurs, these categories are spot on in my experience as and with entrepreneurs.

Measuring Risk

An important question remains: how do they measure that risk? First, it clearly is nothing but a matter of opinion: hopefully an educated, skillful estimate of the future, but still just an estimate. Second, the standard for quantification is nonexistent…. Third, risk is deceptive.

Marks’ second step – recognizing when risk is high – can only be accomplished if you have a framework for comparison, which requires measurement. Not only is “accepting risk a personal matter” but measuring it is also “a matter of opinion”. Bring together technical and business experts not only identify different risks but each group sees different levels of risk in the other areas. In my experience, greater risk is generally seen in the other person’s activities.

Risk Management is an Unheralded Skillset

Since it’s hard to gauge risk and risk-adjusted performance (even after the fact), and since the importance of managing risk is widely underappreciated, investors rarely gain recognition for having done a great job in this regard. That’s especially true in good times.

I believe entrepreneurs (and management) have the same recognition issue, and this idea ties back into the psychological risks noted above, such as underperformance.

Because Risk is Invisible

Why isn’t risk management celebrated? I’m glad you asked.

risk is covert, invisible. Risk— the possibility of loss —is not observable. What is observable is loss, and loss generally happens only when risk collides with negative events.

This is a very important point, so let me give you a couple of analogies to make sure it’s clear. Germs cause illness, but germs themselves are not illness. We might say illness is what results when germs take hold. Homes in California may or may not have construction flaws that would make them collapse during earthquakes. We find out only when earthquakes occur.

Risk + Adversity = Loss

Likewise, loss is what happens when risk meets adversity. Risk is the potential for loss if things go wrong. As long as things go well, loss does not arise. Risk gives rise to loss only when negative events occur in the environment.

Coming back to the definition of risk, the variability (possibility for multiple outcomes) in itself is not sufficient to cause loss.

Avoiding Loss

Risk control is the best route to loss avoidance. Risk avoidance, on the other hand, is likely to lead to return avoidance as well.

Here is the crux of the entrepreneurial experience. Building a business requires one to take risks, but risk control can be challenging when you are close to a situation. (Here is some insight from Kahneman about entrepreneurs (here & here) and executives exhibiting more optimism than warranted.)

Biggest Risk = Believing There is No Risk

There are few things as risky as the widespread belief that there’s no risk.

Pstscript: Worry, Skepticism and Pessimism

There were chapters on how to be a better investor and I picked a couple of highlights that apply to entrepreneurship:

Worry and its relatives, distrust, skepticism and risk aversion, are essential ingredients in a safe financial system.

Who wants to be around a distrustful, skeptical worrywart?!? But as I thought about these attributes, they are part of my job description…imaging what might go wrong so we can take actions to avoid those outcomes. From a personal perspective, working to focus these behaviors on specific areas rather than having them as default across the board is very important.

that triggered an epiphany: skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.

In simpler terms, don’t just follow the herd. Or as Bruce Booth (@lifescivc) wrote about cancer drug targets, avoid lemming behavior.

Worry about the possibility of loss. Worry that there’s something you don’t know. Worry that you can make high-quality decisions but still be hit by bad luck or surprise events. Investing scared will prevent hubris; will keep your guard up and your mental adrenaline flowing; will make you insist on adequate margin of safety; and will increase the chances that your portfolio is prepared for things going wrong. And if nothing does go wrong, surely the winners will take care of themselves.

One of the other goals of the Breakthrough Prizes is “to celebrate their achievements and inspire the next generation of scientists.” I propose that much more is required than prize money, a televised gala of the stars (and scientists) and a program of lectures and symposiums to enable that vision. The funders of this prize have invested in and built technologies/businesses that have changed our everyday lives, including Google and Facebook. Could they help these (and other) scientists translate their discoveries in ways that are approachable to non-scientists AND enable spreading of those messages using the technologies/businesses?

What if a young person, someone interested in science but without much training (a pre-scientist?), saw the prize for CRISPR/Cas9 prize and searched the interwebs to learn more about it? (Admittedly, already a big what if – but that is where we hope to end up, right?) The young folks I know like to learn through videos so to Google Videos: about 12,800 results with the first page filled with technical explanations of the science. I saw similar things when I searched YouTube directly. I tried adding non-scientist to the search terms and was able to find this one minute video from The Independent.

What if these prizes were built (around existing resources) to explain the science and the potential impact of these breakthroughs? What if these technology barons could #breaktheinternet with science (scientists)?

Note: Scientists critiquing these prizes isn’t new. One I recalled from last year was GrrlScientist’s piece in The Guardian, which includes a discussion about rewarding individuals for what many of us consider a team endeavor.