Industry Roundtable: Neurotech Execs Discuss Innovation, Challenges, Next Steps (part 2 of 4)

In part II of a series, panelists discuss venture capital, NIH grants, SBIR and foundation funding, as ways to support discovery.

Neurotechnology Industry Organization Executive Director Zack Lynch, three member CEOs and the COO of a therapeutic foundation sat down in Boston Sept. 10 to share with "The Pink Sheet" DAILY their views on the challenges facing developers of central nervous system therapies.

In addition to Lynch, the panel included Acorda Therapeutics CEO Ron Cohen, EnVivo Pharmaceuticals CEO Kees Been, Alseres Pharmaceuticals President Mark Pykett, and Melanie Leitner, chief operating officer of Prize4Life, a foundation focused on ALS cures.

[Editor's note: This is the second in a four-part series. Part 1 was published in the (Also see "Industry Roundtable: Neurotech Execs Discuss Innovation, Challenges, Next Steps" - Pink Sheet, 17 Sep, 2008.), issue of "The Pink Sheet DAILY.]

"The Pink Sheet" DAILY : What about financial support for this kind of research and development? There's a drought in venture capital. SBIRs are a possibility. Foundations are a possibility. What are the issues?

Zack Lynch: Last year venture investment in the U.S. for neurotech reached an all-time new high of $1.77 billion. That was an increase of over 250 percent over the past seven years. Last year, nearly one in five venture dollars invested in a life science company went to a company that was working in the commercial neuroscience space. Last year there were 128 different deals in [that] space here in the U.S., which I think was an increase from 90 the year before. So there is venture investment.

This year it's a completely different story. We have seen a drying up of that early-stage capital and a widening, if you will, of the valley of death. That's where NIO's National Neurotechnology Initiative [aims to] play a key role, in helping sustain and promote and help fund some of the innovations that are going on out there in the research labs as well as the young companies.

[Legislation to implement the NIO initiative was filed May 7 in the Senate (S. 2989) by Sens. Patty Murray, D-Wash., and Pete Domenici, R-N.M. and in the House (H.R. 5989) by Reps. Patrick Kennedy, D-R.I., and Ileana Ros-Lehtinen, R-Fla.]

One component of the NNI is to fully fund the NIH Blueprint for Neuroscience Research, which is an internally generated program among the 16 institutes out of the 27 at the NIH that currently support brain and nervous system research. Fully funding that program to the tune of $80 million a year will increase the crosspollination of ideas occurring among the different institutes, and therefore, support long-term innovation.

The next key component is funding Small Business Innovation Research grants and Small Business Technology Transfer grants. A component of the legislation is $75 million a year to fund SBIR and STTR programs focused on neuroscience. This is above and separate from the current set-aside.

We're asking for new money for all of this, which makes it a more complex task, as you can imagine, up on the Hill.

[Lynch also discussed NIO and the initiative's goals during our February roundtable in San Francisco (² (Also see "Industry Roundtable: Brains Behind Neurotech Discuss Innovation, Challenges Ahead" - Pink Sheet, 13 Feb, 2008.); ³ (Also see "Industry Roundtable: Brains Behind Neurotech Discuss Innovation, Challenges Ahead (Part 2 of 3)" - Pink Sheet, 15 Feb, 2008.); ⁴ (Also see "Industry Roundtable: Brains Behind Neurotech Discuss Innovation, Challenges Ahead (Part 3 of 3)" - Pink Sheet, 28 Feb, 2008.))]

Melanie Leitner: There's an aversion to risk, I think, across government [and] venture. I mean, really, the only potential area which might be somewhat less risk averse is the nonprofit foundation arena.

Ron Cohen: I see several issues on funding. And I've come from angel financing to extreme venture capital financing, all the way through public, so I've had the opportunity and the privilege, if I may say, to see how difficult it is to raise money from all these constituencies.

On the NIH side and the grant side, no matter how much money you pour in there's a fundamental structural problem if you want to get therapies out the other end: The biases continue in the scientific, academic world that controls those grants to keep funding what you funded before and not to fund the innovator, the young, creative mavericks.

The NIH doesn't fund innovation by and large. It's extremely hard. It's an old boys and girls network. It is bureaucratic. It is stodgy. It is academic. And it is interested in hypothesis-driven science, which is critically important, because you want to have that always being funded.

But there's a gap, and the gap is that that is not where you go to look for the translational science, for the creative, high-risk but potentially high-reward, zany, out-of-the-world ideas, nine of 10 of which are absolutely going to fail but one of which may be a blockbuster, which is a venture capital portfolio model of how you fund this stuff.

"The Pink Sheet" DAILY : What about SBIR?

[The government] killed the SBIR for venture-backed companies. Guess what? Most biotech companies that are worth anything are venture backed. Why are they venture backed? Because they're worth something, and because diligence - sophisticated, educated, professional diligence - sorts out these companies and says, "You're worth taking a risk on. We're going to fund you."

So, instead of recognizing that that's actually a more efficient way of allocating government dollars, what's happened is you have constituencies who make a living off SBIR grants who have gone to offices on the Hill and said, "Hey, you know, these venture capitalists, they're all rich, and they're funding these companies. You don't want to make them richer. Let us have the entire pot."

And you've got companies who are literally getting $10, $12, $15 million a year in SBIR grants. They're surviving entirely on these grants, without any diligence, without any requirement for output.

In the end, companies like mine, companies like everyone around this table, if you're venture backed more than 50 percent, you cannot get an SBIR grant, even though the reality is that when venture capitalists put money into my company it was because of our lead product, and only because of our lead product, and they didn't want to allocate any of that money to our pipeline.

In order to fund our pipeline, early on we got SBIR grants to get proof of concept so that venture capitalists would be interested in funding it. But we can't get that message across.

[A bill to reauthorize SBIR with a VC policy amendment that would allow limited partnerships between grantees and VCs was approved by the House in April (⁵ (Also see "House Passes SBIR Reauthorization, Loosens VC Restrictions" - Pink Sheet, 30 Apr, 2008.)). The Senate Small Business and Entrepreneurship Committee finished its version July 30.]

"The Pink Sheet" DAILY: What role is there for the foundations in all this?

Cohen: If you look at some of the groups that are trying to come in and fill the vacuum - these are the private groups, so the Myelin Repair Foundation, the Cystic Fibrosis Foundation - they're really at the forefront now of trying to gather a lot of money and then using it to sponsor a lot of integrated work across different academic centers and involving industry. And my argument would be [that] it's because they're willing to take risk, because they're so motivated for this particular disease they'll look at someone and say, "You seem bright. That's a wild idea. Let's fund it and see what happens."

Lynch: NIO is sponsoring a summit in San Francisco May 11 to bring together all of the nonprofit foundations and patient advocacy groups to share best practices and discuss collaborative development. Prize4Life, which has a sort of venture philanthropy prize model, as opposed to grantmaking, will be there.

Leitner: I think the consortia idea is really critical, but also information exchange. That's one of the things Prize4Life is trying to do, look at the commonalities among these neurodegenerative diseases. Let's find ways to leverage efforts across, as opposed to stovepiping, which has been much more the traditional model, partially driven by funding, partially driven by turf and other issues.

"The Pink Sheet" DAILY: If there were unlimited funds to support neuroscience-related basic research, is the science ready to deliver?

Mark Pykett: If you can tip the balance in favor of more effort, then the chance occurrences that are occurring in some frequency are going to yield more in the long run.

But I do think that there's an element to how much ground remains unplowed, and neurosciences is still a very new frontier. In the last maybe five to 10 years there's been a groundswell around efforts that we're particularly involved in: neurodegenerative diseases, neurotraumatic disorders, and I think that's created a lot of forward momentum.

And I do think that the fundamental science is then driving a lot of the opportunity in medicine, which is leading to the idea that these markets can be created and that you can follow through with good drug development.

-Shirley Haley ([email protected]) and Mark Ratner ([email protected])