ITI Life Sciences: Scotland Minds the Funding Gap

Scotlands ITI Life Sciences aims to create a unique model for plugging the widening funding gap between publicly funded research and venture-funded commercialization of technology. The firm's first four programs reflect the various ways it aims to drum up life sciences business in Scotland.

By borrowing ideas from a variety of early-stage funding schemes, Scotland's ITI Life Sciences has created a unique model for plugging the widening funding gap between publicly funded research and venture-funded commercialization of technology.

By Christopher Morrison

The evolution of private fund raising in health care, and in particular in the biotechnology sector, has increasingly favored larger investments in later stage firms. As venture capitalists raise larger funds, minimum investments go up, and since more eggs are in each biotech basket, investors tend to favor those firms with near-term big-bucks potential. With the product-platform pendulum stuck almost exclusively in the product camp, early-stage investments in technology platforms are ever more difficult to come by. As such, the gap between publicly funded university research and privately (VC) funded commercial research continues to grow.

The problem is particularly acute in Europe, where investment in biotech and other early-stage health care firms has traditionally trailed support in the US, resulting in lower R&D spending in Europe and a subsequent lag in the commercialization of innovation. Aiming to plug this leak in the funding pipeline, Scottish Enterprise, Scotland's primary economic development agency, created three Intermediary Technology Institutes (ITI) in September 2003, each designed to invest £150 million ($282 million) over ten years to bolster Scottish innovation. Dundee-based ITI Life Sciences (the other two are ITI Energy and ITI Techmedia), which has so far funded four projects, ranging from £3.7 million to £30 million over three years, is off to a roaring start, having identified areas such as cell-based screening and biomarker research as niche opportunities for funding.

What sets ITI Life Sciences apart from the myriad government-sponsored economic development corporations that have sprung up all over the globe, which typically rely on subsidized loans, tax breaks, grants and equity investments, is its ongoing participation in and ownership of its funding programs. In that sense, it is unique, notes Tom Shepherd, PhD, CEO of CXR Biosciences Ltd. , the Scottish developer and marketer of drug development solutions to the pharmaceutical and chemical industries. "It is a bit of a one-off organization; most government support programs around the world operate through grants and so on," he notes. "But there's really nothing like the ITI, which feels that governments simply putting money in to support projects in a single company is not as good as trying to develop IP and technology bases within the ITI itself that they can spin or license out into different companies."

Which is why the ideas for ITI Life Sciences programs tend to come from within. "Most of the time these are programs that are too early for mainstream industry but in areas that ITI has identified as a future market opportunity," explains ITI Life Sciences CEO John Chiplin, PhD. "The ITI funding will get us to the point where we can leverage these programs to secure industry money and private equity." In short, ITI spots emerging technology markets—including out-of-vogue hot spots like stem cells and bioinformatics—and aims to assemble the necessary IP and skill sets to create and fund programs that can be commercialized a few years down the road. ITI typically owns the resulting IP, which it licenses to its collaborators to commercialize in exchange for a licensing and royalty fees, for example.

The organization has announced four programs since February 2005 designed to benefit the Scottish economy and a fifth, stem cell-focused venture should be announced in the coming months. (See Exhibit 1.) Programs typically last about three years, after which there are four ways ITI can exit its programs, explains Chiplin. ITI could create a new company around the program assets, pulling in private equity; it could license the assets to an existing Scottish player; it could use the assets as bait to bring to Scotland an international player; or it can sell the assets outright for cash. "Whether we just monetize the asset or work with existing Scottish companies or companies new to Scotland, it's always about what's the best deal on the table," he says.

"We Don't Fund Companies …"

This flexibility reflects the fact that ITI doesn't so much have a set model, says Chiplin, but that it borrows pieces from a lot of different schemes. But while ITI's programs don't tend to have identical structures or set routes to commercialization, each does have common elements. "Each program has built-in and established metrics for success," explains ITI's director of program coordination Michael Bayewitch, PhD.

ITI's research and development decisions are based on market research and due diligence procedures akin to those of venture capitalists and not-for-profit regional development agencies, Bayewitch says. But whereas these investors typically fund early-stage but fully independent enterprises, "we don't fund companies, we fund programs," points out Chiplin. But nevertheless, "[ITI's] programs have a definite shape, a means to take the technology to the next step, and a hard commercial endpoint."

ITI has oversight of each of its programs organized by a department of program management within the organization and an ITI-created steering committee comprising external specialists in a particular area. Ideas for programs can come from the market research commissioned by ITI, from its growing list of members—including many small life sciences companies in Scotland and elsewhere in Europe and the US—which have access to that market research. Once emerging markets have been identified and evaluated for their mid-term commercial potential, ITI identifies the local and sometimes not-so-local players and relevant IP necessary to put a program together.

This last step requires the participation of university technology transfer departments, which according to Chiplin often don't have the means to realize the full potential of the value of their portfolios—either because they only hold a small piece of the IP puzzle, while other universities or corporations hold the others, or because they lack the financial leverage to commercialize large swathes of their patent estates. As levels of early-stage private financing continue to ebb, it's likely this situation will worsen. But while ITI's programs may require a certain level of university research and IP support, they are unlikely to be in the pure start-up vein.

"In a scheme like this you don't want to finance projects that are too immature or too far down the road, but even so you want something that is mature enough that you'll see results you can commercialize within three years," says Peter Stadler, PhD, CEO of the Cologne, Germany-based Exelixis Inc. subsidiary Artemis Pharmaceuticals GMBH . "So with this limited time frame ITI has to carefully decide which projects to pursue, which are in a fine-tuned way at the right step in the innovation cycle," he says.

Filling the Void

The Scottish life sciences industry is by no means starting from scratch. While the region doesn't have the same name recognition as the Medicon Valley of Denmark and Sweden, the colorful boom-and-bust track record of German start-ups or the caché of England's Oxbridge academic centers, Scotland has its share of life science expertise—perhaps most famously, Dolly the sheep, the world's first cloned mammal, was created at Edinburgh's now-defunct PPL Therapeutics.

"Scotland has an extremely well-connected life sciences community with high levels of science and technology expertise to rely on," says Artemis' Stadler. "With elite institutions and government support for high tech it's no surprise breakthrough results come out of Scotland." ITI counts 350 active biotechnology organizations in the region—including European standouts Ardana Bioscience Ltd. , ProStrakan Group Ltd. and Cyclacel Ltd. —and 100 medical device companies. Research centers include the Institute for Stem Cell Research at University of Edinburgh , the MRC Human Genetics Unit in Edinburgh, the MRC Protein Phosphorylation Unit in Dundee, and the University of Dundee .

But regardless of its scientific charms, the environment for start-up technology firms in Scotland has suffered with the rest of Europe and the US as venture capitalists move their money—even A round money—further down the value stream to companies with clinical pipelines in hand at inception. "For a number of reasons, and some are well founded, VCs are all pretty much on the same line and a lot of opportunities will be lost because the tech transfer from academia into the biotech industry is drying out because nobody's financing it," says one European biotech executive. "Start-ups are hardly financed at all and this system is in jeopardy."

Those start-ups that are financed tend to be spin-outs from pharmaceutical companies or bigger biotechs that can afford to release unwanted assets, VCs and executives point out. In regions like Germany, where the problem is particularly acute, getting early- or mid-stage platform technologies funded basically requires the firm to in-license rights to a clinical-stage asset as well, according to one German VC. For many private investors the mantra is start up big or don't start up at all. (See "German Biotech: Coalescing Around the Haves," IN VIVO, March 2005 (Also see "German Biotech: Coalescing around the Haves" - In Vivo, 1 Mar, 2005.).)

Building Big …

Elsewhere too, starting up with built-in critical mass has its advantages—and requires significant funding to succeed. During ITI's so-called foresighting process, the market intelligence process undertaken by the organization to determine where to spend its resources, biomarker research was flagged up as a technologically important and likely lucrative research space. Setting aside its self-imposed guidelines for the size of its programs (which will normally range from £0.5 million to £6 million), ITI committed £30 million over three years to help set up a new firm in Scotland, Stirling Medical Innovations Ltd., to pursue the research.

The move was a departure for reasons beyond the size of ITI's programs. Stirling Medical is a wholly owned subsidiary of US-based Inverness Medical Innovations Inc. (IMI), which will commit £67.5 million to establishing the new company; Stirling Medical will focus on the identification of novel biomarkers and technologies to develop near-patient and home-use diagnostic tests. "Yes £30 million is a lot of money, but you have to consider what IMI is bringing to the table and their successful track record in Scottish industry. We were able to leverage our funding to bring in significant assets," says Chiplin. Moreover, "if we would have passed on the IMI deal, it would have popped up elsewhere within a few months. There was significant competition for that program," he says.

IMI is the latest firm headed by diagnostics entrepreneur Ron Zwanziger, the company's CEO, and was created from the non-diabetes-related assets left over after Zwanziger sold his previous firm, the Massachusetts-based Inverness Medical Technology Inc.—which had strong ties to Inverness, Scotland since 1995—to Johnson & Johnson 's LifeScan Inc. glucose monitoring subsidiary for $1.3 billion. [See Deal] (See "No Surprise: LifeScan is Probably Buying Inverness," IN VIVO, May 2001 (Also see "No Surprise: LifeScan is Probably Buying Inverness" - In Vivo, 1 May, 2001.).) ITI was introduced to IMI by Scottish Development International, the international outreach arm of Scottish Enterprise. At the time, IMI was considering several sites in the UK and elsewhere in Europe to establish a cardiovascular-focused business.

For IMI—which will retain all rights to IP developed at Stirling for use in human health care (ITI will receive a royalty on sales of any products)—the deal subsidizes the group's CV R&D expenditures and allows it to consolidate its CV programs under one roof. IMI has grown since 2001 primarily through acquisition, and while its commercial interests remain focused primarily on the women's health market, it has recently expanded into cardiovascular diagnostics research, most recently through the acquisition of Ischemia Technologies Inc. in February 2005. [See Deal]

ITI brings back to Scotland one of the diagnostics industry's success stories and with it IMI's significant contribution to Stirling. According to IMI the company plans on creating about 500 jobs there over the next five years including 100 technical positions in R&D. ITI will also receive rights to commercialize IP from Stirling Medical outside the area of human health—for example in biodefense and veterinary care—for which it will pay IMI a royalty.

… And Not So Big

Perhaps more indicative of the types of programs ITI is running is the February deal between ITI, CXR Biosciences and Artemis Pharmaceuticals to develop new predictive models for preclinical drug development. Here ITI will own all the resulting IP from the program, which will last three years and in which ITI will invest £5.5 million. According to Chiplin, ITI's goal is to fund a broad set of programs: "We want a balance in scope, in program length, in size." And while the organizations funding so far has been directed at biomarkers and biotechnology, look for ITI to do some device investing as well, he says.

In all cases, ITI aims to bring together complementary sets of technology. "CXR has particular expertise in ADMETox, coupled with Artemis which is skilled in making transgenic animal models. The ITI has also licensed other relevant IP in the field from third parties," explains CXR's Tom Shepherd. "It's an interesting project format and I don't think VCs are generally in a position to do that sort of thing," he says. Artemis' Peter Stadler agrees. "Neither CXR nor Artemis had the capital reserves to finance this out of our own pockets, and ITI recognized that this had a high commercial value and that, from the point of view of ITI's priorities in terms of what type of programs they finance, would fit very well," he says.

While the two firms' CEOs already knew one another and had collaborated previously, ITI brought them together again in 2004 at the BioDundee conference. After just over six months of due diligence and technical planning, says Stadler, the contracts were worked out and the financing put in place. ITI will license the resulting IP to CXR and Artemis, which will pay ITI a royalty on sales of the products. "Five years ago it would have been a totally different story, people would have thrown money at us," to develop this technology, says Stadler. But now, "traditional venture funding would not be available at all for an approach like this. Today, you wouldn't get a dime." As with its other programs ITI has established an advisory board which includes representatives from Artemis and CXR, an ITI chairman and an ITI program manger. ITI can bring in external advisors as necessary.

A fifth ITI program is in the works in the stem cells area after which the group will probably take a breather before launching new ones, says Chiplin. "We'll take stock of how things are going—what's working, what isn't—to shape future programs," he says. Meanwhile, so long as private equity players continue to shun early-stage technologies, ITI will have plenty to work with.

And if the model begins to bear fruit by generating palpable economic benefit to Scotland, expect other economic development schemes in the US and Europe—which already compete tooth and nail for the high-quality life sciences jobs they want located in their own backyards—to imitate ITI's example. Artemis's Stadler has already begun lobbying Germany to set up a similar effort. Sums up Chiplin, "The ITI initiative is going to be copied even before it's successful."