Biotech U: Marrying academia and industry in Charlottesville

Critical mass.

With 35 biotechnology companies currently doing business in the city, members of Charlottesville’s biotech industry say they’ve got it.

Two years after the University of Virginia retooled its intellectual property regulations to encourage more researchers to move their ideas to market, biotech is bigger than ever here, and looming large in the financial future of the city and the University. The growth is both the result and cause of an increasing culture of commercialization around UVA’s biomedical sciences—a change officials and many researchers are welcoming with open arms.

Just what the sector’s long-term impact on Charlottesville will be isn’t clear. The high-risk industry is defined by change. But with about 20 percent of the state’s biotech companies located here, a steady supply of high-quality concepts from UVA, and the potential for start-up capital from big donors, biotechnology is already shaping the city’s present.

W. Mark Crowell, who has been UVA’s chief innovation guru for two years, speaks at a recent Tom Tom Founders Festival event on the growth of the biotechnology industry in Charlottesville—a who’s who of big names in the industry locally. The city is home to about a fifth of the state’s biotech companies, and Crowell’s efforts to encourage commercialization of UVA research is part of the reason. (Photo by John Robinson)

R. vs. D.
Public universities owning and profiting from the intellectual property of faculty is a relatively new phenomenon. Discoveries coming out of research institutions that received federal funding were government property until 1980, when the Bayh-Dole Act turned the system on its head.

The act gave institutions first crack at patenting their researchers’ inventions, though that right comes with some strings attached: Universities must offer the discoverer a cut of any patent royalties and use whatever’s left for more research and education; and they have to work to develop the discovery, or license it to someone who will.

Since Bayh-Dole, public universities have increased their focus on what’s known as technology transfer—the complex business of shepherding inventions and discoveries from idea stage to commercialization—by creating their own patent and licensing organizations. And despite the fact that biotechnology is costly to develop in terms of money and time, the sector accounts for a large and growing piece of the tech transfer pie.

W. Mark Crowell has watched the changes unfold.

He’s UVA’s man in the middle of it all, hired two years ago to be the University’s first executive director of innovation. His task: strip down and overhaul the University’s approach to handling intellectual property.

Crowell spent 21 years in similar roles in North Carolina’s research triangle. First at Duke, then at North Carolina State University and the University of North Carolina, he watched and lent a hand as the the area grew into one of the top tech transfer regions in the country. In 2008, he joined the Scripps Research Institute outside San Diego, an even hotter market.
Over that period, Crowell saw a dramatic change in how top research universities view their patenting and licensing departments.

“It’s gone from being a sort of misfit, gotta-find-somebody-to-do-it thing to being front and center,” said Crowell. Now, when university presidents talk about their responsibilities to state and private funders, “one of the first things they talk about is innovation and research capacity, and how we’re using that to create jobs, products, services, companies—essentially, a return on investment.”

And while the revenue stream is important, he said, it’s not all about the money. There’s a growing mentality that simply collecting ideas doesn’t cut it anymore, Crowell said, and to compete for grants and top talent, schools have to throw more energy into commercializing research. “I think people realize that having a strong tech transfer program is like having a good library,” he said. “If you’re going to be a big research university, you’ve kind of got to do this.”

By the time UVA’s vice president for research, Tom Skalak, hired him in 2010, Crowell said the will to make the shift was already present at UVA. His first priority on arrival was to take an axe to what he saw as outdated regulations.

Since its founding in the late 1970s, just before the passage of Bayh-Dole, the UVA Patent Foundation’s formula for dispensing earnings from licensed inventions had been the same. In Crowell’s eyes, it was cumbersome, confusing, and didn’t incentivize disclosure. If an idea—a drug, a computer program, or any other kind of intellectual property—became profitable, the inventor, his lab and dean’s office, and the UVA scholarly activities fund all got money, but the Patent Foundation always took 40 percent. And as profits went up, the inventor’s cut went down.

Not only did the model discourage researchers from taking the time-consuming and often expensive leap to patent their findings, said Crowell, it also sometimes spurred the Foundation to act in its own self-interest instead of driving local growth and innovation.
For instance, he said, imagine a University lab churns out a new drug. Crowell could license the patent to big pharma for a $200,000 fee with a promise of a $100,000 milestone payment when the drug hits a certain point in development, or he could offer it to a small startup—perhaps founded in part by the researcher—in exchange for an equity stake, and wait a decade for a return.

“One of those is good if I’m getting 40 percent of the cash,” he said. “The other is good if I’m looking for economic development, and trying to create opportunities for faculty and staff to be entrepreneurs.”

So they rewrote the rules. Inventors now get a flat 35 percent return, no matter how much money their ideas generate. Another 30 percent is divided evenly between the inventor’s lab, department head, and dean. The final 35 percent goes straight to the University. The Patent Foundation no longer gets the cut with which it earned its keep—instead, it receives steady funding from UVA.

And it got a new name: the UVA Licensing and Ventures Group, a rebranding that advertised the shift away from patents for the sake of patents.

“We decided we really needed to bury that old mentality,” Crowell said. There’s an increased focus on pushing startups, too. About 10 percent of the 140 to 150 disclosures his office deals with each year are licensed to new companies, many located in Charlottesville.

The next big change was staff. Crowell’s pick for director of the newly renamed group was Michael Straightiff, whose biomedical engineering background had served him well as a young head of tech transfer at Case Western Reserve University. He’s the first person to hold the job who isn’t a patent attorney, Crowell said. Other new recruits have similar science backgrounds—more evidence of where the new priorities lie.

Often, before you can bridge the gap between scientists and investors, “you have to be able to understand the technology coming out of these labs,” said Aswin Sundaram, a licensing associate with the Licensing and Venture Group. “We want to bring on folks who can dissect the technologies and understand them on a fundamental level, and then turn around and be able to promote them to other people in the community.”

The changes weren’t easy, Crowell said, and there was some pushback from people invested in the old model. But the thing about the new structure, he said, is that it works. The Licensing and Ventures Group is pulling in an average of $4 to $8 million a year. Financial records show 2011’s earnings were more than $6.3 million. That means the group is more than breaking even, said Crowell, which is actually rare in the university tech transfer world.
And that’s fine by him. He’s not here to deliver a cash cow to the University.

“We’d still love the income stream to generate a surplus, but if that doesn’t happen, that’s fine,” Crowell said. They’ve converted UVA’s old Patent Foundation from a revenue center to a service organization, he said, “and I think that’s the critical part of the business model that changed.”

The University is more than ready for the shift, said Crowell. Well before his overhaul of the patent payout formula, some UVA researchers were moving from Grounds to private labs. Their approaches to business might be different, but they took the leap.

Martin Chapman (above) was a professor of medicine at UVA when he founded Indoor Biotechnologies to explore commercial applications for a line of allergen antibodies. (Photo by John Robinson)

Going rogue
Martin Chapman got the entrepreneurial bug early.

Chapman, an immunologist and allergy specialist, arrived at UVA in 1985 by way of the University of London and UCLA. In 1998, he set up Indoor Biotechnologies to explore ways to spin out his allergy antibody research into allergen testing technology and other marketable products. Around the same time, he said, he felt like he’d hit a glass ceiling at UVA as a PhD in a clinical department.

“I was a fully funded, tenured professor,” he said. “Where else was there to go?”
His company offered him more control over his research, and soon it was bringing in more money than his UVA lab was getting in grants. The choice seemed clear. He parted ways with the University in 2001, and secured small business innovation grants.

Today, Indoor is one of the companies at the heart of the Charlottesville biotech hub. It’s a business success story—its environmental allergen test kits are used all over the world, including in research at the National Institutes of Health and Centers for Disease Control and Prevention—but it’s also a poster child for the community-minded approach to growing local industry.

Chapman hasn’t just put down roots; he’s planting a forest. Last spring, his company bought the abandoned Coca Cola bottling plant on Preston Avenue for $2.5 million, both to allow Indoor to expand, and to be an incubator for young startups needing commercial lab space—a precious commodity here. Growth is good, he said, “but the real issue is, how much of this stays in Charlottesville?”

But Chapman acknowledges that there’s more than one way to build up biotech. “Everybody’s approaching it differently,” he said.

Dr. Eric Houpt, an associate professor at UVA, studies infectious diseases and parasite immunology. Studying the epidemiology of specific pathogens—especially in far-flung corners of the developing world, as he frequently does—requires reliable diagnostic testing, so researchers can know as quickly as possible what bugs they’re up against. Molecular diagnostics—identifying pathogens via DNA—is the gold standard, he said. No waiting around for cultures to grow, no microscopes needed. But there was a problem: Everybody knew DNA testing was the future, but nobody was providing the products to let them do it.

Chapman left the University to run Indoor full-time in 2001, and is now turning the vacant Coca Cola building on Preston Avenue (above) into a vast lab space to house his growing company and other local biotech companies. Some startups aim for acquisition, but Chapman said he’s here to stay. “I feel like we have a responsiblity to our employees,” he said. (Photo by John Robinson)

“There’s often a lag between the technology and the laboratories that use them,” Houpt said. “It takes time for the latest cutting-edge technology to make it to society in bulk.”
By 2005, Houpt was tired of waiting. He wrote a small business grant to fund the development of testing products from some of his own research, and Phthisis Diagnostics was born.

But while Houpt was more than happy to go commercial with his most promising technology, he remained a man of the medical school. “I’m 99.9 percent MD and researcher at UVA,” he said. Running a business wasn’t in his game plan.

Enter Crystal Icenhour. A PhD specializing in infectious disease, the Arkansas native was Houpt’s pick to head up his fledgling company. She built Phthisis from the ground up, taking charge of everything from finding office space to aggressively pursuing NIH and venture capital funding to hiring a staff of five. She described the intensity of those first couple of years in blunt terms.

“It’s painful,” she said. “When you survive on government grants, it’s year-to-year drama.”
But Icenhour grew up in a family-owned business, and combined with her science background, that experience has helped her navigate a biotech company, she said. It’s a challenge she’s grown to love. And though it hasn’t always been easy convincing investors to take a chance on a young executive with only postdoctoral experience under her belt, she’s managed to keep the money flowing in—including a new infusion of venture capital earlier this month —and the product advancements marching on. The company now offers a kit that lets labs do quick, simple DNA extraction from human stool samples, and next year will launch DNA-based testing products that can rapidly detect a pair of nasty intestinal illnesses.
But long-term success may well look different for investor-hungry Phthisis than for Indoor Biotechnologies, which is guided by Chapman’s commitment to growing in place.

“When you get investors, they want to know, ‘When am I going to get my money back?’” Icenhour said. “The most likely way that happens is if another company comes in and acquires you.”

Crystal Icenhour, president of 7-year-old Phthisis Diagnostics, is both the head scientist and chief investment seeker at the biotech startup. The company was founded to develop the research of UVA MD Eric Houpt, who patented molecular diagnostic techniques through the University in the hopes that they’ll translate to marketable tools for labs around the world. (Photo by John Robinson)

Follow the money
Nobody denies it: The biotechnology and biomedical sciences industries are full of turnover, and, quite often, failure. Drug development in particular is a years-long process that could go wrong at any number of stages. Many small biotech firms are created solely to cook up promising business plans and get them past what the entrepreneurial world calls the “valley of death”—the stretch between potent idea and appealing prototype where funding wells dry up. Once they come out intact on the other side, their product looks far less risky to a big, established company, and often, it’s at that point that they get snapped up.

So is Charlottesville setting itself up to create a graveyard marking good ideas that left town?
Maybe, said Crowell, but that’s not necessarily a bad thing.

“I think success will mean that more go,” he said. “And I think we need to guard against thinking it all has to stay. I think our deals need to end up where they’ll be successful.”
Upheaval and change can be great for innovation, he said. While in the Research Triangle, he witnessed periodic mergers among big pharmaceutical companies, which inevitably led to talented scientists staying behind when their employers relocated. And each time, good things followed.

“Every time Glaxo had a burp, we’d see this spike in startups,” Crowell said. Similarly, when companies sell up, he said, they’ll leave experienced and business-savvy people in their wake who want to stay local, and who will be ready to tackle and polish the next raw idea that comes along. Stability might mean jobs that stay in Charlottesville, but instability breeds serial entrepreneurs.

That’s a term Martin Chapman isn’t wild about. Neither was Steve Jobs, he said. The Apple exec was a notable critic of the start-and-sell model.

“The feeling is they should really do the work of building a real company. And that’s kind of the attitude we have. Otherwise it just becomes a kind of money game, and there’s not really a lot of fun in that.”

What everyone agrees on is that there’s been a profound shift in the way people in higher education view the commercialization of research, and their own respective roles and responsibilities. It’s happening everywhere, said Crowell.

“In the early days at Duke, I spent half my time convincing professors not to toss me out of their laboratories,” he said. “People said, ‘Why would I think of patenting?’ Today, our best scientists are involved in this.”

Chapman agreed that during his tenure, colleagues were dismissive of the Patent Foundation.

“Whenever it came up, the attitude was ‘Don’t even bother going there, it’s just a waste of time,’” he said. “That has been a dramatic turnaround.”

The fact that there’s money here helps, too, especially considering funding from the NIH and other federal sources is contracting. While it’s not Silicon Valley, there are plenty of people in Charlottesville with high net worth who are interested in biotech investments, Chapman said.

Whether scientists embrace commercialization may now determine whether they even get in the door at UVA. Crowell said he was recently called in to consult on a possible new hire for the department of medicine, to help assess the candidate’s ideas for innovation.
He concedes that some don’t have such a rosy view of a push to recruit entrepreneurs from the halls of academia.

“It’s a fair question,” he said. “Are we selling out? Are we pursuing science in order to get rich?” Crowell doesn’t think so. But he readily acknowledges that he measures his success as chief innovator in part by his ability to create conflicts of interest. The antidote is disclosure, he said, and vigilant watchfulness on the part of the University, which has a strict conflict policy.

But UVA will continue to allow professors to publish on scientific findings they have a stake in, and allow researchers to fund their labs with money from their own startups.

“I just think progress is too important to stop progress because we want to legislate morality,” he said. “If you don’t figure this out, then are you sitting on innovation capacity that has the potential to create not just wealth and jobs and companies, but to create better health and help the environment and create a stronger economy? And I think the answer is yes. So we have to figure it out.”