(Chapters may be ordered individually)


Chapter 1  Stop the Madness and Cure Something

Most of the progress that scientists make in academia will never impact the lives of patients because the mechanisms for bringing their discoveries to the clinic are dysfunctional. Biotechnology commercialization is so high risk that it has been called the Valley of Death (VoD). We have identified three elements of the “Translation Gap” which inhibits the commercialization of academic discoveries as they enter the VoD. (1) Universities don’t make what companies need: Academic science is produced and evaluated by different standards than what is needed for commercialization, so it often enters the VoD before it is ready. (2) Good innovation is not always a good investment: The most transformative discoveries may never make it to the clinic because they do not make sense to investors. (3) Technology transfer wastes money and innovation: The process of transferring technologies from academia to the for-profit VoD is poorly conceived and wasteful, imposing a substantial financial burden on the system.

Chapter 2 – Into the Valley of Death

Academic biotechnology start-ups face significant challenges in achieving venture capital funding and therefore need to rely on grants and Angel investors, despite recent increases in biotechnology funding and the fact that academic research is an important source of innovation for pharmaceutical companies. The history of the biotechnology company Human Genome Sciences illustrates the massive requirements of time and money that are required for biotechnology drug development. These are not compatible with support for development of important drugs that do not offer a significant return on investment. Examples include drugs that are given for short periods of time, such as antibiotics for bacterial infections, or drugs that have a long timeline to approval, such as treatments for pediatric brain tumors. Better allocation and use of resources may help align incentives to improve translation of academic discoveries into therapies that can solve important medical needs while providing attractive financial returns.

Chapter 3 – Clinical Promise ≠ Investment Practice

Dr. David Horn is an experienced physician and entrepreneur who started a company to develop an experimental immune stimulator molecule that has potential to improve the effectiveness of the influenza vaccine, and may have roles in treatment of other infectious diseases, diabetes and cancer. Funding the company through personal and Angel investments has been difficult. Because funding of biotech companies depends on Angel investors and venture capital firms, the availability of funding for early stage companies capital is closely related to macroeconomic forces that affect the supply of investor capital. Those forces have steered investment practices toward later-stage biotech investments. Biotech funding has undergone two boom–bust cycles and is presently in the midst of a boom that may be near its end due to concerns about drug pricing strategies, global economic instability, and a drop in investor valuation of biotechnology stocks. Economic phenomena unrelated to clinical value may ultimately determine whether Dr. Horn’s drug development efforts will succeed.

Chapter 4 – Velcade, a Biotech Success Story

Bortezomib (Velcade, Takeda Millenium) is an example of how academic medical research can lead to a novel drug. Bortezomib arose from the long-standing interest of Dr. Alfred Goldberg at Harvard University into the causes of muscle wasting, which eventually led to the discovery of proteasome inhibitors, a novel class of drugs that is effective against the blood cancer, multiple myeloma. Goldberg’s company, Myogenics, later ProScript, created candidate proteasome inhibitor drugs and relied heavily on academic collaborations to understand the mechanism of action and potential clinical utility of bortezomib in cancer, as well as to conduct Phase I clinical testing. Despite the encouraging preclinical data, ProScript eventually ran out of money and had to be sold to another company, LeukoSite, which was then acquired by Millenium, which sponsored a successful Phase II trial in multiple myeloma. The story of bortezomib illustrates the opportunities and obstacles that face the development of innovative biotechnology drugs.

Chapter 5 – Biotechnology and the Future of Pharma

Biotechnology is the field of applied sciences that manipulates biological processes, with a goal of improving the diagnosis and treatment of diseases. The importance of biologics and orphan drugs to medicine and the pharmaceutical industry continues to increase. Due in part to the “patent cliff,” patent expirations on many top-selling drugs that have enabled generic incursion, pharma has reduced internal research and development spending to bolster returns in the short term, and increasingly relied on acquiring technologies developed by smaller companies in a “buy, rather than build” model. The importance of new drug initiatives surviving the Valley of Death is more important than ever.

Chapter 6 – Why Pharma Should Care About the Valley of Death

Start-up biotech companies are naturally focused on getting a deal or partnership with one of the Big Pharma companies. The Pharma industry is seeking such relationships as an offset to (and justification for) the downsizing of their internal research and development efforts. The premise that start-ups are more nimble and innovative is usually correct, but on-the-ground reality means that start-up companies are strained by the need to support both operations and research. Consolidation and changes to the Big Pharma business model have reduced the absolute number of opportunities for start-up biotech companies to partner—yet Pharma remains the primary path to the clinic for biotechnology companies. The nature of discovery and scientific inquiry mean technologies originating with academia are made to different standards than what is ultimately needed by commercial partners, and critical results cannot always be replicated. The disconnect between what academia produces and what is needed to merit clinical development, combined with the increasingly limited availability of Pharma partnerships, challenges even the most technologically promising start-ups in the Valley of Death.

Chapter 7 – Porter’s Five Forces and the Market for Angel Capital

The current drug discovery and development paradigm depends on borrowed money for start-up companies. Products rarely emerge from universities fully ready for development, and typically require support from Angels and other early stage investors. Despite an almost limitless range of differentiation between technologies, the primary economic activity of companies in the Valley of Death (VoD) is the sale to investors of equity or debt instruments, collateralized by intellectual property. Porter’s Five Competitive Forces That Shape Strategy can be used to understand the factors that determine success in the VoD marketplace for investment opportunities. Three of these forces are especially pertinent to our discussion, and predominant in characterizing transactions in the VoD: (1) buyer power, the leverage held by Angel investors; (2) rivalry among existing competitors vying for the same pool of investor money; and (3) supplier power, the control universities have over the intellectual property needed by the start-up companies. Angels invest for reasons that do not correlate with the innovation or potential impact of the technologies supported. Altering Angel incentives may encourage investments in societally as well as economically valuable directions.

Chapter 8 – Out of the Frying Pan: The Fire’s Not So Great Either

The Bayh–Dole Act enables organizations that receive federal funding for research to retain title to innovations developed with that support. Most universities have created technology transfer offices (TTOs) to facilitate the emergence of their science into the commercial realm. Despite the commercial opportunity, 84% of TTOs lose money. TTOs are the sole arbiters of whether a technology can be transported out of the university and into the Valley of Death, and how much this will cost. Within the context of Porter’s Five Forces, that means they have absolute supplier power. One of the greatest challenges in technology transfer relates to conflict of interest (COI) policies. Turbulence over COI policies wastes money and opportunity. It encourages institutional paralysis and undermines reasonable synergies between universities and industry that could save time and money. The proliferation of new models for technology transfer reveals the fault lines, and demonstrates the value of increasing efficiency in the third part of the Translation Gap: technology transfer wastes money and innovation.

Chapter 9 – Getting to Australia

Lipoprotein Lipase Deficiency is a classic target for gene replacement therapy. Glybera (alipogene tiparvovec) is a genetically engineered adeno-associated virus (AAV) that introduces a functional copy of the lipoprotein lipase gene into patients’ muscle cells. It is also the most expensive drug ever made. Doctors, health insurers, and pharmacy benefits companies, among others, are joining the chorus of patient voices complaining about high drug prices. Some moderation of drug prices is likely, but severe price controls could have a devastating effect on the biotech Valley of Death (VoD). Angel investors are attracted to the lucrative drug development pathway that enables stratospheric prices for specialty drugs. If no exits can be achieved at enormous multiples because the system will not pay for these multibillion-dollar drug franchises, then early-stage investors will have much less incentive to participate in very high risk bets. Incentives need to be adjusted to encourage rationalization of the flow of money in the VoD, which will in turn improve outcomes.


Chapter 10 – When Is an Experiment Ready for the Valley of Death?

 in academia have many motivations to commercialize their technology. Most academic biotechnology discoveries are not ready for partnering with pharma, so they will need to form the basis for a company and navigate the Valley of Death (VoD). The first Translation Gap, universities don’t make what companies need, refers to the fact that university technologies are often poorly suited for uptake by pharma, or even to support an investment thesis that will enable a new company to survive in the VoD. An inventor’s expectations for patenting a discovery are often at odds with their technology transfer offices, who need to see a commercial pathway for the patent, and many more invention disclosures are submitted than can be patented. The commercial potential of academic discoveries can be hard to discern at this early stage. The decision about whether to patent a new discovery is nevertheless a precondition for success or failure in the VoD.

Chapter 11 – Unintended Consequences of Applying for a Patent

One of the most important decisions in biotech commercialization is whether to submit a patent application, but the technology selection process is not accompanied by a consistent standard of review. Patenting in the United States has two key deadlines. The first is at 12 months, when the provisional patent must be converted to a utility application. The next is 18 months later, when an application is designated for entry into the national phase. Because there are substantial costs involved at each phase, and technology transfer office budgets are constrained, licensing of rights typically involves creating a legal entity and company, someone assuming the responsibilities of executive management, and a source of funds to cover basic infrastructure and legal costs. Most of this activity must be paid for out of the proceeds of Angel funding, and those investments carry the obligation of expected financial return. New discoveries are burdened with financial liabilities that are out of proportion to their value at that time, which can ultimately work against continued investor support and the prospects of realizing a drug candidate. New models for selection and evaluation of patents are needed.

Chapter 12 – What if It Doesn’t Actually Work?

Intellectual property (IP) produced by universities forms collateral for the investment activity in the Valley of Death (VoD). Universities out-license the IP, generally at the point that a patent application has been filed (often provisional), but do not assume any contractual responsibility for the quality of the IP or its ability to support an investment thesis in the VoD. Common metrics for evaluating the success of the technology transfer office (TTO) process do not assess the quality of the IP licensed or its ultimate success or failure in the VoD, and TTOs have limited motivation and means to obtain experimental validation for licensed IP or to perform detailed analyses of the commercial potential of the IP. Ineffective IP harms technologies, universities, inventors, and the entire drug development ecosystem. Alternate models of evaluating and financially supporting inventions prior to patenting are needed, with greater collaboration and risk sharing.

Chapter 13 – Building a Better Mousetrap

Alternate models of evaluating and financially supporting inventions prior to patenting may improve their potential for commercial success in the Valley of Death (VoD). Models exist for improving the ability of university patent applications to support a VoD company. David Allen at the University of Arizona has one such model, which incorporates the results of expert market research and engagement with the entrepreneurial community into the decision to submit a patent application. Examples are given of other efforts that seek to support proof-of-concept (POC) experiments in the pre-patenting and pre-licensing stages. The National Institutes of Health Small Business Technology Transfer program could be expanded and tailored to provide pre-patenting POC support by enabling virtual companies to apply for funding. The University of Oxford has an advanced technology transfer system (Oxford University Innovation) that offers substantial resources for POC efforts. Ultimately, the buyer power of investors may leverage systemic improvements in intellectual property validation prior to university licensing.


Chapter 14 – Due Diligence and Angel Incentives

Commercial development of biotechnology requires early support from Angel investors. Scientific theses need to be shaped to support investment propositions that are relevant to these investors. Angels make investment decisions in part through a methodical due diligence process that analyzes unmet clinical need, the size of the addressable market, the adoptability of the product in clinical practice and the potential for sustained competitive advantage. Accurate assessment of these due diligence parameters is critical, but so is, frankly, experience-based intuition. Industry pricing strategies focused on extreme pricing, especially for drugs that treat small numbers of patients, have changed the investment equation, and reimbursement and financial implications for clinical practice have assumed overriding importance as determinants of whether a drug can achieve traction in clinical practice. Bexxar and Provenge are examples of drugs that fared poorly because of failed reimbursement strategies, whereas Abraxane has been very successful because it makes financial sense for physicians. Sustained competitive advantage is difficult to predict and cannot be ensured by intellectual property protection.

Chapter 15 – What Is Value?

Due diligence conducted by Angel investors also evaluates mediators of development, including the likelihood that proof of concept is attainable, and regulatory challenges. Some targets, such as Alzheimer’s disease, may not be attractive due to an historically high clinical failure rate, while others, such as rare (orphan) diseases, may offer a more straightforward clinical pathway. Angel investment is also dependent on whether a company is premised around a viable business model. Beyond these practical considerations, it’s clear that investment decisions are influenced by subjective, psychological factors, which have no necessary connection to the level of innovation or even the magnitude of clinical benefit. Finally, Angels operate within an economic paradigm that dis-incentivizes investment in many important diseases affecting the Western world, as well as (for different reasons) diseases primarily affecting developing countries. To encourage Angels to address the entire spectrum of unmet medical needs, we need to shift the incentives that drive the drug development ecosystem.

Chapter 16 – Angels at the Crux of Invention

For Angel investors, supporting biotechnology companies is entirely discretionary. However, Angels are at the crux of decision making about which, if any, academic technologies will receive an opportunity for commercialization. The trend of pharma outsourcing drug discovery and development makes Angel support of our academic biotechnology even more essential, so the decision-making processes Angels use to invest have long-reaching effects. Scientific due diligence presents significant challenges for Angel investors, which is why innovation is not always a good investment—because it is difficult to predict whether a particular scientific program will work in the long term, and because markets are initially more resistant to disruptive change. Academic technologies are often platforms, without defined therapeutic candidates, but with clear nodes of uncertainty that represent profound vulnerabilities for startup companies. Investment strategies need to address these nodes and raise enough money to support the next round of fundraising. Ultimately the valuation of a company is whatever the investors will agree with.

Chapter 17 – Investment: A Nuanced Decision

Foundational to biotechnology (or any other start-up) investment is a presumed constant ratio of positive outcomes to the number of investments made. Angel investors are focused on achieving favorable financial returns, but their motivations are complex and nuanced. Neurocognitive reward theory can help explain behavior of the Angel investment community; indeed, some Angel investors may continue to be drawn toward high-risk behaviors because of their own history as successful founders or executives. Angels are also influenced in their investment decisions by networks and local ecosystems. Nonverbal cues and cognitive styles may affect how they evaluate a company as an investment opportunity. Because successful outcomes are rare and biotechs have a long gestation, investing in the category by Angels limits the opportunity for iterative learning. Execution of an Angel investment ultimately depends on whether a company appears to be able to support a series of debt transactions collateralized by a high-risk scientific proposition and possibly extending for 10 years or more.

Chapter 18 – Ready for a Long-Term Relationship With a Science Experiment?

After investing, an Angel has a financial interest in an entity that has uncertain prospects and almost no liquidity for an indefinite period of time. Clearly, the new partners have a mutual interest in success. Much of the relationship is defined by the terms of the investment, which are structured to favor the interest of the investor over the company founders in a process called de-risking. Start-up biotechnology companies are often funded by convertible debt, which converts into stock when a funding event occurs that sets a share price, such as a Series A Venture Capital investment. Convertible debt has some advantages, but it also has potential pitfalls associated with warrants for a discount at share price conversion and multiple liquidation prefernces. Consequently, convertible debt is enormously expensive money for a company with the risk proposition typical of the Valley of Death.

Chapter 19 – Investing in Hockey Sticks

Biotechnology investments must have the potential to increase imputed valuation and ultimately be acquired at a significant premium to the amount already invested. This promise of a “hockey stick” upward inflection in valuation supports the investment thesis by projecting the ultimate commercial potential of the technology. Every fundraise is tagged to a specific set of objectives, “milestones” that, when met, will clearly increase the value of the company and its attractiveness to subsequent investors. Yet, the outcomes of the milestone-driven investment strategy in the Valley of Death are significantly challenged by unbalanced market forces that can drive not only unfavorable terms for founders, but mutually destructive decision making by constituents. Financing agreements reflect the unbalanced buyer power inherent in the investor–inventor equation and have a good chance of underfunding development and/or diverting it to short term and opportunistic interests, rather than creating long-term value. We believe in better aligning the interests of founders, investors, and society through a shared process that respects both financial and medical objectives.

Chapter 20 – Harps for Angels

Angels contribute billions of dollars to fund biotechnology in the Valley of Death (VoD), a portion of the more than $24 billion reported funneled into start-ups in 2015. Preserving Angels’ interests is essential, and this must happen within the context of the whole early-stage biotechnology ecosystem. This means making the VoD marketplace as attractive as possible, which translates into improved financial returns. The distribution of money within the VoD is less correlated with innovation per se or a particular technology focus than it is with risk, timing and potential return on investment. Incentives should be aligned to make investment consistent with the long-term, sustainable growth of start-up companies. The failure rate of Angel investments in the VoD is so high that solutions must also address systemic causes for failure. Factors of importance include the regional entrepreneurial ecosystem, the local Angel investment culture, and market saturation of available start-up investments. More needs to be done to measure VoD practices, outcomes, and the effectiveness of economic development initiatives with respect to technology outcomes.

Chapter 21 – Connecting Innovation to Investment

Public and philanthropic initiatives can de-risk investments and encourage innovation toward important unmet medical needs. Regional economic development initiatives provide non-dilutive grants and loans or matched coinvestment. Venture philanthropy is uniquely positioned to de-risk the most innovative technologies and match companies to important medical needs. Funding from the National Institutes of Health, in the form of Small Business Innovation Research and Small Business Technology Transfer grants, as well as the Therapeutics for Rare and Neglected Diseases and Bridging Interventional Development Gaps programs, are essential for encouraging investment in innovation. Companies and Angels need to work together to set milestones and timelines that meet both of their needs. Novel Angel incentives, such as coinvestment and royalty sharing, can enable investment in high-risk technologies. The interests of Angels need to be aligned with the needs of society to nurture and promote the most valuable and innovative products of our academic research enterprise, because if the Angels are not there, then nothing happens.


Chapter 22 – Mitigating Supplier Power

An unintended consequence of the Bayh–Dole Act is that technology transfer offices have absolute supplier power to determine what gets licensed for development, which imposes substantial costs on the process and can prevent commercialization of some technologies. Technology license fees consume investor money before real value has been created. Improving efficiency requires a different perspective on the part of university administrators, lowering the barriers to assigning IP to inventors, and consideration of novel licensing models that emphasize royalty payments over licensing and milestone fees. The goal is to maximize the impact of early funding on development while reducing costs and fees that constitute a “tax on innovation.” We also propose increasing the involvement of scientists in market assessment and aligning the selection and advocacy of university inventions with market needs. Inventions ultimately need to transition from support by the university as a research proposition, to support by investors of an investment thesis, to support by customers of a clinical value proposition. Better alignment of objectives increases the likelihood that an invention can progress to the clinic.

Chapter 23 – Preventing Speeding by Closing the Road

The Bayh–Dole Act assigns valuable intellectual property to not-for-profit institutions, setting them up for a philosophical struggle between academic purity and financial survival. Conflict of Interest (CoI) regulations seek to preserve the former despite commercial temptation, and the result is to impose substantial costs on technology transfer. CoIs can prevent an investigator from having significant ownership or involvement in a company that has licensed his own technology and prevent that company from sponsoring research in the investigator’s laboratory. These regulations waste value and impose practical and financial burdens on Valley of Death companies, increasing the costs of scientific progress, reducing synergies, and displacing equity. Too much direct involvement of founders in the research performed by their companies is presumed to incentivize scientific fraud or data misinterpretation, when in fact commercial engagement may have the opposite effect. Federal regulations give universities leeway in how they define and resolve conflicts, which provides an opportunity to evolve practices in a way that is more conducive to biotech commercialization.

Chapter 24 – Breaking Old Habits

A story is told of how elephants grow up with chains that restrain them from acting independently or feeling they can escape old habits. Solving the problems of the third Translation Gap, Technology transfer wastes money and innovation, will require old habits of tech transfer to be broken. We discuss with Thomas Hockaday the business model of Oxford University Innovation, the for-profit technology transfer arm of the University of Oxford, and the cultural change that it embodies. We also interviewed Eric Tomlinson, DSc, PhD, about the entrepreneurial ecosystem built at the site of an old tobacco factory in Winston-Salem, NC, the Wake Forest Innovation Quarter. These models demonstrate enhanced potential for technology transfer as a catalyst to build companies. Novel models of collaborative innovation should enable early stage companies to better survive the first proof of concept through collaborative research within universities. Implementation of a minimum commercialization unit strategy for biotechnology commercialization will improve incentives, resulting in better investment returns and more productive technology development.

Chapter 25 – Epilogue: Why We Do This

Full realization of the benefits from biotechnology innovation will also require organizational innovation. The challenges to managing innovation include the risk of scientific discovery, academic commitment to commercialization, Angel selection processes, clinical criteria, investor resistance to supporting experimentation, and the disconnect between clinical value, innovation and investability. These contribute to the Translation Gap, the obstacles to commercialization of biotechnology that originate within universities and hamper the development of novel therapeutics in the Valley of Death. Solutions include harnessing Angels’ buyer power to improve commercialization processes as well as cultural change within universities, e.g., an affirmation of the academic principles of objective collection and analysis of data, data sharing, peer review, and collaboration. Additional metrics need to be established and outcomes measured, for both academic technology transfer and Angel investment, to better align the interests of all stakeholders through a shared process—one that respects both financial and clinical objectives.