From UW-Madison labs to the marketplace

Scientists, entrepreneurs and financiers are working to turn stem cell research into marketable products. A key aim of the effort: Cultivating new companies, and good jobs, right here in Wisconsin.

Milwaukee Journal Sentinel
April 23, 2006

Second of three parts

Madison - For years, two of Wisconsin's least-known exports have been among its most valuable: the intellectual and investment capital that help power the economic engines of states such as California and New York.

The Wisconsin Alumni Research Foundation, among this country's most successful university patenting and licensing organizations, has licensed most of the University of Wisconsin-Madison's life sciences technologies to out-of-state companies.

The State of Wisconsin Investment Board - the 25th biggest pension fund in the world, managing $76 billion - has used firms that focus on places such as Boston and the Silicon Valley to make virtually all of its venture capital investments in young businesses.

Now human embryonic stem cells, first isolated in UW research labs, are providing a once-in-a-generation opportunity to change that dynamic.

"What you have in Wisconsin is the top stem cell research in the world," said Robert Palay, an Illinois investor who is chairman of Madison-based Cellular Dynamics International, the state's first embryonic stem cell company. "The opportunity is to commercialize this in Wisconsin.

"The question facing the state is: Are you going to keep it there or let it go?"

For the first time in decades, Wisconsin - like the Silicon Valley at the advent of the personal computer age - has the pieces in place to drive a technological breakthrough and build a knowledge economy around it.

Supporting the human embryonic stem cell research that pervades the UW-Madison campus are:

• A commitment by the Wisconsin Alumni Research Foundation, or WARF, to help build more embryonic stem cell companies in its own backyard, and baby steps by the Wisconsin Investment Board to make some venture investments in the Midwest.

• A recently solidified, coordinated effort in Madison - from the governor's office to the university and trade associations - to create an environment that embraces entrepreneurs and removes obstacles for start-up companies.

• An increasing ability to finance deals or bring in outside financing, and growing pockets of managerial talent.

A decade ago, many of those pieces were missing.

Homegrown companies: The WARF portfolio
WARF has a long history of licensing UW technology, and a $1.5 billion endowment to show for it. But it wasn't until 1994, nearly 70 years into its existence, that WARF received partial ownership of a Wisconsin-based start-up company in exchange for providing patented technology. That company, Third Wave Technologies Inc., went public in 2001 and was the first of WARF's efforts to grow more companies here at home.

WARF now has 30 state start-ups in its portfolio. One is Cellular Dynamics, which was formed in late 1994 by stem cell pioneer James Thomson and two other UW professors. The company aims to screen potential drugs for safety and effectiveness, ultimately using human heart cells generated from embryonic stem cells.

"I think we'll see a number of (embryonic stem cell) spin-outs in Wisconsin - we got the first one going, and we're working on at least one more," said Carl Gulbrandsen, WARF's managing director.

WARF also has stepped up its efforts to license UW discoveries to state companies. In the past five years, the proportion of its technology patent portfolio licensed to Wisconsin companies has risen from 24% to 27%, according to Andrew Cohn, a WARF spokesman.

The importance of WARF to the commercialization of homegrown technology is immeasurable. When Thomson first isolated non-human primate embryonic stem cells in 1995, and human embryonic stem cells in 1998, WARF immediately knocked on the door of the U.S. Patent Office.

Despite fierce competition, WARF holds two basic patents that broadly cover human embryonic stem cells and a method for their preparation, and has received or applied for 33 more.

WARF also has paved the way for embryonic stem cell commercialization and related licensing revenue by forming its WiCell Research Institute subsidiary in 1999. WiCell trains scientists to work with stem cells and allows UW scientists to work with stem cell lines that aren't approved for federal research funding.

WiCell has 35 employees, most of them scientists, and expects to employ more than 50 within 18 months, Gulbrandsen said. In October, it won a $16 million National Institutes of Health grant to oversee the National Stem Cell Bank.

WiCell is just the second institute WARF has formed around one of its technologies. The first, WARF Laboratories, was created in 1928 to leverage the discovery of vitamin D. UW became a vitamin D research powerhouse, and related discoveries today yield 70% of WARF's licensing revenue.

"Vitamin D has certainly been good to us, but I don't know that we've ever had a technology that's been as broad in its application" as embryonic stem cells, Gulbrandsen said. "All disciplines at the university can benefit from having access to this tool."

The Wisconsin Investment Board has allocated up to $50 million to two Wisconsin venture funds - Mason Wells of Milwaukee and Venture Investors of Madison - that make most of their investments in state companies. In the last four years, the board committed an additional $135 million to venture investments in companies that have headquarters or substantial operations in Wisconsin.

The board is obligated to get the best return on its investments regardless of geography. But there are opportunities in the state because there is so much research here and not much venture capital chasing it, according to Monica Jaehnig, a portfolio manager in the investment board's private market group. The $185 million represents a little more than 10% of the board's $1.7 billion of investments in private equity, which includes venture capital.

Coordinated effort: A tech landscape blooms
From the governor's office to University Research Park to trade organizations such as the Wisconsin Technology Council, there's a push to build and promote an industry around the university's cutting-edge embryonic stem cell research.

Thomas Primiano is one example of how it's working.

Primiano last year moved his 5-year-old biotech company to Madison from Chicago Technology Park. Clonex Development, which has one patent, and four patents submitted for approval, received nearly $300,000 in loans and grants from the state to relocate. Madison's embryonic stem cell research provided a powerful lure for the company, which has a process for spurring cells to produce more proteins used in making drugs.

"We thought we could strike up some collaborations here to help us test our theories to see if (our technology) works in stem cells," Primiano said.

The 255-acre University Research Park houses 110 mostly high-tech companies with a combined 5,300 employees, who at last count made an average salary of about $60,000 a year. The research park plans a 270-acre expansion on Madison's far west side.

The park's incubator - the MGE Innovation Center - has 65 occupied suites and recently added 20 more, said Mark Bugher, the park's director. Fisher Scientific has a self-service store there selling commonly used lab items such as gloves and glass beakers to biotech start-ups.

The number of Madison companies doing work related to embryonic stem cells is growing.

Cell Line Genetics just moved into space at University Research Park. The company was started in October by Lorraine F. Meisner, a professor of population health sciences at UW-Madison and head of the cellular genetics section of the state hygiene lab. Cell Line Genetics provides DNA fingerprinting and other products and services to labs doing embryonic stem cell and cancer research.

Research park administrators are recruiting another out-of-state biotech company that works with embryonic stem cells, Bugher said. The company wants to be at the "epicenter of the stem cell world," he said.

"Our strategy is to continue to make the infrastructure available and be ahead of the curve when these companies come," Bugher said.

Investing in ideas: 'Angels' provide money
Wisconsin companies pulled in only about 0.2% of nearly $200 billion known to be invested by venture capitalists in the five years ending in 2005, according to the MoneyTree Survey.

"The shortfall of venture capital is Wisconsin's biggest challenge - we're farthest behind in venture capital of any of the important inputs into high-tech economic development," said Tom Hefty, president of the Wisconsin Security Research Consortium and former co-chairman of the Governor's Economic Growth Council.

However, angel investment - in which financiers willing to take high risks for high rewards invest in young companies, even at the idea stage - has improved dramatically in Wisconsin. The state tracks and maintains a Web site for 11 active angel networks, up from six a year ago. Angel networks bring together investors looking to put money into businesses at birth, before they're proven enough to attract even venture capital.

Mason Wells and Venture Investors put money into slightly more mature companies and have honed their ability to form investor syndicates from a broader region. Dan Broderick, a Mason Wells managing director, founded Mid-America Healthcare Investors Network, an association of more than 40 venture capital firms that share information and syndicate deals in the Midwest.

"I'm confident that if the great opportunity is there, and there's a large market that can be served and a clear path to clinical approval, the financing can be found to make it happen - and I wouldn't have said that 10 years ago," said John Neis, senior partner at Venture Investors.

Franco Cerrina is impatient for more to happen in Madison. A UW-Madison computer engineer who co-founded NimbleGen Systems Inc. and is president and chief technology officer of Genetic Assemblies Inc., Cerrina says a more serious commitment of resources is needed to help research flourish.

"You go to MIT, in Cambridge, and there are new companies everywhere," pouring money into stem cell research, Cerrina said. "That's not happening here."

Still, FierceBiotech, an industry e-mail newsletter, in January named Wisconsin one of the five places in the world best-positioned to be a hotbed of biotech innovation. The others were California, Maryland's I-270 technology corridor, New Jersey and Singapore.

That potential attracted Trevor Twose,a biochemist turned entrepreneur who devotes part of his time to running Mithridion Inc. in Madison and the rest to a consulting business called Biopons Inc., which helps start-ups write business plans. Twose's business plan for Mithridion, which is developing drugs for Alzheimer's and other neurological diseases, won the Governor's Business Plan Contest in June.

"Wisconsin is relatively short of experienced managers because there isn't a large pharmaceutical company in the neighborhood here - and that's the opportunity for someone like me," said Twose, who moved to Madison three years ago.

Uncertain future: 'An era of ferment'
Venture capitalists tend to be wary about investing in a young science where it's difficult to predict a timetable and development costs for an end product.

"The hard part about stem cells as a business is, 'What's a business you can start now that might be able to show a profit before it runs out of money from investors?' " said Nick Seay, a patent attorney in the Madison office of Quarles & Brady and Cellular Dynamics' chief operating officer.

This early in the game, it's as difficult to imagine the commercial applications that will be built on embryonic stem cell research as it would have been for the Wright brothers to anticipate intercontinental air travel after their first flight on the beach at Kitty Hawk, said Scott Stern, an associate professor of management and strategy at Northwestern University's Kellogg School of Management.

"We are in an era of ferment," Stern said. "We don't know even what the precise applications, revenue streams, business models and key pieces of intellectual property are likely to be.

"And that's not bad at all."

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