Life sciences panel pegs bright spots in Indiana

A panel of six participants from the state’s life sciences industry took on a wide
range of topics July 23 at IBJ’s Power Breakfast at the downtown Marriott:

Anthony T. Armstrong, president and CEO of the Indiana University Research and Technology Corp.

Philip C. Belt, vice president of the customized fund investment group at Credit Suisse Securities. The
firm manages INext Fund, a $58 million fund that invests in venture capital funds.

Andrew Cothrel, president and CEO of SonarMed Inc., which recently won U.S. Food and Drug Administration
approval to market its airway monitoring device.

Jennifer M. Marcum, CEO of Sentry BioPharma Services Inc., which provides cold storage of biomaterial.

Christofer Matney, air services director of the Indianapolis Airport Authority.

Bart Peterson, senior vice president of corporate affairs and communications at Eli Lilly and Co., and former
mayor of Indianapolis.

The following is an edited transcript:

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Hot subsectors: Phil Belt, what subsectors of the local life sciences industry do you see investors most interested
in these days?

Belt: Therapeutically, there remains a lot of interest in, not surprisingly, disease states that are prevalent
and still have a significant amount of unmet needs. Metabolic disorders such as diabetes and obesity remain for small companies
as well as large companies an area that investors remain interested in.

There’s also cardiovascular, which from both a therapeutic and a device standpoint has a lot of activity in the investing
space. It doesn’t necessarily mean that dollar-wise it is disproportionately directed at metabolic disorders or cardiovascular
disease. But that’s where a lot of innovation is occurring in Indiana and elsewhere and that’s where a lot of
interest is among investors.

I wish I could say that there was as much interest in the very early stages as there seems to be in later stages, but that’s
simply not true.

IBJ: Do any of you have an inkling as to what portions of the region’s life sciences industry
have particular potential for growth in the next few years?

Marcum: I think on the clinical side, companies are looking for more depot services where you have somewhat of a
large structure and you’re able to manage clinical trials on the logistics side from a single location. So it simplifies
somewhat their clinical trial shipments and interactions.

We still have some opportunities to really streamline the clinical trial process and help companies bring their drugs to
market faster so that we’re all sharing in the successes together.

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Out-of-state investors: Are you seeing more interest from out-of-state investors or are we still kind of flyover
country in that regard?

Belt: It’s very different now. In 2001, Indiana was ranked 36th out of 50 states in the amount of
venture capital dollars invested into the state. By the end of 2009, the amount invested in Indiana had doubled and our ranking
among all the states had risen to 19th.

A lot of that, quite frankly, is driven by this very intentional effort in Indiana that began in the early part of this decade
to have an infrastructure that’s really a unique amount of combination and cooperation between academia, government
and the private sector. The creation of BioCrossroads, things like that, have all served to increase the investor awareness
and interest in Indiana.

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University technologies: Given the lack of venture capital interest in early-stage technologies, what do you
see as an effective fund-raising and exit strategy for university spin-out technologies?

Armstrong: I think, as Andy’s proven, I’d look at some of the nondiluted funding sources—the
SBIR and STTR programs, the state’s 21st Century Fund. The universities now have funds, we have a fund that we’re
managing. I know Purdue has a fund, Notre Dame has some resources. And then maybe the next stage is in some way the great
work that Wade Lange has done with ImmuneWorks and some others of trying to move those along and then find development partners
along the way. You get these technologies moved far enough down the pipeline, find a group that’s interested in that
area, and connect with them and actually do that further work with them.

Belt: Tony raised an important point. One of the things in early-stage investing that is very appealing to investors
is nondiluted financing. I think if the business, the technology, whatever it is, that is already in place has been able to
advance even the earliest work, in crude terms, on somebody else’s nickel diligently and efficiently but not in a diluted
fashion, that does make it much more attractive.

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Life sciences cargo: A lot of folks may be surprised to learn how much life sciences-related cargo now is shipped
through Indianapolis International Airport.

Matney: A lot of that can be tied to the success we’ve had partnering with FedEx and their growth
at the airport. A lot of that growth has mirrored kind of the large expansion that we’ve had in the life science industry
and some of that carryover into the logistics. A good example is a company like Pasturage Technologies. [They have] acknowledged
that their ability to work with FedEx has really helped support some of their clinical trial sample movements.

Another example would be that we’ve had services direct to Puerto Rico in support of pharmaceutical manufacturing on
the upstream of manufacturing activities. Most recently, in 2006, we’ve seen a situation where a global freight forwarder,
DB Schenker and Cargolux, has brought a direct international all-cargo flight from Europe into Indianapolis and they’ve
seen sustained success in those operations primarily because of the challenges they had working in an environment like an
O’Hare (airport).

When I look at census data and take a look at international air exports of life sciences, Indiana as a state is the third-largest
dollar exporter of life science products in the country. We’re only behind Massachusetts and California

IBJ: To what extent do you think the airport could actually spawn new life sciences companies, say life
sciences logistics or cold storage firms?

Matney: We just need to do a better job of raising the awareness of those decision-makers to understand
that we have a sustained, successful supply chain coming through our airport. The goal after that is to convince them that
it is very easy to move new planes into a market. It only took three months to get Cargolux into this market and get a system
put in place. It’s very easy to do that.

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SonarMed market: Andrew, you recently completed the long regulatory process of securing marketing approval for
your airway monitoring device. When do you plan to go to market and generally how big of a market do you see for SonarMed?

Cothrel: We’re going to go to market fourth quarter of this year. I’m not going to try to defend
the FDA and their process, but on the other hand, they’re an easy scapegoat sometimes, too. And so I want to be a little
evenhanded in how I describe that process. But we had a pre-submission meeting with the FDA and they actually were helpful,
they gave us ideas for predicate strategy we hadn’t even thought of. The downside of that was, about the time we got
around to our submission, a lot of those folks weren’t there anymore. They move up the ranks in the agency or they left
the agency. The new ones come into the agency and at the same time the agency’s perspective on what was an appropriate
predicate strategy had evolved.

We think the market size ultimately will depend a lot on where we end up with pricing on the product and we’re still
testing pricing. But if you look at about 80,000 intensive care unit beds in the U.S., about 1.5 million ICU intubations a
year, about 15 million operating room intubations a year, we expect to market hundreds of millions of dollars in the U.S.
and the same size in the rest of the world.

IBJ: You were talking about how SonarMed has been able to really propel itself along over those
years by accessing federal grants, which minimized your need, I think, to some extent for a lot of private capital.

Cothrel: I cannot overstate how critical the funding was that came from both the [National Institutes of
Health] and [21st Century Research and Technology Fund] here in the state. Not only was the money pretty darn handy, it made
us a very capital-efficient company and makes us a very attractive investment for investors. But this was during the “Death
Valley” of 2008/2009 when capital formation was just not happening, and so that money enabled us to live through that
and enabled us to weather some bumps in the road that without that money, given that capital formation environment, could’ve
very well been fatal.

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Lilly work force, drug pipeline: Lilly has been busy lately, making a number of changes including trimming more
than 2,000 jobs. It’s also trying to reduce annual expenses by more than $1 billion. Yet business is as big as ever,
with about 65 experimental drugs in human testing. How is Lilly going to manage all of this work with thousands fewer employees?

Peterson: Well, I think it starts with figuring out ways to operate more efficiently, basic management challenges
that every company faces.

But we’ve also pursued a strategy of recognizing that we don’t need to do every single thing in our process,
from drug discovery right on through commercialization, by ourselves and using our own resources and taking a hundred percent
of the risk.

So our strategy of bringing in partners and expanding the base, helping to expand the base of life science businesses here
in Indiana has a collateral positive effect. [It’s] involved selling our facilities in Greenfield to Covance and entering
into a long-term agreement with them, our Tippecanoe Laboratories in Tippecanoe County to Evonik.

IBJ: Lilly has launched one new drug in the last couple of years and hasn’t launched a new
drug discovered in its own lab since, I think, 2004. It raises the question why is Lilly, and many of its peers, apparently
in such an innovation drought?

Peterson: This is an industry-wide phenomenon. I think it’s fair to call it a drought or a trough. I think
some aspects of it are a bit beyond our control. All these things tend to be somewhat cyclical. But also the reality that
this is hard work, some of the low-hanging fruit has already been picked. And probably more relevant, the fact that all around
the world, starting with the FDA here in the United States, the bar has been raised. So what is considered to be an acceptable
new drug is a very different level of innovation and progress than what might have been viewed as acceptable 10 or 20 years
ago when companies were routinely coming out with “me, too” drugs.

Now these regulatory authorities are really demanding progress. They’re demanding that they won’t approve new
drugs unless they advance the cause, which we think is actually very appropriate. … We believe that it is within our
control to bring new medicines to market and that’s what we’re all about. If you look at Lilly, we just announced
our results for the quarter, [and] 21 percent of all of Lilly’s revenue for the quarter went back into R&D. That
is No. 1 in the industry worldwide. So we are the leading investor in R&D of all the global pharmaceutical companies in
terms of percentage of our revenue reinvested into R&D.

So while many of our competitors are going into consumer products and generics to try to reduce their risk, they’re
also taking capital away from innovation and drug discovery. We at Lilly are going the opposite direction. We believe that
innovation is the future and we have the biggest pipeline (in years). You never want to call anything the best because you
can’t predict the future, but Lilly has never had a pipeline this large with almost 70 products, potential new medicines,
that are in clinical testing right now.

IBJ: Does anyone on our panel think that Lilly’s consolidation will be bad for the region
or can be good to the extent that you expect Lilly to outsource more locally?

Cothrel: I think the potential for good is quite significant and I say that on several levels. First, it spins a lot of talent
out into the region. I would posit that [while] a lot of the hand-wringing goes on about brain drain for our IU and Purdue
grads, I’m much more concerned about our Lilly and Roche alumni than I am about an IU or a Purdue grad, because the
amount of brain drain when a 30-year Lilly vet leaves the state is frankly worth a heck of a lot more than the brain drain
of a new grad that decides to take a job on the coast.

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Academic collaboration: Tony, is IURTC seeing more or less academic collaboration with the life sciences industry
these days? Why or why not?

Armstrong: I think we’re seeing a lot more interaction not only between our university faculty researchers
and industry but even between the universities. Phil made a good point about maybe at the beginning of the decade of the idea
of trying to have the universities work more closely together. That’s really taken off and had a huge impact on the
state—of IU working with Purdue, working with Notre Dame, Butler and Ball State and Rose-Hulman.

I think the Indiana Clinical and Translational Sciences Institute is the perfect example of tying all of those assets together
and helping tell that story, making folks aware of what we have to offer. With the industry partner, we’ve seen a lot
more interest in industry groups taking a look at the technologies that we’re developing. They’re still very early,
obviously, but we have seen an uptick in interest.

What we’ve tried to do with the IURTC and our new Office of Engagement is really try to serve as a bridge in that process.
[We’re trying] to not only work with faculty members to find new technologies that they’re developing, and share
those, but really go out and try to survey and work with capital providers and companies and try to search out opportunities.

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Pharmaceutical outsourcing: Jennifer, one would think that a lot of the outsourcing done by the big pharmaceutical
companies of clinical trial functions in particular has been a part of your growth.

Marcum: Well, some of that business that they’ve decided to move to an outsourcing strategy has been
part of our company’s growth. We’re also seeing trends and changes in security. In 2007, there were [industry-wide]
about 35 thefts, in 2008 and 2009 about 46, and in 2010 Q1 there are already 10. So we’re on the trend to be continuing
to rise. And if you assume that the losses average $4 million, you can see that that number could add up to a $200 million
business for those people engaging in that type of activity. So for us, we have a lot of attention placed on security and
the anti-counterfeiting initiatives as well as heists and theft in general.

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Health care reform: Someone asks what silver lining you see or project as a result of the health care reform
law?

Peterson: First of all, 30 million more people are going to have health insurance and that’s going
to make a difference for everybody involved in the life sciences, I believe, and just for our industry.

Specifically, seniors will now have, starting Jan. 1, half of their out-of-pocket costs in the so-called “Medicare
doughnut hole” covered by the pharmaceutical industry, and that gap will eventually phase out completely.

And again, a specific thing that pertains to everybody here and to the research climate around the biopharmaceutical industry
is that there is now a 12-1/2 year data protection aspect of the law or a law that was part of health care reform that protects
data and in essence is sort of a proxy for a patent on biotech or biological products that ensures that investments made in
biotechnology will be able to be reimbursed and will be able to earn a decent return.

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Reimbursement rates: Phil, how will you and your investors adapt your investment strategy if health care reimbursement
rates decrease substantially and if the U.S. economy fails to recover substantially over the next three to five years?

Belt: I’ll speak just to the private equity investing stage. There is so much opportunity and so much
work to be done in the pre-commercialization area that investors, again at least on the private equity side, will continue
to, in what we all hope would be an innovative fashion, invest in the development of technologies and create opportunities.
Investing activities in the early stages of product or drug discovery and development will continue, I think, regardless of
the payment regimes.

Where there will be an effect is in the prices that are willing to be paid, the prices that people are willing to pay for
commercialization-stage entities because of the reimbursement. So that’s far too long of a way to say I don’t
think in the early science stage the payment methodologies will be as impactful as in the near term but certainly for commercial-stage
companies, prices may suffer as a result.

Cothrel: People will look earlier and they will look harder at what this device or therapy does relative
to what’s already out there. So the decline in reimbursement is not a universally bad thing for early-stage companies
if you happen to have a product that actually takes costs out of health care delivery. Those may become sexier versus some
of the therapies and other things that have been extremely expensive to develop and deliver only to modest increments.•