Profiting from the BioShield

FRAMINGHAM (11/24/2003) - In the aftermath of Sept. 11, arguably the hottest segment in life sciences has been biodefense. And with good reason. On the table sits a proposed federal funding bill, coined BioShield by the Bush administration, that would provide a whopping US$5.8 billion to defending the homeland against biological Armageddon. This bill has already passed in the U.S. House and awaits a vote in the U.S. Senate.

But while many see this as an opportunity to turn biodefense into an industry of its own, BioShield is surrounded by controversy. Some critics charge that this new legislation will derail federal monies presently allocated for other key civilian, nondefense biotech initiatives. In turn, these nascent biodefense programs will steal away from already anemic budgets for government-subsidized venture funding to private industry.

Others applaud BioShield's possibilities but fear that it will be biased toward vaccine and drug developers traditionally synonymous with biodefense, versus offering opportunities to medical device makers and other critical peripherals in the campaign against bioterror.

BioShield creates a permanent pot of money, by law, over the course of 10 years, rendering it immune to any shifts in budget cycles. But how and to whom will these monies be allocated? And how can your organization benefit?

The group most concerned about missing out is enterprise software developers who write specialized biodefense applications that support biotech firms. Such programs might carry out strategic planning, perform diagnostics, manage data, and initiate recovery efforts after an attack.

"The federal government (doesn't) have those (necessary) in-house services," notes Henry Bernstein, assistant director of the Montgomery County (Md.) Department of Economic Development. "If companies are positioned right, they're going to benefit ... We have companies that either by way of design or retooling are moving into the area of homeland security."

Software plays key supporting roles for biotech companies. Databases collect and consolidate data so that scientists can easily find information. Modeling software makes predictions about scientific outcomes in response to inputs about potential threats. These threats fall into six categories:

-- Availability and access to biotoxins

-- Presence of weaponized genetic material

-- Detonation of a weaponized device

-- Spreading of a biological epidemic after detonation

-- Fending off an epidemic with no known cure or remedy

-- Vulnerability of unprotected, unexpecting targets, including civilians

Mission control

No matter what support function software designers look to fill, their mission is to create tools that simplify and enhance the work of lab scientists and technicians, either in mitigating threats or dealing with damage from an actual attack. The central goal is not to automate decision making, but to manage the data to enable human operators to make more educated, less emotional decisions.

Software is also used to conduct surveillance -- a good example being the "anthrax sniffer" now found in a number of major post offices across the country. (A sniffer is a device backed by a computer program located on a mail assembly line that screens for DNA.) Other surveillance programs monitor a possible attack to predict the spread of an epidemic.

First-responder software technology (software programs that literally sound an alarm to flag the operator's attention immediately when a dangerous substance is detected) senses chemical changes in the environment that deviate from standard "safe zone" benchmarks. It operates 24 hours a day, immune to human distractions and subjectivity, and is sensitively calibrated to err on the side of a false alarm. Some companies in this arena are large defense corporations providing many homeland-security services with an enterprise software team that is just one branch of the company. Others are merely software startups working out of an entrepreneur's garage.

For example, Igen International Inc., a biotech company in Gaithersburg, Md., has created portable detection hardware that screens for the DNA and molecular properties of botulinum toxins, Ebola, severe strains of influenza, and Streptococcus. The FDA and the Centers for Disease Control and Prevention (CDC) as well as the Department of Agriculture are using the equipment to ensure that food supplies have not been contaminated. Igen also operates the Department of Defense's (DoD) Automated Biological Agent Testing System at the Edgewood Chemical and Biological Center.

The company has built 450 testing instruments and reagent kits for the Joint Biological Agent Identification and Diagnostic System, a key program under the DoD. Igen executives say they have sold $5 million (as opposed to only $1 million last year) worth of biodefense products, a healthy 12 percent of its $42-million total revenue.

Research and development is a big focus at Igen. The U.S. Army Medical Research Institute of Infectious Diseases has contracted Igen's Origen technology, which provides assays for neurotoxins and hazardous environmental agents that troops might face in the field.

Also heavily in the spotlight are Northrop Grumman Corp. and subcontractors Cepheid, Sceptor Industries Inc., and Smiths Detection-Edgewood. They were awarded a $3.7-million pilot program contract by the U.S. Postal Service in December to build and expand 292 bio-agent detection systems for anthrax, called GeneXpert, in mail-sorting facilities across the country. Tom Gutshall, Cepheid chairman, says that the genetic material sniffers are so sensitive that they can pick up the slightest traces of airborne and surface-to-surface pathogens. Similar biodefense deals could generate more than $20 million in sales this year.

Early warning

Quantum Leap Innovations, in Newark, Del., received $2.5 million last year from the Delaware Congressional Delegation in a joint contract with the U.S. Navy to develop an intelligent software application that provides an early-warning defense system for chemical, biological, and radiological threats. The pilot detects molecules and genetic material commonly found in suspicious agents and diseases. It also closely monitors trends through a "knowledge wall" and develops instantaneous, pre-formatted plans for first responders and emergency personnel in mitigating an outbreak, identifying its source, and strategizing as to how to contain the spread. This advanced technology is interactive and adaptable in different environments such as high altitudes or very wet areas.

Sen. Joe Biden (D-Del.) said in a press release: "Companies like Quantum Leap, run by dedicated professionals who are able to produce excellent and innovative products at lower costs than major computing companies, are what gives America the real long-term advantage in the fight against terrorists." And Sen. Tom Carper (D-Del.) added: "The company's innovations hold the promise of saving an enormous number of lives by quickly identifying terrorist threats and coordinating defensive responses."

Delaware's commitment to homeland security is somewhat surprising. It has built a $2-million database for disease reporting, the Delaware Electronic Reporting and Surveillance System, that includes statistics on how, where, and how fast an epidemic has spread.

At the federal level, the Electronic Surveillance System for the Early Notification of Community-Based Epidemics (Essence II) was built in 1999 to collect and interpret data submitted by military doctors on a daily basis. Supported by $12 million from the DoD's Defense Advanced Research Projects Agency (DARPA) and Johns Hopkins University, it was expanded after Sept. 11 to include worldwide data from military installations abroad.

Essence has helped to identify 138 cases of the Norwalk virus that first broke out at a San Diego naval base in 2000. Biosurveillance matches patient demographics with precedents of personal disease contraction. In August 2002, the DoD Pharmacy Data Transaction Service began to contribute prescription data to further enhance the database.

Oracle Corp. has thrown its hat in the ring as well. Teaming up with the Air Force Surgeon General's Office, it has created a disease-tracking system that consolidates Web resources from various public health databases for hospitals, government agencies, and emergency response teams. Rival company Integic offers portable patient records-tracking software that can be carried on the battlefield with soldiers. The program is being used by military hospitals for diagnostics and symptom identification.

The good news for these enterprise software firms and supporting players is that BioShield is not the only source of government funding. Sens. Ron Wyden (D-Ore.) and George Allen (R-Va.) are co-sponsoring a bill that would create a clearinghouse for companies to present new product ideas to federal agencies such as Defense, Agriculture, or Health and Human Services, and also offer a test-bed facility to assess product prototypes. DARPA has been granted $500 million by Congress to seek out mission-specific ventures that meet both short- and long-term goals. Funding can be as high as $21 million, as was the case with Palo Alto, Calif.-based pharmaceutical company Anacor Pharmaceuticals Inc.

Grants are also plentiful. A large program run by the National Institute of Allergy and Infectious Diseases offers more than $35 million for biodefense companies. There are several specialized government-backed venture funds: For example, the U.S. Army's Soldier and Biological Chemical Command seeks proposals from biotechs for next-generation bio-agent alert systems that employ reagents used to detect biotoxins from a safe proximity. The army is also spending heavily on safeguards against ricin and sarin gases because chemical "weapons of mass destruction" are a category of bioweapons.

Moreover, biodefense companies should not shy away from private equity investment outlets. "(State funds are) appealing as another source of dollars to help the biotech startups that are cash-starved, but it's not a long-term business solution," says Jonathan Root, a partner at U.S. Venture Partners. "I worry that biotechs will (rely on) the government as a source of financing." HealthCare Ventures, Oxford Bioscience, New Enterprise Associates, and Burrill & Co. are among the investment banks and venture funds increasing their biotech positions.

Whether federal or private funding, biodefense software ventures should recognize the key investment criteria, many product-focused, that investors want to see in a business plan.

Critics have many anxieties about the future viability of biodefense as an industry, fearing it all might be a fad. "No one knows (what will happen) -- it's too new," says David Gollaher, president of the California Healthcare Institute. Gollaher thinks that government contracts offer a fantastic opportunity, but their numbers are limited. He fears that some companies may divert scarce resources toward winning bids, only to lose to a competitor and have no way of recouping lost time and money spent in the bidding process. "Companies that don't have product revenue and don't have a strong cash flow have to make strategic decisions on how to use their cash," Gollaher says.

Very early-stage companies are at a huge disadvantage, even if they have a product that will change the world. AlphaVax CEO Peter Young agrees: "Companies need to think about how much sense it makes to go after the money."

Even those who win government contract bids have cause to worry. Early-stage software executives are speculating that any biodefense product invented and employed at the request of a federal client would become intellectual property of the state, not the private firm that developed it, and developers could be prohibited from applying for patents. Losing ownership rights to the code of a biodefense software package would be almost like losing ownership of the entire firm, because in many cases developers employ the same platform and programming for both civilian and defense software packages. Federal clients could have the right to sue developers for continued use of particular code, even for non-defense-related applications.

Similarly, these clients would likely require a software firm to obtain federal security clearance. Developers could be prohibited from selling applications overseas to foreign entities, and even prospective domestic clients could be heavily regulated. Then there is the issue of liability. What happens if your software malfunctions? Could the client hold you accountable (civilly or criminally)? Riders to BioShield have yet to be set up to safeguard against these concerns.

Perhaps the biggest challenge for biodefense software firms is the politically charged game that surrounds applying for federal funding. For biodefense firms, "government contracting is new and emerging with a very different culture (that) the biotech industry is not used to ... in fact, only a handful of biotech companies have dealt with the DoD in the past," says Carl Feldbaum, president of the Biotechnology Industry Organization. The low-key approach favored by many developers in marketing their products puts them at a disadvantage and could result in a proposal being buried in a pile of competing applications.

The biodefense initiative provides outstanding opportunities and challenges for enterprise software designers, whose products can be just as important as vaccines and medical devices in this changing world.

Jason B. Lee is a certified financial management analyst and managing director of Lee, Pirelli & Co., an investment banking advisory firm. He can be reached at

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