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BU-Backed Spinout Allegro Diagnostics Nets $4M Series A Financing for Lung Cancer Dx

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Allegro Diagnostics, a Boston University spinout attempting to commercialize a new lung cancer diagnostic, said last week that it has closed a $4 million Series A financing round to advance its technology to clinical trials.
 
Kodiak Venture Partners, a Boston-area venture capital firm, led the round and was joined by Catalyst Health Ventures. The exact amount committed by each investor was not disclosed. BU has also taken an undisclosed equity stake in Allegro, the company said.
 
In conjunction with the financing, Andrey Zarur, general partner with Kodiak, and Josh Phillips, general partner with Catalyst, have joined Allegro’s board of directors.
 
Allegro will attempt to commercialize gene expression technology developed by Jerome Brody and Avrum Spira, physicians in the Pulmonary Center at BU’s School of Medicine. Brody, former head of the Pulmonary Center, has also been appointed CSO of Allegro.
 
Specifically, Brody and Spira’s technology involves using microarray analysis to examine the gene expression patterns of airway epithelial cells, the surface cells that line the respiratory tract and that are sampled during a bronchoscopy – the most frequently used technique for diagnosing lung cancer.
 
Bronchoscopy still has major drawbacks, in particular its invasiveness and a relatively low accuracy that has been reported in the literature as being anywhere from 55 percent to 80 percent.
 
Brody and Spira developed an 80-gene biomarker panel from epithelial cells taken from a bronchoscopy that yielded near 90 percent sensitivity for diagnosing lung cancer. Furthermore, when combined with cytopathology of cells obtained by bronchoscopy, the gene expression analysis yielded 95 percent sensitivity.
 
The researchers published their findings in a breakthrough paper in the March 2007 issue of Nature Medicine, and along with the BU OTD, applied for a patent on the method.
 
The scientists also have evidence that many of the genes altered by smoking in the cells obtained during a bronchoscopy are also changed in cells from the nose and mouth. As such, they have also applied for a patent surrounding a technique for isolating nucleic acid samples from mouth epithelial cells in order to develop a less-invasive sampling technique than bronchoscopy.
 
Al Hawkins, director of the New Ventures program in BU’s OTD, which helped spin Allegro out of the university, said that he and the Allegro scientists also in-licensed additional related IP from an undisclosed company. Hawkins said that this IP had been originally developed at BU and previously licensed to the undisclosed firm.
 
One of the main reasons BU decided the technology was promising as the basis of a spinout company was that it was “a lot more advanced than a lot of technologies we deal with. They had some clinical data … and had shown great sensitivity and specificity,” Hawkins said.
 

“The fact that you get the results of the test and, combined with other clinical factors, you can actually make a decision … that to me is critical. It is the difference between a million-dollar [company like] Genomic Health and a cohort of unsuccessful molecular diagnostic companies out there.”

“I think it has a really tangible clinical benefit,” he added. “It can avoid a lot of people going into unnecessary surgeries, imaging, and other procedures. It can detect if someone has cancer sooner, and especially when used in association with bronchoscopy.”
 
Kodiak’s Zarur, who was recently recruited to the VC firm to help build its life sciences investment portfolio, said that a number of factors spurred Kodiak’s decision to lead the investment in Allegro.
 
“Lung cancer is an area that is hugely underserved, especially on the diagnostic side,” Zarur said. “If you have a patient that is suspect for lung cancer, [bronchoscopy] is a little bit better than flipping a coin. And taking a biopsy is very risky. So to me this is a hot area.”
 
Although other research institutions and companies are attempting to develop lung cancer diagnostics, most of them don’t “get you to a clinical decision,” Zarur said. “This thing does. It tells you whether the patient has cancer or not, with uncanny accuracy and sensitivity.
 
The fact that Allegro’s technique supplements and improves an existing method like bronchoscopy makes it particularly attractive, and the fact that you get the results of the test and, combined with other clinical factors you can actually make a decision … that to me is critical,” Zarur added. “It is the difference between a million-dollar [company like] Genomic Health and a cohort of unsuccessful molecular diagnostic companies out there.”
 
Zarur also said that Brody and Spira’s prominence in the field of lung disease increased the company’s attractiveness as an investment target.
 
Although Boston University is also an investor in Allegro, it didn’t directly participate in the Series A financing. BU’s investment came in the form of a $175,000 convertible note issued to Allegro last year as part of a new funding program from BU’s New Ventures program.
 
“That got them some walking-around money to continue experiments,” Hawkins said. When Kodiak and Catalyst made their investment, the $175,000 note converted to an equity stake.
 
Allegro CEO Dan Rippy said that from his company’s perspective, BU’s investment is still considered direct even though it wasn’t a pure cash investment through its venture fund.
 
“It seems to me that when you own shares in a company, that’s about as direct as you can get, and BU now finds itself in that position,” he said.
 
Indeed, Allegro’s convertible note was the first time BU invested in a company through a new program that provides two to three awards of between $50,000 and $200,000 per year to boost spinout companies in exchange for equity.
 
Hawkins said that the program, called Launch, also offers entrepreneurial services to its spinouts. “We try and raise money for them, help hone their investment presentations, and sometimes help them find management,” Hawkins said. “We mentor them through these processes.”
 
One of the major differences between convertible equity stakes and direct investment is that in the latter, investors “might have wanted board representation, and things like that, which [BU] currently does not have,” according to Rippy. “It would be different, but the way I look at it is that BU has endorsed this company, and that doesn’t change based on the vehicle that was used.”
 
Rippy added that universities are now “routinely” taking an equity stake in spinout companies to provide seed funding for promising technologies developed in their laboratories. Such funding, he said, is becoming increasingly meaningful to attract add-on funding from external private sources.
 
While Zarur agreed that it is becoming more “mainstream” for universities to supply seed funding and take equity positions in its spinouts, he doesn’t see it becoming a big trend.
 
“It boils down to their particular technology licensing strategy,” Zarur said. “It is pretty different between Tufts, MIT, Harvard, Partners Health – they all have different strategies, and largely that strategy depends on the technology licensing officers.
 
“The reality is that for these universities, the cash flow that will come from successful companies is rarely through the equity; it is mostly through the royalty streams,” Zarur added. “So I see them becoming more active, putting venture capital in and trying to get their professors and investigators to be more entrepreneurial, but I don’t think we’re going to be seeing VC groups out of every major university.”
 
For its part, BU has maintained a traditional venture fund since the 1970s and has made direct investments in a number of university spinouts as well as companies outside the school, Hawkins said. Some 21 life-sciences firms and 13 information-technology companies are listed in the investment portfolio of the BU OTD website.
 
Although the university has recently begun shying away from such direct investments, according to Hawkins, it has continued to provide internal funding mechanisms such as the Launch and Ignite programs for commercially promising technologies developed at the school.

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