PROVIDENCE – The news that CommerceRI has chosen to invest $3 million from its pool of $8.5 million in the state’s Renewable Energy Fund into a new energy investment fund at Slater Technology Fund heralds a change in the state’s investment policy.

It recognizes that the state’s economic development agency, now known as CommerceRI, lacks the specific expertise to make good investments in early-stage energy companies to receive loans, something that Slater does very well.

The allocation of the money, collected from charges on consumers’ electric bills, also appears to recognize that Rhode Island needs to ramp up its investment in renewable, clean energy by supporting the development of such early-stage technology companies in the state.

More importantly, perhaps, the investment also marks the ongoing transition of Slater from a state-financed investment fund to a series of public-private partnership funds. The new energy investment fund, which will be seeking additional private capital for investment, is the first of several potential funds that Slater may choose to undertake.

Federal securities law prevents Slater from discussing the type of funds, the kind or size of investments, according to Slater officials.

Since its inception, the state of Rhode Island has pumped some $40 million into the Slater Technology Fund, for which it has compiled an excellent track record in making investments.

The upcoming FY 2015 budget, however, will have no money allocated to the Slater Technology Fund.

The interim “bridge” strategy by Slater has been to rely on federal financing – in particular, the federal State Small Business Credit Initiative, as well as capital gains from the sale of companies such as Andera.

Only about $1.9 million of the promised $9 million in federal money has been delivered to Slater – with the rest tied up in a federal audit. Slater remains optimistic about the eventual outcome, but has agreed not to make any substantive comments until the process is completed.

ConvergenceRI sat down recently with Richard Horan, managing senior director at Slater, to discuss the future of the biomedical and health IT sector in Rhode Island – and the aspirations of the knowledge economy emerging in Rhode Island.

A year ago, in the inaugural issue of ConvergenceRI, Horan called for the development of a more coherent plan. “If success in building a knowledge-based economy is to occur, a goal which has arguably eluded us here in Rhode Island thus far, it calls for convergence around a more coherent plan,” he wrote. “Life sciences, research and health care, particularly in the new era we have entered, present most promising possibilities along these lines.” [Against this backdrop, he added: “There could not be an initiative more poignant and timely than that being launched by ConvergenceRI.” See link to ConvergenceRI story below]

Horan, who is, by default, the keeper of the tales of start-up ventures and the progeny that they have spawned over the last 20 years, discounted any label that he is Homeric in his telling the tale of Rhode Island’s odyssey. But ask any question, and Horan often begins, like the ancient mariner in Coleridge’s epic poem, spinning a tale of past history to inform the future opportunity.

ConvergenceRI: How important is it to have an accurate map of the potential of the emerging knowledge economy in Rhode Island?
HORAN: I think the people actively engaged in it have a very good grasp of what’s going on here in Rhode Island and how it fits into the broader innovation ecosystem.

Having said that, I think we can benefit greatly from a deeper portrayal of both the current landscape as well as the history.

The bio-medical research enterprise in the academy comprises something like $200 million to $250 million on an annual basis.

The next dimension of comparable size is the established pharma and medical device companies that exist and operate here, of which there are a small number.

Amgen, down in West Greenwich, and their bio-manufacturing facility; you have Alexion in North Smithfield and their bio-manufacturing facility, and CR Bard, headquartered down in Warwick.

If you tried to come up with a comparable metric, in terms of their annual spending, the aggregate economic activity, it [would be about] $250 million.

Amgen has about 1,000 employees, Alexion has about 200-300 employees, and Davol [Bard] has about 500 employees.

So, you have [the shape of] a barbell emerging. On one hand, you have the biomedical medical research enterprise, with some $250 million in annual spend. And then you have the established players, primarily in the bio-manufacturing mode, at a comparable level [of about $250 million].

In between [the two ends of the barbell] is an expanding group of startup or emerging companies, of the likes of Nabsys, Mnemosyne and Tivorsan, as good examples.

In aggregate, these companies spend about $25 million a year – roughly 10 percent of the research enterprise or the bio-manufacturing ends of the spectrum.

ConvergenceRI: How does that fit into the larger ecosystem?
HORAN: Just mapping that along can give you a macro-level picture of the level of economic activity. Slater has developed a map of that activity as part of its strategy of investing in bio-medical start up companies.

They play in a larger ecosystem, with significant players just outside of the Rhode Island economy.

Notably, the world’s leading concentration is in Boston-Cambridge, and that’s from basic biomedical research to major pharmaceutical companies and everything in between.

And, for that matter, the smaller but meaningful levels of activity in places like Pfizer in Groton and Yale in New Haven.

The scale in Boston is 10 to 15 times the size of what exists here in Rhode Island, depending on what you measure – the venture capital, the pharma or medical device company spending.

ConvergenceRI: What is Rhode Island’s sweet spot?
HORAN: I think you have to consider the history to develop a really good answer along those lines.

In Rhode Island, we have developed some distinct competencies over the course of time. By way of focus on the academic research sector, one significant event dates back to the 1970s, when Brown re-established its medical school in partnership with the leading clinical institutions.

It is a relatively young medical school, compared to its peers at Harvard, Yale and Stanford, but during its relatively brief history it has developed some real competencies, leveraging off the science capabilities at Brown and leveraging off the competencies in the health care institutions.

By way of example, Brown has developed some competencies in neuroscience. John Donoghue and his colleagues in the BrainGate program have achieved national and international acclaim for their work in that area.

Those competencies extend into the clinical world, with the psychiatry practice at Rhode Island Hospital and the pediatric psychiatry at Bradley, and through Care New England, Butler Hospital, which is equally deep in psychiatric care. It’s an area where we have developed significant competencies from basic science and neuroscience right through to clinical care.

ConvergenceRI: With John Donoghue’s taking a leave of absence to head up the new Wyss Institute in Switzerland, how does that change the equation?
HORAN: The new Wyss Institute is a very exciting, well-resourced initiative. John’s appointment is a real testament to the high caliber of science and scientists that have emerged here in Rhode Island.

Prior to assuming that position, John had been appointed to the brain commission of the Obama administration.

[The translational research focus], that’s where the megatrend is really emerging in the realm of federal funding policy. It’s an opportunity where we in Rhode Island can really capitalize on things – the opportunities in taking innovation from the bench to the bedside.

It’s the fact that we have, on one hand, the basic biology research [expertise] in our universities, and, on the other hand, well-established clinical institutions.

It’s an excellent test bed to pursue translational research.

Another distinctive competency that has emerged here in Rhode Island, and it ties back to the history, is in the area of tissue engineering and regenerative medicine.

The origins of the story go back at least to the 1980s under the leadership of the late Pierre Galletti and Patrick Aebischer, who were members of the Brown faculty with clinical appointments at Rhode Island hospital. They established a research focus on tissue engineering and regenerative medicine; the work they were doing became the basis of Cyto Therapeutics.

Here’s the story: Cyto Therapeutics was spun out of Brown and Lifespan; it was backed by the Mayfield Fund, a San Francisco venture capital firm. It was sent up originally in Richmond Square; they were the lead tenant in the development of Richmond Square. Later in time, they moved up to Lincoln and North Smithfield, where they expanded into multiple facilities, including 701 George Washington Highway.

The company went through several rounds of private financing, they partnered with some major pharmaceutical companies; they became a public company. Then their lead product failed in clinical trials, a real setback.

ConvergenceRI: And then what happened?
HORAN: Ultimately, the company combined with a Palo Alto company called Stem Cells, Inc. Early on, one of the scientific founders, Pierre Galletti, tragically died. Not long thereafter, one of the scientific co-founders, Patrick Aebischer, went back to Switzerland, his native county, where he built the EPFL, one of the most respected research institutions in Europe.

More recently, he was recruited to head up the Geneva-based Wyss initiative that John Donoghue is joining.

ConvergenceRI: Two top Rhode Island scientists end up together in Geneva….
HORAN: The story is that out of the labs of Galletti and Aebischer came Cyto Therapeutics, which focused on encapsulated cell therapy and other areas of tissue engineering and regenerative medicine.

And, while that company wound down here in Rhode Island, its progeny very much remains – whether it’s the facilities they developed, or some of the technology they developed, or more to the point, the people who were recruited as part of the original launch.

In that regard, here a few significant developments. Neurotech, a company based in Lincoln, was a direct result of the technology that been developed by Cyto Therapeutics. Neurotech was launched by Moses Goddard, one of the former Cyto Therapeutics scientists, in 2000, with a modest amount of seed capital from the Slater Fund and much more significant backing from a European venture company. To date, that company has raised more than $50 million [in venture capital] and has developed into what is really the world-leading encapsulated cell development therapy, delivering a therapeutic protein in the eye to hopefully halt macular degeneration.

Along the way, in 2008, the state of Rhode Island provided financing to Neurotech of about $4.5 million to help fund a $6 million bio-manufacturing facility located in Highland Park.

Further downstream, Lars Wahlberg, originally with Cyto Therapeutics, started NsGene.

ConvergenceRI: Looking forward, are you optimistic about Slater – and about Rhode Island’s emerging innovation economy?
HORAN: There are a couple of different levels to talk about. In the last 12 months, Slater has been navigating a challenging year. We have portfolio companies that are really progressing well. The primary challenge for us has been with funding sources. It’s a multi-dimensional problem we’re trying to solve.

There has been diminished state funding. In the FY2015 budget, state support, which has in the aggregate accounted for some $40 million since Slater’s inception in the late 1990s, will have ended. It will be the first year that there will be no annual appropriation.

Our strategy is to take the Slater fund to scale. The Slater program has been very successful over the years, relying primarily on state support. The goal moving forward is to take the program to scale through the engagement of private sector investors in one or more private sector funds.

The key questions have been about bridging ourselves from state funds to private sector funds. Commencing as far back as 2011, we have been able to [develop] federal funding, called the State Small Business Credit Initiative [created as part of the federal Small Business Jobs Act of 2010 under the jurisdiction of the U.S. Treasury Department]. Rhode Island was awarded some $13 million [in June of 2011], of which Slater was allocated $9 million. Thus far, we have received and deployed $1.9 million in federal funding.

A second important piece of the transition from public sector to the public-private model has been the realization of returns on some of our portfolio company investments. To that end, in the last 18 months or so, we’ve realized some $4 million in gains from prior investments, most notably in the sale of Andera to Bottomline Technology, announced in April of this year. [See link to ConvergenceRI story below.]

Over the course of the last 12-18 months, we’ve been navigating that challenging course from reliance on state funding to reliance on federal funding, and increasingly capital gains, and ultimately, private sector investment.

It’s challenging, but we’ve made considerable progress along those lines. At this point, I’m quite optimistic.

ConvergenceRI: Is there a light at the end of the tunnel in resolving questions about the federal financing from the U.S. Treasury?
HORAN: A process is underway, and we’ve agreed to refrain from substantive comment until the process is completed. I’m optimistic about the prospects for resumed funding of the federal funding program over the near term.

ConvergenceRI: On the macro level, all of this activity is not happening in a vacuum.
HORAN: On the macro level, Slater is essentially a public-private partnership. The partners we work closely on public side include CommerceRI. On the private side, there are institutions such as Brown, URI, Lifespan, Care New England. There are also established corporations with which we work as well.

There has been progress at all sorts of levels over these last 12-18 months. On the public side, you have new leadership at CommerceRI.

More to the point, you have an election year, with the prospect of a new governor and a new mayor in Providence. That sets the state for new leadership and a new look at the opportunities.

In the private sector, there is new leadership at Brown, both at the university with Christina Paxson and with the appointment of Jack Elias as the new dean of the medical school.

At the University of Rhode Island, things continue apace, with major investments in the new environmental and life sciences building, the construction of the pharmacy building, the push on chemistry. Major progress [has been made] along those lines.

And the start up companies [in which we have invested], Nabsys, Mnemosyne, IlluminOss, Tivorsan, to cite a few, have raised significant money.

ConvergenceRI: Nabsys now has a new CEO, Steve Lombardi. What will Barrett Bready’s role in the company be now?
HORAN: As it was reported, he will be remaining actively engaged in the company, both as a significant investor and as an employee in support of Steve Lombardi.

Recruiting senior management is one of the most [important tasks] of these starting and emerging companies. In Steve Lombardi, they have recruited someone with some 25 years of experience.

I’ve known Steve for more than 25 years. He was originally with Applied Biosystems, a market leader in applied sequencing systems. He brings a wealth of industry experience directly relevant to the market that Nabsys is launching.

Barrett Bready was the first CEO, he joined at the inception state, and he’s done a terrific job of the building the team there. He brought in Point Judith Capital as lead investor. Later in time, Stata Venture Partners came in, and most recently Bay City Capital.

The company is now approaching commercial launch [of its product], a critical inflexion point in any company development, particularly in the field of bioanalytical technology platforms.

The timing to bring in a guy like Steve Lombardi, with the background and experience he brings to bear, is quite good. I’m quite optimistic about the prospects.

ConvergenceRI: What is your investment in Nabsys?
HORAN: We put up the original seed capital to launch the company, $250,000 in 2004-2005.

We put another $250,000 as part of a limited equity round, with other regional investors, primarily local and regional angel investors, with limited equity of about $1.5 million.

That equity round was expanded to include investment by Point Judith Capital in 2007 or 2008, reported to be approximately a $5 million round.

Later in time, Nabsys completed a Series B round, with Stata Venture Partners as the lead investor, a $7 million round.

There was also a Series C round of about $10 million.

Then Bay City Capital committed a $20 million Series C round about 18 months ago. Bay City is now the lead investor, and they’re working closely with Stata Venture and Point Judith.

ConvergenceRI: What do you think attracted Ray Stata [the founder of Analog Devices] to Nabsys?
HORAN: I think he saw what Nabsys was going as a merge of the semi-conductor science with the field of DNA analysis in life sciences. In particular, the core technology at Nabsys are these nanopore arrays which enable electrical detection instead of fluorescent space detection.

It’s a whole new paradigm of enabling technology for DNA analysis. I think that Ray Stata brought a unique frame of reference to bear on the possibilities.

ConvegenceRI: And what is Slater’s total investment in Nabsys?
HORAN: The aggregate investment we carry on our books is on the order of $1 million.

They are in the process of effecting the first phase in DNA sequencing known as early access programs. They enter in alliances with major biomedical research institutions and give them early access to the technology, and the companies develop applications with the technology.

It’s the functional equivalent of beta testing in the world of genomes and engineering, but it’s called early access.

Nabsys has positioned themselves right now for a broad-based, national and international rollout.

ConvergenceRI: How important is it for the story to be told, for the institutional memory to be preserved, for the importance of the history and explaining what happened?
HORAN: I think that understanding the landscape is critical to developing a coherent, strategic plan in the life sciences, in the biomedical sector in particular. There’s a landscape and a history. It’s a fertile field on which to cultivate plans going forward.

The story of biotech – nationally and internationally – is the story of an industry which has grown up in the straggled between basic biomedical research institutions on one hand and large pharmaceutical and medical device companies on the other hand. With start up and emerging companies as the key agents of change in the middle.

We’ve seen that formation play out in all of the mature locations where biotechnology has flourished – whether it’s Boston-Cambridge, Palo Alto and Berkeley or San Diego.

You can see it on a smaller scale in Rhode Island.