Disruptive technology acquisition

In 2006, Thomson’s research at the University of Wisconsin-Madison proved the potential for induced pluripotent stem cells [iPS cells]. In simple terms, iPS methods could generate stem cells from adult cells rather than embryonic cells. This technological advance could resolve a number of outstanding technical and operational issues associated with stem cell production and commercialization, potentially bypassing entirely the use of cells derived from embryonic sources, a continuing source of ideological controversy. The third entity, iPS Cells, Inc., was formed specifically to license this technology from WARF.

The addition of iPS technology impacted numerous functions at the companies and changed the conceptual and narrative frameworks utilised by executive management as part of operational and long-term planning. This fundamentally altered the underlying capabilities set at the organisation. In contrast to the initial configuration, which focused on the development of assays that would support drug discovery, Tom Palay noted in 2009, “Our expertise is in the automation and production of cells based on culturing stem cells and differentiating those cells.” [paraprhased from interview with Tom Palay, 2/6/2010]

The immediate effect was to completely change the organisations’ long-term manufacturing strategy and capability requirements. At the time iPS was licensed, the company had been attempting to resolve a variety of technical problems associated with large-scale, high-efficiency stem cell manufacturing. This was due, in part, to variations in cell culture stocks available from acceptable vendors, but also to

limitations on extant laboratory processes for cell culturing. iPS enabled the organisations to approach distinct cell-type manufacturing issues within a single framework. In addition, the iPS platform provided a common basis for stem cell competencies associated both with drug discovery tool products as well as long-term therapeutic product development. At a tangible resource level, the iPS platform simplified certain aspects of the organisations’ internal materials development and automation skills.

In Spring of 2008, executive management and the founders of the separate entities held a series of strategic-level meetings. The discussions concluded that iPS provided a common platform for longer-term technology development for both therapeutics and tools. According to senior managers, discussions about merging the organisations had previously focused on the challenges associated with ensuring

“fairness” with regard to equity stakes. Stock transfer pricing had been seen as a potentially volatile topic that could be difficult to resolve to the satisfaction of all parties.

Two other factors associated with organisational finance appeared to influence the transition process. First, a federal grant that would have funded some of the long-term therapeutic research was unsuccessful. Second, executive management was unable to secure venture financing from a lead venture capital fund. Given the length of the normal venture funding process, closing a venture round could not be anticipated in less than three months from the initiation of intensive discussions with a given investor. In interviews, members of the executive team expressed surprise and resignation associated with these circumstances.

Particularly with regard to venture financing, managers expressed the opinion that the complexity of the organisation’s structure and apparently conflicting business

models may have created challenges for outside financiers. By mid-2008, management had acknowledged that a significant, mid-term venture capital investment was unlikely.

In summer 2008, executive management recommended that the Board of Directors of the entities approve the merger of the entities into a single legal structure. The merger was announced in late 2008; implementation of the merger lasted into summer of 2009. A variety of structural and cultural changes merit notice.

The research team from SCP was significantly redeployed to development work: of 20 researchers only 5 were retained to continue long-term research specifically on the therapeutic products. The general manager of iPS, Inc., who was also serving as CTO of CDI and SCP, retained oversight of only the five long-term researchers. His role had previously included technology acquisition; this became his primary responsibility following the merger. Significant long-term R&D direction and oversight was shifted to a research manager within the merged organisation.

The combined company focused on the development of a single assay cell type, cardiomyocytes, and subsequently developed a high-throughput process for the manufacturing of that cell type for drug discovery purposes. The product was launched at the end of 2009. The manager of corporate development, who previously had managed a staff of two, was given authority to ramp up sales and marketing activities. By early 2010 the external-facing function within the organisation had ten full time employees. Throughout the organisation, employees noted a shift, described alternately as “research” to “development,” or “development”

to “manufacturing and sales.” The interviews conducted in early 2009 displayed predominantly relaxed, optimistic, and cheerful tones. The interviews conducted in late 2009 suggested higher stress levels and tensions, sometimes explicitly linked to

the restructuring, sometimes linked to the new focus on commercialization. Two of the interviewees positions had explicitly changed, both in terms of title and responsibilities. These interviewees expressed the most dissatisfaction with the transition. In general, mid-level employees appeared to be the most affected by the transition, both in terms of changing responsibilities and change in attitude or outlook.

The new configuration of the organisation placed primary importance on manufacturing, sales, distribution, and support processes. At the same time, significant research activities continued, including project scoping and selection activities worth noting. For example, the firm used an internal “call for projects”

activity in late 2009 to identify high-potential new product areas. Management winnowed ten proposed projects to three and tasked inter-functional groups with preliminary research to demonstrate feasibility. Final proposals were presented in February 2010 and a single project chosen for further funding.

5.3.4 Organisational outcomes

The company has reported a number of positive outcomes. In August 2009, the company added Leroy Hood and George Church to its Scientific Advisory Boad.

Dr. Hood and Dr. Church are two of the world’s most celebrated scientists in genomics and have been instrumental in the formation and success of more than 20 successful biotechnology companies, including Amgen, Applied Biosystems, Millipore, and others. In December 2009, CDI announced the launch of iCell™

cardiomyocytes for drug development testing. In April 2010 the firm closed on $40.6 million in venture financing, bringing total venture funding to date to more than $70 million.