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Kansas Bioscience Cuts Jeopardize Health Innovations

Andy Marso
Heartland Health Monitor
The Kansas Bioscience Authority is threatened by a contracting state budget and a philosophical shift among legislators about how best to create jobs - through investments or tax cuts.

Thousands of Kansans rely on hemodialysis treatments to keep them alive because their kidneys no longer function properly.

Nick Franano, a doctor and medical researcher from Johnson County, estimates that at any given moment, about 50 of them are in hospitals across the state, suffering potentially serious complications because they don’t have a vein of optimal diameter for dialysis.

“Every day, in every part of the world where dialysis is done, vascular access is a problem,” Franano said. “And we have the opportunity to really take that problem down several levels.”

Credit Andy Marso / Heartland Health Monitor
Heartland Health Monitor
Nick Franano, a doctor and medical researcher from Johnson County, has launched two companies receiving startup assistance from the Kansas Bioscience Authority.

Franano, through a company he named Flow Forward Medical, is developing a device that could toss a lifeline to millions on dialysis worldwide. The vein-widening device is on its way to market thanks to financial startup help from the Kansas Bioscience Authority, an embattled state agency that Franano and others fear soon will cease to exist.

KBA leaders laid off half their staff in June and put a moratorium on new investments in response to dwindling state funds.

“The current KBA is hanging on by a thread,” said John Carlin, a former Kansas governor who served on the KBA’s board from 2006 to 2012.

“And maybe that’s generously optimistic.”

The moratorium provided a bit more certainty for businesses in the existing portfolio, like Franano’s. But future breakthroughs are on hold.

The KBA is threatened by a constricting state budget and a philosophical shift among legislators about how to best create jobs: through investment or income tax cuts.

Since its inception in 2004, the KBA’s goal has been economic development first and medical breakthroughs second. But the two are entwined.

Franano said gutting the KBA will increase the probability that some cutting-edge medical device companies are based in other states by the time their products get to market because their Kansas founders will have moved to places with better access to capital.

It also will increase the probability that some Kansans never risk launching a life science startup, meaning their ideas will never make it to market — or to the patients who need them.

“It’s all about numbers,” Franano said. “How many get started, and how many that get started are successful. With something like the KBA, more companies get started, more companies get started in the region and more companies that get started in the region end up being successful than without the KBA.”

The background

The Kansas Bioscience Authority was created in 2004 under then-Gov. Kathleen Sebelius, a Democrat.

Its mission, according to the bill that created the KBA, was to spur “the growth of bioscience businesses in Kansas, to make Kansas a national leader in bioscience, and to make Kansas a desirable location for bioscience entities to locate and grow.”

The idea was to leverage Kansas City’s animal health corridor by supporting public university research and private sector companies to make eastern Kansas a destination for bioscience investment.

John Carlin, a Democratic former governor who served on the KBA’s board from 2006 to 2012, said it was a model that other states scrambled to follow.

“It was the smartest thing the state had ever done,” Carlin said. “It was creative. It put us ahead of the competition.”

Two of the KBA’s early initiatives were to help Manhattan secure the National Bio and Agro-Defense Facility and assist the University of Kansas Hospital in earning National Cancer Institute designation. Both efforts were successful, funneling billions of federal dollars into the state.

At the same time, the KBA began courting private sector bioscience investment by offering startup capital, plus scientific consulting, marketing help and access to a network of “angel investors” who could provide further funding.

The funding model was key to that part of the KBA’s work, Carlin said.

Credit Andy Marso / Heartland Health Monitor
Heartland Health Monitor
The Kansas Bioscience Authority, with offices in Olathe, was created in 2004 to leverage Kansas City's animal health corridor by supporting public university research and private sector companies to make eastern Kansas a destination for bioscience investment.

  By law, the independent KBA, with offices in Olathe, was to be funded by a direct transfer of 95 percent of the state tax withholdings from all bioscience companies and all state employees involved in university bioscience research. The KBA was to get about $35 million a year for 15 years.

That offered a level of stability attractive to startup companies that need a partner willing to stick with them through several years of product development.

“It gave Kansas a weapon nobody else had at the time,” Carlin said, “and got us a lot of attention and a lot of progress in a short amount of time.”

But troubles started for the KBA in 2011, when questions emerged about executive director Tom Thornton’s possible connections to businesses receiving KBA funds.

Results of an audit released a year later revealed little of significance on conflicts of interest but called out Thornton for wiping files from his state-owned computers, using KBA funds improperly and carrying on an undisclosed romantic relationship with a co-worker who reported to him.

By the time the audit was published, Thornton had moved on to another job at the Cleveland Clinic. The KBA is now run by Duane Cantrell, a former Payless ShoeSource executive.

While questions were emerging about the KBA under Thornton’s leadership, the Legislature was undergoing a shift in philosophy about the government’s role in economic development.

After taking office in early 2011, Gov. Sam Brownback and conservative Republicans trumpeted income tax cuts as a more effective tool for growing jobs than direct business investments that they frequently termed “government picking winners and losers.”

Income tax cuts passed in 2012 constricted state revenue, leading to funding cuts in several areas.

From 2012 to 2014, the state’s contribution to the KBA gradually was reduced from $11.3 to $4 million.

Aides to Brownback and Senate President Susan Wagle did not respond to requests for comment about the future of the KBA and the human health initiatives in its portfolio.

Last session a bill was proposed to fold the KBA into the Kansas Department of Commerce. It remains in committee heading into the 2016 session, creating uncertainty about the future of the KBA and the human health projects it fosters.

The portfolio

Those projects include two young companies started by Franano, who grew up in Ottawa, Kansas, and earned an undergraduate degree from the University of Kansas before continuing his education at Washington University in St. Louis and Johns Hopkins University in Baltimore.

Franano has a recent track record of success. A previous company, Proteon Therapeutics, went public last year on the NASDAQ, generating a return for investors including the state.

More importantly, Franano told state legislators earlier this year, Proteon is deep into clinical trials for an investigational drug to treat blood vessel injuries that can lead to blockages and reduced blood flow.

In addition to a few animal health and agribusiness startups, the KBA is fostering five companies looking to improve human health through innovation:

  • Flow Forward, Franano’s company, which is working on a device that patients would wear for a few weeks before they begin dialysis to expand the vein that will be used and decrease the odds of complications.
  • Metactive Medical, another Franano company that is in the beginning stages of developing a device to insert into cerebral embolisms and prevent strokes.
  • Health Outcomes Sciences, an Overland Park company working on a cloud-based computing system called ePrism. It would allow health care providers to upload patient information and receive personalized risk assessments for various treatments. It also would turn those assessments into graphics to help patients better understand their options and risks as they make health care decisions.
  • Innara Health, a Shawnee company that has developed the NTrainer System, a device that helps premature newborns learn how to suck, thereby reducing the length of their stays in the neonatal intensive care unit.
  • Oncimmune, a company with a lab in De Soto working on autoantibody test to detect solid tumor cancers years earlier than is possible with current tests.

The products are in different stages of development.
Kevin Lockett, the KBA’s chief financial officer and chief operating officer, said Innara Health and Health Outcomes Sciences are closest to market, beginning to see some revenue and soon will be attractive “acquisition targets” for bigger companies.

The companies the KBA invests in have a five- to seven-year horizon for showing a return on investment, but several are getting there, Lockett said.

Getting a financial return is always the KBA’s top priority, he added. But improving health outcomes is “not too far behind.”

“We take a lot of pride in the fact that not only are we changing the way things can be done in the market, but at the same time we’re making things better for the end user, which is the patient,” Lockett said.

Franano’s companies are farther from marketability but moving through the development process.

The KBA provided $45,000 to fund a prototype of his Flow Forward dialysis device, which Franano took to potential investors. Those investors joined forces with the KBA to get Franano’s idea into animal testing.

“That animal data, which we recently published, is spectacularly good,” he said.

Franano said the device has increased vein diameter by four times and blood flow by almost 10 times.

“We feel that we have a really important medical device in development for millions of people in the world who have a terrible problem that is creating sickness and death and costing a lot of money,” Franano said.

Philosophical change

But in the world of startups, not every investment pans out, regardless of the value of the idea.

Oncimmune, which received a loan from the KBA, was purchased by Virginia-based Health Diagnostic Labs in 2013. That was a good thing until last month, when Health Diagnostic Labs sought bankruptcy protection.

“What happens to Oncimmune is still kind of left up in the air,” Lockett said.

That’s the type of outcome that vindicates lawmakers who say the state should not meddle in markets.

The Wichita Eagle reported last month that the KBA’s most recent financial audit showed it still relies primarily on state funding, drawing only $613,000 over three years in investment income.

But Franano said there’s more to the story.

“Anyone’s investment portfolio is going to have winners and losers,” he said. “The issue in Kansas is we have not had life sciences investors, and the KBA has fulfilled that role and done well doing it.”

Finding early investment capital is tough, Franano said.

Wealth managers shy from investing in startups because of the risk involved — especially for medical devices that are subjected to long U.S. Food and Drug Administration reviews before they can go to market.

Franano said it’s traditionally been easier to find investment capital for those sort of startups in places like Massachusetts and California. But thanks to an unexpected recession, the KBA had startup capital from 2008 to 2013 when it was notoriously tight elsewhere.

That era appears to be ending.

Franano also lamented the end of the Kansas Technology Enterprise Corporation, another economic development agency that Brownback folded into the state’s Department of Commerce in 2011.

Last session’s budget crisis spurred talk of ending tax credits and deductions, including the Angel Investor Tax Credit. Franano said that would be the nail in the coffin for many potential entrepreneurs, severely limiting the amount of capital they’re able to access in a state with relatively few wealthy potential investors.

He said the state’s new approach to economic growth, focused on cutting income tax rates, does little for startups. By nature, they have very little income to tax.

“My view on life sciences is that marginal tax rates are not particularly motivating,” Franano said. “It doesn’t matter to me what the marginal tax rate is. I’m consuming capital. By the time it matters to me what the marginal tax rates are, I’m too big to move anyway.”

Andy Marso is a reporter for KHI News Service in Topeka, a partner in the Heartland Health Monitor team.

Andy Marso is a reporter for KCUR 89.3 and the Kansas News Service based in Topeka.
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