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A Conversation with Jeoff MacKay

July/August, 2007

Geoff MacKay has been a driving force in the field of regenerative medicine for the last decade. Prior to joining Organogenesis in 2003, Mr. MacKay held numerous leadership positions in big pharma with a background in transplantation, immunology, tissue-engineering, and biotech.

Q. Mr. MacKay, how are the lessons of Organogenesis relevant to the development of the stem cell field?

A. Our field is regenerative medicine, which encompasses stem cells and other cell types being used to build therapeutics. In the commercialization of our cell-based therapeutic, Apligraf^®, Organogenesis (OI) had to over­come challenges through every step of the value chain to get to the point where we could make the claim that we have treated our first 200,000 patients with living human cell therapies. Our successes are the result of paying close attention to business fundamentals that companies involved in any stem cell therapy will have to master to gain economic traction. Organogenesis' successes in overcoming challenges, whether they've been in R&D, clinical trial design, manufacturing, regulatory approval, distribution, commercialization, or reimbursement, are landmarks for regenerative medicine.

Q. What was Organogenesis' first breakthrough?

A. The first product we developed was bio engineered living skin. Apligraf^® is a bi-layered living cell therapy that closes more chronic wounds faster than conventional care. People immediately think of burns as the most obvious application. However, our focus has been on chronic wounds of the extremities. These gaping, open wounds represent a health crisis because they are both devastating to the patients' quality of life and an economic drain of billions of health care dollars. There are millions and millions of chronic wounds like diabetic foot ulcers and venous leg ulcers. These wounds can remain open for months and even years. Every minute that a diabetic foot is open increases the risk for systemic infection, which leads to amputations. So that's really been our target market. And in fact, Apligraf's^® two FDA indications have been for diabetic foot ulcers and venous leg ulcers.

Q. What are the biggest challenges facing regenerative medicine companies?

A. What's exciting is that in early, basic research, it's absolutely clear that the field has tremendous promise. The pace of scientific breakthroughs in cell biology is incredible. The challenge for companies exploring living cell therapies is to be able to build and deliver living tissue on demand to heal diseases, from paralysis to heart defects and beyond. Once you translate that brilliant Petri-dish science into a viable product concept, you still face a number of hurdles. And the first, really on the research side, is to be able to predictably, consistently, and cost-effectively multiply cells and get them to behave in the same way again and again. These are living cells. The variability in nature makes the commercialization of breakthroughs in research and development incredibly difficult. The inherent variability of cell lines must be overcome.

It took many years to reliably mass-produce living cell therapies, but we were able to achieve that. In fact, today we have transitioned the mass production of cells from a lab-based process to one of roboticized automation. OI's second hurdle was the development of a steady inventory of a cell based product. Our model is to ship non-cryopreserved cells, because it's the most viable and convenient strategy available. The shelf life of the cell-based products that we grow is about 15 days, so there's a razor thin margin for error. You have to be able to forecast demand and to grow the cell-based product consistently, and get it to medical clinics around the world on the exact day that they want it it.

Q. Has achieving medical insurance/ coverage been a major factor in the adoption of new cell-based therapies?

A. Yes, thankfully, now Apligraf^® is covered extensively by Medicare, Medicaid, and by 350 private payers. Obtaining that level of coverage took many years. When you're in the middle of gaining acceptance, it seems like the process is as slow as molasses, but standards in medical care change very slowly. To early-stage companies, the process of achieving reimbursement is sometimes viewed as tomorrow's problem. In my opinion, it's absolutely vital to the viability of all companies in this industry. In fact, we have had projects terminated early in design control due to an unattractive health policy assessment. Achieving reimbursement for new types of therapies is a very complex process that can take up to 24 months after the product launch. For a new approach to medicine, it's an extensive exercise that involves assigning procedure codes.

For example, to treat any given surgical wound or heart defect, there are established, assigned medical procedure codes, driven by the time required and the intensity of the work involved. When it comes to getting insurance approval for a new drug to treat a disease state, there are clear precedents for how that's handled. With stem cell therapies, on the other hand, there are few precedents yet, and that presents key challenges for our industry. Any new cell therapy is a new approach that has to be assessed by insurers, not just on a national level, but also by local Medicare carriers, private payers and many other stakeholders.

Achieving insurance reimbursement requires continual attention, and OI's success in gaining and maintaining broad coverage is a result of a serious commitment of company resources toward that goal. The health care system is constantly evolving, and therefore needs constant reassessment. The other key issue to consider is that the total pie for health care dollars is under unprecedented pressures. There's a lot of competition among professional bodies for payment for every new technique.

Q. How did you increase adoption rates among practitioners for your novel therapies?

A. We did extensive market research with hundreds of surgeons who treat wounds, and we asked them "What's standing between you and the decision to use more Apligraf^®?" The good news was that almost all of them were fully aware of it and overwhelmingly perceived it to be highly efficacious. But two issues emerged: The first obstacle was that they felt that they needed the product to be better reimbursed. Since we do finally have good reimbursement now, we viewed this as a trailing perception from years of suboptimal coverage so this problem can be solved by better informing practitioners. The second obstacle was that surgeons felt they needed to be better educated and trained about how and when to use the product. That issue led us to expand our operation aggressively. We've gone from 60 people to 300 people, with one third of the team comprised of a very strong sales and marketing team to educate doctors.

Q. How else can regenerative medicine companies increase awareness of their products?

A. To date, we've had a two-pronged strategy—the first strategy has been to educate practitioners, and the second strategy has been to educate patients to ask for the product. We're just in the process of launching a major direct to consumer campaign to let patients know that alternatives exist if a wound is not healing properly. The reality right now is that patients are accepting care that is inconsistent, and often uses outdated principles of wound healing. Although Apligraf^® is being used to treat a wound once every three minutes somewhere in the U.S., probably only two percent of the patients who need advanced treatment are receiving it. A wound that doesn't heal can lead to osteomyelitis or amputation. So we've finally reached the stage now where we are making the broader commitment to let patients know what standard of care they deserve and should expect.

Q. How do you navigate the various regulatory agencies that must approve of your therapies?

A. It's very complicated to develop cell therapies. In Europe, it's the most complicated because the European Agency for the Evaluation of Medicinal Products (EMEA) has yet to approve a single cell therapy. The FDA has much more experience in evaluating cellular products and, although the review process is still not a well-traveled path, they have developed a strong competence in the field over the last 10 years. We have found that early and ongoing dialogue with regulatory agencies can will avoid serious problems later in the development of new products.

A major current problem that we have as we globalize is that every country regulates cell therapies differently. We just received approval in Switzerland for bio-engineered tissue, which is being treated as an organ transplant. The unique challenge in living cell therapies is the process of how to make the product—essentially the process is also the product. There are always more efficient ways of manufacturing, so our products are constantly evolving. As mentioned before, we moved from a manual lab to automation. The lack of international harmonization is a huge problem since, at any one time, we have multiple process changes in the works. Having regulators in different geographies viewing the field differently prevents a company from developing and evolving products in a synchronized manner.

Working with regulatory agencies is critical to what we do, and I see our ability to run well-controlled, randomized trials as a competitive advantage. The data required to reach the market is substantial, but the sample sizes of studies in most therapeutic areas of stem cell research is a fraction of that which is required for typical pharmaceutical drugs.

Q. Can cell-based therapeutics be a commercially viable business?

A. We're in an unusual situation because the field has only existed for 20 years. About $7 billion has been invested in the field and for most of that time; there haven't been any commercially successful products. We recently announced our position as the first profitable regenerative medicine company. The significance of that in the field is dramatic, because after $7 billion dollars, it's pretty hard for a young company to go to a venture capitalist and say: "I've got a good idea in regenerative medicine." Many in the investing community remain skeptical about our field—they're not questioning the concept, and not questioning the hope—but just basically saying there's no clear business model that shows the generation of revenue and profits within a five year planning period. Great science had not transitioned into great business. Now that is finally changing. In fact, many companies are transitioning from a purely development focus to addressing the simultaneous challenges of scale up and commercial design. What investors need to see to properly value the field are two to three high growth, revenue generating companies and at least one company reaching over $100 million in revenue. A blockbuster profit in the pharma world is defined as $1 billion. I think we should define a blockbuster profit in a regenerative medicine product as $100 million. The field will reach these milestones within the next 12-24 months.

Q. Given the industry track record, how did Organogetiesis build a successful business model in this field?

A. We had a company populated by brilliant scientists, but what we had incredible difficulty doing was dealing with scaling and manufacturing. It had never been done before and we had to build systems and processes, process development, and engineering skills unique to this field. That was the first challenge. Then we had to be able to automate the production of our cell therapy product, which we've done successfully. Our costs are a fraction of what they were four years ago. Over the last few years we have delivered our cell therapies to medical clinics around the world at the exact time they need it more than 99.7 percent of the time.

The biggest hurdle was to build a commercial entity that has the precise skill sets to introduce living cell technology into the health care system. In the past, big pharmaceutical companies have tried and failed, as have big medical device companies. Clearly, these large professional multi nationals possess the potential to successfully commercialize a cell therapy. What holds them back right now is simply the overall profitability and how it fits within their existing companies. Until the revenue potential is shown to be higher, the view is that it is not worth the management time and effort to build a unique structure from the ground up. The challenge is that virtually every department, from research and development (R&D) to sales, requires customization. Just look at how complex our customer service typically the most straightforward of departments—has to be. We ship living tissues around the world the same day. It's akin to shipping ice cubes around the world before they melt. In fact, we learned more from studying fresh flower distribution models than from health care.

Q. How has the company changed as you've brought new products to market?

A. The culture of the company at first was "really cutting edge science." Commercialization, marketing and sales were an afterthought, to the extent that these functions were just licensed out. Organogenesis defined itself as an R&D-based company. The trouble with that is that the model often doesn't work. It is very well documented that the majority of out licensing partnerships don't translate into success for the smaller partner.

In late 2003, we decided to build our own marketing, sales, health policy, and reimbursement capabilities as opposed to licensing them out, because we felt we could do it better. It's our product. We know the most about it. In order to do that, we had to change the culture from just a science and R&D-based culture to one that was more commercially focused and market driven.

The transition to a business culture was made easier by the fact that 35 tissue regeneration specialists from Novartis and another 15 from Smith & Nephew decided to follow their passion and leave very solid companies to join us. These are people who have dedicated their careers to regenerative medicine, and they really provided us with a solid core of business acumen. This base of marketing and sales experts has now grown to 100 as we've gotten onto our feet as experts in commercializing living technology.

Q. How does your product development or offerings reflect that business model?

A. The regenerative medicine field includes what are called allogeneic and autologous cell therapies. Autologous therapies use the patient's own cells and are simply not scalable at the present time. Allogenic cell therapies use cells that are derived from sources other than the patient's own cells. However, allogenic cells can be subject to immune rejection, so we target disease states where immunology doesn't prevent delivering this type of cell therapy. Our mission is to standardize this kind of therapy. We don't want to build products for the super rich or only for niche areas. We'd actually like to treat hundreds of thousands or millions of patients. We focus on allogeneic therapies because we want to target diseases where a universal donor is possible. The reason for that is simply to reach a price point that makes economic sense. We want to get one source of donor tissue expanded to many, many cell banks. With one donor, we can make 100,000 units of bio engineered tissue and that allows us to deliver a price point that's feasible; it's a business model that makes economic sense.

Q. How can a company assure it will have multiple product successes?

A. It's a huge transition to go from one product to two, three, or four products without dropping the ball, because that's inevitably what happens if you're not careful. We just received regulatory approval on our third product. It's daunting to go from sort of a one-trick show to having multiple priorities—it affects every single department, every single person in the company. It introduces resource allocation challenges, focus challenges—people get caught up in new projects and that detracts from attention that needs to be paid to older projects, for example. The internal engine of a company reaching this stage has to be a very professional project management team that can identify, consistently track, and resource assets throughout their development.

Q. What are your near-term goals for Organogenesis?

A. We have three goals to achieve in our five-year plan. One is to triple the adoption of Apligraf^®—we're actually ahead of that trajectory right now. The second goal is to introduce two or three synergistic, innovative regenerative medicine products. And the third goal is to continue to identify skill sets and ensure the scalability necessary to succeed in this unique space.

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