The MX Q&A: John McDonough, T2 Biosystems

But when the celebrated founders of a new venture approached him during the six-month period after the acquisition announcement, McDonough found he couldn’t resist the lure of a “compelling” market opportunity.

That new venture is T2 Biosystems, a Cambridge, MA—based private biotech company that’s developing a proprietary point-of-care diagnostic device that combines nanotechnology and miniaturized MR capability. The single, portable instrument will use the technology to offer rapid POC care in a range of healthcare settings, according to the company. The MR technology itself uses superparamagnetic nanoparticles and reagents to detect the presence of substances in solution. The concept of portable—and accurate—point-of-care diagnostics is one that had always strategically interested Cytyc, McDonough says.

McDonough wasn’t the only one with an appreciation of the $4 billion market for POC diagnostic devices. In May 2010 T2 Biosystems took in approximately $15 million in Series C funds from steady investor Physic Ventures and new investors such as Arcus Ventures and RA Capital. T2 had raised $10.8 million in Series B financing in 2008. Initial Series A funds of $5.5 million in 2006 had come from Flagship Ventures, Polaris Venture Partners, and IDG Ventures. The company also received approximately $730,000 in grants from an IRS program established to support companies developing therapeutic instruments and diagnostic tests that apply to specific diseases. DOE also awarded $1.4 million in a grant for an environmental testing project that uses the technology to detect water contaminants and other nucleic acid sequences.

T2 Biosystems’ was founded in 2006 by an illustrious team that includes Tyler Jacks, director of MIT’s Center for Cancer Research, and Ralph Weissleder of Massachusetts General Hospital’s Center for Molecular Imaging Research, as well as researchers from Harvard University

A certified public accountant, McDonough graduated from Stonehill College in 1981 and was a senior accountant with Deloitte, Haskins and Sells. Before joining Cytyc, he was cofounder, CEO, and president of Soundbite Communications, the COO of Direct Hit Technologies, and CEO and president of WorkgroupTechnology.

McDonough believes his successful high-tech business background brings outside-the-box thinking to the medical device space. “In high-tech you talk about bits and bytes and in medtech you talk about molecules and proteins,” he says. In this interview with MX McDonough discusses his transition to the medtech industry, his acquisition strategy at Cytyc, T2’s “personal computer” approach, and the similarities between high-tech and medtech.

MX: You have a business background in accounting, and the first companies you led focused on communication and Internet technology. What attracted you to medical devices?
 

John McDonough: Actually, two things, one probably more on a personal level, and the second one was more at the business level. At a very personal level I really made an active decision to [be in the] medical technology space as a natural transition from what I had been doing. One of the companies I had been involved with in high-tech was selling services to medical technology companies [and] imaging product development. My mother had been in the medical industry on the healthcare side. I really wanted to be in an industry where the products you’re developing have a direct impact on people. So reason number one was really just a personal motivation.

And reason number two had more to do with where I see growth opportunities. The businesses I have been involved with have all been kind of fast-growth, and I think there’re just enormous opportunities in medical technology, and the Internet boom is just a little bit less [active].

What aspect of moving to this industry was particularly challenging for you?
 

In terms of technology you need to get up to speed on the different lingo, if you will, and the work in one industry and how it fits in, and understanding the big picture. Business backgrounds can be great for understanding markets and market opportunities, but now you need to really understand the inner workings of technology. The good news is that in high tech you talk about bits and bytes, and in medtech you talk about molecules and proteins. Honestly, they’re almost the same things in terms of how they operate. There’s a lot of overlap.

Almost like building blocks. Conversely, what are some advantages of bringing someone with your business background and success level to a medtech company?
 

I think the big advantage you have is that you more naturally think outside of the box. That’s helpful when you’re developing this instrument for decentralization of diagnostics out of the lab in a point-of-care setting. In high-tech the first start-up I was involved with, which goes back to 1983, was with the advent of the personal computer. So a lot of our strategy [reflects] the way I think that our instrument can be the personal computer for medical diagnostics, and I think of our strategy as very similar to Apple in terms having a single interface with a number of applications that run on this instrument.

I actually the analogy fits extremely well. You may think about business models that may have been applied in high-tech that people in the medical technology industry haven’t really thought about.

That leads to a question about your acquisition strategy at Cytyc. Obviously, it was very successful. You mention thinking outside the box, but are there any thoughts or advice you can share on how best to achieve those results? What kinds of things you were doing that made you so successful there?
 

Honestly, I’d probably start by saying make sure you surround yourself with a great team like we had a Cytyc, [one] that works really well together and that really creates the strategy. So I’d put that at the top of any advice I’d give anybody.

Number two, the approach we took in putting the [acquisition] strategy together was somewhat formulaic, but we stuck to our knitting; meaning we first really tried to understand what the strengths of Cytyc were. We then really tried to understand where the market opportunities were; we tried to match the strength of Cytyc to the market opportunities, and then we applied great discipline to the value we were trying to create. You know, if we were acquiring a company, we wouldn’t overpay, and we understood what the value was. We did over a billion dollars in acquisitions, but we probably walked away from another billion dollars in acquisitions.

T2 Biosystems has quite a pedigree, given the people working with you. Did you find the company or did you decide to leave Cytyc Development?
 

They found me, and it was after we had announced the acquisition by Hologic. In that six-month period between the announcement and closing they approached me with the T2 opportunity. And I was honestly planning on staying, because I really loved Hologic and I think the opportunity there was phenomenal and on a personal level there were some great opportunities as well.

But the T2 opportunity was compelling because of the founders and investors behind the company, and more important at Cytyc we had a strategy of looking for a company that could move us into decentralized diagnostics. So I knew what that opportunity was—I had never heard of T2 because it was a very early-stage company—but when I was presented with the technology and the opportunity I knew how big this could be and with the kind of scientists and investors we had it just made sense.

Is there a lot of competition in that POC diagnostics space?
 

The way I would position it is that you don’t directly compete, but there are others coming at point-of-care testing from a different standpoint. Other companies are basically taking the same approach that runs on large analyzers that are in central labs and trying to miniaturize it and bring it to point of care. There’s been some success; it’s over a $4 billion market. But having said that, it’s only 10% of the overall $40 billion point-of-care diagnostics market. And the reason that it’s only 10% is that the accuracy of the result when you miniaturize something is not as good as when it’s done by a central lab.

The T2 approach is different. We’re not miniaturizing what other people are doing; we’re completely changing what we’re doing.

You have a new kind of science or technology.
 

Exactly. We have a novel way of detecting within our diagnostic instrument…that changes the whole game and creates big opportunities. You can almost think of our detector as being the operating system, going back to my first analogy of when mainframes were replaced by personal computers and the operating system changed. The DOS operating system—the Windows operating system—essentially was created for the personal computer. I would argue the T2 detector has been created for decentralized diagnostics. Others are trying to use the old operating system….

The technology and the concept clearly have been recognized. T2 has received grants from the DOE and an IRS program. Did they approach you or did you pursue those?
 

We pursued those. In the case of the Department of Energy we approached them with certain opportunities. The grant from the IRS was a whole process. The IRS had established that if you didn’t pursue it you weren’t going to get it. In both cases we were the ones pursuing those opportunities.

On the financing side this year T2 has received funds from Physic Ventures and even some new investors. What’s the investment community’s attitude toward medtech and T2 in particular? Are you doing better, do you think, in this climate because of T2’s unique technology than some other companies perhaps?
 

I think that’s right. I think it’s a tough market to be raising money, honestly, no matter who you are. And [that’s true] certainly as a small company. From a venture capital standpoint it’s extremely difficult to find new investors, because investors are holding whatever capital they have as reserves to support companies they’re already invested in. So it’s tough to get them to invest, but you want to find a new investor because you certainly want to expand the connections and capability of your investor syndicate, and you also like to have someone from the outside validating everything that you’re doing on the inside.

Our success, I think, was really related to the quality of the technology, but very importantly [it’s related to] the fact that we have been able to validate and prove that it works. And so if this were a good idea it would have been harder to get people to invest than if it were a good idea that has really been validated to work but now we need capital to build the product. So in our case I think it was the quality of the market opportunity, the unique technology position, the fact that it was proven, and the fact that we have world-class founders, and honestly just an exceptional group of engineers and scientists at the company developing the product.

It has to be all that because one tenet of investing is that investors like stability, and with some uncertainty still surrounding the status of healthcare reform there’s a sense that people might be a little reluctant to put their money up.
 

No question. I think in our case we play extremely well into the changes in healthcare.

Why is that?
Because we take cost out of the healthcare system. If you look at it from a macro level you’d rather be investing in a company that enables the reduction of cost, because if there’s anything we’re sure of, it’s that there’s going to be a focus on cost containment here, probably for the next 20 years and beyond that.

You say you have a fully functional alpha version of the benchtop instrument. When will T2 launch its first commercial product?
Our plan is to be in a clinical setting doing our FDA clinical trials by the end of next year.

Speaking of settings, your Web site talks about developing diagnostic devices for hospitals, labs, medical offices, and consumers. Will the devices be configured differently for each end use or be pretty much the same configuration?
 

There are definitely differences in configuration. The basic detector is the same, that doesn’t change. But what changes as you go to different settings relates to what kind of throughput the instrument can allow. In hospitals and labs, for example, they’re going to be running hundreds, if not thousands, of tests a day, so you need to enable them to be able to load multiple cartridges on an instrument and walk away. In the home you’re going to do one test at a time. You don’t need that kind of throughput. So the differences in configuration really have to do with the throughput of the instrument. What we’re developing today—the first instrument—is what I would call a “medium-throughput” instrument that would fit extremely well into a hospital lab setting and even a physician’s office. And then we will have versions that will work with consumers and, going the other way, even higher throughput instruments that could go into the larger labs.

Do you have the price points figured out yet?
 

We do not have the costs yet.

Is there anything you could share in terms of price range?
 

We would certainly expect the initial instrument that’s targeting the hospital lab setting to be in the $30,000 to $40,000 cost range.

As you acknowledged, replacing a large lab instrument with POC testing typically is difficult. How do you answer skeptics who say that such devices are too tough to operate or ineffective in everyday settings? Your proof of concept is already there, right?
 

What I say is: “Come into our lab and let me show you how it works.” For us it’s simple. If you have a whole blood test and you’re in a hospital, blood is captured in a tube. In our system, you take that tube, you snap it onto our cartridge, you put the cartridge in the instrument, and you’re done. The instrument manages everything else, runs the test, provides the results, not just on the screen, but actually the automation is integrated into the hospital lab information system so the results go automatically into the patient’s record. But we can demonstrate that now and just have somebody look at in a lab.

What would say is your biggest challenge right now then?
 

There are always big challenges. (Laughs.) I wish I could say there are no challenges. The big challenges for us are, first, we’re building out this instrument…to a commercial instrument, and we’re building tests and instruments at the same time, so you’ve got to manage that from an operational standpoint, and I’m knocking on whatever my desk is made of.

That’s going well. We’ve been right on track with what we want to accomplish, but it is and will always be a challenge. And, second, there is a tremendous amount of interest in our technology within the industry by diagnostic companies and biotech and pharmaceutical companies. Also, third parties want to use this technology either to run their tests for their decentralized diagnostic strategy and for preclinical trial management, and managing all the external interest is a challenge and making sure that it doesn’t [make us lose our focus] from the products we’re building and want to bring to the market. That’s one of the biggest challenges—keeping ourselves focused—because we literally probably have 25 to 30 discussions going on with the third parties.

With your business background and track record, would you say what you just described is always a concern when you are trying to build a company?
 

You bet. Because when you’re a little company you have to be extremely focused, but then you also have to be extremely opportunistic. And those two things conflict, right? So you need to keep talking and listening to people and then you need to be really disciplined so that you don’t lose focus.

Are there any plans to go public at some point or is it too soon to talk about that?
 

It’s probably a little soon to talk about, and certainly the public markets aren’t there. Certainly, we could very well be in a position within the next two years to three years to consider that path. Not that I’m an expert, but I think there’s a reasonable probability that the public markets might be open in that time frame, so it certainly could be a path for us.