Moonshot: Behind Spartan Bioscience’s troubled mission to build a coronavirus test, and transform an industry
Did Spartan and, by extension, the federal government take on too much risk?
Author of the article: James Bagnall
Publishing date: Jun 30, 2021 • 1 hour ago • 12 minute read
Dr. Paul Lem, co-founder and former CEO of Spartan Bioscience wanted to change the DNA-testing industry. PHOTO BY JULIE OLIVER /Postmedia
On May 1, 2020 Lem was briefing Members of Parliament about his company’s plans to produce more than 200,000 portable COVID-19 test kits per week.
It was an ambitious target. Had he succeeded, Spartan this past year would have contributed kits for more than one-quarter of the COVID-19 tests administered across the country, including in many remote areas ill-served by traditional government laboratories.
A 15-year old firm with fewer than $3 million in annual revenues would have morphed with astonishing speed into a $200 million-a-year business.
“We are a proudly Canadian company,” Lem told members of the House of Commons operations committee, “We are excited that our technology will be an important part of fighting the COVID-19 pandemic in Canada.”
Yet, as he spoke, medical device experts at the government’s National Microbiology Laboratory in Winnipeg had just concluded Spartan’s proprietary swabs were ineffective.
Spartan’s test kit technology, known as the Cube, would have to be recalled and re-engineered. The lab-in-a-box — which sold for $8,000 each plus $70 plus for each test kit — had been approved for sale just three weeks earlier.
The Spartan Bioscience rapid-testing device for COVID-19. PHOTO BY AHS
The ramifications for Lem were swift. He stepped down as CEO the following month to become Spartan’s Chief Medical Officer. By November he was gone.
It’s a common enough story in Ottawa’s high-risk tech and life sciences community, but there was something unusually raw about Lem’s ambition and the nature and number of risks he was willing to undertake — all in pursuit of a mission that happened to coincide with the national interest.
In the midst of a public health emergency, tiny Spartan bet everything, and a fortune in taxpayers’ money besides, on quickly adapting its core DNA testing technology to wage war against a previously unknown virus. That was risky enough but Spartan also targeted the most difficult part of the virus-identification business — the Cube was a portable device that squeezed together multiple, complex steps for extracting, amplifying and correctly identifying COVID-19 genetic material in less than an hour.
Lem, who declined to be interviewed for this story, actually didn’t believe this was a big stretch technically. Before the pandemic struck, the Cube used DNA analysis to identify strains of legionella, the virus that causes Legionnaires’ disease. The hand-held device could also quickly determine if heart patients had a genetic marker that made it dangerous to take certain drugs.
By adjusting the chemicals to target different genes, Lem believed his Cube could identify any number of pathogens or genetic quirks that would be useful for doctors and patients to know. Like most ambitious entrepreneurs, Lem had an audacious end goal — he wanted to move DNA testing from the professional lab to the home. Under the terms of that federal government contract the price of the Cube was to drop to $4,000 by last summer. Lem expected a further decline to $2,000 by yearend assuming a redesign.
“Our ultimate goal is to get this to the several hundred dollar mark,” Lem told MPs that day in May, “so no one will have to think twice about purchasing one of these things.”
He likened the Cube to a Keurig coffee machine. “Once you have the device, it can run different pods,” he said.
The COVID-19 test was to be another pod. It proved not to be that simple.
The story of Spartan is not over. Under new management, it re-designed its swabs and other aspects of the test kit, conducted a clinical trial and, in January, once again received Health Canada’s stamp of approval.
But the delays have proved costly and its moment may have passed.
While Spartan was racing to revalidate its technology, dozens of firms worldwide achieved regulatory approval for portable, rapid-testing technology.
They were also pushing the technology ahead. In December Health Canada approved kits developed by competitors Roche Diagnostics and Cepheid that tested for both COVID-19 and flu.
A domestic rival, Fredericton-based LuminUltra, created a new testing niche by adapting its flagship GeneCount device for use in mobile labs. GeneCount also serves the large government laboratories. Indeed, CEO Pat Whalen— who testified before the Commons committee the same time as Lem — has given the country a textbook demonstration of how to expand a COVID-19 testing business at a blistering pace, without losing his way.
Pat Whalen the CEO of Fredericton-based LuminUltra, a leading supplier of COVID-19 test technology. SUPPLIED PHOTO PHOTO BY SUPPLIED /LuminUltra
Spartan’s delay in delivering a properly-working Cube also resulted in lost opportunities. The number of COVID-19 tests in Canada — Spartan’s key market — surged from a million per month a year ago to an average of 3.4 million per month from January to May this year.
The demand for tests appears now to be shrinking. Thanks in part to a dramatic increase in vaccination rates, the number of tests in June dropped to about two million.
Other potential growth areas remain, including COVID-19 tests for travellers as the Canada-U.S. border re-opens, and for employees returning to the office. However, Toronto-based Switch Health earlier this year was awarded a $100 million contract for testing this year at the border.
Nor is it clear how much COVID-19 surveillance will actually be required for returning office employees if Canadians soon achieve herd immunity from the coronavirus.
Roger Eacock — Spartan’s hired-gun CEO until April — seemed well aware of the competitive challenges. Shortly after the Cube regained regulatory approval for COVID-19 tests in late January, he put into motion a plan to sell Spartan shares to the public on the Toronto Stock Exchange, a process known as an initial public offering.
According to an industry executive familiar with the discussions, investment bankers reckoned Spartan could raise $150 million, which would help fund aggressive expansion and plans for new products — testing kits for new COVID-19 variants and other viruses, for instance, as well as adapting the Cube for the home market. The IPO would, optimistically, value the company at half a billion dollars.
“Spartan had commenced exploring the possibility of an IPO back in February/March, 2021,” said Spartan spokesman Jeffrey Fenton, “We had not yet finalized the valuation or the raise plans.”
Early this spring, Spartan once more halted deliveries of Cube, this time for an unspecified technical glitch. The Cube “showed a higher than previously observed incidence of returning ‘inconclusive’ results than in the clinical trials,” a company executive noted in a recent court filing.
Health Canada’s approval for the overall system remains, suggesting a relatively minor issue. But until the Cube is fixed, no revenues will be coming in. The IPO has been shelved for now.
Although Spartan had recently raised nearly $6 million in a private share sale, the company had been expanding so rapidly it was still in danger of insolvency.
On April 5, Spartan sacked 60 of its 86 employees along with 11 co-op students to conserve cash. It also filed for protection from its creditors, providing insight into its supply chain and customers.
Just two firms of any significance had secured their claims — Casa-Dea Finance (owed $6.9 million) and BDC Capital ($8.8 million). Health agencies in Ontario, Quebec and the federal government collectively are owed $35 million, representing money advanced to purchase Spartan’s Cubes and test kits. The main contract manufacturer, Sanmina of Toronto, is owed $6.3 million.
In all, there are $73 million worth of claims.
The hope now is to re-capitalize under the protection of the court, and emerge in the weeks ahead with its COVID-19 order book intact. It’s likely Spartan in late June received offers for its technology and equity.
Spartan in late June began negotiating with Casa-Dea as its preferred bidder. Casa-Dea has proposed a $20 million equity investment that would give it two-thirds of Spartan’s equity. Existing shareholders would keep 25 per cent while key employees would receive about eight per cent.
Under the plan of arrangement, which must be approved by the court, unsecured creditors have been offered 15 per cent of Spartan’s net profits for five years starting in 2022, up to 100 per cent of their claims.
Casa-Dea’s equity infusion is meant to provide sufficient working capital to permit Spartan to regain its footing after it emerges from bankruptcy protection as planned later this summer.
“There are some exciting developments in the pipeline,” a company spokesperson said in response to queries by this newspaper, “We are optimistic about what’s to come in the coming weeks as the process completes.”
Shortages hit hard
Did Spartan and, by extension, the federal government take on too much risk?
Considering the context, there was little choice. When the pandemic ripped through Canada early in 2020, the reality of a domestic biotech industry dominated by branch plants hit hard.
As the demand for COVID-19 tests vastly exceeded what were available, shortages emerged for many of the components of the test kits, including swabs and chemicals known as reagents. U.S. and European biotech giants were pressured by politicians to serve home markets first.
“We put our hand up to help out during the pandemic when the multinationals left Canada high and dry,” says LuminUltra’s Pat Whalen, whose company supplies many of the country’s health laboratories with the bits and pieces needed to build tests for COVID-19 and other viruses.
At one level, most biotech firms that jumped into the business of testing for the virus that causes COVID-19 were on equal footing. This was a brand new virus, whose genome had been sequenced in the second week of January 2020.
The methods for detecting the virus had also been widely disseminated.
German scientists published a recipe on Jan. 21 for conducting tests, using World Health Organization protocols. This included a list of genes to target and the chemicals that could be used for extract the genetic material (RNA) from the virus.
The U.S. Centre for Disease Control and Prevention the same day said it had finalized its own version but a defective chemical resulted in a month-long delay in the ability of U.S. labs and companies to create their own test kits. Spartan relied on the CDC recipe.
Tests devised by industry and government labs are fairly similar. Chemicals known as reagents are used to extract the virus’s RNA from a saliva sample. The RNA is then converted into DNA, which is amplified into a sample large enough to be detected by a fluorescent probe. The result is compared to the known genetic makeup of the coronavirus. If the targeted genes aren’t present, the sample is presumed COVID-19 negative.
Throughout the pandemic the big differences in testing have been between portable devices and heavy-duty machines located in large laboratories. Portable, point-of-care devices are easier to use, produce faster results but are generally less accurate. Lab-based gear must be operated by professionals, takes longer but produces results in which health officials have confidence.
So why use portable machines? If the test result is positive for COVID-19, it can usually be trusted. This has been true of Spartan’s Cube. However, portable testing devices tend to produce more false negatives — that is, they miss the presence of the virus if saliva is collected from the wrong area, it’s early in the progression of the illness or the sample size is too small.
Health Canada graded LuminUltra’s technology at 100 per cent for sensitivity to COVID-19, meaning it was unlikely to produce a false negative reading of the virus.
A healthcare worker uses an Abbott Laboratories ID NOW rapid test machine at Newark Liberty International Airport in Newark, New Jersey. PHOTO BY ANGUS MORDANT /Bloomberg
The Cube produced a sensitivity reading of just 84 per cent, suggesting false negatives 16 per cent of the time. Spartan was hardly the only firm with less-than-perfect sensitivity scores. Little more than a year ago, the U.S. Federal Drug Administration warned about potential inaccurate results being produced by ID Now, the portable COVID-19 testing device developed by Abbott Laboratories, the Chicago-based pharmaceutical giant.
When Health Canada approved the ID Now rapid test for use last September, it rated the sensitivity at 93 per cent.
Alberta Health Sciences last November offered this perspective on the usefulness of rapid tests:
“Expert opinion on the deployment of rapid test platforms suggest that these tests can be used as a surveillance tool for lower-risk populations to conserve diagnostic testing capacity for populations where accuracy is paramount.”
A pithy way of looking at it comes from Pat Whalen the head of LuminUltra: “With DNA testing, people want ease of use, speed and accuracy,” says Whalen, “You can have just two.”
The deeper you examine Spartan’s financial accounts and technologies, the more breathtaking the firm’s ambition compared to its starting position. Consider first the massive difference in size between Spartan and Abbott, a US$35 billion-a-year conglomerate with 15 separate manufacturing entities in Canada that hold 260 medical device licences here.
Also revealing is the contrast between Spartan and LuminUltra — two relatively small Canadian firm confronted little more than a year ago with the same opportunity to go big.
On the eve of the pandemic, Spartan was bleeding cash. According to recent court filings, the company posted a $7 million loss on revenues of just $1.9 million in 2019. About two-thirds of its sales involved tests for legionella.
Spartan at that point had been searching for a hit product for years. Since its inception it has posted cumulative losses of more than $75 million. In order to keep going, the company raised money over the years from more than 300 private investors. The company’s pivot to COVID-19 test kits was an unexpected shot at a home run.
LuminUltra — with about a decade more history than Spartan — was in much better shape. The New Brunswick firm was profitable on the eve of the pandemic on annual revenues of roughly $20 million, most of it generated abroad. Its sales catalogue includes comprehensive DNA tests for a variety of viruses, including legionella.
Whalen last year embarked on a two-pronged strategy. First, he expanded his firm’s capacity for producing the basic chemicals and other components required by government labs to build their own COVID-19 tests. Then LuminUltra developed its own comprehensive tests for the virus, which were approved by Health Canada last November.
Unlike Spartan, LuminUltra did not try to integrate all the steps in a single test kit. The extraction, purifying, amplification and analysis are kept discrete. The GeneCount technology promises results in less than two hours compared to less than one hour for Spartan’s Cube.
“These (testing devices) were designed for mobile labs,” Whalen says, “somewhere between portable testing and large government labs.”
LuminUltra generated $100 million worth of federal government business to the end of March 31, 2021. “We delivered everything they asked for,” says Whalen.
Along the way, Whalen has significantly expanded his production facilities, more than doubled his staff to 150 and begun pushing into new areas of DNA testing for pathogens on surfaces, in wastewater and air. LuminUltra recently signed a deal with Toronto-based VCI Controls, which helps clients at more than 2,000 facilities, many of them aviation, assess the effectiveness of their environment cleaning strategies.
The New Brunswick firm also has a healthy international business. For instance it’s reporting a lift in sales from U.S. companies concerned about whether legionella developed in their buildings’ cooling systems while employees worked from home.
This is why, despite the recent decline in the number of Canadian COVID-19 tests, LuminUltra revenues this year are expected to top last year’s performance of more than $100 million.
That suggests there is hope for further increases in Spartan’s legionella business, albeit starting from a much lower base.
But what would really save Spartan is getting its COVID-19 test back on track before an abundance of competitors overwhelms it — and the market for such tests finally begins to recede. It needs to generate significant amounts of cash to allow it to invest in some of the many DNA-testing opportunities that lie in plain view — either that or attract substantial new equity from an outsider.
Either way, it means looking past the home run the company missed hitting.
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GM Gordon Moore2 HRS AGO
The federal government helped many companies, especially in Quebec, but did not help this company. Why?
Why was the Trudeau govt so fixated on China and Chinese companies at the beginning of the pandemic, and ignored Canadian companies?