Long before Rich Lunak became president and CEO of Innovation Works—the Pittsburgh region’s top seed-stage investor—he was on the other side of the table, working to turn Automated Healthcare, a humble three-person startup focused on automating pharmaceuticals distribution, into a company fit for a $65 million acquisition. It was no walk in the park.
“I didn’t have a health care background. … I spent a lot of time in pharmacies, understanding medication use in hospitals and how drugs are managed,” Lunak said. “It’s a massive undertaking. How is that customer going to buy? Who pays for it? What’s the clinical process? How do you provide better patient care?”
These are the kinds of questions that founders will grapple with in AlphaLab Health, a new accelerator program that Innovation Works has spearheaded in conjunction with Allegheny Health Network. It will focus on early-stage funding and mentorship opportunities for companies working in diagnostics, therapeutics, medical devices, and health information technology.
AlphaLab Health will not exist in a vacuum, though. Instead, it will join the ranks of other life sciences-focused investment programs and incubators, including the University of Pittsburgh’s LifeX accelerator, UPMC Enterprises, and Pittsburgh Life Sciences Greenhouse (PLSG).
But how will these investment firms and accelerators learn to play nice in a space that traditionally suffered from a lack of competition? And how will AlphaLab Health’s new innovation campus at a defunct hospital help spur economic development in the city?
Accelerating the life sciences
Innovation Works—which is financially supported by Pennsylvania’s Department of Community and Economic Development—first publicly announced AlphaLab Health back in September, but the plan has been in motion since 2017.
Jeff Cohen, a practicing urologist and chief physician executive for community development and innovation at Allegheny Health Network, had been “noodling” on the idea with Lunak, and how it might borrow from the models that Innovation Works has already refined with its existing software and hardware accelerators, AlphaLab and AlphaLab Gear.
Each company that goes through the AlphaLab Health accelerator program will have the opportunity to take on $100,000 in investment. Half of the money comes from Allegheny Health Network, and Innovation Works supplies the other half. Startups don’t have to take that full amount, but it’s an attractive option for companies in the life sciences sector, which, on average, require more time and more cash to come to market.
“We can reduce the barriers, and cost, and speed, to help the entrepreneurs bring a product to market,” Lunak said. “Unlike software companies, which are more capital-efficient, these ones really bring a lot to bear.”
With that in mind, he believes that some companies may care more about access to lab space and medical data than financial investment. If a machine-learning startup is designing a diagnostic product, it will require clinical data to train its algorithms, for instance. Allegheny Health Network has 12 hospitals within its system, Lunak noted, so “maybe they can give you access to 10,000 or 12,000 repositories of data on that topic. … It could make or break a company.”
In return for this kind of access, Innovation Works and Allegheny Health Network will take up to a 2 percent equity stake in the startups, but it could vary by company. For instance, if a startup has already participated in AlphaLab or AlphaLab Gear, the equity stake may be lower. Lunak said that they don’t want to “double dip.”
The application cycle is still underway, with companies participating in preliminary interviews this month. Ultimately, Innovation Works and Allegheny Health Network will select six startups for the inaugural cohort, and the program will begin in January 2021 and run for six months. Lunak expects this class to run the gamut from seed-stage startups to more mature life sciences firms.
Breathing new life into Bellevue
AlphaLab Health’s success will, in some ways, hinge on the success of a defunct hospital in Bellevue—Allegheny General Hospital’s Suburban Campus. There, Innovation Works and Allegheny Health Network are converting former operating rooms into wet lab space—a move that provides certain financial benefits, Cohen said, because much of the equipment has a significant “translational capacity.”
In this case, that means that the operating room and the wet labs have similar functional requirements. For instance, both need filtration facilities and utilities like oxygen. The labs will also include subzero freezers and fume hoods, among other components.
All in all, Cohen said the job will cost about $2 million to complete, half of which Allegheny Health Network has already raised. The designs are all complete, he noted, and the six lab spaces should be ready for use in January.
“We would like this to be a home for anybody who needs the space,” Cohen said. “The rent’s really cheap compared to anything else, and most innovators don’t really care about the space as long as there is a roof.”
It’s a win not just for the lucky entrepreneurs that land investment through the AlphaLab Health program, but for the life sciences ecosystem at large. Wet lab space is expensive, and for companies in Pittsburgh, open facilities are often far from the city. “When companies needed wet lab space, they’d go to Harmarville…the idea of having it within 10 minutes of downtown—it’s two blocks from Lincoln Avenue—is very attractive,” Lunak said.
He recalled chatting with a local entrepreneur, whom he declined to name, who had been considering a move to Boston. But upon realizing the Boston wet lab space would cost about $160 per square foot on average, compared to an average of about $60 per square foot in Pittsburgh, she decided to stay put.
Rehabbing the old Suburban hospital for startup space is on-brand for the Pittsburgh region, but it’s also indicative of a larger trend in real estate amid the COVID-19 pandemic. In New York City, for instance, the local government is supporting real estate companies in building commercial laboratories for medical researchers, biotech startups, and pharmaceutical companies.
In a report last month, CBRE Group—a Los Angeles-based real estate investment firm— ranked the country’s leading life sciences hubs, placing Pittsburgh as the No. 1 “emerging cluster.” Amid an unpredictable landscape, this life sciences real estate is a bright spot for developers.
Lunak said that there are parallels between the real estate development at Suburban hospital in Bellevue and the economic revitalization that’s occurred at Nova Place over the past few years. Formerly a shopping mall in the central North Side, Nova Place underwent a serious facelift and welcomed a host of new tenants, primarily in the technology sector. Innovation Works itself set up its home base there.
“I thought … it could be the best thing or the worst,” Lunak said regarding his dual excitement and anxiety about moving to Nova Place. “I’m hoping, and I think, that [Suburban] will have that same kind of energy.”
A dose of healthy competition
While Innovation Works is the main game in town for many AI, robotics, and enterprise software startups looking for an early investment, it will still be challenging to enter the life sciences fray with established contenders like LifeX, Pittsburgh Life Sciences Greenhouse, and UPMC Enterprises.
“We’ve had a good track record of working with the organizations in our sphere,” Lunak said. “To me, that signals the growth in our ecosystem…you wouldn’t expect to go to New York, or San Francisco, or Boston and expect to see just one organization.”
It’s true that the comparatively small city of Pittsburgh struggles with a lack of internal competition when it comes to funding opportunities. But folks like Jim Jordan—the president and CEO of Pittsburgh Life Sciences Greenhouse—see AlphaLab Health as an opportunity to diversify those investment streams while simultaneously positioning companies for follow-on capital.
“I could imagine a new startup thinking, ‘Can I get UPMC Enterprises or Highmark to fund me all the way? If not, can AlphaLab or LifeX help me show proof of concept?’ ‘When they have, would IW, LifeX, or Highmark fund me next?’ So, I think it is all complementary,” he explained.
Meanwhile, UPMC Enterprises promised to invest $1 billion into life science companies over the next five years. The investment arm of Pittsburgh’s largest hospital system has already put capital into companies like Cerevance, a Boston-based company creating therapies for neurological and psychiatric diseases, and SparingVision, a Paris-based genomics company focused on inherited retinal diseases that cause blindness.
“UPMC embraces collaboration with other investors and incubators since a thriving environment is good for all of us, as we seek to attract talent and ideas to this area,” said Jeanne Cunicelli, executive vice president at UPMC Enterprises.
Cohen agreed. He sees the life sciences ecosystem as an engine for building employment and bringing down the cost of healthcare in the long run, no matter which organizations are leading the charge.
“Good competition will force all of us to get better,” he said. “The region will grow, there will be jobs, and we won’t have to go through what happened when steel declined in the ’70s and ’80s.”
“If AlphaLab Health can be of help to people, a credible alternative that keeps people in town, then we’re doing our job…and it’s good for everybody.”