JOHN P. FUNKHOUSER, President and CEO of PharmaNetics, Inc., is a senior executive with a successful track record of managing medical device companies. His experience spans more than 20 years of investing in and managing high growth companies. His business experiences encompass commercial banking, investment banking, venture capital and managing four technology driven companies as CEO. Mr. Funkhouser has served on numerous boards of venture backed, high growth companies. Mr. Funkhouser joined PharmaNetics in 1993 as CEO, where the company’s products were in the prototype stage of development, and has managed the products’ commercialization, as well as the automation of the company’s manufacturing facility. The company went public in December 1995. Mr. Funkhouser holds a B.A. from Princeton University and an M.B.A. from the University of Virginia.

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TWST: First, if you would, just a quick profile on PharmaNetics, a little bit of the heritage of the company to put us into context. Then, would you describe your business in today’s environment.

Mr. Funkhouser: PharmaNetics was originally formed in 1989. It was founded by the former head of research and development at Becton Dickinson in the Research Triangle Park named Bruce Oberhardt. His interest was in coagulation and bringing rapid coagulation testing to the point of care. The company was basically funded through NIH grants, angels and other grants for a number of years; then a group of venture capitalists lead by Intersouth Partners became involved, I think somewhere around 1990.

The management team that is here today became involved in 1993 and completed an IPO led by Bear Stearns & Co. in December 1995. We have taken the technology from basically a concept to a reality with commercialized products. We have today 18 FDA-approved products, and we’re looking to expand to 33 products within the next 18 months. We believe PharmaNetics has the leading rapid coagulation technology in the world and offers the unique ability to monitor numerous therapeutics across multiple disease states. The application for such monitoring is primarily in the critical care areas of the hospital where timely results are at a premium. Historically, diagnostic testing has been largely confined to the hospital’s central laboratory, but our technology can be accessed at the point of care and provide rapid results that may influence therapy. Therefore, we believe we are a part of a new trend in diagnostics that we call “theranostics,” which is providing a physician timely diagnostic results that may impact therapy decisions. The technology’s competitive advantage is to offer a comprehensive test menu – not only tests to monitor existing anticoagulants, but future anticoagulants as well.

TWST: What does the competitive landscape look like today? First, what do you consider competition? What are the legacy systems, the legacy players that you have to address — and then how is that competitive landscape going to evolve over the next two to three years?

Mr. Funkhouser: The competitive landscape is primarily confined to routine testing of existing anticoagulants, heparin and coumadin. We consider ourselves to be the leading rapid coagulation technology in the world capable of monitoring, we hope, any anticoagulant or thrombolytic. There is some existing competition in point of care with limited testing capability, such as ITC’s Hemochron and Roche’s Biotrak system. However, we believe the future of coagulation testing is in monitoring new anticoagulants, such as thrombin inhibitors, antithrombins, platelet inhibitors and low molecular weight heparins. From that standpoint, we don’t have any point of care competition nor have we identified another technology platform with the capability of developing a comprehensive menu.

Highlights
PharmaNetics has one of the leading rapid coagulation technologies in the world and offers the unique ability to monitor numerous therapeutics across multiple disease states. The application for such monitoring is primarily in the critical care areas of the hospital where timely results are at a premium. CEO John P. Funkhouser says the company is not just another diagnostic, but a technology breakthrough that should be viewed as one would a device, as opposed to a traditional diagnostic. He believes the primary asset is the technology platform ’s flexibility to monitor numerous therapeutics, which creates the potential for explosive growth, depending on the success of the drugs. It also allows the company to diversify its risk by monitoring multiple therapeutics.

“We have a strong distribution agreement with Bayer Diagnostics, who invested $6 million into the company as part of the agreement we signed with them in November of last year. Our present cash position is about $7 million and we would expect to seek additional capital within the year either in the form of development funds or equity.”

We have divided our tests into two types, routine and theranostic tests. The routine tests are common to the hospital today and are composed of the PT test for monitoring warfarin, the aPTT for monitoring low levels of heparin and the ACT, or activated clotting time for monitoring high levels of heparin. But the real sex appeal of our company is in monitoring various drugs or screening patient population to ensure the right patients receive the right amount of drug at the appropriate time. These are the theranostic tests. Inherently, cardiovascular drugs have a need for monitoring for certain indices because to give too much drug causes bleeding and not enough drug could impact efficacy. Therefore, PharmaNetics is concentrating its efforts on theranostic tests and actively pursuing pharmaceutical collaborations to expand its menu and improve patient outcome by monitoring therapeutics.

TWST: What are the limitations at this point on your companies over the next two to three years? Is it cash or capital?

M r. Funkhouser: The biggest limitation, I think, is timing. Many of the drugs that we are monitoring are in development, and in many cases, we cant get regulatory approval for our tests until the drugs are approved. For some drugs with approval for certain indices, we have to go back through the regulatory process to demonstrate our monitoring capability for new clinical indices. So if there is a restriction on our market, it’s that many of these tests will be commercialized over the next three years. Therefore, our revenue sources are somewhat limited for the year 2000, until the new drugs begin to come on in 2001 –2003. We go from a company with about a $100 million market in 2000 to a company with perhaps a $750 million market in 2003, depending on when these various drugs get approval.

We have a strong distribution agreement with Bayer Diagnostics, who invested $6 million into the company as part of the agreement we signed with them in November of last year. Our present cash position is about $7 million and we would expect to seek additional capital within the year either in the form of development funds or equity.

“I think that our business potential is enormous, but our upside is tied to the success of the drugs we monitor. I think it’s hard sometimes for an analyst to quantify how these drugs are going to do. I think, as the drugs get closer to market and there’s more clinical data available about the various drugs, PharmaNetics will benefit because we offer an alternative to invest in the success of these drugs — with, obviously, a lot more leverage given our capitalization.”

TWST: Can you put the next two to three years into a list of items to be accomplished? What items on that list would make that next 12-24 months a success?

Mr. Funkhouser: The routine tests are distributed through Bayer’s sales force and are expected to grow significantly over the term of the distribution agreement. PharmaNetics’ product line is very synergistic to the Bayer Critical Care Division. Bayer offers blood gases, chemistries, electrolytes and immunoassays while PharmaNetics rounds out the offering with a comprehensive coagulation menu. In addition, all the testing is tied into Bayer ’s MIS system, Rapidlink, which is a critical competitive requirement. For the routine tests, our success is tied to Bayer and its ability to sell a total critical care product line. We are very optimistic about the distribution agreement because of Bayer’s position as a leader in critical care and their commitment to PharmaNetics.

Our theranostic success is ultimately tied to the success of the drug we monitor. To be successful, we must diversify the number of drugs we monitor by increasing the number of pharmaceutical collaborations. We are working with Knoll on two drugs: one is a stroke therapy drug called Ancrod, for which we have developed a test; and also a thrombin inhibitor, PEG-Hirudin, for which we also have a test. We have been working with Eli Lilly on a therapeutic anticoagulant and have a letter of intent with Astra for one of their new anticoagulants. We are in the process of submitting our new heparin management panel for monitoring heparin levels during bypass surgery to the FDA. In addition, we are working on completing numerous other collaborations.

“We are not just another diagnostic, we are a technology breakthrough that should be viewed as one would a device, as opposed to a traditional diagnostic. Diagnostic companies have few product areas that can still command value added pricing and PharmaNetics offers attractive earnings potential with significant barriers to entry.”