NEW YORK – After securing millions of dollars in COVID-19 testing contracts, Canadian biotech firm Spartan Bioscience was ultimately foiled by a problem with an aluminum foil seal in its sample prep kit.
The Ottawa-based developer of near-patient PCR instruments and assays became insolvent and was acquired this month by investment firm Casa-Dea for an undisclosed amount. The team is now raising financing and pursuing a US regulatory strategy under its new name, Genomadix.
The company's new CEO, Steve Edgett, is also its former executive vice president. Edgett originally joined the firm in July 2019 to help bring its technology to market.
In an interview, Edgett said Genomadix plans to continue operations in Ottawa, but will now pursue US Food and Drug Administration Emergency Use Authorization and Health Canada regulatory approval for a revamped COVID-19 test on its near-patient Cube system.
Cofounded in 2005 by former CEO Paul Lem, Spartan Bioscience first unveiled its Cube system in 2016. The miniature PCR instrument processes one test in about one hour, and up to 10 cubes can be tethered together and run from a single user interface.
In the ensuing years the firm had pursued a "niche first" strategy, developing a precision medicine assay for cardiac disease, a test for Alzheimer's pharmaceutical trial selection, and a Legionella environmental testing assay.
This strategy was meant to help prove the technology as well as to gradually gain scale, Edgett said, but the ultimate goal had always been to enter the clinical infectious disease testing space.
The COVID-19 pandemic accelerated Spartan's plans, in part because it enabled the firm to build supply chain and manufacturing capabilities that could allow it to achieve a competitive cost of goods, Edgett said.
"COVID-19 got us there," he said, adding, "After COVID, there will be a panel of respiratory infectious disease tests to come out on the Cube."
Spartan is also purportedly the only PCR-based infectious disease assay and instrument developer based in Canada, although there are a few rapid antigen test developers. Encouraged by the Canadian government, Spartan secured Health Canada approval for a SARS-CoV-2 assay on its Cube system in April 2020.
Edgett said Spartan had already lined up a slate of more than 40 customers when it was forced to step back and modify its test.
This first setback was related to the proprietary buccal swab that the firm had been using for its precision medicine assays and had incorporated in its COVID-19 test that received Health Canada approval.
The SARS-CoV-2 assay performed well, but the swab did not allow for collection of sufficient viral material. So, last May, while the global swab crisis lingered, the firm underwent a voluntary recall and began a pivot to gold-standard nasopharyngeal swabs as well as a new approach to sample collection and processing.
Spartan's assays are usually direct, or "dirty" PCR, Edgett said, but the need to dilute virus off of a nasopharyngeal swab led the firm to add a sample prep kit to the assay.
The resubmitted test was approved by Health Canada in January of this year, but this second pivot also contained the fatal blow for Spartan.
The firm had already manufactured and distributed assays with the new sample prep kit when it discovered that over time the collection buffer had begun interacting with the aluminum foil seal of the tube.
Edgett said that the SARS-CoV-2 target detection was unaffected by this, but the aluminum had started to inhibit the PCR reaction for the RNase P internal control.
"We are a small company and we were scaling really fast, so we had hundreds of thousands of test kits in inventory just about to ship," Edgett explained. "We had to stop ship on those, and we had a huge working capital crisis at that point ... almost instantaneously the company was in an insolvency status."
Constrained by the assay's shelf life, Spartan ultimately had to dispose of millions of dollars of inventory.
Spartan had been supported by the National Research Council, which Edgett said is the equivalent of the US Health and Human Services' Biomedical Advanced Research and Development Authority in the US. It also had about a half a dozen large Canadian government contracts, and approximately 30 smaller contracts to supply test systems to industries like travel, mining, and offshore fishing. Only a few of these customers had given advanced deposits.
Larger companies may have had similar pandemic learning curves, and even problems with buffers and viral transport media, Edgett noted, but they typically also have other revenue sources.
"When Spartan scaled up so fast for COVID-19, it basically became a bit of a one-legged stool," Edgett said, adding, "When we had a problem in the COVID-19 assay, we had nothing else to fall back on that could fill the gap and provide the kinds of revenues we would require in order to sort out the problem."
Although investors — including Casa-Dea — extended bridge loans, the small firm ultimately had to file the Canadian equivalent of Chapter 11 bankruptcy, Edgett said, and undergo restructuring.
It was disappointing, to say the least. "The company had been moving this technology along for so many years," Edgett said. "To finally be in the spotlight and be so close, and then have a small problem with a buffer solution and a little foil seal cause us to miss this huge opportunity and go into this really difficult process over the last five months ... was a school of hard knocks for the team here, for sure."
Casa-Dea is a private family investment fund managed by Edgett's brother, Darrell Edgett. The fund provided bridge financing during the swab switch, and so, "when things went sideways this spring, Casa-Dea was the first secured creditor," Edgett said. He added that Casa-Dea "believes in the technology and the company," so the team put a plan together to develop a new company with new financing rather than liquidate the company and get a portion of their money back.
The new firm, officially established on Sept. 9, is called Genomadix, but it plans to maintain the Spartan Cube as a brand name, Edgett said.
Casa-Dea provided seed capital as well, and now Genomadix is in the midst of completing a recapitalization round. It hopes to raise enough financing from institutional life science funds and other investors to help keep it going for the next two years.
Former Spartan CEO Lem had moved on from the firm around the time of the swab crisis. His startup firm for point-of-dispensary cannabis sensitivity testing, Lobo Genetics, was also recently acquired as well, but Edgett said the two have remained close and that Lem is currently pursuing a number of new entrepreneurial ventures.
The solution to the aluminum foil issue was ultimately rather simple: switch to polypropylene-backed foil.
But once the firm "opened the hood" on the assay, Edgett said it also found ways to reduce background noise, and made a number of other iterative improvements to the test. Now, the test is so altered, it will need to be resubmitted to Health Canada.
This time around, however, the firm is planning a different regulatory approach.
Health Canada accepts US clinical trial data, Edgett said, but the US Food and Drug Administration is more stringent and rarely accepts data gathered outside of the country.
So, Genomadix is pursuing EUA in the US with the help of a contract research organization, and then that trial data can be used simultaneously in Canada.
The preliminary trials are currently being done in the Southern US, which is experiencing high positivity rates, facilitating the studies. The firm has also simplified the testing workflow in order to make it more likely the test can achieve a CLIA-waived status.
Genomadix expects to remain in Ottawa, and Edgett believes the Canadian government will again be interested in its system once the issues are sorted out and the test re-attains Health Canada approval.
"The Canadian government has recognized that there is a need to have a domestic [molecular diagnostic development] capability, and that we can fill that niche, so they remain very supportive and interested," Edgett said.
Having pulled through, "we think we have an exciting future," he said.