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Diffusion Pharmaceuticals seeks Wall Street investment while staying local
David Kalergis and John Gainer, Diffusion Pharmaceuticals- June 12 2017
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Credit: Josh Mandell, Charlottesville Tomorrow
Diffusion Pharmaceuticals is developing a drug to treat glioblastoma, the most common form of brain cancer. From left: David Kalergis, CEO; John Gainer, Chief Scientific Officer.
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Josh Mandell | Saturday, June 17, 2017 at 7:30 p.m.

A small Charlottesville biopharmaceutical company recently was granted entry to the Nasdaq stock exchange.

Diffusion Pharmaceuticals (DFFN) has attracted millions of dollars in private investment to develop cancer drugs from a unique molecule invented at the University of Virginia.

The company went public in 2016 to fund its first Phase 3 clinical trial.

“We are starting to become a later-stage biotech company,” said David Kalergis, co-founder and CEO of Diffusion. “As a Phase 3-ready company, the amount of financing necessary increases very significantly, because the clinical trials are so much bigger.”

Diffusion Pharmaceuticals was founded in 2001 by Kalergis and John Gainer, now an emeritus professor of chemical engineering at UVa.

Gainer, Diffusion’s chief scientific officer, invented trans-sodium crocetinate (TSC), a chemical that re-oxygenates hypoxic tissue without allowing too much oxygen to diffuse into normal tissue.

Gainer’s initial work on TSC was sponsored by the Office of Naval Research, which was interested in the chemical’s potential to treat severe wounds on the battlefield. Gainer eventually obtained a patent for TSC after UVa released its patent rights.

Gainer, now 78, didn’t expect to still be a pharmaceutical executive more than a decade after retiring from UVa. He said the possibility of creating life-saving drugs with his invention drives him to continue working.

“If you have a drug, it’s only useful if it’s out there helping people,” Gainer said.

To pursue the commercialization of TSC, Gainer partnered with Kalergis, a corporate lawyer and investor who had served on the boards of Pharmaceutical Research Associates (now PRA Health Sciences) and Virginia National Bank.

“I had always wanted to be involved in the development of new drugs, but ... I knew it would have to be on the business side,” Kalergis said. “If you don’t have an exciting drug that works, it doesn’t matter how good of a business person you are, you’re not going to be able to finance it.”

Diffusion Pharmaceuticals soon began to test TSC’s effectiveness in treating glioblastoma, the most common form of brain cancer.

Since glioblastoma tumors contain much less oxygen than normal brain tissue, Gainer and his colleagues hypothesized that TSC could slow the progress of brain cancer by oxygenating these tumors.

In a Phase 2 clinical trial, TSC in combination with radiation and another drug, temozolomide, increased newly diagnosed glioblastoma patients’ chances of survival at two years by 37 percent.

A greater impact was observed in patients with inoperable tumors, who demonstrated a 380 percent increase in survival at two years. “By focusing our Phase 3 clinical trial in that subset, we can do a study with fewer patients. It will cost less and we believe it will have a greater chance of success,” Kalergis said.

Diffusion expects to complete a Phase 3 trial with more than 200 newly diagnosed glioblastoma patients by 2021, at a cost of about $30 million.

Diffusion was approved for listing on the Nasdaq last August after completing a merger with RestorGenex, an Illinois-based company. As the surviving entity in the merger, Diffusion retained its board of directors and executive officers.

“Many institutions that invest in biotech are limited to investing in listed companies,” said Kalergis. “We had an opportunity to go public and bring money into the company.”

Kalergis said Diffusion’s listing on the Nasdaq reassures investors that the company is managing its finances and operations well.

“I thought we ran a tight ship as a private company — and we did,” Kalergis said. “But the level of scrutiny that is given to us ... means that this company is really run to the very highest standards.”

Despite the growth of the Charlottesville area’s startup scene, public offerings by locally based companies are still rare.

PRA Health Sciences, founded in Charlottesville in 1982, made its IPO on the Nasdaq in 2004. It was later purchased by a private equity firm and relocated its global headquarters to Raleigh, North Carolina. It returned to the Nasdaq in 2014.

Value America, a long-defunct online retailer based in Albemarle County, went bankrupt a year after it sold $126.5 million in stock on its first day of trading in 1999.

“It used to be that if you wanted to be a public company, you needed to leave Charlottesville, and you needed to go to one of the big urban areas,” Kalergis said. “We felt some pressure to do that ourselves as we began the process of going public.”

“But Charlottesville has changed and global communications have changed,” he said. “You don’t need to be anywhere in particular, as long as you have a great internet connection and an airport.”

The market has been bearish toward Diffusion in its first year of trading; the company’s stock price has dropped to under $3 per share from a peak of $9 soon after its Nasdaq debut. Hiring accountants and other experts to ensure compliance with federal regulations also imposes significant costs on the company.

However, Kalergis said the company has attracted enough investment to proceed with the Phase 3 trial.

Diffusion hopes to one day sell its glioblastoma drug to a major pharmaceutical company. Kalergis said the chance of a big payout from this sale is not the only thing motivating Diffusion’s investors.

“Our investors really believe they are putting their money to work by helping to create more hope for cancer patients,” he said.

“This is a special group of people that we feel we are helping,” Gainer said. “If you can’t have surgery [on a cancerous brain tumor], you don’t really have much of a chance to survive.”

Another Charlottesville company, Cavion, is developing its own drug to treat brain tumors. The chief executive officers of Cavion and Diffusion expressed mutual admiration for each other’s accomplishments.

“Diffusion has found a high, unmet medical need,” said Cavion CEO Andy Krouse. “They’ve had some very nice responses in patients. Sometimes you have to do a large clinical trial to see if a drug actually works — and they’ve got a nice indication that it should work.”

Diffusion is also beginning preparations for clinical trials of TSC in pancreatic cancer patients and as a preliminary treatment for stroke victims.

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