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New CEO writes the prescription for growth

Stuart Shapiro M.D.’s experience spans myriad sectors-a background expected to help VirtualScopics LLC grow into a $100 million firm.
“Too many companies today have brilliant technology, which this company has, but they lack the ability and focus to scale up, and I think I can cross the line between entrepreneurship and stable business,” Shapiro says. “It is taking where you’ve got raw ingredients and bringing focus to make it really escalate.”
Shapiro, 62, last July joined the firm as CEO. He was brought in to lend his expertise in medicine, government, finance and business to the University of Rochester spinoff. His task is to propel the firm into its next growth phase.
“Had we found him earlier, we might have done it earlier,” says Warren Bagatelle, chairman of VirtualScopics and managing director at Loeb Partners in New York City. “We interviewed with a number of people. It is not exactly hiring someone for Johnson & Johnson. It is hiring somebody to a relatively young company; you can’t take a big-company approach to a small company.”
Christopher O’Donnell, general partner at local venture capital firm Trillium Group LLC, agrees: “(They) are now poised for the next breakout and it required someone coming in and providing the leadership to take the company to the next level. Stuart is certainly the right guy.”
VirtualScopics is on the brink of becoming a significant player in an industry that uses imaging techniques to aid the drug development process, company officials say. It hopes to play in a worldwide market estimated to grow to $2 billion by 2010, from roughly $100 million to $200 million.
VirtualScopics employs some 40 staffers at its Linden Oaks facility, up from 35 employees a few months ago. The firm plans to hire some 20 people by the end of 2005. Annual revenues are expected to reach $7 million to $12 million in the 2005-06 period.
“The market is realizing the value of imaging; the customers are realizing the value of imaging. Contracts are coming in, so now we have to scale up the functions. The project management group needs to get better. Each one of the groups needs to grow larger,” said Mikael Totterman, chief operating officer at VirtualScopics.
The firm is the result of collaboration among UR’s engineering and medical school researchers. Its technology can extract complex information from scans produced by ordinary computerized tomography and magnetic resonance imaging. The images can provide information on the progression of diseases such as osteoarthritis, cancer and multiple sclerosis.
“Many, many (pharmaceutical firms) prefer to do their studies non-invasively,” Bagatelle says. “If you can use imaging to evaluate the safety and effectiveness without cutting somebody open, without using probes or other measurements, obviously imaging is much better.”
VirtualScopics has some 12 clients, up from eight last year. These include pharmaceutical and biotechnology firms, clinical research organizations and government agencies, such as the National Institutes of Health. The firm’s corporate customers include Pfizer Inc., Amgen Inc. and Johnson & Johnson. It also has attracted attention from GE Medical Systems, a unit of General Electric Co.
Since Shapiro’s arrival, the company has refocused its energies to develop image-based biomarkers for use in drug development. A biomarker usually is defined as a cellular or molecular indicator of disease or susceptibility to disease. VirtualScopics has coined the term “imageonomics.”
Imageonomics is a scientific breakthrough that enables medical professionals such as clinicians and radiologists to precisely measure small and subtle changes in disease progression over time. VirtualScopics’ technology will help companies to quickly and accurately study disease progression and drug efficacy, company officials say.

Raising funds

The company is drumming up $5 million to $20 million in funding to build its technology platform and attract additional customers.
“We are not yet profitable. We anticipate being profitable within the next year or two,” Shapiro says. “We have invested a lot of money in R&D and we have invested in proving our systems, whether that is technology infrastructure, whether that is quality, whatever systems.”
He adds with a laugh: “We could have been closer to cash flow positive, but since my arrival I’ve been spending cash.”
Totterman approves of Shapiro’s strategy to invest in a technology infrastructure and improve VirtualScopics’ processes.
“(If) you just set a goal, ‘I’m going to maximize profitability every quarter,’ you are not going to be able to build sufficient systems in order to be able to scale up when the large volume of work comes in,” Totterman says. “It’s a hard decision to make, but it is going to make us much more capable of being able to handle the large volumes of work that are coming in.
“I would not have been able to make that decision on my own.”
Shapiro voices optimism over the firm’s capability to attract funds, especially because of the findings of a March U.S. Food and Drug Administration report. The report discusses the pipeline problem-a slowdown in the development of medical therapies.
“Normally the FDA is very slow to make changes and accept new technologies,” Shapiro says. “(But) they actually issued a white paper saying that image-based biomarkers and imaging are the wave of the future.”
The FDA report suggests the use of a new product development toolkit, including animal- or computer-based models, biomarkers for safety and effectiveness, and new clinical evaluation techniques to improve predictability and efficiency along the path from lab to market.
The study predicts new imaging technologies will contribute important biomarkers and will provide insights into the distribution, binding and other biological effects of pharmaceuticals.
VirtualScopics hopes to capitalize on the prediction, peddling its techniques and biomarkers to pharmaceutical and biotechnology industry giants. Shapiro acknowledges convincing large companies of a new technology is a challenge, but he expects the FDA report to act as a selling tool.
“There are challenges of recognition of new technologies, but we have been fortunate in that the FDA, for the first time that I am aware, has taken the lead and said to pharma companies, ‘Use this type of technology, because it can help drug discovery,'” he says. “Usually it is the other way around. The drug company will find something and go to the FDA.”
An integral piece of VirtualScopics’ growth strategy is aligning its functions, such as sales and quality assurance, with the firm’s growth goals-a companywide attitude instilled by Shapiro.
“We have the basic competencies. It is a matter of bringing it all together so everybody is singing to the same page,” Shapiro says. “From a business sense, one of the words I like to use is goal alignment. It is getting salespeople not ahead of our technology.
“(It is) all the little things that make you deliver on-time goal-aligned, so that everybody is working together.”

The family business

Born in Charlotte, N.C., Shapiro’s ties to Upstate New York were established at a young age.
“My father was a small-town general practitioner in Niagara Falls,” he says. “He was raised in Buffalo. I was born while my father was stationed in Charlotte during World War II.”
Shapiro followed his father’s footsteps into the field of medicine. He obtained his medical degree from SUNY Buffalo in 1968, four years after he earned a bachelor’s degree in psychology from Syracuse University.
Shapiro finished his residency at Massachusetts General Hospital in Boston and completed a fellowship at Peter Bent Brigham Hospital in the same city. During that time, he enrolled in Harvard University’s master’s of public health program, graduating in 1973.
While at Harvard, Shapiro had worked briefly as an intern for the U.S. Senate Subcommittee on Health and Scientific Research. He also continued his medical training until 1976, when he was named deputy commissioner of health for Massachusetts. In this role, Shapiro directed all HMO and drug-related regulatory issues, infectious-disease control and personal health services.
He also stayed in touch with Sen. Edward Kennedy, the chairman of the Senate Subcommittee on Health. Kennedy in 1977 invited Shapiro to join his staff.
“I worked for Sen. Kennedy and wrote many of the laws we are living under today,” Shapiro says.
He managed the legislative and political processes for health care financing and cost-containment reform, including Medicare and Medicaid, HMOs, mental health and other areas. Shapiro worked in Washington, D.C., for some four years and then moved to Philadelphia to become the commissioner of health for the city in 1981.
“It had the largest health department in the country at that time,” he says.

Shifting to business

Shapiro managed Philadelphia’s health department, which had more than 2,500 employees, 300 contract agencies and 10,000 contract employees. In 1986, he decided to enter the business realm.
“I liked (business), so I became a banker so I could learn the ins and outs of health care financing. I did that for a bank in Philadelphia,” Shapiro says.
First Pennsylvania Bank N.A. hired Shapiro as divisional vice president of health care financing. He worked there for a year. Under his leadership, the division structured debt for hospitals, nursing homes and other health care providers. It also led multi-institutional banking teams that participated in equity financing and leveraged buyouts.
A year later, NutriSystem Inc. recruited Shapiro as its senior vice president. He provided leadership and built a management team that designed, developed, tested and implemented all health care programs and services in an international ambulatory health care network.
While Shapiro was at the firm, the weight loss center chain grew from 800 centers to more than 1,700 worldwide, and retail revenues from franchise and corporate centers grew from $250 million to $1 billion.
But in 1992, when Shapiro was scaling Mount Kilimanjaro, he had an epiphany-he decided to meld his public health experience with his business acumen in his next career move. Shapiro wanted to “help people and make money at the same time.”
Roughly a year later, Shapiro was appointed president and CEO of Prison Health Services Inc., a subsidiary of America Service Group Inc. Publicly traded America Service Group is a non-governmental provider of correctional health care services in the United States.
“Why we wanted him in the organization was because he had a medical career. He knew a lot about internal medicine. He knew more than most about correctional medicine,” says Peggy Harrison, former chief financial officer of Prison Health Services. “And we also were interested in his enthusiasm. He is very upbeat; he has a can-do attitude and he is a team player.”
Shapiro led the Prison Health Services team that implemented a marketing and pricing strategy, and re-engineered operations, resulting in a 50 percent increase in annual revenues to $150 million.
“He spent a good deal of time initially understanding the dynamics of the company and working to get its operational people all on the same page, which isn’t always easy to do,” Harrison says. “He recruited some very good people while he was there. He is a guy who can really think outside the box, and he prides himself on thinking outside the box.”
Harrison also speaks fondly of Shapiro’s sense of humor. She recalls a Halloween party at Prison Health Services when the VirtualScopics’ CEO masqueraded as a pregnant lady. Shapiro and wife, Gina, were expecting their first child, daughter Carly, at that time.
“He is always willing to be on the wacky side,” Harrison says with a laugh. “That year my costume was him. I wore his kind of glasses and wore a lab coat with his kind of sayings.”
In 1996, Shapiro was tapped as CEO of the Presidents’ Summit for America’s Future in Philadelphia, after which America’s Promise-the Alliance for Youth was formed.
The summit involved former Presidents Bill Clinton, George Bush and Jimmy Carter, and others who asked the nation to make youth a national priority. Shapiro managed all operations for the summit, including finances, logistics, marketing and security details.
“(The) presidential summit was devoted to kids, and I had the privilege of working with former President Bush, President Clinton and General Colin Powell, founding and working through a large non-profit called America’s Promise,” Shapiro says.
Following the summit, Shapiro directed America’s Promise’s national advisory board activities. He led a national program through which 1.2 million students annually shadowed employees in more than 100,000 businesses.
Shapiro spent the next several years as a private investor, mentoring entrepreneurs in the Philadelphia area. Examples of his role as a mentor include his work with Infusion Dynamics Inc., a company that designs and manufactures portable medical devices for hospital and pre-hospital use.
Shapiro became a director of the company and helped develop and execute a marketing plan. He also was instrumental in developing the firm’s military sales strategy.
“He was a board member, but a very active board member,” says Paul Loughname, president of Infusion Dynamics, a division of Zoll Medical Corp. “He was in touch with the company on a weekly basis. He used to go to trade shows with us. As CEO I relied on him for his business judgment.”
Loughname credits Shapiro for his ability to spot talent.
“He made some critical hires,” Loughname says.
Shapiro views Infusion Dynamics as a success story. He helped engineer the company’s sale to Massachusetts-based medical device maker Zoll Medical in a
roughly $6.6 million cash-plus royalty payments-deal.
Infusion Dynamics worked with Robert Friedman, managing director at New York City’s Burnham Securities Inc., on the deal.
“When we were done selling it, I said, ‘Robert, if you know of a company that is looking for a CEO, I am ready to go back to work full time,” Shapiro says.
Friedman called Shapiro a week later to tell him about VirtualScopics.
“There are very few companies that are aware that they need a CEO at the point that they need one,” Shapiro says. “I wanted (to work with) a company with several million dollars of revenue, that had good technology, that was both in the service business and the technology business, that had very good intellectual property and decent, smart people.
“VirtualScopics had every one of those components. We are going to grow this company; it is going to take off. My commitment is to bring real shareholder value over the next several years.”
For VirtualScopics, finding a candidate with Shapiro’s qualifications was fortuitous.
“We never imagined that we’d be able to find the set of skill sets that he has,” COO Totterman says. “We are extremely fortunate that not only does he understand (the field), he is trained in the field we are focused on, and he was willing to take the job.”
Totterman is enthusiastic about learning from Shapiro.
“He’s got very good scale-up experience. He’s got very good fund-raising experience, and the other thing is he is extremely helpful acting as a coach for me for the operational components,” Totterman says. “Once you get to this stage of scale-up you want to have as good a set of hands on deck as possible.”

Off the job

Shapiro temporarily resides in Brighton. He and his family plan to settle either in Brighton or Pittsford, he says. He skis, reads biographies, runs marathons and enjoys following politics.
He has been involved in the non-profit sector in Philadelphia and hopes to be a player here as well. Another item on Shapiro’s agenda is volunteering his services as a doctor.
“Until I moved to Rochester, I volunteered in a clinic two days a month for people who didn’t have health insurance and I hope to do something similar here; I just reactivated my New York license,” Shapiro says with a smile. “I don’t want to make any money taking care of people, but I am still a pretty good doctor.”
Shapiro is eager to mix the intellectual challenge of science with the business challenge of making money and increasing shareholder value, he says.
“We are becoming known globally,” Shapiro says. “I hope that we can bring to Rochester the fame and the fortune that Kodak did in the imaging field.”
(rbj@rbj.net / 585-546-8303)

10/29/04 (C) Rochester Business Journal

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