When MassDevice.com last spoke with T2 Biosystems CEO John McDonough, in August 2009, the 22-worker firm was still developing a novel use for MRI technology – diagnostics.

T2’s device uses magnetic resonance to identify pathogens in just about any kind of sample, eliminating the need for time-consuming blood culture work.

Nearly 4 years later, after a move from Cambridge, Mass., to nearby Lexington and a major expansion, T2 and its more than 45-member team have found that their device conveys an unexpected side benefit: It’s much more accurate and precise than diagnostic tests based on optical technology.

It turns out that the T2 Biosystems device can detect a single colony-forming unit in a 1 milliliter sample in about 3 hours. Compare that with the 100- to 1,000-CFU limitation imposed by molecular diagnostic technology – which takes 3 days to culture – and you can understand why McDonough gets excited when he talks about T2’s prospects.

We sat down with McDonough shortly after a $40 million Series E funding round to get an update on T2 and the technology McDonough believes will revolutionize the diagnostics space.

MassDevice.com: Give us a quick primer on where you folks are now and where you plan to go.

John McDonough: We’ve come a long way in 4 years. The basic premise behind the company even 4 years ago – which we’ve developed and proven out, this is an exciting time – we’ve developed a novel method of diagnostic detection. It uses T2MR, which is a magnetic resonance-based approach to detection.

What’s novel here is that we’re using really small magnets. The magnets we use are about 4 inches in diameter and the power of this detection method is that we can directly detect the presence of an abnormality directly in a sample. So unlike all other detection methods that are typically based on a optical method of detection, we’re not disrupted by background noise.

In a blood sample today, all diagnostics require wash steps, extraction steps to try and put whatever it is you’re looking for into something that looks like water in the background and then you can visually see it. We’re not disrupted by the visualization, so we eliminate all of those steps and go straight to detection. The big deal about that is that we’ve proven that you’ll be able to detect at much lower levels of abnormalities than current detectors.

For our first panel of tests, for example, which is a test for candida, which is a blood-borne fungal disease associated with sepsis, we can detect all the way down to 1 colony-forming unit per ml directly in a blood sample, and we can do that in about 3 hours.

Existing molecular diagnostic platforms have limits in detection that are typically between 100 and 1,000 cells per ml, so they can’t detect all the way down at that 1 CFU-per-ml range. That’s a colony-forming unit, which can typically range between 1 and 3 cells. The data we have show that if a patient sample has an abnormal cell in it, we’re probably going to detect it. Nobody else can do that.

So you now play the game of – if you have 1 bad cell in your system, which means you’re really sick, you want enough sample size so that you have a probability that you got that cell in the sample that you drew. So for us we’re using 2 ml blood in the case of candida. For our hemostasis applications, we have a development where you don’t need to be detecting 1 cell at that level, we can use a finger-stick sample size. The detector is very versatile in terms of sample size.

The big deal here is that for sepsis and candida specifically, the only way you can detect candida today, because you’re looking for 1 or 10 cells, is through a blood culture. Blood cultures take on average about 3 days because you need to grow it up and incubate it. And blood cultures – their alarm goes off, and it’s literally an alarm that measures carbon dioxide. So you’ve got to grow up to a million cells, and an alarm goes off – that typically take a couple days, as much as 5 days, and then you’ve got to take it to another instrument and it takes you 24 hours to determine, "What is it? I know something is there but I don’t know what it is."

In our case, you simply take the tube of blood that you’ve drawn from the patient, you snap it on to a cartridge in the instrument, and in about 3 hours you get a result that’s not just telling you something is there. We’re telling you it’s candida and in the case of candida, there’s 5 species of candida and you want to know which species because the drug you put the patient on depends on the species. So we tell you it’s candida, we tell you what species it is, which can direct the right therapy.

The data show that today there are over 100,000 patients in the United States that will have candida on an annual basis. The mortality rate is over 40%. If you can detect and treat a patient, with an earlier diagnosis, you can reduce the mortality rate to 11%. Hopefully we can enable treatment much faster with a 3-hour test and reduce the mortality rate.

MassDevice.com: How many people are tested for candida every year?

John McDonough: That number is in the well over 10 million patients, so it’s a big market. We think this test should be run all the time on what I’ll call the "high-risk" patients: Any immuno-compromised patient, a patient in the intensive care unit, a cancer patient on chemotherapy, an HIV patient. If those patients are sick, they’re highly susceptible to these kinds of infections. There are about 6.5 billion of those people a year just in the U.S. and you can more than double that on a worldwide basis.

MassDevice.com: Apart from the sheer size of the potential market, what were the other drivers for choosing candida as a 1st focus?

John McDonough: I’ll go back to 2008, when our scientists – who deserve all the credit here, because they developed our incredible platform – while they were developing the platform, trying to figure out what can we do, we were trying in parallel to figure out what could we do [on the business end]. Before you do anything you need to do something.

So we had a checklist. Number 1, we picked candida and sepsis (we’ll have a bacteria panel in development to cover the other pathogens associated with sepsis) because you can save lives. That’s a big deal and we try here constantly, we see signs that every day we can save lives.

Number 2 is topical today and I think we had a little bit of foresight 5 years ago when we were thinking about this – we knew that there needed to be significant economic savings associated with whatever it was we did. So in the case of candida, the published data show that if you can treat in 1st first day you can save $20,000-$30,000 per patient by getting them on the right therapy. It kind of follows the reduction in morality, right? The most expensive week of your life is your last. So if we can eliminate that, you’re saving a lot of money and specifically you can get a patient out of the hospital on average 9 days quicker, and spend 2 fewer days in the intensive care unit. Today, while you’re waiting for that blood culture result, you’re treating them with a whole bunch of drugs – that is just wasteful. So you can save a lot of money.

The other savings associated with our test is that, today, while you’re waiting for the blood culture, sometimes you’re aggressively treating for candida when you shouldn’t be. Treating with anti-fungal drugs costs $350 a day; they’re toxic injectable drugs, so there’s big savings even for us to be able to see that a patient is negative for candida, because you cannot put them on these really expensive drugs. There’s significant costs savings – that translates into the order of $5 billion in savings, if you tested the entire 6.5 million patients in terms of costs savings.

Reason number 3 is that we wanted a test that would really show the power of our platform and ideally have a test that nobody else can develop, a proprietary test. In diagnostics, it’s not uncommon for successful companies to have some kind of proprietary biomarker. They discover some cardiac marker associated with heart disease. BG Medicine is a great example.

In our case, we don’t technically have a proprietary biomarker, but what we have is a proprietary platform. We have the machine, we have the platform, we’re going to go directly to market with our infectious disease applications.

But what’s really unique to T2 is that, unlike those proprietary biomarker companies, we can take the same concept of 1 CFU per ml using the proprietary detector and apply it to hemostasis, or apply it to cardiac. We have the opportunity to partner with others to expand into other markets. We have some pretty interesting discussions underway.

The other reason for picking candida is that it’s a 510(k) clinical path, so it’s quicker. Reimbursement is already in place, so we don’t have to go get reimbursement. Most of these patients are being reimbursed under what’s called a DRG code, which means the hospital gets a fixed price for treating a patient with sepsis. So if we can come in with a test that saves money, the hospital wants it, because they’re the ones that will benefit from the savings.

MassDevice.com: How do you plan to spend the Series E round?

John McDonough: Very slowly. I’ve been doing this for a long time, so from a private rounds standpoint, it’s the largest round I’ve personally been involved with. The key here for us is that we want this funding to take us through the clinical trials for candida, to take us through commercialization. As I mentioned, we have a bacterial panel in development and we plan to get into an FDA trial late next year with that bacterial panel, in late ’14. And we are quite hopeful that this will be our last private capital funding. So while I joke that we’re going to spend it slowly, I mean we’re going to spend it slowly. We’re going to stay laser-focused on executing on the same plan we had before we raised $40 million.

MassDevice.com: Where are you on the regulatory path toward that 510(k) clearance?

John McDonough: We’ll be very soon entering that clinical trial and our plan is to file with the FDA in the 2nd half of this year. So its a reasonably quick trial, will probably take about 6 months, and so we would expect to be FDA cleared in the 1st half of next year. We’ll also get a CE Mark, which is the marking you need to enter the European market, and we expect to do that at the end of this year as well. And you’ll start to see more visibility of T2 this year. We’ll start showing up at more trade shows.

MassDevice.com: The way that things played out, are you surprised that the instrument performs as well as it does?

McDonough

John McDonough: When I joined the company, what attracted me was that I understood that this novel detector might have some unique characteristics and capabilities. But what honestly attracted me here were the founders behind the company, the investors behind the company – [venture capital shops] Flagship and Polaris at the time. It’s the 5th time I’ve been involved with an early-stage company and I fundamentally believe it’s all about the people. And then you make the technology work.

So I’m not surprised, with the team that we have, where we ended up, but I don’t think anyone would have predicted that this is where we would have ended up. There was a lot of thought – doing magnetic resonance testing, a hand-held, which are all within our capabilities – but the team of scientists and engineers we have at T2 are really innovative, reflected now in 10 U.S. patents that all came out of the work that’s been done at T2.

We laser-focused on sensitivity and specificity. That was one of my early mantras. If we can do something better than anybody else, we’re going to have a significant market opportunity. And that’s a little bit different that just saying, "Let’s just try to do something faster and cheaper than everybody else."

But I never would have thought, even when we started this candida program, our objective was to get to about 10 CFU per ml, and we did an order of magnitude better than that. No one would have predicted that.

MassDevice.com: You mentioned being involved in other early-stage companies. Can you give us a rundown on those?

John McDonough: Before T2, I was at Cytyc, which was based in Marlborough, Mass. I was the president of Cytyc Development Corp. and Cytyc was, of all the things I’ve done in the last 30 years, was the diversion. Cytyc was a publicly held company when I joined in 2000. It had $300 million in revenue and was a single-product company, and so we needed to figure out how to get growth back. Share price was stagnating, because we had a 70% market share and we could do better than that. So we put together a pretty robust strategy to focus on being a women’s health company, which at the time wasn’t as obvious because we could have said, "Let’s be a diagnostic company." It was a 1-product company with multiple ways to go, but we had a unique sales channel. So we focused on selling to OB-GYNs and we leveraged that channel and through over a billion dollars in acquisitions and got the growth rate back up and grew the company over 4 years to about $750 million in revenue and took the share price from $11 a share up to about $35 a share. Then I led the sale of Cytyc – a combination of Cytyc with Hologic (NSDQ:HOLX), which happened in the latter part of 2007, which was a $6.3 billion acquisition from Cytyc. So the market cap went from about $1.2 billion when I joined to about $6.3 when I left.

Prior to that, I had been involved in 4 startup companies. Mostly in high-tech, companies that were focused on selling software and services to medical device and pharmaceutical companies, which is where I kind of made the bridge into this industry, and for a bunch of personal reasons wanted to be in this industry.

MassDevice.com: Can you go into those personal reasons?

John McDonough: You know, I don’t think I’ve ever really told anyone this story. My mom, who was a tremendous influence in my life, I lost in 2002. She was a nurse, she was really an incredible human being and anybody who knew her would know that. And I wanted to, a little bit, follow in her footsteps and have some association between the work I’m doing and good things that come out of it. With high tech, you get that, I don’t want to say that’s not the case. You’re creating jobs, you’re creating products that become used in the medical industry, but I wanted to be 1 step closer.

I thought, "Wouldn’t it be nice if part of your job, if the output of your job would do something good for somebody in a more direct way." So I made a very conscious decision, which is how I ended up at Cytyc, which was a bit of a diversion. My hope at Cytyc was that I would then go get involved with an early-stage company afterwards.

So that’s really how I ended up here. The other thing I’d say is that I just saw a lot of growth opportunities in this industry. And if you looked at high tech back in 2001 and 2002, I had been involved in an Internet startup that we sold at the end of the boom, which was really nice. At that point it wasn’t clear where the next wave would come from. It’s taken a while and it looks like we’re here now, which is great for the economy and for the industry. And in this industry there’s always going to be opportunity. If you can have a product that can make a difference, there’s always going to be a place for that company.

MassDevice.com: How does Obamacare affect T2 Biosystems?

John McDonough: You know, ironically, in an odd way and in a very positive way.

At the end of the day, there are 2 things here that are going to drive the adoption of our products. Certainly the physicians and doctors really care about their patients. Talk to any infectious disease doc about what we’re doing, and in 10 seconds you’ll hear things like, "I’ve been waiting my whole career for this." They know blood culture is a problem, because it takes too long, and they know they’re losing patients and that healthcare is being negatively affected. The other thing that’s going to drive adoption – that’s not enough unfortunately, I wish I could say that was enough – but cost savings are a big deal.

Obamacare puts an incredible focus on the need for cost reduction. At the heart of it, that’s good for us, because a significant part of what we’re doing is saving costs. So it does not hurt us. In an obscure way, and I’m not rooting for this, but as I mentioned earlier you have these DRG codes where hospitals get a fixed price for treating a sepsis patient. In an obscure way, if that goes down then hospitals are going to have to look for more ways to save costs and they’re going to be more interested in what we’re doing.

MassDevice.com: What about the medical device tax?

John McDonough: We would be subject to the medical device tax. In the short run, there’s no impact on us. And we’re going to have to build an infrastructure, if this tax stays in place, that builds in the fact that there’s a tax you have to pay. But when you build that infrastructure it means you’re going to have to save money somewhere else.

If I were to go back to my days a Cytyc, a public company, if there was a 2.3% tax that got added to our business, you would not go out to your shareholders and say, "We’re lowering our earnings estimate because of this tax," because your share price would drop a lot more than 3% if you lowered your earnings estimate. Instead you’d find ways to cut costs somewhere else. And there is absolutely no doubt that that is what will happen, and that probably means there are going to be fewer jobs.

When it’s all said and done, is it worth it? I’m not smart enough to know. The big-picture question is that the government is getting 2.3% and what they do with it, will that create more jobs than you lose? But you’re going to lose jobs.

And I’ll tell you the evidence of that, because anyone who thinks that’s not true is missing a point. Let’s take a look at the economy and how we hit a wall in 2008. So what happened between 2007-2008 and 2012? Well, corporate earnings did not go down, actually they went up. Revenue went down, because the economy hit the wall, but earnings did not go down. How did that happen? They cut costs to compensate for the loss in revenue, which is why the unemployment rate went up. So public companies are going to manage to their earnings and if you throw more expenses at them, they’re going to cut it somewhere else.

You’re essentially paying a royalty. It’s also the sort of inherent – why is it a medical device tax? There are no taxes on other things. It’s no different from the pharmaceutical industry, which is not being taxed. it seems a little odd that 1 group got singled out. If you need the tax, spread it around all of [the healthcare industry].