Sloan Kettering’s Cozy Deal With Start-Up Ignites a New Uproar

This article was reported and written in a collaboration with ProPublica, the nonprofit investigative journalism organization.

An artificial intelligence start-up founded by three insiders at Memorial Sloan Kettering Cancer Center debuted with great fanfare in February, with $25 million in venture capital and the promise that it might one day transform how cancer is diagnosed.

The company, Paige.AI, is one in a burgeoning field of start-ups that are applying artificial intelligence to health care, yet it has an advantage over many competitors: The company has an exclusive deal to use the cancer center’s vast archive of 25 million patient tissue slides, along with decades of work by its world-renowned pathologists.

Memorial Sloan Kettering holds an equity stake in Paige.AI, as does a member of the cancer center’s executive board, the chairman of its pathology department and the head of one of its research laboratories. Three other board members are investors.

The arrangement has sparked considerable turmoil among doctors and scientists at Memorial Sloan Kettering, which has intensified in the wake of an investigation by ProPublica and The New York Times into the failures of its chief medical officer, Dr. José Baselga, to disclose some of his financial ties to the health and drug industries in dozens of research articles. He resigned last week, and Memorial Sloan Kettering’s chief executive, Dr. Craig B. Thompson, announced a new task force on Monday to review the center’s conflict-of-interest policies.

At a staff meeting Thursday morning, Dr. Thompson and others, including Dr. Lisa DeAngelis, the acting physician-in-chief who replaced Dr. Baselga, described the recent events as a disruption and acknowledged that the hospital was under a microscope, according to several people who attended. Doctors said they were concerned about a lack of communication from hospital leadership, and one said patients were nervous that their health data was being commercialized by the institution.

Hospital pathologists have strongly objected to the Paige.AI deal, saying it is unfair that the founders received equity stakes in a company that relies on the pathologists’ expertise and work amassed over 60 years. They also questioned the use of patients’ data — even if it is anonymous — without their knowledge in a profit-driven venture.

In addition, experts in nonprofit law and corporate governance have questioned whether Memorial Sloan Kettering, one of the nation’s leading cancer centers, complied with federal and state law governing nonprofits when it set up the deal. The experts pointed out that charitable institutions like Memorial Sloan Kettering must show that they didn’t provide assets to insiders for less than the fair market value.

Cancer center officials said that they acted properly in approving the deal with Paige.AI and that if successful, the venture could change the future of cancer diagnosis. “This is an incredibly expensive undertaking — it needs a lot of money,” Dr. Gregory Raskin, the hospital’s vice president of technology development, said in an interview. “We feel this is a really valuable and important technology to get developed.”

Officials said that some board members invested only after early efforts to generate interest from outside companies and investors had failed. But they acknowledged that they did not seek an independent valuation of the tissue archive, nor did they put the proposal out for competitive bidding before licensing it to a single company. In exchange for sharing its voluminous database, Memorial Sloan Kettering received ownership shares amounting to about nine percent in the company.

“It just seems awfully coincidental that the individuals involved happen to be people in control and influence of that asset, and they ended up with an exclusive use of it,” said Marcus S. Owens, a Washington lawyer who ran the Internal Revenue Service division that oversees tax-exempt organizations. “It seems to create a cascading series of conflicts for the operation of Sloan Kettering.”

The decision to license images of the patients’ tissue slides to a for-profit company also highlights the broader debate over the use of personal medical data, ranging from genetic information to, in this case, images of a person’s cells, for research and commercial purposes.

After ProPublica and The Times began asking questions about the arrangement, one of the founders — Dr. David Klimstra, the chairman of the pathology department — said he would divest his ownership stake.

Dr. Klimstra and another co-founder, Dr. Thomas Fuchs, the head of the computational pathology laboratory, pursued the idea for Paige.AI in 2015, hospital officials said. Dr. Fuchs had previously worked for NASA developing algorithms that would teach the Mars rovers to navigate terrain, and has said some of the same algorithms can differentiate cancerous tumors from benign ones. In a statement, he called the AI start-up the culmination of his “life’s work.”

Universities and teaching hospitals have long sought to turn their scientific discoveries into lucrative business deals. Indeed, 10 cancer drugs approved by the Food and Drug Administration originated at Memorial Sloan Kettering. But the Paige.AI arrangement is different because what’s being commercialized is not an invention, per se, but rather access to raw materials — notes and slides — gathered over decades.

Paige.AI is among a growing number of companies, including Google and Microsoft, that are exploring ways to use artificial intelligence to improve health care. Pathology has been a focus because it remains a time-consuming, error-prone and often subjective process, where doctors examine tissue slides to decide whether cancer is present, and which type. Other start-ups in the field include PathAI, based in Boston, and SpIntellx, which is working in partnership with the University of Pittsburgh.

The Paige.AI project finally took off after enlisting the help of Norman Selby, a member of the hospital board’s executive committee and a longtime health care consultant, manager and investor. He is listed as a founder and executive chairman of Paige.AI and holds an equity stake.

Jim Breyer, the early Facebook investor and venture capitalist, also agreed to invest. At a New York Times conference in February on artificial intelligence, he said Paige’s goal would be “to provide predictive data and help to cancer physicians around the country — as second opinions, in many cases as well, because not everyone of course has access to a Sloan Kettering.”

The three other hospital board members who became investors are Stanley Druckenmiller, Alexander T. Robertson and Marie-Josée Kravis, according to Richard Beattie, honorary chairman of the cancer center’s board and a member of its executive committee. “We were desperate,” he said in an interview. “This is more risky than most transactions, and we couldn’t find investors.”

The board investors in Paige.AI, and Mr. Breyer, either declined to comment or did not return calls and emails. Mr. Selby has pledged to donate some of his profits to the hospital, Mr. Beattie said.

Experts in nonprofit law and corporate governance questioned whether Memorial Sloan Kettering, which is a charity, acted properly in what is known as a related party transaction with the founders of Paige.AI.

While federal law does not specifically require seeking bids from competitors or independent appraisals of the assets in such a transaction, nonprofit groups that make deals with companies associated with board members or employees must demonstrate that they have taken steps to ensure that insiders don’t get preferential treatment. If nonprofits are found not to have complied, they or the individuals involved could face tax repercussions.

Mr. Beattie said the hospital relied on some investors to set a value for licensing the slides, with guidance from hedge fund leaders on its board. A law firm, which he did not identify, evaluated the documents and said it was a good deal.

Nell Minow, vice chair of ValueEdge Advisors who has written books about corporate governance, said the center’s process was “inadequate.”

“They could be throwing a dart at the wall to figure out what the valuation is,” she said. “They’re accepting somebody’s word for it and that’s very, very risky.”

Mr. Beattie said the cancer center would follow I.R.S. rules requiring it to list the transaction on financial forms, which won’t be public until next year. He also said the hospital had set up plans to manage conflicts for the three company founders. All four members who are invested, including Mr. Selby, must recuse themselves from any board actions about the company, Mr. Beattie said. A review of the hospital’s I.R.S. filings does not show any similar transactions in recent years.

In two meetings this month, staff pathologists confronted hospital leaders over the cancer center’s relationship with Paige.AI, some of them angered by the deal that would allow others to profit from their work.

At a tense meeting Sept. 12, some pathologists said they only learned about the deal online after it was announced, two people in attendance said.

As for how the deal came about, Dr. Klimstra told colleagues that Google had twice approached the hospital about securing access to the pathology slides and was turned down. Mr. Beattie said there were never serious conversations with Google. A spokeswoman for Google declined to comment.

Doctors also expressed concerns about whether patients had consented to have images of their tissue used in this way.

Dr. Klimstra told them the project had been approved by an institutional review board, which considers ethical issues involving patients. Patients who had not given their consent to having their readings shared would have all personal health information stripped from the images and notes, he said. Dr. Raskin said that between 30 to 40 percent of patients typically do not consent.

And Paige.AI will not have exclusive access to slides that resulted from federally funded research, he added.

Alexander Capron, a professor who teaches medical ethics at the University of Southern California, said courts have generally ruled against patients in disputes over ownership of human tissue, but that institutions should be as transparent as possible with patients.

Internal concerns about the deal and how patients would perceive it escalated after Dr. Klimstra wrote an email in August informing the pathology staff of his involvement. It elicited a mocking response from Dr. Marc K. Rosenblum, a neuropathologist and former chairman of the department, who suggested in a reply that the center was auctioning its expertise to the highest bidder. The email included a tongue-in-cheek fight song. “To PAIGE I pledge my self entire and promise to be true,” he wrote in the email. “I had a thing for MSK but now that thing is THROUGH!”

It then says, “(contemplate consulting fees, repeat with feeling.)”

In an interview last week, Dr. Rosenblum said he wasn’t seeking financial compensation, but felt “the leadership had not been particularly transparent with us about the founding of this company, and I feel that we were not sufficiently credited with what had been our intellectual input in this.”

Kathryn Martin, the hospital’s chief operating officer, said the cancer center did not anticipate the pathologists’ objections. “I think we could have done a better job communicating it,” she said in an interview.

Dr. Klimstra said in a statement that the project represented a “quantum leap” in the pathology field.

“Other than my family, there is nothing more important to me than running my department,” he said, and added, “I sincerely regret the fact that my equity ownership in Paige has served as a distraction to my primary leadership role at M.S.K.”

Dr. Fuchs, the head of the computational pathology lab, defended his role in a separate statement. “Computer scientists like myself very seldom get the chance to really help patients,” he said.

Details for distributing any profits or proceeds from Paige.AI have not been worked out, officials said. Ms. Martin suggested that if the deal is successful, some funds could be set aside for the pathology department to finance research projects.

For now, much of the talk is theoretical — the company is years away from selling a finished product, with a staff of fewer than 20 employees.

The roster of other key advisers also appears to be in flux. Until recently, Dr. Baselga was listed as the chairman of Paige’s scientific advisory board. But his name disappeared from the company’s website last week, the day after he resigned from Memorial Sloan Kettering. He also recently resigned from board positions at the pharmaceutical company Bristol-Myers Squibb and Varian Medical Systems, a radiation equipment manufacturer.

Charles Ornstein is a senior editor at ProPublica.

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