The Economy

Biotech Dreaming

Cities and states are vying to become biotechnology hot spots.
Kate O'SullivanDecember 1, 2006

Two years after its founding in Boulder, Colorado, Sirna Therapeutics Inc. picked up and moved to San Francisco in 2005. While most CFOs might have balked at the idea of relocating to one of the most expensive real estate markets in the country, finance chief Greg Weaver saw the move as critical for Sirna’s growth.

“What we need to drive this company forward is to attract and retain the highest-quality talent,” says Weaver. “We needed a large, biotechnology-specialized employee and executive pool.” That’s why the tiny public company headed west to continue its work on RNA-interference therapies — techniques that suppress certain genes and viruses, potentially treating such conditions as macular degeneration and Huntington’s disease.

With just 68 employees, $5 million in revenues, and a 2005 loss of more than $20 million, Sirna seemed an unlikely candidate to attract attention from economic-development officials. But San Francisco mayor Gavin Newsom rolled out the red carpet for Sirna and its executives, meeting with them personally to discuss the move. “He essentially said, ‘If there’s anything you need to facilitate your relocation, let’s do it,’” says Weaver. Sirna subsequently caught the attention of pharmaceutical giant Merck, which bought the company in October for $1.1 billion.

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Newsom is not alone in his eagerness to welcome biotechnology companies. At last count, some 41 states had programs in place targeting the industry, while many more countries, counties, and municipalities offer their own incentives. Attendance at the Biotechnology Industry Organization’s annual trade show has boomed, with exhibitors from Minnesota to Malaysia hoping to attract biotech business. “Everybody’s working on it, frankly,” says Bruce Johnson, lieutenant governor of Ohio and director of the Buckeye State’s economic-development activities.

“States and local governments are looking for the industry of the future,” says Gautam Jaggi, a senior manager with Ernst & Young’s Global Biotechnology Center. “There is more and more of a feeling among economic-development people that [biotech] has the potential to be the next big thing, and they’re all looking to figure out how to attract a piece of it.”

From its roots in the 1970s, the global biotech industry has grown to more than $60 billion in revenues and is expanding at a 16 percent annual rate. The industry comprises a range of applications, including new drugs, disease-resistant crops, waste remediation, biofuels, and more. U.S. biotech companies posted a collective net loss of $2.1 billion in 2005, according to Ernst & Young, but that was less than half the loss recorded the previous year. By 2015, spending on biotech drugs could make up a third of the entire pharmaceuticals market, predicts Sherrill Neff, a partner at Quaker BioVentures, a Pennsylvania-based venture-capital firm.

The Biotech Map

Most of biotech’s success stories so far have been concentrated in a handful of clusters around the country. According to a 2002 Brookings Institution study, five metropolitan areas — Boston, San Francisco, San Diego, Seattle, and Raleigh-Durham, North Carolina — accounted for 75 percent of the new venture capital invested in biopharmaceuticals between 1995 and 2001. Likewise, those areas received 74 percent of the value of research contracts from pharmaceutical firms, and 56 percent of the new biotech businesses formed during the 1990s.

Now, other regions like Florida, Ohio, Iowa, and upstate New York are competing fiercely to put themselves on the biotech map. “You’ve got Bio-Alley, Bio-Swamp, Bio-This, Bio-That. It’s the current version of the dot-com mania,” says Rob DeRocker, a partner with Development Counsellors International in New York.

One of the most aggressive players in the battle for biotech is Florida, which promised more than $500 million in state and local incentives to land a Scripps Research Institute facility in 2005. Scripps, based in San Diego, is building a second campus with 74,000 square feet of lab space and 190 employees in Jupiter, Florida; the facility is projected to eventually expand to 350,000 square feet with a minimum of 545 employees. “That was the largest economic-development coup for this area and for the state of Florida in a very long time,” says Kelly Smallridge, president of the Business Development Board of Palm Beach County. In addition to the financial incentives provided, Palm Beach touted its climate, low cost of living, diverse population, access to multiple airports, and business-friendly state government.

While Scripps is a nonprofit and won’t generate income tax for the state, Florida officials hope the prestigious research organization will serve as an anchor tenant for a biotech community. The state’s economy has traditionally rested on tourism, construction, and real estate, but Smallridge says the long-term plan is to transform Florida’s business base from services to knowledge work. “We want to shift the entire educational level of the workforce up several notches,” she says. The Burnham Institute, a medical research center based in La Jolla, California, and the Torrey Pines Institute for Molecular Studies, in San Diego, have also committed to building facilities in Florida.

Iowa is also eager to claim a spot in the bioscience marketplace, providing incentives through the Iowa Values Fund, a 10-year economic-development program. The state has focused on biofuels and food- and agriculture-related bioscience, with its targets running the gamut from small companies in the nutrition ingredient market to agriculture conglomerate Cargill.

Mike Luukkonen, finance chief at Embria Health Sciences, a Cedar Rapids, Iowa-based manufacturer of bioengineered-food ingredients, says his search for a place to expand the company’s operations initially encompassed 9 or 10 states. But Iowa’s incentive package, as well as its workforce, tax structure, and access to major transportation routes, ultimately drove the decision to build there. “I think we got the hardest pitch from Iowa, maybe because we’re already located here,” says Luukkonen. The city of Ankeny offered a five-year property-tax abatement worth almost $1 million; the state of Iowa provided an investment tax credit, sales-tax refunds on the construction of a new facility, and a jobs-training credit that added up to approximately a million additional dollars in incentives.

Into the Talent Pool

Tempting as such incentive packages may be, they are rarely the deciding factor in where a biotech business decides to locate (see “What Are Tax Breaks Worth?” at the end of this article). A highly skilled labor pool is the most critical element in choosing a location, say many industry executives. And that talent can’t be created overnight.

Michael Egan, CEO of Transmolecular Inc., a company that is developing treatments for aggressive cancers, moved the business to Cambridge, Massachusetts, last year from Birmingham, Alabama, for the same reason Sirna moved to California. “We relocated here to tap into a readily available level of expertise that’s hard to match anywhere else except maybe the San Francisco/ San Diego corridor,” says Egan. Within a week of moving, the company had most of its senior management in place. “You come to a place like Cambridge and you can just go out and find someone with 30 years of experience,” he says.

Egan stresses both the importance of exchanging ideas with other members of the biotech community and the proximity to research centers at top hospitals. “If you want to talk to an expert on the latest techniques for scanning patients with brain cancer, 10 minutes down the road is a center at Mass. General [Hospital] that does nothing but that,” he says.

Three years ago, when biotech giant Genzyme Corp. wanted to expand its facility by 50 percent, “we didn’t even think about going somewhere else,” says Michael Wyzga, CFO of the Cambridge-based company. “If you want recombinant-protein scientists, they’re here, they’re on the West Coast, and they’re probably in Cambridge, England. That’s where you go.” With such specialized workers, Wyzga says, the company doesn’t consider incentives offered by other locations. “We could tell our scientists that we got a better deal to move to Iowa, and they’d say, ‘Great, but I’m not going.’”

Access to financing sources ranks a close second in importance to a deep, specialized talent pool. Here again, the coasts hold the lead. Large institutional investors and venture capitalists alike are clustered in California, Massachusetts, and New York. Maryland and Virginia have also had success, thanks to their location near the National Institutes of Health (NIH) and other government agencies that sponsor research. “This is an industry where we’ve had three record-breaking years on the financing front, but it still remains an environment where a lot of companies burn through a lot of capital with research and development,” says E&Y’s Jaggi. “Access to VCs is a big part of attracting companies.”

“In Ohio, part of our struggle is that there’s just not enough density of venture capital,” acknowledges Lieutenant Governor Johnson. To address the shortage of funding, Ohio is investing in early-stage funds around the state and providing grants of $15 million to $25 million to public-private partnerships that can demonstrate a commercial application for their products. The state has also instituted a tax credit for angel investors to encourage more seed financing by individuals.

Beyond Research

Because certain locations have a 30-year head start in developing talent and financing networks, aspiring biotech meccas may be unable to close the gap. “Clearly, becoming the next San Francisco or Cambridge is not something that anyone could hope to achieve in the near term,” says Jaggi.

But not every area needs to become a cutting-edge science center, says Jerry Gordon, president and CEO of the Fairfax County (Virginia) Economic Development Authority. Just as Iowa has focused on agricultural biotech, Fairfax County, traditionally strong in information technology, is pursuing bioinformatics, an ancillary industry that provides software for biotech researchers to analyze their data. “Things like genomics and proteomics require IT support for the pure science,” says Gordon. While he acknowledges that competition is fierce, he says there are enough opportunities to go around. “There are so many different parts of it,” says Gordon. “One area could focus on research, another on medical devices or manufacturing or IT support.”

Different locations may also find success at different points in companies’ life cycles. In the drug discovery and development phase, the pure science involved may require access to top research hospitals and universities in an expensive urban biotech center. But once a concept has been tested and a company begins manufacturing its drug, other locations may stand a better chance of competing with incentives to reduce the cost of building and running a large plant. Increasingly, offshore locations are wooing U.S. biotechs: for example, Puerto Rico and Ireland have become popular lower-cost sites for drug manufacturing.

“Incentives will likely play a bigger role in manufacturing than in R&D,” says Jim Frates, CFO at Alkermes Inc., a Cambridge-based biopharmaceutical company. “When you’re starting a company, it is much more important to be near the key academic talent.” When Alkermes launched, the scientists who founded the company would walk over from the Massachusetts Institute of Technology a couple of times a week to check on progress. But now that the company is at the manufacturing stage and focusing more on profitability, running plants in lower-cost locations makes sense, says Frates.

There are too many areas courting biotech for all of them to succeed. Some, like Florida, are putting themselves in a strong position by attracting big names and investing in the network needed to support them. Palm Beach County is developing new bioscience programs in its high schools, and the University of Miami and the University of Florida are aggressively hiring scientists. Still, Florida receives about a 10th of the research grant money from NIH that California does. “Remember, we are only two or three years into this,” cautions Kelly Smallridge.

Ultimately, some regions may not have enough of the key ingredients for biotech success. Some may find that they have thrown away economic-development dollars that would have been better spent on their existing business base. But others may carve out a piece of the market that fits their talent pool. “If it’s growing as an industry, even a little piece of it can make a big difference,” says Ohio’s Johnson. “Not everybody can be successful, but everyone can try.”

Kate O’Sullivan is staff writer at CFO.

What Are Tax Breaks Worth?

Many states and cities offer incentives to attract biotech companies, but skeptics question how effective those incentives really are.

“Dozens of studies show that tax incentives at best have a marginal impact on business location,” says Peter Enrich, a law professor at Northeastern University in Boston who is currently representing plaintiffs in an Ohio case about the legality of incentives. “Even for businesses that are profitable, state and local taxes are a tiny portion of their costs.”

Mark Foletta, finance chief at Amylin Pharmaceuticals Inc. in San Diego, just completed the process of selecting a site for the company’s first manufacturing plant. After considering Massachusetts, North Carolina, Kentucky, and California, Amylin chose to buy and retrofit a warehouse in Ohio for the manufacture of its diabetes drug, Byetta. While Ohio offered job-creation tax credits and property-tax abatement, the fact that Amylin’s drug-development partner, Alkermes Inc., already had a facility in Ohio sealed the deal. (Amylin will transfer technology from the Alkermes facility.) “I don’t want to minimize the incentives and say they had nothing to do with it,” says Foletta, “but clearly the Alkermes presence there was more of a driver.”

Part of the appeal of sweetening the pot with tax breaks stems from their political convenience, says Enrich. “You don’t have to factor them into your budget, because it’s just some money that’s not coming in that otherwise would have,” he says.

Incentives are more likely to serve as a tiebreaker between attractive locations. “If you don’t have the fundamentals, forget about it,” says Rob DeRocker, a partner with Development Counsellors International. “You can save all the money in the world, but you don’t want to end up with the wrong people in the wrong jobs.” — K.O’S.