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BNH FORUM
Banking on Biotech
Throughout the '90s Connecticut has looked to bioscience to rekindle economic growth. Can the industry now deliver on its lofty promises?
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Business New Haven
6/14/99
By: BNH
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On June 30, the University of New Haven will host a conference called Cities, Regions and the State of Biotech, sponsored by the United Illuminating Co. and part of the International Festival of Arts & Ideas. Moderated by Connecticut Public Safety Commissioner Henry Lee, the 4-to-8:30 p.m. event will bring together a half-dozen experts to discuss the promises and prospects of biotech in Connecticut and beyond: Nathan H. Block, vice president of regulatory affairs for the Branford-based Neurogen Corp., Torben Christensen, president of Molecular Staging in Guilford, Jonathan Soderstrom, director of the Office of Cooperative Research at Yale University, Martha Connolly, senior biotechnology industry representative for the state of Maryland's Department of Business & Economic Development, Elliot Parks, director of CONNECT, the Program in Technology and Entrepreneurship at the University of California/San Diego, and Robert Santy, president of the Regional Growth Partnership in New Haven.
BNH had its own discussion of the issue with Santy, Connolly, Soderstrom and Block's boss, Neurogen President and CEO Harry H. Penner Jr. What follows is an edited transcript of that discussion.
As with many industries, bioscience companies tend to form clusters within a particular geography. What are the most important elements that a biotech firm would consider in selecting one region over another?
Soderstrom: First of all, are you referring to startups or existing companies? Because they're different. New ventures tend to start up where the scientific founders are. In the early stages most bioscience ventures are heavy on the research side, and therefore you need to have continual, frequent interaction between the founding scientists and the corporate [entity]. So you want to be as close to the source of the research as you can. Biotech ventures tend to congregate around the academic centers of excellence in life sciences. For relocation, it gets into other things - economic-development incentive packages, taxes, real estate.
Penner: It tends to be a combination of critical factors. Perhaps most important to startups is technology transfer. There has to be an active technology-transfer program at the institution that may be responsible for some new breakthrough technology. Number two would be availability of lab space. This is absolutely critical, and it's expensive space - it can run upwards of $300 or $400 per square foot. As part of the state's cluster initiative there has been [created a] $30 million fund, administered by Connecticut Innovations Inc., which is being used to incent the expansion of existing facilities and also to create incubator space in reasonable proximity to the centers of technology transfer. The final issue that's most critical is the overall package of incentives that the state puts together to encourage companies that do spin out of these technology centers to locate in the state. These tend to take the form of tax incentives, and there's a lot of competition out there to attract these companies because the jobs are good jobs, they tend to pay in excess of $50,000 and employ educated people. A fourth critical factor is the availability of a talented workforce. However, that has not always been available to a lot of these small companies, and in key areas there's a national or international market for these jobs. But it is becoming increasingly important to these small companies.
Santy: I think there are two: One is a strong academic research institution; and the second is the availability of a workforce. We have the first one in spades - in my mind the driver of our regional economy is Yale's biotech or bioscience research - and we have enough of a critical mass of biomedical, pharmaceutical and biotech activity that we're growing the workforce here. But we still need to do more in that area.
Connolly: In Maryland, the determining factors in the clustering are the presence of the National Institutes of Health [NIH], and the U.S. Food & Drug Administration is the other. The NIH is 23 different institutes located in Bethesda; it has more than 14,000 biomedical researchers working there with about a $2 billion in-house budget. The FDA is the center of all regulatory decisions about who gets approval for what drugs and devices on the biomedical market. We attract a lot of international companies coming from Europe or Japan which want to penetrate the U.S. market - and what better place to be locating than where you are going to have to be going to address all the regulatory issues? Some companies locate [in Maryland] because they have a steady stream of workers from federal government laboratories; counting the NIH there are about 60 federal laboratories in Maryland. That represents a tremendous pool [of skilled labor].
Martha, how large is the private bioscience sector in Maryland?
Connolly: There's a perception that Maryland is strictly a government-lab state, but actually if you look at government, university and private employment, private is the largest sector. There are about 40,000 people statewide working in bioscience, and about 21,000 of those are in private industry.
How does Connecticut stack up against other regions, such as Maryland or San Diego, as an incubator for biotechnology?
Santy: I think we're very competitive. Since the creation of a biotech cluster in the state, the state has developed specific policies to make us attractive to this industry. Whether it's R&D tax credits, or the facilities fund through Connecticut Innovations, we're moving to address the issues that these companies have told us we need to address to make us competitive.
Penner: There was an article recently in Forbes ranking entrepreneurial hot spots, and New Haven was on the map - we ranked 47th or 48th among 160 communities. I thought that was noteworthy. What the state is doing currently in facilitating cluster development is critical to the growth of these newer industrial sectors, whether it's software, biotech or what have you. And it's been very useful in cementing relationships between the universities, the pharmaceutical companies, the smaller biotech companies, the hospitals and so forth. There has been tremendous growth over the past three years in biotech and the pharmaceutical companies in terms of adding jobs and growing research spending. The percentage increases are well above the national averages in these areas, and the growth in the last year was equal to the growth in the prior two years. This is without taking into account the dozen or so companies that are being newly spun out of Yale. So it indicates to me that things are really beginning to take off.
Soderstrom: The biggest problem we have is critical mass. First of all, we don't have a lot of available laboratory space that people can easily walk into today. In fact, we have none. Secondly, you have to be in an environment where people are asking, 'Where's the next opportunity?' Most people in entrepreneurial ventures are not looking to make a career out of any single business; they say, 'If I do this one is there going to be an opportunity for a next one,' and so forth. Not only for themselves, but for recruiting people. Is there going to be a flow of talent coming through here that will keep us vital and alive?
Martha, you're not here, but do you have any perceptions about growth of the biotech sector in Connecticut?
Connolly: Naturally, I would think it would cluster around Yale, as the Boston-based ones have clustered around MIT- and Harvard-based technologies. These companies are fueling themselves on intellectual property, and that's what's important to them: They want to be near where the new technologies are going to come from so that they can identify hot new trends and license intellectual property as it [surfaces]. It's nice to have a new technology up and running, but with these companies you always have to worry about tomorrow. Looking for the next technology is certainly an issue. People want to center a bioscience company around not just a hot technology now, but what they perceive as the pipeline for the future.
Does our region have a critical mass of biotech/biomed activity today to attract more activity? And how would you quantify what defines a critical mass?
Soderstrom: That's an interesting question. After you hit a couple of dozen [companies], you absolutely are there for a region this small. You'll know you've got it when people recognize that you have it. It's an attitude that you have arrived. So it may be achieved with ten companies; it may be achieved with 50. It depends. In an economy the size of ours it probably won't take as many as trying to do something in Cambridge, Mass. or San Diego, Calif. We're close. We have probably 15, 16 of those companies going now. They're going, and they're talking to one another, and that's exciting.
Penner: I do think we're there - just there. A couple of initiatives that are part of the budget bill are now pending before the state legislature: one is extending the net-operating-loss carryforward to 20 years in line with federal [standards]. Secondly, and most important for biotech companies that go many years without having any sustainable income because of the nature of drug discovery, is a provision that would allow companies with income of less than $100 million to sell their accumulated tax credits back to the state for some percentage - I think it's about two-thirds. In [Neurogen's] case, we get these huge credits for spending tens of millions of dollars on R&D, and we can't use them because we don't have the income. So this [proposed legislation] would go directly to the bottom line and give us a leg up on other states.
Santy: I think we're there. We are per-capita the third-largest recipient of NIH R&D funds in the country. We have four major pharmaceutical companies [Bayer, Pfizer, Bristol-Myers and Boehringer-Ingelheim], and they are looking to form strategic relationships with smaller companies, so that will drive companies to look to us. I also think the [advent] of [high-speed] rail transportation in the region will be a driver. I'm not as interested in whether you can get to New York quickly as I am in the connection between New Haven and Cambridge, New Haven and Princeton, New Haven and Baltimore, the other centers of biotech activity on the East Coast.
Connecticut historically had a reputation for its skilled workforce. But we lost a lot of brain power during the recession. How does the state's workforce stack up today in an information-based economy?
Penner: We have a lot of work to do. There's a lot less genuine communication between industry and the academic community than I think is necessary in order to help students understand what job opportunities there are. So many students might sidestep chemistry courses in high school because they're hard. But if they knew that [science-based] jobs pay a lot and there are going to be a lot of those jobs in the area, they might think differently about it. And there's no reason you can't take liberal-arts courses along with science courses; we're not trying to turn out only techies.
Soderstrom: We are extremely competitive, but it is a tight market. We're already recruiting from outside to come in - Bayer is recruiting in; Pfizer is recruiting in; most of the biotechs are recruiting in from the outside. So it's actually working as a reverse brain-drain. But people are willing to come. But as for the talent we need to sustain the growth in life sciences? No - it's not sustainable with the talent we have currently available in the state.
Santy: We clearly have a lot of Ph.D.-level scientists in the state right now, but with the growth that you're seeing both in the large pharmaceutical companies and the smaller biotech companies, we're not meeting the demand. In the short term, we have to meet the demand through recruitment. The companies can offer what they have to offer, but we as a region have to do a better job of selling the quality of life in our region.
How?
Santy: One of the major companies told me that of all the Ph.D. scientists they recruit, 60 percent of them are married to other Ph.D. scientists. It tells you the magnitude of what's called the 'trailing spouse issue.' If Bristol-Myers offers somebody a job, they also have to try and find that spouse a job in a related field, [but] probably not within their own company. At RGP we've said, 'Why can't we be the clearinghouse for jobs in bioscience that helps match these spouses with job opportunities elsewhere in the state?' We need to help these companies to know how to sell the strengths of our region.
The state through its economic-development agencies talks a good game about growing the biotech sector. But is it actually pushing all the right buttons?
Soderstrom: The state has made a tremendous amount of progress in their understanding of what needs to be done. We're developing better relationships with the economic-development groups in the state, and we're starting to see some payoff in terms of their willingness to entertain more creative and more aggressive approaches to supplying the economic infrastructure that needs to be in place both to initiate and to grow and sustain the biotech companies that are coming out of the research [institutions].
Santy: The state is pushing the right buttons, but we're still learning if we're dealing with the critical issues in the right way. As an example, we have this $30 million facilities fund. We need to make sure that we're structuring these financial deals in a way that's attractive to these companies. One thing I want to learn is, in other regions, who's taking the risk on these financial deals, and are laboratories being built on spec? Because that's clearly what we're being told that we need to do here. And if there is a way of doing that that we're unaware of, then I'd like to know so that we can make adjustments in some of our statewide programs.
Martha, what's the public sector in Maryland doing that's different from what has been done here?
Connolly: I can contrast what we're doing with Connecticut Innovations Inc. [CII], for example. We have a venture-capital arm called the Investment Finance Group that makes early-stage - pre-seed, even - investment in high-technology companies. Not just biotech, but information technology, telecommunications, advanced materials, that sort of thing. [The technology] has to be patented, proprietary technology with a potential for economic development. We've invested in about 100 companies over the last five years through this program.
It must be difficult to select companies for investment at such an early stage of development. What criteria do you employ in Maryland?
Connolly: I read all the business plans, and I look for the elements any venture capitalist would look for: a hot new technology that's very promising and has a big market; the entrepreneur has identified the market that [he/she] is targeting; is it the ideal market; what kind of management is there; what kind of finances; what are the facilities available to them.
What is unique about this sector that it justifies such a high level of public investment compared with other sectors?
Santy: If you look at what we do that is a product or process that's world-class, that makes us competitive on a global scale, you naturally are drawn to [bioscience]. The quality of Yale's research is the major economic driver in our region. And if we want to grow our competitive position in the global economy, this is the best place we can do it. That's what justifies the high level of public support. Globally, people talk about bioscience and biotechnology being the next industrial revolution, being the cluster that will push 21st-century growth. And there's not a lot of reason to doubt that. So not only do we happen to have a strength regionally, but it's in an area that is going to grow globally over the next 25, 50 years.
Soderstrom: It's a quality-of-life issue. The industry we're talking about provides a wonderful image of the kind of economic diversity you want to see in a state. This isn't just about making money; it's about doing things that are useful in terms of health and well-being. Two, the types of jobs it creates are highly skilled - and highly compensated. It also creates lots of second-order impacts, service jobs that supply to the biotechs. That's where you start to see a lot of growth. Third, it's the kind of economic growth and development that is sustainable in this area because we have a lot of raw materials - a highly educated workforce that is very productive. We have a wonderful physical place in the New Haven area, a wonderful cultural environment - the kinds of things people who work in these types of companies look for.
Connolly: That's easy to answer. Let's suppose that you are a venture capitalist with $100 million to invest. On a given day you're going to see two companies: One is an information technology company that's selling [like] amazon.com books over the Internet. Anybody could be selling it; there's nothing proprietary about it; you can get it up and running in a few months; and it's either going to hit or miss. Then take the next guy who comes in there: He's a biological researcher from Yale, and he's got a very promising new method for detecting cancer activity in cells. The first question you might ask this person is, 'Where's the product? Are you selling information to a pharmaceutical company so they can discover drugs? Are you selling a device, a diagnostic product, a therapeutic product?' If you're selling a therapeutic product, you're talking ten years to develop it, $500 million in investment - $400 million to $500 million is the average number - and when it happens, then maybe you'll get to Phase III and find out it's toxic in humans, and you can't sell it. So your money's just gone up in smoke. So if you're the venture capitalist and you have these two choices - Company No. 1, where in three months it will either go or it won't go - vs. this company that requires a tremendous investment in money, may or may not go and it's going to take ten years to find out - which are you going to pick? I think most people would pick the company that has the faster turnaround. The very patient, long-term capital that funded these [bioscience] companies in the past isn't as patient anymore. Also, they're not going to fund an early round; they're going to fund a mezzanine round - going later to minimize the risk to them. If you look at who is going to finance an early-stage biotech firm that's looking for the first $2 million to $3 million, the answer in the private sector is: nobody. So if the state doesn't step up, [no one will]. We really do fill a critical void.
Penner: What's unique about biotech is also what's unique about pharmaceutical development. It can take 12 to 15 years to get your product on the market due to the necessary safety and efficacy requirements. And while the payoff can be enormous, the expense of getting there is equally enormous. How do you stay in business for the ten-, 12-year period necessary to reap the benefit of the product success you have? That's where incentives are so important. And there's a realization in society that the kinds of advances for which this sector is proving to be responsible have a lot to do with our overall quality of life, and perhaps even the extension of our lives. Plus, in some cases they offer an alternative to long hospital stays, which are far more costly.
A lot of biotech and biomed start ups are closely linked to Yale, in some cases financially tied through payment of royalties or residuals for technologies developed at Yale. Why shouldn't Yale, instead of the state, be the principal investor in a lot of these companies?
Penner: Yale is an investor in some of these companies. They provide relationships whereby the [Yale] labs continue to work with these companies on a preferential basis to see [projects] through. The academic institutions are very anxious to work with these companies to help them grow and to locate here in the state.
Santy: I don't think we should expect Yale to underwrite industrial development or economic development. The fact that their research is the driver here is a tremendous contribution. Now, the private sector and public economic-development folks have to step up to do the other pieces. Also, if you look at how Yale's endowment can be invested, they have severe limitations on this type of activity.
Soderstrom: We're not asking the state to be a principal investor in any company.
You're asking the state to be an important investor in a lot of companies through mechanisms such as tax incentives...
Soderstrom: The tax aspect has little if any impact on a new venture. That's [relevant] for a company that's been around for a while and that is approaching profitability. That's more important to a Pfizer or a Bayer than it is for a Yale-sponsored spin-off. Point No. 2 is: Yes, Yale is a beneficiary of these companies in terms of the licenses. But guess what? We're the beneficiary of a company with a license in San Diego, Calif., in Baltimore...We receive those benefits through the license no matter where the company is located. The ventures that make sense to start up that are based on Yale technologies - we're committed to try to get them to locate in the New Haven region. And we're doing that. What we're asking is that someone help us out with the infrastructure. Now, does it give Yale any additional benefit to have them locate in New Haven? Well, not financially. Certainly it promotes the development of the regional economy, which makes this place a much more attractive place to live, which helps us in terms of faculty recruitment and retention. But those are secondary benefits to us. The state has the much more primary benefit: They receive the income-tax revenues from these jobs that are created. They get other tax-related benefits from companies investing in this area - from property taxes, real property income and the like - that are much more direct to the state than they are to us.
How are Yale and UConn doing today in terms of technology transfer?
Santy: Very much better. Six years ago when I was with the state, we started the critical technologies program at Connecticut Innovations. The purpose of that program was to encourage commercialization [of academic research]. That helped; changes at Yale have helped, both with President [Richard] Levin and the Office of Cooperative Research. And I would expect to see them branch out beyond biotech to commercialize the results of some of their information-technology research. It comes right down to an individual faculty level: If you are in a discipline and you look at the people who are tops in your discipline nationwide, they are involved in commercial activity. So it has become more of a competitive issue for academics as well.
John, what changed to make Yale much more pro-active in terms of technology transfer over the last six or so years?
Soderstrom: It probably isn't a single change, although one could probably point to Rick Levin becoming president and Alison Richard becoming provost as the culminating events. But it was really a whole series of shifts in this direction on the part of the faculty and the administration over a period of years. One of the areas [Levin and Richard] wanted to see a positive impact was in the area of economic development.
In the best-case scenario, biotech startups might in the next decade add 3,000 jobs for researchers statewide. An existing pharmaceutical giant such as Pfizer is adding 1,000 researchers in the next two years. Instead of trying to pick individual winners and losers, wouldn't we as a state be better off investing in education to give us a long-range competitive advantage?
Penner: The question can't be answered with a yes or a no; we have to do both. We need to be investing in the educational infrastructure here in order to make certain we have students coming out of our universities who are qualified to get jobs in our state.
Santy: It's never either/or. There's always a debate about retention of businesses vs. recruitment, and this is clearly an industry where we're going to grow our own companies to a large extent. We also will have the ability to recruit some businesses because of the critical mass that's here. These kinds of investments have a return, and it's a financial return to the state of Connecticut. So they have to be looked at differently. We absolutely have to invest in education; we have to encourage secondary-school students to take the science and math courses - that's an investment, too. But it has a different type of return. I see us making an investment in an industry cluster, and in return seeing benefits not only in jobs but in state revenues over a period of years.
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