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Out of
Thin Air
Measuring success in
biotech start-ups means using a whole new set of standards
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Business New Haven
1/11/1999
By: Nick Raposo
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The biotech industry is going to be big money and change the way I live my life.”
If you don't agree with the preceding statement, this article, looking at the industry's year in Connecticut, probably isn't going to change your mind. However, if you're a believer, everything's coming up roses, or at least rosebuds.
Taking stock of the biotech industry isn't exactly a clear-cut proposition. The word biotech itself is used to cover a vast array of technologies relating to biology. In its current usage, it indicates a focus on gene-based sciences.
The problem is that when two “biotech” companies, and the technologies they're harnessing, are compared, there may be no common ground. It would be like comparing a company that makes light bulbs and a company that makes uranium pellets for nuclear reactors, because they're both in the electricity industry.
That said, there's another problem, which is that this so-called “industry” is remarkable because many companies have yet to produce any products, let alone a profit.
But biotech is not the emperor's new clothes, either. It can and has generated products that are revolutionizing medicine and agriculture. There is little doubt that some companies in this arena will reap spectacular rewards. But it is some indication of the complexities of the industry that Neurogen Corp., one of the most successful biotech companies in Connecticut, reported a net loss of $257,000 for 1997.
The Farmington-based Connecticut United for Research Excellence (CURE), part of a coalition “promoting the process and benefits of biomedical research,” recently released its 1998 “Economic Report Card” on the state's biomedical research industry. The report highlights major gains in employment and research-and-development spending.
While these figures are buoyed by including the four major pharmaceutical companies, any serious portrayal of the biotech industry wouldn't be complete without them, as they play such a vital role in the ability of small biotech firms to get their products into the marketplace.
The CURE report states that R&D spending by Connecticut biotechnology companies totaled $76,457,834 for 1997. That represents a 37-percent increase over last year's number. Total R&D spending in the state, a number that includes pharmaceutical companies and major universities, climbed to $1.84 billion.
Of the more than 1,100 jobs created in what CURE designates as the biomedical industry last year, however, only 140 were specifically in the biotech realm. But those 140 represent a significant 40-percent increase over 1996 figures.
The CURE report also cited what it considers the most important factor to the health of the biotech industry in Connecticut: lab space. It reports that biotech companies and pharmaceuticals currently occupy more than 189,000 square feet of lab space, but projects that by next year, they will need almost 320,000 square feet.
Last year did see the creation of a good deal of lab space - from Pfizer's new (and newly proposed) research facilities to Branford's Institutes for Pharmaceutical Discovery's impressive new facility that will reinforce that company's status as a major Connecticut biotech force.
But most biotech companies, the conventional wisdom goes, are not capable of building and outfitting expensive lab space with their meager seed money. The answer the industry proposes to this is for the state to step in and work with developers to get lab space built, and fast. Just saying “If we build it, they will come” might seem like putting the cart before the horse, but industry insiders insist this is the only thing holding back the boom.
The problem is, who's going to pay for it? And in the biggest small story of 1997, that question was, to a large extent answered by S.B. 599, pending before the state senate (see below). It turns out that Connecticut taxpayers are going to help build that lab space.
Before trying to conclude whether that's good or bad thing, it's useful to revisit some of 1997's big stories:
n Pfizer decided to expand its research facilities.
In February, Pfizer announced that it would be building a new 400,000-square-foot clinical research facility on the 24-acre former New London Mills site. The facility will be used for testing new drugs in patients. This lab will be completed by the year 2000, and should be generating some $129 million in payroll for almost 2,000 employees by 2002.
To make the New London expansion more attractive to Pfizer, the state threw in several tax incentives, and released liens it held on real estate Pfizer will be developing. In addition, the state and the city of New London will work to develop a biotech start-up “incubation” space in the former Undersea Naval Warfare Center, with Pfizer's help. Companies sprouted there, of course, would be in a position to benefit Pfizer, being just outside its back door.
All told, the state could be laying out up to $68 million. That shows the kind of commitment that Pfizer, and other pharmaceutical companies, like to see.
In a related story, Bayer Pharmaceuticals decided to increase its laboratory space as well, after having resorted to temporary space out of state to house its expanding R&D efforts. The company has already broken ground on the proposed 55,000-square-foot lab space.
n CuraGen went public.
At the end of March, CuraGen's IPO put three million shares of common stock, valued at $11.50 per share, on the market (NASDAQ: CRGN). CuraGen's revenue from this offering should be in the neighborhood of $31 million.
This move is part of a larger financial restructuring of the company which includes private placement of $10 million worth of common stock with the company's collaborative research partners, Biogen and Genentech. CuraGen has also recently entered collaborative agreements with ArQule, a biotech information company, and Pioneer Hi-Bred, an agricultural company, to develop gene-based products for that market.
This story was a big deal because a local start-up succeeded, putting the state's number of publicly traded biotech firms at five. Five public companies is a far cry from what Victor Budnick, president of Connecticut Innovations Inc. (CII) of Rocky Hill, sees as critical mass for the industry (more like 25, he says), but it is certainly a start.
n S.B. 599.
Perhaps the biggest story in biotech this year was also the least flashy. S.B. 599, which was developed to implement recommendations of the state's industry cluster advisory boards, passed with flying colors through the Commerce Committee, and appears on its way to ratification by the state senate.
The bill creates incentive for businesses in targeted “clusters” to locate in Connecticut. Its first section grants them a tax break in the form of a 20-year net operating loss carry-forward period, up from five.
Section II of the bill allows the carry-forward for 20 years of a 20-percent incremental R&D tax credit statute, and allows the sale of the incremental tax credit. In other words, businesses that might not need the credit can sell it, and get cash from a business that wants to reduce its tax burden.
Section III of the bill amends a scale that granted a six-percent non-incremental credit only to companies spending more than $200 million or more in R&D. The amendment eliminates the $200 million qualification. Companies would be able to obtain the six-percent tax credit starting with the first dollar of research and development dollars spent.
Section VII “is designed to encourage entrepreneurs to start their businesses in Connecticut.” It creates a 25-percent credit against the state's corporate tax for anyone investing in Connecticut companies less than five years old, and having less than $1 million in capital.
Also under the bill, CII is given much latitude to dispose of the cash in its coffers in any way it sees fit.
However, one priority specified in the bill is for CII to use its funding for “such things as special loan and lease programs to develop biotechnology laboratory space.”
This is an indicator that the state is finally putting its money where its mouth has been for several years, and is hailed as essential by industry insiders looking to boost biotech business in Connecticut.
n Yale expands its biotech roster.
Yale University, an important player in the biotech industry thanks to the herds of scientists it corrals into the state each year, helped launch four new businesses through partnership agreements in early 1997.
The companies created were: L2 Diagnostics, which will develop diagnostic testing tools for Lyme disease and Lupus; Molecular Staging Inc., a company dedicated to creating diagnostic tools that are more effective than those currently in use, in this case for cancers and deadly infectious diseases; polyGenomics Inc., a genomics company analyzing population genetics; and Transmolecular Sciences Inc., which is creating technology to image, diagnose and treat malignancies in the brain, and other brain-related diseases and dysfunctions.
These are businesses that Yale, and Gregory E. Gardiner, director of the university's Office of Cooperative Research, believe will be able to produce the kinds of returns that they need.
The deals also ratify Yale's commitment to creating businesses that will help the state reach critical mass in a developing industry.
So what does all this mean?
For the state's largest biotech firms - Neurogen, CuraGen, Alexion Pharmaceuticals and Vion - 1997 was a banner year, and prospects for 1998 don't look so bad either. But biotech companies (even the public ones) are currently gauging their financial success by how much outside capital they can bring in each year to fund everything from the electricity bill (more than you can possibly imagine), to purchasing the best brain-power available.
Just don't look at the price-to-earnings ratio. This may seem like a strange way of doing business. But it is the way those in the industry say it has to be. At least for now.
Why? As CII's Budnick says, “The industry is in its discovery phase right now.”
But discovery doesn't come cheap, and it is only discovery that can lead to the kinds of revenue that the “forward looking” prospectuses of the few, the proud, the public biotech firms talk about.
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