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Weathering the Storm
In uncertain investment climate, biotech in Connecticut inches toward critical mass
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Business New Haven
5/13/2002
By: Nancy Barnes
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Industries take root in particular locations for any number of reasons. In telecommunications, a pool of highly educated talent is paramount. Thus New Delhi, which has six engineering schools, is a mecca for the Asian semiconductor industry.
Biotechnology, the industry that succeeded it as new, sexy and hot, has burned with the same, high-tech fever as the field for entrepreneurs and investors in the new millennium - even if investment in the sector nationwide slowed in the first quarter, plunging by 32 percent from the last quarter of 2001.
Relative to its population, Connecticut now ranks seventh in the nation with respect to the number of biotechnology companies operating within its borders, according to the latest edition of Ernst & Young's Biotechnology Report. And even if the Holy Grail the industry seeks of treatments for diseases as bedeviling as cancer or schizophrenia remains unclaimed, the biotechnology industry is in the Nutmeg State to stay.
In 1990, an organization called Connecticut United for Research Excellence (CURE) was formed to combat inflammatory reports on the use of animals in research. At that time - which, for biotechnology in Connecticut, constituted the Dark Ages - large pharmaceutical companies such as Pfizer and Bristol-Myers Squibb as well as the American Heart Association comprised its membership. According to CURE President Debra Pasquale, biotechnology companies were then “virtually nonexistent.”
“I think there was just a natural reluctance culturally to engage in the commercialization of technology,” adds Jon Soderstrom, who today heads Yale University's rejuvenated Office of Cooperative Research (OCR).
Although the large pharmaceutical companies who were founding members of CURE have infrastructures capable of bringing new products to market, a strong academic base is necessary in drug development for the pre-clinical research that new prescription drugs require. Biotechnology firms - small, nimble and focused on a single molecule or technology - create the bridge between the two.
Alan Sartorelli, professor of pharmacology at Yale University and one of the founders of the New Haven-based biotechnology firm Vion Pharmaceuticals Inc., recalls the days when Yale shunned mixing academia with money. Then chairman of the Yale School of Medicine's Department of Pharmacology (and later director of the school's Comprehensive Cancer Institute), Sartorelli says: “What I was looking for was an outlet. We were interested in trying to design a particular drug to hit a target. That's what we were good at.”
Sartorelli received three bids from pharmaceutical firms willing to work with him. (He eventually signed with what was then Bristol-Myers.) Soon he learned that any faculty member seeking a licensing agreement had to clear that agreement with all faculty committees before receiving university approval for the commercial venture.
“Politically, it was not the thing to do in the Yale environment,” Sartorelli says of the year he spent arguing his case before the university committees. “I got beaten up pretty badly. I persisted and the agreement went through, and indeed it was supported by the dean and the president. There were many who felt I was destroying the university by doing this.
“We had different philosophies about benefiting mankind,” he continues, explaining the recalcitrance he faced. Sartorelli says the arguments against his petition pitted the taint of commerce against the purity of academia - “absurd things, because, certainly, industry has to make money. It was a terrible environment for someone who felt developing medicines that benefited mankind was part of our mission.”
The culture at Yale changed dramatically in 1993 with the appointment of Richard C. Levin as president. Levin had been a Yale faculty member for 20 years prior.
According to Yale University Vice President and Secretary Linda Lorimer, Levin presented a “Design for the Yale-New Haven Initiative” to the university's board of trustees in 1994. One of the report's key components was, Lorimer says, “a belief that the fields of biotechnology and biomedical affairs are the most promising sectors for New Haven to attract business.”
Although Levin did not change the culture of Yale overnight, he did bring in officials who were determined to attract biomedical ventures to the greater New Haven area. OCR's Soderstrom, for instance, says his office spent a lot of time courting the companies. He himself recalls driving the CEOs around to show them potential houses. “We did whatever it took,” he says.
Science Park, the non-profit incubator for start-up companies co-sponsored in the 1980s in the New Haven Enterprise Zone of Newhallville by Yale University - over then-President A. Bartlett Giamatti's reluctance - attracted Vion Pharmaceuticals, Alexion and CuraGen, among other young companies. The Park building, once home to Winchester Repeating Arms, was found to have an ideal structure for laboratories. Its floors were able to bear the heavy weight of laboratory equipment, and its high ceilings allowed companies to install power and air-handling equipment.
The former SNET building at 300 George Street in downtown New Haven, where start-up Achillion Pharmaceuticals located after the firm had been courted aggressively by Princeton, N.J., has also been touted as a location for biotechnology firms.
The city of New Haven streamlined its permitting process, and the state created a fund to help start-ups lease property. One quasi-governmental agency, Connecticut Innovations Inc. (CII), also has created a BioSeed Fund, whose resources are targeted to companies in very early stages.
In 1996, according to Pasquale, CURE extended its focus from educating schoolchildren and teachers on how animals are used in medical research to serving as a resource and advocacy group for - what else? - bioscience.
Its calendar lists bioscience-related meetings and symposia, and it compiles annual economic reports that tout the multiplier effect the bioscience industry has on different sectors within the state's economy, including retail, services and construction.
In CURE's most recent economic report, companies reporting from the biotechnology sector said they raised more than half a billion dollars in public and private capital last year despite a difficult financial environment nationwide. The industry in Connecticut has matured to the point where last year biotechnology companies reporting to CURE experienced a 55-percent jump in expenditures on clinical trials. That amounted to more than $41 million, relative to $26.7 million the preceding year.
Clinical trials on human subjects, which account for the lion's share (roughly 70 percent) of the costs of drug development, follow pre-clinical research.
In an agreement that appears to be the largest in biotech history, the German chemical and pharmaceutical giant Bayer AG formed a broad alliance with New Haven's CuraGen Corp. that could cost the pharmaceuticals giant over $800 million.
In the first phase of the alliance, Bayer will use CuraGen's technology to help it evaluate which of its compounds have the best shot at becoming marketable drugs over the next five years. (According to Yale's Sartorelli, only one in ten drugs that enter clinical trials ever make it to the consumer market.)
CuraGen will screen drugs in Bayer's development pipeline to identify those with toxic side effects. The biotechnology firm will also evaluate the drug compounds' effectiveness based upon individuals' genetic makeup.
Of the $124 million that CuraGen will receive directly from Bayer, $85 million will cover a seven-percent equity stake in CuraGen; the remainder will go toward research funding.
In the second phase of their alliance, the two companies will discover, develop and sell small-molecule drugs that treat obesity and adult diabetes. In this phase, they will share costs of as much as $1.34 billion over 15 years. CuraGen and Bayer are splitting the investment and profit from any drugs that result from the agreement by a ratio of 44 percent to 56 percent.
CuraGen's success is all the more remarkable given the company's humble beginnings. The company's founder, president and CEO is Jonathan Rothberg, a New Haven native who, while teaching at Yale in the early 1990s, conducted research in the basement of his New Haven home. The company, which left its start-up laboratories in Science Park in 1997, now occupies space in the Long Wharf Maritime Center.
Last year, CuraGen announced that it would move to a new, 88-acre campus in Branford. That, along with Alexion's move two years ago to Cheshire, has raised the ire of some who saw the biotechnology firms as the engine that would drive New Haven's economic future.
Most recently, the Connecticut Center for a New Economy (CCNE) in New Haven released a report titled “Incubating Biotech.” In it, it bemoaned the loss of jobs and property-tax revenues as biotechnology companies left their low-cost Science Park spaces and, by extension, New Haven. In 2000, for instance, CuraGen's personal property net tax assessment at its Long Wharf location amounted to $1.9 million, according to the report.
Richard J. Grossi, chief executive officer of the Science Park Corp., is confounded by such concerns. In a late 2000 interview, he emphasized that the function of Science Park has always been to nourish very small, start-up companies. As CuraGen's deal with Bayer illustrates, the companies within the biotechnology sector are no longer small.
Even Vion Pharmaceuticals, a company that has remained at Science Park, employs fewer than 60 workers largely because it outsources many of its products for development, according to the CCNE report.
Yale's Lorimer is philosophical about the changes. “I came back to Yale in 1993, in large part to help initiate the new role for Yale in the community,” says Lorimer, referring to her previous position as director of the new Yale University Office of New Haven affairs.
“The future of New Haven needs to be created like a mosaic. It will require many tiles from quality public education to a rich cultural life,” says Lorimer.
“We have to dream big. Certainly, all of these things have to start small,” she says, referring to the biotechnology sector as it existed just several years ago. With regard to CuraGen's move outside New Haven, she says, “The region is the region. I think we all float together.”
Certainly, the biotech sector in greater New Haven continues to attract investment in spite of the national slowdown in that sector. In January Achillion received roughly $40 million in funding. Agilex got $22 million. Vion as well was able to attract new financing.
As the Ernst & Young Biotechnology Report points out, the biotechnology companies are not fly-by-night affairs, like many of the exuberant dot.coms. Rather, as Ernst & Young reports, the industry - now 25 years old nationwide - is led mainly by seasoned executives and sophisticated scientists.
Still, developing a drug takes years. As Lorimer points out, “It will be interesting to get to the year 2020, and see if the small, start-up firms have fulfilled their promise.”
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