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Smokin' - Tobacco Windfall Spurs Biotech Investment 

Forty-one states roll out the red carpet for biotech with official initiatives. Sixteen are funding their efforts with tobacco industry settlement cash. 

By Kristen Bole

March 7, 2002 | In November 1998, the tobacco industry signed a landmark $300 billion settlement to reimburse U.S. states for medical care provided to ailing smokers. Big Tobacco agreed to pay each state sums ranging from $200 million to $28 billion over the next 25 years to cover smoker health-care costs — many of which had already been paid by the states. Perhaps paradoxically, this sudden windfall of cash prompted many states to embark on a "biotechnology sector development" spree that has grown into a fierce competition for the minds, hearts, and dollars of biotechnology companies and entrepreneurs.

Look out California and Massachusetts. Here come Michigan, Colorado, New Mexico, and many other states hungry to participate in the life sciences revolution. Many are armed with tobacco settlement money. They all want a piece of the biotech industry, which generated $25 billion in revenue in 2000 and paid $10 billion in taxes in 1999. No one wants to miss the next big boom.

Forty-one states have created bioscience initiatives to invest in their work forces, improve their business

Leading States' Initiatives in Biosciences 
Forty-one states have set up some type of program to support bioscience development. Though most have focused on tax credits and private sector support, such as venture capital, 30 states have also used public efforts and funds to drive bioscience initiatives.

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climates, and facilitate access to capital, according to a new study by the Biotechnology Industry Organization in Washington, D.C. Fifteen states have emulated Michigan's innovative use of tobacco funds to help drive biotech development. Another 35 have set up biotech trade associations, and five have created state-backed seed funds to invest exclusively in bioscience companies.

Suddenly, choosing where to locate your company or to seek a biotech job isn't as easy as it used to be.

The Michigan experience is instructive. Michigan has the sixth largest Medicaid population, and its tobacco windfall amounted to $310 million immediately, with another $8.3 billion to follow. The only restriction was that funds be used for health-care related purposes. "At the time, the economy was doing great, so the money was not needed to fill any holes," says Raili Kerppola, managing director of the Michigan Life Sciences Corridor initiative, located in the Lansing region. "This was a tremendous opportunity to develop initiatives with a long-term impact on the state."

That funding has become a cornerstone in Michigan's strategy to create a world-class center in biotechnology and life sciences research. A come-from-behind player, Michigan has developed a comprehensive plan that has already pumped millions into corporate-government-academic collaborations and hired microbiologist business leaders to help startups.

One challenge has been overcoming the state's stereotype. "Michigan is so dominated by the auto industry in the eyes of the world," Kerppola says. "The fact that we had a considerable presence in life sciences went unnoticed." To help spread the word, Michigan mounted a radio advertising campaign in San Francisco to lure people away from the Bay area.


Getting the Word Out 
"They're very aggressive, to be sure," says Edward Penhoet, a pioneer of the biotechnology industry (co-founded Chiron Corp. in 1981) and the current dean of the School of Public Health, University of California at Berkeley. "They [Michigan] are making a very serious effort to put themselves on the map."

So are many other states. Consider just these three:

  • New York has allocated $1 billion to fund Centers of Excellence in the life sciences throughout the state, including a $150 million bioinformatics center in Buffalo and a center for nanotechnology at Cornell University in Ithaca.
  • Texas has ponied up $800 million for science, engineering and commercialization efforts, of which $385 million will go into research facilities in the state's universities.
  • Wisconsin launched BioStar, a $317 million initiative to build a series of state-of-the-art-research centers on its campuses.
Of course, California and Massachusetts remain the Goliaths of biotech and enjoy a 25-year lead supported by renowned research institutions, venture capital communities, and public bioscience venture funds. California ranks first in biosciences funding, number of bioscience companies, and skilled labor pool. It brings in $2.25 billion in outside funding for bioscience research every year and employs 1-in-8 of the nation's biological scientists. It also offers an array of funding and tax breaks and is still creating initiatives: $100 million to create the Institute for Bioengineering, Biotechnology and Quantitative Biomedical Research, with a matching $200 million in private donations; and $500 million from its state retirement fund for bioscience ventures.

"We can't be California," says Jan Gensheimer, executive director of the Michigan Bioscience Industry Association. "California moves at a different pace. It has a different community of venture capital and risk-taking that Michigan can't have." But Michigan still has its advantages. "Our primary industry is automotive, which has a long-term vision and a history of regulations. Both of those are true of the biotech industry. It takes years to get a product to market and it's heavily regulated, so we're well suited for it."


Lessons in Pain Avoidance 
After being hit hard as a single-sector economy in the last recession, the state was determined to diversify. Michigan began focusing on new technologies in the mid-'90s, but the tobacco settlement was the defining stroke. Suddenly Michigan had the money to drive development.

The state dedicated $1 billion of its tobacco windfall to creating a Life Sciences Corridor that would

California's Love-Hate Affair with Biotech 
Bioscience initiatives are everywhere — except, paradoxically, in Berkeley, where researchers helped launch the industry but politicians view it with suspicion.

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promote biotechnology, genomics and other life sciences research in the state. A consortium of the University of Michigan, Van Andel Research Institute, Michigan State and Wayne State universities, run by the Michigan Economic Development Corp., was created. That organization now oversees $50 million per year in grants for biosciences. Of that, 40 percent will go to basic academic research, half will help fund collaborations between the university and private sector, and the remaining 10 percent is for commercialization activities.

"This was truly a revolutionary concept," Kerppola says. It was certainly ambitious, but the timing was also propitious: new-found tobacco money required a health-care focus; the Human Genome Project was drawing public awareness to the funding-intensive biotech industry; and three of Michigan's universities had been clamoring for state funds to build a collaborative life sciences system to help unify and commercialize their research efforts.

Kerppola's office awarded the first $100 million in late 2000—two year's worth of funds to jump-start the program. Another $59 million went to create the Core Technology Alliance, a group of five technology centers that will provide services to academic and private researchers. The centers—in genomics, proteomics, bioinformatics, animal models and structural biology—will help bear the financial load of research so startups can get off the ground.

Meanwhile, the state bioscience association was creating local awareness with aggressive promotion, and the University of Michigan's Office of Technology Transfer (OTT) was beefing up its life sciences effort. The 18-person OTT added two bioscience experts in business development whose only responsibilities are to help startups with their business plans, commercialization strategies, seed funding, and executive recruitment.


Will Company Building Work? 
"What we're doing is very complex," says Karen Studer-Rabeler, assistant director of business development at the OTT. A microbiologist by training, Studer-Rabeler says her technology background and work experience at Fortune 500 and startup companies have enhanced her effectiveness. Last year, the OTT fostered a dozen startups drawn from University research efforts and it's on track to do the same this year. Among OTT's offspring are NanoBio (nanotechnology-based delivery systems), Rubicon Genomics (gene sequencing and bioinformatics), and Nephros Therapeutics (kidney disease treatments).

"Researchers and professors used to focus on publishing, and when they talked to each other in the hall, they talked about what they published," Gensheimer says. "Now, professors are talking about viability and commercialization."

It is still too early to know if these state programs will deliver on their full promise. In Michigan, some of the effects have been subtle, exemplified by a friendly legislative attitude towards the initiative and by the increased inclination of university scientists to commercialize their research.

The biggest change at the Life Sciences Corridor, says Kerppola, is the increase in number and improved quality of applications she is seeing for their annual grants. She has seen 300 initial proposals this year that are viable contenders, with roughly equal participation from the academic and private sectors. "This initiative is truly creating the incentive we intended to make," Kerppola says, almost with surprise. "We're seeing exactly the kinds of development from the program as we hoped, and we're getting there faster than we anticipated."


Is Michigan's Plan Working? 
One important question for Michigan to answer is whether or not its efforts to attract bioscience companies and professionals are working. State officials cite at least one instance of success.

Jeff Williams was the chief operating officer of a growing diagnostics imaging company, IRIS, near Los Angeles when he got an offer in 1997 to turn a well-funded Ann Arbor software company, BioImage, into a leader in robotics for genomics research. He said he needed three things to succeed: technical staff, academic research, and the ability to expand.

"The existing staff was strong and the Ann Arbor location meant we were in close proximity to the University of Michigan, Michigan State, Wayne State and Eastern Michigan," says Williams, who took the job as president and CEO. He was also aware of the state's biotech focus and, with an MBA from the University of Michigan, he knew the appeal of both the Midwest work ethic and the low cost of living. All the pieces were there, even the people. "Recruitment has never been an issue," Williams says. "In fact, our location has proven to be an advantage."

Four years and a few acquisitions later, Williams has transformed BioImage into Genomic Solutions Inc., a world-class instrumentation company that expects $33 million in revenues in 2002. He also signed a worldwide distribution agreement with instrument giant PerkinElmer Life Sciences and spun off a state-of-the-art proteomics laboratory for outsourced research. * 


ILLUSTRATION BY DAVE CUTLER

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