Biotechnology

Case Study of the Biotech Industry (2005)

In the wake of the dot.com bust, cities and states across the country put renewed emphasis on biotechnology as the magic bullet for economic development. By 2002, more than 80 percent of local development agencies were listing biotech as one of their top two priority areas for investment, and some 41 states had created programs to lure biotech facilities. It seemed as if every place in the country was vying to become the next "life sciences cluster."

These efforts almost always, of course, involved the offer of subsidies to individual companies or the use of government funds to build research parks or to create public pools of venture capital. At times it seemed that government officials were simply throwing money at firms, even tiny ones. South Carolina put together a $17 million package to attract the headquarters of a company, Pilot Therapeutics, with only 14 employees. "A lot of communities are betting a farm, if not the farm, on biotechnology," said one consultant to the Wall Street Journal while he was helping eight different development agencies make pitches to the industry at a biotechnology trade show.

For most of the areas seeking biotech riches, the odds of success were not very good. A 2002 study by the Brooking Institution Center on Urban and Metropolitan Policy found that biotech investment was heavily concentrated in nine metropolitan areas: Boston, San Francisco, San Diego, Seattle and North Carolina's Research Triangle--and, to a lesser extent, Los Angeles, New York, Philadelphia and Washington, DC. The first five accounted for three-quarters of all venture capital funding given to biotech start-ups during the previous six years.

The report also found that biotech ventures did not create many jobs. New plants typically employed only 50 to 150 people. Moreover, many of the jobs were not secure, given the precarious position of many biotech firms. A Standard & Poor's survey of the industry in 2005 pointed out that "although about 340 biotech companies have their shares listed on major U.S. stock exchanges, the vast majority of these firms are money losers."

Some communities, especially those close to one of the nine established clusters, have had better success when doing deals with one of the larger, more stable players in the industry. In 2003 Pennsylvania provided $12.75 million in subsidies to Cephalon for a $100 million campus that was expected to create 650 jobs.

Yet it remains unclear that subsidies are what make the difference. During the 1990s, the biggest winners in the biotech sweepstakes were North Carolina and California, two states that tended not to offer much in the way of direct subsidies (though California had a generous R&D tax credit). Articles in publications such as Site Selection pointed out that the availability of skilled workers was the most important consideration when biotech companies chose to invest. That was part of the reason for the concentration found in the Brookings study. In fact, California won the contest for one of the largest investments by the industry--a $600 million Genentech facility in Vacaville, northeast of San Francisco--despite more lucrative offers of assistance from other states.

The fact that location and workforce considerations are what secured these investments did not put much of a dent in the desire of government officials around the country to attract biotech investments with extravagant subsidy deals. The largest of these deals was seen in Florida, where Gov. Jeb Bush diverted more than $300 million in federal funds that were supposed to help with budget shortfalls to subsidies for a large biotech facility that the non-profit Scripps Research Institute agreed to establish in Palm Beach County. The county provided more than $250 million in additional assistance. Ultimately, the aid reached some $800 million--more than $1 million for each of the 545 jobs that Scripps was supposed to create.

Site location consultants and trade publications encouraged such giveaways by arguing that new clusters were bound to emerge and that states and cities had to compete aggressively to achieve that status. A January 2005 article in Site Selection magazine on biotech venture capitalist Steven Burrill quoted him as saying that "the expectations that you will be able to create massive new economies around this industry are probably overstated," yet he immediately went on to say: "But, we will create large numbers of new companies and we will create large numbers of opportunities."

States such as Illinois and Minnesota have responded to this siren song by creating new pools of public seed money for biotech development. Connecticut allowed biotech firms to cash in tax credits, even when they didn't have revenues. The pitfalls of these strategies were illustrated in a June 2005 article in The Record newspaper of Bergen County, New Jersey. Amid debate over a proposal by the state to spend $380 million to promote research on stem cells--on top of several hundred million in biotech subsidies in the past--the paper found that:

  • Millions of tax dollars had gone to companies that took valuable research, profits and jobs from New Jersey and strengthened the biotech industry elsewhere.
  • Millions were being spent on tax breaks and other public subsidies for small biotech firms and big pharmaceutical companies, even as they provided lucrative golden-parachute payouts to their executives and continued to charge eye-popping prices for patented drugs.
  • Laws written to protect trade secrets shrouded potential conflicts amid the web of financial interests linking biopharmaceutical companies, the state's universities and the three medical schools run by the University of Medicine and Dentistry of New Jersey.
  • Millions of tax dollars were put in the hands of venture capitalists who invested in privately operated biopharmaceutical companies - without revealing where they are investing.

The article also noted the lack of evidence that biotech investments had done much to create jobs in New Jersey. When Dr. Roger E. Wyse, the internationally recognized plant scientist who was recruited to run the publicly financed Center for Agricultural Molecular Biology at Rutgers University, was asked how many jobs the venture had generated, he responded: "Three. Me and two assistants."

It is unclear whether exposés such as this have much effect, as government officials continue to try to buy their way to economic growth.


Sources

Joseph Cortright and Heike Mayer, Signs of Life: The Growth of Biotechnology Centers in the U.S. Washington, DC: The Brookings Institution Center on Urban and Metropolitan Policy, June 2002; online at http://www.brookings.edu/es/urban/publications/biotech.htm

Josh Hafenbrack, "State Pay Plenty for Biotech Firms," Sun-Sentinel (Fort Lauderdale, Florida), July 13, 2005.

David P. Hamilton and Ken Gepfert, "Desperately Seeking to Lure Biotechnology Businesses: States and Cities Craving Jobs Look to Gene-Based Science, But Critics Predict Disappointment," Wall Street Journal, June 11, 2002.

John McCurry, "Site Seekers Eye Non-Cluster Locations," Site Selection, January 2005.

John W. McCurry, "States Ramp Up Biotech Sweepstakes," Site Selection, January 2004.

Clint Riley, "N.J.'s Big-Bucks Experiment: Tomorrow's Scientific Promises Take Tax Dollars Today," The Record (Bergen County), June 19, 2005.

Zach Schiller, Biotechnology in Northeast Ohio: A Growth Industry Takes It Slow. Policy Matters Ohio, January 2002.

Sabine Vollmer, "States Ante Up Incentives at Bio," Triangle Business Journal, June 27, 2003.

Richard Westlund, "Skilled, Available Workers Top Pharmaceutical Site Seekers Wish List," Site Selection, July 2000.