The “Keystone State”, Pennsylvania, remains an unusual mix of rural small towns anchored by Pittsburgh to the west and Philadelphia to the east. However, state legislators have been working diligently to unite the state as a biotech hub. With the help of legislative packages, coupled with federal grants and private funding, Pennsylvania has morphed into a biosciences powerhouse, albeit discreetly.

“The great thing about Pennsylvania is that it is a global leader in the biosciences. But it’s a story that has not been told internationally yet,” says Fritz Bittenbender, president of Pennsylvania Bio, a statewide association dedicated to advancing the cause of bioscience.

The whole package

According to Mr Bittenbender, bioscience in Pennsylvania covers the continuum, from basic research undertaken at institutions of higher learning to an impressive collection of companies engaged in the research, discovery and development of therapies in the bio-pharmaceutical sector and medical devices and diagnostics. Philadelphia’s strength lies in bio-pharmaceuticals; Pittsburgh is a leader in medical devices and diagnostics.

The industry is huge: Pennsylvania Bio reports that the sector boasts about 83,900 jobs; $5.5bn in total wages and 2038 bioscience establishments. Between 1998 and 2002, when most industrial sectors were sagging, employment in biosciences rose by 42%.

Providing a solid foundation for the sector are world-class academic and research institutions that garner a substantial $1.3bn of National Institute of Health (NIH) funding. Among them are the University of Pennsylvania, which is the number four NIH recipient, University of Pittsburgh (number six), Drexel University, Hahnemann University Hospital, Carnegie Mellon, Penn State University, Thomas Jefferson University and Lehigh University.

Besides attracting NIH funds, Pennsylvania also attracts companies that bring their own research to the plate, such as Cephalon, Wyeth, Merck, GlaxoSmithKline and Novartis. “This company research totally outpaces the research we get from the NIH,” says Mr Bittenbender.

With the industry contributing $9bn to Pennsylvania annually, business leaders and state legislatures see this as a significant chunk of change for the state. “We project the industry will grow 10% or more over the next decade,” says Mr Bittenbender.

To help promote the growth, the state has created various healthcare-related initiatives funded from 100% of its share of the Tobacco Master Settlement Agreement of 1998. That agreement directed $246bn in tobacco assets to 46 participating US states over 25 years. Pennsylvania’s share is estimated to be about $11bn between 2000 and 2025.

Dennis Yablonsky, secretary at the Pennsylvania Department of Commerce and Economic Development, says the biggest component of settlement funding ($1.7bn) is committed to research. Each year, the state holds a competition with a theme, in which selected institutions can match their NIH money with the settlement funds. “This translates into $70m a year,” says Mr Yablonsky. Additional state money is awarded each year for research in areas such as nanotechnology that focus on pharmaceutical and bioscience areas.

Innovation zones

The state governor, Edward Rendell, has introduced Keystone Innovation Zones, designed to foster innovation and create entrepreneurial opportunities by aligning and combining the resources of educational institutions, private businesses, business support organisations, commercial lending institutions, venture capital networks (including angel investors) and foundations. “They implement programmes to create more companies, retain more students and drive more growth. Many have an element of life science,” says Mr Yablonsky.

Tax credits of $25m a year are available for Keystone Innovation Zone companies. “The tax credits are tradable, which is very important for small companies that need capital,” says Mr Yablonsky. “Companies can sell their tax credits to big companies for cash.” In addition, the state offers $10m for the universities to enhance their technology transfer operations.

Finding capital

Another aspect that the Rendell administration is emphasising is access to capital. “In my opinion, until the last few years this was the biggest gap, especially in taking companies from early concept to commercialisation,” says Mr Yablonsky.

The state taps into a long-standing network of organisations called the Ben Franklin Technology Partners (BFTP). Organised as four centres strategically located throughout the state, the network fosters innovation and stimulates Pennsylvania’s economic growth and prosperity. BFTP of Southeastern Pennsylvania, for example, invests in convertible debt instruments to provide early stage seed capital; growth capital for product development, process improvement and technology commercialisation; financing through mezzanine and guarantee funds; funding for the commercialisation of university discoveries; and access to venture capital funds.

In addition, $60m of the state’s tobacco settlement funds have been set aside for three life science focus venture funds. Among them is Quaker BioVentures, which has already raised more than $300m in matching money. And the Governor’s Economic Stimulus plan, together with its $2bn plus Life Sciences Enterprise programme, is expected to result in $620m in additional venture capital.

“Not all [of it] is for biotech but a large chunk will be invested in this,” says Mr Yablonsky. “We are determined that the capital to grow these businesses [here], not in Boston or California.”

The state is also investing in sites to grow companies out of incubators. And the tax commission is recommending a reduction in Pennsylvania’s corporate income tax and a phasing out the corporate stock and franchise tax.

An innovative scheme implemented by the state is the Life Sciences Greenhouses programme. Greenhouses in Philadelphia, Pittsburgh and Harrisburg are funded equally with $100m of the state’s tobacco settlement money. Each greenhouse operates with its own board of directors to meet its constituents’ needs.

The Pittsburgh Life Sciences Greenhouse (PLSG), for example, is a public/private partnership founded by the University of Pittsburgh, Carnegie Mellon University, University of Pittsburgh Medical Centre Health System, the Commonwealth of Pennsylvania and its regional foundation community. It services 49 counties with hubs in Centre County, the Lehigh Valley and the Harrisburg-Hershey area.

The PLSG president and CEO, Dr Doros Platika, says that the greenhouse’s funds are matched by the private community in the Pittsburgh area, bringing its total to $70m. Four funding programmes are offered that range from $100,000 to $200,000. “The focus is to support early stage technologies from concept to company formation,” says Dr Platika. The PLSG has allocated $15m of its fund to become a limited partner in a group called PA Early Stage, which is committed to investing $20m in the region and avails financing from $250,000 to $2m. To give an additional boost and support to companies, the PLSG has created an angel network called LifeSPAN Investor Forum, which is funded with BFTP.

Funds for BioAdvance, the Biotechnology Greenhouse of Southeastern Pennsylvania, are managed by Quaker BioVentures, a Philadelphia-based venture capital firm that is dedicated to investing in life science companies located in the mid-Atlantic region. In January, BioAdvance announced its third round of investments, which provides $3.5m to seven local life sciences researchers or companies. “About half are involved in therapeutic products and half are working on diagnostics or devices,” says Barbara Schilberg, BioAdvance’s CEO. “Some of our companies are already going on to raise their own venture capital funding or to get product approval. One company has been sold.”

Market vision

BioAdvance is located in the University City Science Centre, which has a set goal to commercialise 40 new Philadelphia-based life science and high-tech companies with a market value of $1bn by 2010, and 60 new companies worth $3.3bn by 2015. To implement this vision, the centre is introducing a number of changes including a $10m investment capital fund to start new companies.

“The science centre’s more aggressive mission is a visionary plan that will take the region’s scientific and business community to the next level,” says supporter David Holveck, president of Johnson & Johnson Development Corp.

This matches the mission of the state of Pennsylvania itself, which plans to take its burgeoning biotech sector to the next level.