Although quite a lot of buzz surrounds the life sciences sector, talk is cheap. What is needed to get products developed, tested and launched – and to get companies off the ground – is money. And money to fund biotechnology start-ups is in short supply.
Biotechnology is a high-risk, high-reward business, and life science companies can take up to 10 years to post a profit. Many investors would rather not wait that long to see a return. With large pharmaceutical entities such as Pfizer and Merck trimming costs by cutting overheads, many are relying on the research and development from biotech companies themselves rather than purchasing the firms and their science.
Making matters worse, biotech start-ups are finding it harder to secure grants. Most have their roots in university settings where grants are critical for basic research. Even those in the US are feeling the impact because of cutbacks at the National Institutes of Health (NIH), the world’s largest grants provider. Compounding the problem, venture capital funds increasingly want to see successful conclusions of stage one and two clinical trails before risking investments. Before they frequently offered large amounts just on a concept. Some venture capitalists no longer invest in biotechnology at all.
Less public offerings
Meanwhile, large pharmaceutical companies are gobbling up some of the promising biotechs before they can go public. Consequently, initial public offerings (IPOs) are decreasing, meaning fewer investment opportunities.
Yet venture capital money is on the sidelines and in the hands of large philanthropic organisations, the Gates Foundation being one. Finding ways to tap into these funds is critical.
Communities are taking action. In Huntsville, Alabama, the Hudson-Alpha Institute for Biotechnology (HAIB), a non-profit organisation, is fostering a new biotech sector with nearly $80m from private investment and $50m from state support. As a result, nine established biotech companies are relocating operations to Huntsville¹s Cummings Research Park Biotech Campus and will locate in HAIB's new 270,000-square-feet facility.
“Hopefully, we have grown the companies to a point that when they do get venture capital funding they will not lose control,” says Jim Hudson, HAIB president.
Huntsville is already known for having one of the best success rates for small business in the country, and the city benefits from the significant presence of NASA and US Department of Defense facilities in the area.
Kalamazoo, Michigan, is aggressively trying to retain its scientific talent and lure companies through the Southwest Michigan First Life Science Venture Capital Fund. In January, Pfizer reported that it would close R&D facilities in Kalamazoo and neighbouring Ann Arbor, which would affect thousands of jobs.
Southwest Michigan First will only invest in life science/biotech companies that commit to a relocation or expansion in Kalamazoo. At $50m, the fund is the largest sum of private capital ever to be raised and managed by an economic development organisation.
“We are not looking for volume, but quality. There has to be phenomenal science,” says Ronald R Kitchens, president and CEO of Southwest Michigan First.
The fund has made three investments thus far and expects to make six more in 2007. Mr Kitchens admits that Kalamazoo will probably not attract a headquarters, “but our ability to grow a headquarters here is phenomenal”, he says.
OCTANe, a private, non-profit corporation comprised of biomedical and technology companies, entrepreneurs, venture capitalists, strategic service partners, private investors and universities is working to drive innovation and accelerate biotech growth in Irvine and Orange County, California. “OCTANe aids entrepreneurial individuals who are working in the area for a large corporation or a university to stay engaged in the technology community,” says Gary Augusta, OCTANe executive director. “They are the risk-takers and have lots of talent, knowledge and wealth to contribute to up-and-coming companies.”
To date OCTANe’s partner, Okapi Venture Capital, has raised $30m for early-stage technology companies. Orange County has attracted $1.1bn in venture capital money in two years for both bioscience and high technology. “On the bioscience side, we are starting to see more start-up companies,” says Mr Augusta. “There is extreme strength in dermatology and ophthalmology R&D with Agilent, Alcon and the University of California, Irvine here.”
Bioinformatics analysis company ImmPORT Therapeutics had its start in Irvine. Initially funded by NIH and small business grants, ImmPORT has obtained about $5m in funding with the support of OCTANe and the Gates Foundation. “We have been able to think about growing without investment at this point,” says ImmPORT founder Phil Felgner.
The North Carolina Biotechnology Center (NCBC) and venture capitalists in Raleigh-Durham Research Triangle are ensuring world-class funding options for North Carolina. In 2005, the Council for Entrepreneurial Development ranked the state third nationally in total venture capital dollars raised by life science companies.
NCBC helps companies to define and qualify their business plans and offers a unique package of loans and grants. Its strategic growth programme, for example, matches loans up to $250,000 from angel investors or venture capitalists.
“We find that the venture capitalist or angel network will be more interested in making an investment in a company when our money leverages the risk,” says John Richert, NCBC vice-president of business and technology development.
Since NCBC’s inception in 1989, the organisation has made about $16m in loans, thereby resulting in about $1.3bn in additional venture capital, angel or IPO money.
A number of venture capital funds in North Carolina promote biotechnology. The Aurora Funds provides money for innovative, early stage start-up healthcare and information technology companies, for example.
“There are different funding models, but companies need $100m to get to a successful conclusion to be in an IPO or mergers and acquisitions transaction. Many deep pockets around the table are required,” says Jeff Clarke, Aurora managing director.
Since 1994, Aurora has invested in more than 60 portfolio companies, resulting in five IPOs and eight M&A transactions. Among them is Regado Biosciences, a Durham-based biopharmaceuticals company.
Although biotech funding in the US outweighs that in Europe by five to one, Europe’s investment climate is improving. According to Ernst & Young, the number of IPOs in Europe in 2005 increased 22%, an all-time high for the sector. That same year, there were 23 new biotech IPOs compared with 13 in the US. Revenues of Europe’s public companies increased by 17% in 2005, compared with a 5% decrease in 2004. The same year, market capitalisations rose by 26%.
The Swiss Stock Exchange (SWX) in Zurich has a three-year history of the largest biotech IPOs in Europe in terms of the transaction size. “The large volumes have to be seen in context of having a market on SWX, which is dominated by institutional investors that ask for minimal trade and company sizes,” says Christoph Schuler, SWX relationship manager for issuer and investor relations.
Switzerland’s long tradition in the pharma and chemical industry, and the finance industry’s early involvement in the cluster, have resulted in numerous life science companies evolving there in the past decade.
The UK benefits from the London Stock Exchange, the only stock market with an index dedicated to the life sciences sector. Consequently, the UK led the IPO stakes in 2005 with seven listings out of Europe’s 23.
London is flush with capital, as exemplified by international life sciences investment group Abingworth, which closed on its $587m Bioventures V LP fund in January 2007. Bioventures is Abingworth’s eighth life sciences fund and the largest dedicated to life sciences in Europe.
Meanwhile, local efforts are promoting biotech growth elsewhere in the UK. Scottish Enterprise supports the pre-commercialisation of leading-edge technologies emerging from Scotland’s universities, research institutes and National Health Service boards through its Proof of Concept fund. To date, the programme has supported 184 projects worth more than £30m and has already created more than 500 new jobs through 33 spin-out/start-up companies and 31 licensing deals.
STRATEGIES FOR CREATIVE SPACES The London Development Agency, the City of Toronto Economic Development and Culture divisions, and the Ontario Ministries of Economic Development and Trade and Culture have jointly taken on two-year, evidence-based research to identify optimal strategies for building the necessary infrastructure and environment in which creativity can flourish. The goal is to develop strategies for creative spaces to encourage, enhance and develop the growth of creative industries.
Big redevelopment efforts in important urban areas – such as Barcelona Media @22 in Barcelona, Spain; Kulturo in Turku, Finland; the MaRS Centre in Toronto, Ontario; and Media City in Berlin, Germany – centre on the development of new creative places and spaces. These point to an evolving economic development strategy that recognises creativity as a prime driver of urban economies. Locations that win the new global competition for creativity and innovation will be based in communities – local and global, geographic and professional – that can create environments that are supportive of the creative process and allow the best and brightest talents to emerge.
One of the most interesting aspects of this approach is how the value of a city’s creative/cultural assets can be maximised for the purposes of regional economic development and investment attraction.
In Toronto, this approach has led to the renaissance of cutting-edge design and intelligent buildings that are attracting both talent and investment from global multinational corporations in the bio-pharma sector. The Toronto area boasts 40% of Canada’s biotech industry.
For example, the Leslie Dan Pharmacy Building, designed by leading UK architectural firm Foster and Partners, features 12 storeys of highly decorated exteriors in a lantern box-within-a-box style with interior ‘pods’ visible from the street. These ovoid forms, suspended on thin steel rods, appear to float in the large open space of an atrium that reaches to the top of the building.
Directly west of the pharmacy building lies the MaRS Centre, which was voted the Intelligent Building of the Year in 2006 by the Intelligent Community Forum (ICF).
The ICF selected the MaRS complex for its role in supporting the growth in R&D taking place in Ontario overall, and in Toronto’s lauded Discovery District in particular. MaRS (Medical and Related Sciences) is a not-for-profit corporation that brings together best-in-class science, business and academic leaders to accelerate the rate of successful commercialisation of new discoveries in Canada. The $345m complex is located in the heart of Toronto city centre, close to world-renowned teaching and research hospitals, the University of Toronto and Canada’s financial core.
“Creating broadband networks to connect Canada’s scientific, business and financial communities to the international trade markets is essential to Canada’s ability to continue its economic expansion,” says the ICF.
The impetus behind MaRS is to improve commercial outcomes from Canada’s foundation of science and technology innovation and to position Ontario and Canada as competitive players in the global knowledge economy.
GlaxoSmithKline (GSK) and Merck Frost Canada now call MaRS home. In 2005, GSK announced a $1m investment in the MaRS complex over five years. Merck Frost’s committed $3m.
The Terrence Donnelly Centre for Cellular and Biomolecular Research (Donnelly CCBR) is intended to encourage outstanding minds to go to and stay in Canada. It is an interdisciplinary laboratory and teaching facility on 10 open-plan floors for 400 research workers and faculty.
Faculty members have come from universities in the US and Europe because of the building’s open, fluid environment, which encourages new ways of approaching biological problems by stimulating unconventional interactions among disciplines, Ontario officials say.
Apart from giving a boost to the local bio-pharma cluster, such examples demonstrate how connections between culture and commerce can be forged by using the creative forces and cultural infrastructure to attract investment and talent.