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It takes a combination of scientific, political, and financial factors to make a district or region attractive to biotechnology companies.By Peter Gwynne and Guy Page

In a few short years, biotechnology has established itself as a business with huge promise for the 21st century. While the biotechnology industry's total capitalization scarcely exceeds that of pharmaceutical company Merck, it has an extraordinarily rapid growth rate, combined with a great capacity to innovate. Not surprisingly, then, the idea of setting up a strong cluster of biotechnology companies represents an attractive option for regional business organizations. After all, biotechnology businesses tend to be capital-intensive. They occupy comparatively expensive facilities, employ higher-end technical staff, and generate significant local income.

So far, however, only a few geographic centers have succeeded in establishing solid biotechnology bases. The major centers include San Francisco's Bay area, the Boston-Cambridge axis in Massachusetts, San Diego, Seattle, Maryland-Washington D.C., New Jersey-Philadelphia, and North Carolina. Other regions in the U.S. and Canada have efforts under way to build bases of biotechnology, but they find the process a challenging one. The difficulties stem from the complicated web of factors that determine successful locations for biotechnology companies, individually and in clusters.

"Geographical location plays into things, for a number of reasons," says Alan Auerbach, vice president and biotechnology analyst of San Francisco-based First Security Van Kaspar & Co. "You have a number of biotechnology communities that are quite tightly knit. They support one another. The proximity encourages companies to communicate and potentially collaborate with one another."

Biotechnology differs from another modern paradigm of high-technology business success, the software industry, in several ways. Most important, while software developers can set up in a garage and grow from there, entrepreneurs in biotechnology require large amounts of laboratory space, costly equipment, and the efforts of teams of experienced scientists to develop their initial ideas. Even when they produce their first products, biotechnology firms must run an obstacle course of regulatory requirements before they can take them to market and, perhaps, start to show a profit. And the criteria for locating a start-up biotechnology company that concentrates mainly on R&D differ from those that determine whether the same company should set up its manufacturing facilities once the R&D leads to commercial products.

Other things being equal, founders will set up biotechnology firms in their own backyards. "The primary reason that biotechnology companies locate where they do is that the scientists who make the basic discoveries are generally comfortable where they are," says Wayne Schnarr, vice president of BioCatalyst Yorkton, Inc., a venture management firm in Toronto. However, other factors play at least some role in the decision about where to locate initially, or where to move the infant company once it has passed the early tests of survival. The most significant include the academic ambience; the attitude of state and local government to high-technology business; the ability to obtain venture capital and other sources of financial support; the proximity of other biotechnology companies; and the availability of technically trained staff and support personnel with experience in the industry.

ACADEMIC ASSETS

More than almost any other high-technology business, biotechnology depends on close ties with leading academic institutions, both at its inception and for its continued survival. Like most high-technology companies, biotechnology firms emerge to capitalize on narrowly focused ideas or visions. More often than not, those ideas arise in the academic environment, although often in forms different from those in which they are realized commercially.

All research universities and medical centers maintain technology transfer offices that have the goal of publicizing and licensing intellectual property obtained at the institution. However, as any business professional knows, the truly valuable fruits of academic activity are plucked long before they reach the technology transfer office. Close personal and professional relationships between industry scientists and academics provide the main conveyance for the most promising ideas.

Academic clusters provide more than ideas and staff for nearby biotechnology companies.
In many cases, universities also provide the initial staff for biotechnology companies, in the form of professors who spend furloughs or consulting time at the firm, and full-time staff selected from graduate students who participated in the research that produced the commercial ideas. "We encourage faculty to consult up to 20 percent of their time," says Phyllis Gardner, senior associate dean for educational affairs and associate professor of molecular pharmacology and medicine at Stanford University. "They get to know the business world and get a less insular view." Gardner herself recently returned to the campus after a four-year combined sabbatical and leave of absence, during which she served as vice president of research for local biotechnology firm Alza. "There's a culture in Silicon Valley that encourages spinouts," she adds. "That's not always the case elsewhere."
They can participate in collaborative research and furnish academic consultants for clinical trials.
Academic clusters provide more than ideas and staff for nearby biotechnology companies. "They can participate in collaborative research and furnish academic consultants for clinical trials," explains Frank Baldino, founder and CEO of West Chester, Pennsylvania, biotechnology company Cephalon. "You don't have to wait for them to get on a jet at exorbitant cost for a two-hour meeting." Patrick Scannon, founder of Berkeley, California-based Xoma, agrees. "Having the ability to interact with faculty is important," he says. "No matter what size you are, you don't have every specialty. University departments may have expensive instrumentation that biotechnology companies don't have or need for only a few months."

Universities don't represent the sole nuclei for the growth of biotechnology firms. Dyan Brasington, president of the High Technology Council of Maryland, points out that science based federal institutions around Washington, D.C., have helped to create a strong biotechnology cluster along Maryland's I-270 corridor which runs through Washington's northern suburbs. Companies in the corridor include the National Institutes of Health, the Food and Drug Administration, the National Institute of Standards and Technology, and the Walter Reed Army Hospital. Biotechnology companies in the New Jersey-Philadelphia region benefit from a high density of major pharmaceutical corporations. Kansas City plans to set up a biotechnology sector based largely on the Stowers Institute for Medical Research, an institution established by two cancer survivors that will open its doors in July of next year. "A lot of people in the community here see the Stowers Institute as providing the push to persuade biotechnology and pharmaceutical companies to come to Kansas City," says Nelson Pleau, the institute's chief administrative officer.

POLITICS AND ECONOMICS

State and local governments can play particularly prominent roles in developing clusters of biotechnology firms. "There are clearly some local government initiatives that try to draw high-technology business," says Eric Schmidt, a biotechnology analyst at New York City financial firm S. G. Cowen. "They include tax breaks and investing alongside companies." Some states go to great lengths to welcome biotechnology businesses. "It's boosterism backed by money and planning," says Carl Feldbaum, president of the Washington, D.C.-based Biotechnology Industry Organization (BIO). "In North Carolina, a CEO arrives at the airport and goes straight to the governor's mansion. In Maryland, he gets to lunch with the mayor as well. They make it hard for the CEO to go home and not think Maryland is the place to go."

Canadian provinces have taken similar routes. "In Quebec, British Columbia, and Saskatchewan, you see deliberate fiscal and tax policies to attract biotechnology investment and companies," says Graham Strachan, CEO of Toronto-area company Allelix BioPharmaceuticals. "There has been a high level of collaboration among universities, the government, and industry to establish the biotechnology industry in Montreal," says Jacques Lapointe, president and COO of Biochem Pharma. "In terms of high-tech incentives, the Quebec-Montreal area has probably the highest R&D incentives in the civilized world. Quebec province has just moved from a two-year to a five-year tax holiday for scientists, proving its interest in bringing them in."

Government influence extends beyond simple tax breaks. Biotechnology firms need specialized and costly facilities that represent significant risks for construction companies. State and local governments can reduce those risks, with loan guarantees, zoning privileges, and reduced permit charges that help to stimulate development in underprivileged areas. The Charlestown Navy Shipyard, one of the most active biotechnology research centers in greater Boston, relied heavily on the active involvement of the Commonwealth of Massachusetts and the City of Boston.

The key to that involvement is a long-term view that extends beyond legislators' usual terms of office. "North Carolina is a beautiful example of a state that had a vision extending for several decades when it created Research Triangle Park about 40 years ago," says Bill Rastetter, CEO of IDEC Pharmaceuticals, of San Diego. "The state of California has to start thinking now about stimulating economic growth for 2020."

Government can smooth the path of biotechnology business in subtle ways. "Most biotechnology companies in San Diego County deal with just one municipality: the city of San Diego," says Rastetter. "So you have pretty consistent regulations. The city also has an ombudsman whose sole job is to work with biotechnology companies."

Enlightened government policies may help biotechnology companies save money, but no firm can get started or expand without money in hand, in the form of venture capital. Given a history of spectacular losses by biotechnology companies, obtaining that capital can prove difficult. Entrepreneurs agree that it helps to locate new or expanding companies close to sources of venture capital and investment banks with experience in biotechnology. That makes the Bay area, Boston, and Philadelphia-New Jersey, which have critical masses of venture capitalists, particularly attractive to start-ups. "The reason why so many biotechnology firms are in the Bay area is that the venture capital firms are here," says Charles Casamento, chairman, president, and CEO of RiboGene, a company founded in 1990 in Hayward, California. "I was shocked at how hard it is to raise money here," recalls Matt Megaro, president and CFO of Durham, North Carolina, company Trimeris, who had previously worked in the Bay area. "We had to focus everything on one product to create value against which we could get money," he explains.

Local access to capital is not essential, however. "The key for a venture capitalist is finding an investment that's going to make him money. If he has to go to Botswana to do it, and he's going to make money, he'll do it," says analyst Auerbach. "You don't have to be located in the proximity of capital," adds Mark Skaletsky, CEO of Waltham, Massachusetts, firm GelTex. "The key is communication. Financiers want you to keep in touch." That was the experience of Pharmacopeia. A West Coast venture capitalist provided seed capital for the company in 1993, recalls COO Lew Shuster. But the company set up shop in Princeton, New Jersey, close to the New York scientists who developed the combinatorial chemistry techniques on which it focuses, and convenient for the firm's founding scientists who joined Pharmocopeia from Merck.

STRENGTH IN NUMBERS

On the other hand, it does help biotechnology start-ups to locate near established firms in the same business. Of course, competitors who share the same turf must compete for personnel, capital resources, visibility, and influence. They must also face the potential loss of industrial secrets through migration of staff and local gossip. Nevertheless, clustering has considerable value for biotechnology firms. Most important, it permits them to spot the industry's strategic shifts at a speed impossible for isolated companies. "An industry cluster permits a group of biotechnology companies to become strategically successful together," says Ed Fritzky, chairman and CEO of Immunex, the company that introduced industrial biotechnology to the Seattle area.

Biotechnology clusters provide more tangible benefits.
Biotechnology clusters provide more tangible benefits. All companies in the business share the same practical needs for research space, equipment, supplies, business services, and personnel. Builders invest in research space more readily when they know that a neighborhood contains a large number of potential occupants. "We had a problem when we founded the company in 1989 because local landlords had little experience with biotechnology companies," reminisces Stanley Crooke, CEO of ISIS Pharmaceuticals in Carlsbad, California, several miles from San Diego.
All companies...share the same practical needs for research space, equipment, supplies, business services, and personnel.
Several local and regional industry organizations have played important roles in helping to negotiate group discounts for the materials and services necessary to run high-technology businesses. "Bio Commerce here in San Diego speaks with a credible voice on issues of local concern," says Rastetter. "One of the benefits of having a large number of biotechnology companies is the Massachusetts Biotechnology Council in Cambridge," adds Skaletsky. "It gives you a wonderful opportunity to exchange ideas with your peers. Even though we're competitors, we're struggling with the same issues."

Clustering also provides a focus for essential professional services. "It's not a trivial thing that in the Bay area there are a lot of legal firms and patent firms familiar with this type of operation," says Scannon. "Some of these firms have 20 years of experience in biotechnology patents." Indeed, adds fellow Bay-area executive Casamento, "all the services are here, from graphics to design to computers."

Clustering can even help to put biotechnology companies on the map, by attracting industry analysts. "Seattle is not a central location for visits by Wall Street analysts," says Steve Gillis, the founder of Immunex who is now chairman and CEO of Corixa. "In the mid-80s it was difficult to get the analysts to fly in. Now, the more companies there are, the easier it is for the newer ones to latch onto the coattails of those that were established earlier."

What can companies in out-of-the way locations do to attract interest? Proactively solicit the interest of analysts, suggests Eric Schmidt, "by sending them information, faxing press releases, and visiting them in New York City. It's also useful to have a good involvement with the local media and newspapers."

RECRUITMENT AIDS

Ironically, biotechnology clusters help individual companies recruit staff, particularly from overseas. Such recruits "probably want the security of knowing that, if things don't work out with company A, there are four or five other companies they can go to," explains Allelix's Strachan. "The more companies you have, the more willing people are to relocate there, as they know there are opportunities with other companies," says Robert Davis, chair of chemical engineering at the University of Colorado, Boulder, and co-director of the Colorado Institute for Research in Biotechnology. Indeed, working in a cluster reduces the risks of unemployment when, as often happens, a biotechnology company fails. "We have a human resource network within our biotechnology cluster that shares best practices and helps to redistribute people from companies losing contracts," says Brasington of the High Technology Council of Maryland. Stanford University's Gardner puts the issue in a broader context. "The cluster culture tolerates risk and accepts occasional failure," she says. "People can fail at a biotechnology company here in the Bay area and go on to live another day."

Personnel issues, in fact, loom large in any biotechnology company's decision to locate or stay in a specific region. The industry spends proportionately more on R&D than any other. Thus, it depends absolutely on supplies of skilled life scientists, from Ph.D.'s to lab technicians.

Research universities act as major sources of such supply. However, biotechnology executives recruit in several other institutions. "People with technical expertise are well trained by four-year and two-year colleges and technical institutions," says William Haseltine, CEO of Human Genome Sciences in Rockville, Maryland. "Local universities like George Mason and Maryland turn out a very strong product. And government agencies take the place of research universities elsewhere in supplying the best post-doctoral students." Volatility in the pharmaceutical industry has also helped technology businesses. "We've been the beneficiaries of several strategic alliances among pharmaceutical companies in the Philadelphia area," says Baldino of Cephalon. "All the mergers make available very good people who don't want to move."

Young biotechnology firms also need experienced executives. "Management is critical," says Strachan. "You need people who have done it before and who know drug development." Firms often fulfill that need by recruiting among other companies' personnel. Immunex takes the process a stage further. "We're developing linkages with local business schools to make sure that we have the right people coming in," says CEO Fritzky.

Several other factors can make the difference between success and failure in attracting and keeping scientists. Recruiters for companies in San Diego emphasize the region's spectacular climate. "We do our best recruiting in January and February," says Rastetter. "We bring them out here and wine and dine them outdoors, overlooking the Pacific." The Washington D.C.- Maryland locale meanwhile values its location at the center of the modern world. "Everyone comes to Washington," declares Haseltine. "We're at the world's crossroads." Executives in both Boston and San Francisco promote what they tout as their regions' superior cultural amenities. And companies on the edges of major biotechnology regions, such as ISIS and GelTex, point out the cost benefits of more remote locations. "We located in Carlsbad rather than La Jolla because we had no ties to the University of California, San Diego, and we felt that we could recruit people into the area because of lower housing costs," says Crooke.

LEADING LOCATIONS

Which regions have the greatest attraction for new and growing biotechnology companies? Most observers regard the Bay area as the prime center for the emerging industry, followed by Boston-Cambridge and San Diego. The Bay area's success "stems from a lot of factors," says BIO's Feldbaum. "It's the original cluster. It has a convergence of venture capital and technology transfer out of the state university system. It's the home of Genentech and other early biotechnology companies. Cambridge-Boston took a little longer to grow up, as Harvard, M.I.T., and other local universities were a little slower to recognize the need for easy technology transfers. But then they moved fast. San Diego has strong technology transfer, and it offers a good quality of life."

Other regions are working hard to catch up with the top three. Frequently, they rely on existing business infrastructure. Maryland's I-270 corridor, leapfrogging on federal agencies, is perhaps North America's fastest-growing source of industrial biotechnology. The Philadelphia-New Jersey region benefits from both a strong academic environment and a high density of large pharmaceutical corporations. "This is, in effect, having our collaborators and customers close by," says Jack Baldwin, chief scientific officer of Pharmacopeia. Hard-driving, ambitious companies such as Microsoft, Amazon.com, and Starbuck's give Seattle an attractive business aura. "Our area has a lot going for it, like Silicon Valley," says Fritzky. "There's an economic energy that goes a step beyond the scientific ties." In North Carolina and the province of Quebec, governments are pushing the envelope in their efforts to attract biotechnology firms.

New regions are continually seeking a share of biotechnology business. The corridor that links the University of Colorado, Boulder and Colorado State University has already garnered several start-ups. Woodlands, Texas, outside Houston, has a strong academic ambience and plenty of political desire. New York City is slowly building up biotechnology, based on its medical centers and Wall Street. Cleveland, Kansas City, Oklahoma City, and Portland, Oregon, have their own ambitions. So do the states of Florida, Georgia, Illinois, and Minnesota. Common to all are a foundation of academic institutions with strength in science and local governments with the desire to attract technology business.

A MOVE TO MANUFACTURING

Regions new to the biotechnology game don't necessarily have to play on the same field as the established business centers. At present, most decisions about locating biotechnology companies focus on R&D activities. But eventually, says BIO's Carl Feldbaum, "there comes a time when companies have a product and choose to manufacture it themselves. In deciding where to locate your manufacturing plant, different factors come into play. The work force is different. The manufacturing plant does not necessarily need to be co-located with the company's headquarters or research facilities. At times, the advantages of locating elsewhere are so great that they overcome the advantages of co-location."

IDEC chose to keep its manufacturing next to its R&D center in San Diego - although not without plenty of debate. "If I wanted to establish expertise and core competency in biologics manufacturing, I'm not sure I would pick California as the optimal site," explains Rastetter. "The academic institutions tend to be oriented more to academic science than to applied science. Land costs, utility costs, and labor rates are all high. So are construction costs and tax rates. Water is scarce." Nevertheless, Rastetter decided that splitting manufacturing off from the 400- employee company would cause even more problems. "For a small company, the need to put everyone together and keep a critical mass is strong," he asserts. "The nature of the corporate entity is such that you lose strength if you split up a 1,000-person company."

GelTex, in the Boston area, solved the problem in another way. "We contract out our manufacturing," says Skaletsky. "So our main concern is hiring the right people and promising not to move them."

Biochem Pharma took yet another direction. It decided to place both its development center and its production center for vaccines outside its main R&D center in Montreal. "We inaugurated a state-of-the-art production facility early last year in Quebec City," says Biochem Pharma's Lapointe. "And we started a development center in Boston late in 1998. We chose Boston because, while there's excellent vaccine research in universities around Montreal, there's not much expertise in development."

The move to manufacturing as the biotechnology industry becomes better established should ultimately benefit more than the traditional centers of biotechnology. "This has provided an opportunity for a number of other states," says Feldbaum. Thus, the mid-Atlantic states are aggressively seeking manufacturing business from biotechnology companies based in the East. On the West Coast, Oregon, Washington, and Idaho are beginning to compete for the manufacturing facilities of California companies. The Colorado Advanced Technology Institute (CATI), a state science and technology development agency, is working on developing a biotechnology infrastructure that extends from R&D to manufacturing. Departments of biology, chemistry and chemical engineering at Colorado State University and the University of Colorado, Boulder provide a steady stream of graduates with skills necessary for biotechnological manufacturing, says Charles Ferris, director of CATI's bioscience programs. They are also developing Ph.D. programs in process engineering. "You need the scientific side in the engineering disciplines to be able to do processing," points out Ferris.

What advantages do the newcomers have? "These states," says Feldbaum, "can offer better breaks than the traditional centers of industrial biotechnology."

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Peter Gwynne is a freelance science writer based on Cape Cod, Massachusetts. Guy Page is Managing Director of Ferguson Forth Page, a consulting firm in Madison, Wisconsin.


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