Site Lines: Regional Capital Investment
Where’s the bio/pharma money and how is it being spent?
By Tom Spurgeon
A well-known colloquialism that “recessions are yard sales for the rich” speaks to the nature of opportunities that present themselves in times of economic downturn. Weaknesses spackled over with an excess of capital may deepen into fissures when that level of capital investment becomes more difficult to come by. However, successful businesses with a forward outlook and established roles within a regional framework become that much more attractive a target. Such is the case in today’s economy for Life Science businesses in general and contract manufacturing and research for bio/pharma specifically.
The future exhibits signs of general economic promise, at least in comparison to many industries. A surge in biopharmaceuticals should drive the CMO sector through at least 2011, if not well beyond. Major initiatives in countries from Ireland to Israel should result in a significant number of companies wanting to establish a North American presence during final testing and manufacturing phases, and should make available to those initiatives a deep talent pool. Long-term regional inducements — such as 2008’s Economic Incentives Act for the Development of Puerto Rico — should continue to benefit contract organizations, both those already established in that area and those looking for way to offset any decreasing access to capital investment funds. Increased industry-wide attention to efficient practices during the drug development process should continue to bear fruit for contract services, a focus that might even intensify if investment in the broader sense were to slip.
Despite very real external pressures, capital investment in pharma remains primarily constrained by issues and influences unique to its industry rather than forces at large. Continuing interest by outside sources of capital has kept pace with capital investment setbacks, such as intermittent plant closures and job cuts. When it was reported that Wyeth would eliminate positions at facilities in New York and North Carolina late last year, and that its well-publicized merger with Pfizer would lead to at least more plant closings, this unfolded in the context of Pfizer’s own cuts and structural changes stretching back several years. Any plants closing in 2009 would join the nearly 100 pharma industry facilities that ceased operations in the period stretching from early 2007 to 4Q08.
Where capital investment remains of great importance is in the communities that benefit from it. A look at three regions important to the future of contract services shows a number of capital investment and broad partnership strategies in play, each represented by a private partnership. These partnerships play a larger role than ever in regional economic development, providing services that range from simply branding an area in order to attract investment, putting businesses in touch with one another, providing seed money or bankrolling an initiative themselves in anticipation of future return, and even employing various forms of soft influence in terms of either making their chosen area more attractive to certain companies or keeping them there. As one executive described it in a joking manner, these groups will do anything legally and morally allowable to encourage capital investment in their plants, their people, their existing communities.
In a 2008 interview on Fox Television News, Research Triangle Regional Partnership president and chief executive officer Charles Hayes was careful to make a distinction between the research triangle area and the banking industry in different parts of the state that had in recent months began to falter. One of the older initiatives targeting regional development including contract research and manufacturing companies, RTR owes its founding in 1990 to local businessmen who believed too much energy was being wasted between cities in the area competing against each other for the relocation and investment represented by pharmaceutical companies. While RTR coordinates interests among different counties and their economic development committees, it also enjoys a broad mandate in encouraging capital investment within the region. It is largely traditional in its strategies for attracting that investment: serving companies with any information they desire to help have them make a decision and paying attention to longer-term structural issues like transportation costs and the availability of appropriate majors at the region’s major universities.
Mr. Hayes said that today 48,000 of 950,000 employed people in the area work in pharma-related jobs, but that their industry may have more weight than that for its growth potential and generally higher paying positions. It also seems to be a largely recession-proof regional industry (at least thus far). RTR vice president of Client Services Debbie Lilly told Contract Pharma, “We haven’t seen a huge impact here in any of the businesses or industries, definitely not in contract pharma and that kind of thing. There are still companies that are actively looking to locate in the area.” She did note one project that could have an impact on capital investment that may be driven by wider economic concerns: a company seeking to consolidate into a single region. “That company has a presence here and in a couple of other states up and down the East Coast and they have to decided where to consolidate,” Ms. Lilly said. “That’s really the only thing I can think of.”
The state of Indiana’s own commitment to life science and contract organizations lacks the formal history and regional identity of Carolina’s Research Triangle. Biocrossroads, a business formed in 2002 to attract such businesses to the Hoosier State and keep them there, may lack some of the complexities of the mandate enjoyed by RTR. Riding a renewed surge of general capital investment in Indiana during the last half-decade, Biocrossroads was formed to fulfill a specific need: marry the state’s strengths in terms of educational institutions, workforce and the presence of key businesses to the chasm represented by the general loss of manufacturing in the last quarter-century. Speaking of their initiative targeted to contract manufacturing, Biocrossroads president and chief executive officer David Johnson said that his company provided the “humble service” of “pointing out to companies in this sector that they’re in the same business and opportunities to pursue together.”
This makes capital investment more attractive by offering to those companies willing to relocate a more comprehensive use of facilities and equipment. Mr. Johnson cited the highly publicized $1.6 billion deal between Covance and Eli Lilly and Co. in 2008 as an example of a deal with explicit capital investment ramifications. He notes that the complex outsourcing agreement included basic provisions for the CRO to take control of real estate previously utilized by Lilly. In addition to putting those facilities back to work for Lilly according to the aims of their agreement, Covance is now able to develop those properties with other businesses and other deals in mind. The ability to use facilities for multiple purposes and in service of several deals, assisted, introduced and even seeded by Biocrossroads, suggests greater value and encourages investment to continue.
More than 50 companies have started up in Indiana since the initiative’s formation, many of which serve a combination of traditional pharma and biotech companies and thus additional benefit to their level of investment. They have helped the region and each other by serving as a hedge against general economic malaise. “I’m sure there are assignments put off, being slowed down as people stress pennies,” Mr. Johnson told Contract Pharma, but noted that contract manufacturing continues to look forward. “In this sector, the race is to get pipelines fully functional and ready for the next four or five years. Partnering relationships continue, more and more are being outsourced, and if you can work for Pharma you’re tending to find plenty to do.”
Southwest Michigan First chief executive officer Ron Kitchens links the formation of his Kalamazoo-based effort in terms of a attempt to jumpstart the state’s venture capital shortcomings. “In 2005 we had zero venture capital funds in this region and now we have five,” he told Contract Pharma. “This is an achievement, but it’s clear that we were still going to lose early phase businesses to regions a lot closer to the kind of money they need.” Shifting strategies, the group targeted private investors already interested in life sciences including contract manufacturing. They instituted a rigorous approach that included vetting prospective partners on science and likely market outcome, and required companies relocate to the Kalamazoo area. For every 200 companies considered, the group ends up asking to work with about three or four. Since 2006 they’ve made 10 investments, and they plan on making three or four investments per year, eventually holding 18 to 21 companies in their portfolio at any one time. Each company is likely to be held for five to seven years before exits.
This puts Southwest Michigan First in the position of not just encouraging capital investment but frequently driving it on behalf of the companies with which they’re partnered. “In many cases, we’re building out the company ourselves,” said Mr. Kitchens. “We not only operate a fund but a life sciences incubator and a traditional development company. That provides us opportunity to have a great deal of influence early in the idea stream.” Since the company’s development business preceded the capitalization aspects in which it trades now, providing necessary capital investment has been a natural outgrowth as the company’s plan crystallized three years ago. “It really is building our own universe for development,” Mr. Kitchens remarked.
In attracting a recent deal from Israel, Southwest Michigan First has gone as far as to develop a new laboratory property simply because the previous facilities were priced out of their new partner’s range. Even for those companies that don’t remain invested in the area, the capital they provide the group will be redirected into regional business concerns. “We know that some of the pharma products are products and they won’t create large companies here, but they will provide us wealth,” he added.
The recent downturn in the economy has been to the group and region’s benefit as it has made Southwest Michigan First’s pitch that much easier. “We’re seeing a number of potential investments who weren’t interested before because they didn’t want to move or they had all kinds of financial investments where they were. They’re almost begging to come visit with us. We’re seeing tremendous opportunities that we wouldn’t have seen otherwise, including more companies close to market and with a real sense of urgency.”