Biotechnology wants a lead role

After years of preparing a work force and other infrastructure, the industry
is ready to take a star turn in the state's economy.

Every state covets biotechnology, but industry leaders in North Carolina believe the state is especially well-positioned for growth. Business North Carolina recently asked some of those leaders to address industry issues during a round-table discussion sponsored by the North Carolina Biotechnology Center in Research Triangle Park. Participating were Norris Tolson, president and CEO of the biotech center; Sam Taylor, president of the Raleigh-based North Carolina Biosciences Organization, an industry trade group; Chris Kroeger, a partner at Durham-based venture-capital firm Aurora Funds; and two Tar Heel biotech CEOs, Vipin Garg of Durham-based Tranzyme Pharma, which is developing drugs to treat gastrointestinal and metabolic diseases, and Sarah Yocum of Winston-Salem-based Aqualutions, which is developing diagnostic tests to benefit aquaculture. The round table, moderated by Arthur O. Murray, BNC’s managing editor for special projects, was held at the biotech center.

What is the state of biotechnology here?

Tolson: We’re going to create 75,000 jobs in the next 15 years or less. We already have 50,000. We believe they will come from homegrown companies plus others that we’ll be able to recruit, some already in the mix.

Taylor: We’ve been around for 20 years, but the technologies that really have an application in health care are just beginning to open up. You’re going to see this industry continue to grow steeply, not only in the number of jobs it creates but also in the amount of wealth it generates and the economic contribution it makes across the board.

Yocum: I’m coming in on the tail end of that 20 years, and I wouldn’t have chosen any other place to be.

Kroeger: From the venture-capital perspective, we look at a couple of key metrics. Deal flow in primarily very early-stage entrepreneurial companies has been strong for years, in particular on the therapeutic side. The flip side is exits: Are biotechnology companies going public or being sold? We’ve had a few significant IPOs over the past five years or so, and there are a number of companies that are in registration or about to get registered. The question is, will the IPO window remain open? But it’s a promising sign that we’ve got companies that have matured to that stage.

Garg: The challenge is, how do we take products that are coming out of our companies to the next level of success, both in terms of the product itself and financially? That’s really what’s going to take us to the next level as a state and an industry.

So how do you get to the next level?

Taylor: First, we have to understand that what we see today in this industry — the drugs, the devices, the diagnostics — are not going to be the technologies of tomorrow. The contours of the science are going to continue to change. We’ve laid a great groundwork for producing the labor force that we need to deal with that kind of evolving product line. Our next steps really need to be in fostering innovation at the small-company level.

What kinds of steps?

Taylor: We have an R&D tax credit, we have a qualified-business-venture tax credit. But we need more types of tax incentives and maybe even some direct appropriations to entities like the biotech center to fill that gap between the angel-funded stage of companies and the venture-funded stage. A capital-gains tax exclusion, which we’ve advocated for years, would be a perfect tool. Getting companies in a position where they can get access to cash and where their burn rate is reduced are strategies that will succeed.

Tolson: We spend a lot of money in this state to encourage companies to come here, but we need to invest money to help businesses that are here to grow. That’s the thing that we here in the Biotechnology Center are interested in talking to our colleagues about in the General Assembly because we believe that the best growth — in most cases — is internal growth. Most new jobs in North Carolina come from businesses with less than 100 employees. We need to find ways to encourage small businesses to start here and to stay here.

Kroeger: Two things would help. One is funding the gap between great science and a venture-backable company. There’s a significant void there where it’s something that can no longer be adequately developed within an academic setting, but it really isn’t mature enough to be backed by a venture fund.

Taylor: The capital-gains tax exclusion is something that really helps finance and keep our entrepreneurs. Sometimes you get a twofer on these policy changes. If somebody cashes out of a big successful company in North Carolina, they’re tempted to go to Florida, where they don’t pay income tax. We ought to encourage them to stay here and redeploy that money.

Kroeger: The second thing is to find management talent. We as venture capitalists see countless very good, very interesting technologies and business plans for early-stage com­panies. What there is a dearth of in the region is good entrepreneurs to take these companies to the next level.

How do you find those people?

Kroeger: What really needs to happen is for the region to develop its own Biogen, Genentech, Genzyme — a big, successful biotech that remains independent and becomes a billion-dollar company and begins to spin out management talent to start other companies in the region. You really need that foundation company or two. Unfortunately, there’s not a lot we can do to make that happen. It’s going to take some time.

Yocum: You do need a blockbuster company. If I know that Genzyme started in Raleigh, I want to go there because something worked there for them.

Garg: There’s even a lower tier than that, which we need to get to first. Developing pharmaceutical products is a numbers game. It’s really shots on goal. You need to have a lot of drugs moving through clinical trials before you can have a success. We only have a handful of companies that have taken a drug into late clinical development. This is just a function of being a younger industry. So it’s critical that we create more companies because a business can only take about three drugs forward at a time.

Yocum: The biotech center has done a great job of initiating plans to help entrepreneurs. I’m a recent recipient of one. But a lot of professors don’t want to spin out their ideas because they know they can’t get to the next level. So they may as well keep it in the academic setting and publish, publish, publish and get the recognition. These are great ideas, and there’s a lot of money to be made.

Tolson: Like every other business, what we’re in here is a game of wealth generation. And when you look at it that way, instead of just looking at it as jobs or companies, you tend to look at it somewhat differently. When we generate wealth, we’ll generate jobs and a lot of new products.

Taylor: [The North Carolina Biosciences Organization] keeps a running list of publicly announced equity rounds, grants, licensing agreements, building investments. Just the announced transactions are running at about $1 billion a year. And when a company like TranS1 in Wilmington does an $80 million IPO, that money doesn’t just sit in the bank. It goes into the economy just like the sales that a manufacturer might make. Sometimes we forget that.

How significant was TranS1’s IPO?

Taylor: As a device company, TranS1 is a little outside the biotech space. But we feel strongly that North Carolina can leverage its biotech capability to bring in device companies because the line between biotech and devices is going to become so blurred. We can’t compete with Minneapolis on the electromechanical devices. But if you start putting biotech, infotech and nanotech in it, then we can really do it. Those are the kinds of opportunities that TranS1 is exploiting.

Garg: We have to not just think about biotech as a pharmaceutical industry. Biofuels is a major area, even marine biotech. Nanotechnology is clearly going to be big. California is investing a ton of money in stem-cell research and cell therapies. All that talent exists here. But we need to make more money available for those other technologies.

Kroeger: A number of efforts have really just sprung up in the last year or two to try to nurture a device industry here. It’s going to be important as those two things converge. Boston, San Francisco and San Diego all have both a biotech and a device industry. You can’t really have one be incredibly successful and have absolutely nothing in the other.

Garg: We also cannot forget about diagnostics. The whole practice of medicine is going to change, and diag­nostics is going to become a critical sort of companion to pharmaceuticals. Devices, therapeutics and diagnostics — they’ll all go hand in hand ultimately.

How can the state make sure that biotechnology companies don’t just spring up around the universities, or is that not a bad thing?

Tolson: It’s not a bad thing because we’ve got a big university system. What we need to do is make sure we don’t have the haves and the have-nots any longer. We’re looking at programs right now in the biotech center where we can re-engage the universities that are not in the Research Triangle or in Charlotte.

Kroeger: You just need to match the amount of time, effort and capital that we invest in trying to mature those discoveries with the depth and breadth of science at the universities. One proxy for that is National Institutes of Health grants. The schools that get the most NIH grants are the schools we should spend most of our resources on.

Taylor: If you look at where the biotech manufacturing jobs are now, sure, we have Biogen Idec and Diosynth in Research Triangle Park. But we have Wyeth in Sanford, Talecris in Clayton and Novozymes in Franklin County. We have a very strong labor force, great natural-resource space in our rural areas, and we can build on that synergy.

Garg: We have to create centers of excellence and focus on different types of technologies in different parts of the state. If you focus on marine biotechnology, you can draw upon resources from one part of the state. Nanotechnology or biofuels can be in many different parts of the state. Everybody doesn’t have to build a pharmaceutical company in their backyard.

Tolson: The exciting thing about this whole business is getting people who’ve been working in parallel paths starting to say, well, maybe we ought to cooperate. We’ve got a program here at the center that encourages this. What it’s going to do is say let’s get this act together and create a product stream and companies and wealth out of that. We’re going to help fund you as long as you work together. We’ve said this to universities that haven’t talked to each other in 100 years.

Yocum: People have asked why I would choose North Carolina to start a company. It’s because of this collaborative effort across the state. I attended a conference with some people in Wilmington and utilized their strategies for growing bigger fish and genetically engineering them or breeding them. That’s why I’m staying, not just because of the intellectual-property exchange, but also the other resources, the venture capital and angel networks. Everybody is working together.

Doesn’t that happen in other places?

Yocum: No. We were recruited to Maryland. And while we looked at the cost of the space there and what kinds of resources were immediately available, there really was no competition with North Carolina. All the resources are here, and everybody works together.

Is there any concern that the state will train more workers than there are jobs?

Tolson: No. All forecasts that we’ve seen say that North Carolina will grow at 14 to 15% a year in employment in the biotech industry. If we train them, we’ll find the companies that will employ them. There will be occasions where somebody might not be able to find a job, but that’s pretty rare.

Garg: We frequently have to go outside the state to bring people here. In many cases, we are looking for highly qualified, highly trained people who’ve got big-pharmaceutical-company experience. But the fact remains that every day there are jobs being created at every company that I know of. I don’t see any danger of creating too many people with qualifications and not having enough jobs for them, at least not in the short term.

Yocum: You have to start somewhere. If you started the companies first and there was no work force, those companies wouldn’t stay here. I would welcome the problem of too many people to choose from.

Kroeger: Again, the place where there is a bit of a shortage of talent is really at the senior-management level. If you’re creating lots of junior-level folks, manufacturing, technician folks coming out of the universities, you need to have senior management leading the companies to hire those folks.

Is there a danger that lower-cost countries might start attracting Tar Heel biotech businesses?

Taylor: We’ve got serious competition. Maybe in 20 years Amevive will be made in China because it’s so well-characterized and understood that they can make it anywhere. But 20 years from now, we’re going to be making the next great thing.

Tolson: I grew up in the agricultural-chemical industry. We saw it grow and mature, and we saw cost of goods sold become the main factor everybody looked at. And what happened? They went to cheap-labor countries. But the inventions continue to happen in America. As long as that’s the case and we can manipulate it to grow companies with it, we’ll do OK.

Then you don’t see a threat?

Tolson: I don’t think we ought to sit around and wring our hands about the fact that tableting will go offshore or packaging will go offshore. That’s just the inevitable nature of low-cost countries. But after a while low-cost countries figure out they want a higher standard of living, too, and the price goes back up and a lot of that stuff comes home.

Kroeger: The commodity aspects of the industry will eventually move offshore. It’s not going to be next year or the next five years. But I bet in 10 years, certainly a lot of the chemical manufacturing will be offshore and likely a lot of biologics manufacturing will be. So we as a state need to make sure we’re not too married to any one aspect of the biotech industry, and we move as the industry matures.

Garg: I’m CEO of a company, and I’m sitting next to a venture capitalist. They give us money. Our job is to be as efficient with that capital as possible. So even as a very small company, we’ve gone to India to do process-development work. We’ve gone to China to do our pre-clinical animal work. We’ve gone to both China and India to do some of our manufacturing. And we’re now doing clinical trials in Romania and Lithuania and Ukraine; and we just started recruiting patients in India. That’s in addition to work we’re doing in the U.S.

Can that movement be stopped?

Garg: That’s the economics of the process. The key is, what we’re good at is innovation and in building intell­ectual property. We’re also good at supporting entrepreneurs — much better than many of these countries — and let’s not forget that.