Alex Philippidis Senior News Editor Genetic Engineering & Biotechnology News

North Carolina and Maryland are trying to start new funds to support start-ups.

North Carolina and Maryland have reached the same conclusion: The ability to grow their biotech clusters over the next few years will come down to dollars and cents. Both states are considering the creation of new funds designed to assist life science start-ups. North Carolina’s proposal is targeted to the industry while Maryland’s is designed to help a broader range of businesses.

Like most of the U.S., both states are weathering budget shortfalls likely to constrain how much money they spend on biotech. Below are details on the challenges and enduring strengths of each of these biotech clusters.

North Carolina: Lawmakers Weigh Budget Cuts, New Fund

For years the North Carolina Biotechnology Center has served as an engine for life science industry growth within the Tar Heel state. With a $3.4 billion budget hole to plug, though, Gov. Beverly Perdue (D) has proposed a 10% cut to the biotech center’s $19.5 million state subsidy. The center would receive just over $17.5 million from the state.

That could change depending on how the proposed $19.9 billion budget for 2011–13 winds its way through the state General Assembly. The biotech center could have fared worse, but it also could have fared better considering Perdue cut funding for existing state programs between 7% and 15%. “We have very positive feedback from our elected officials on the value that life science is providing to North Carolina, and there’s still a good commitment to that ongoing funding,” Robin Deacle, a spokeswoman for North Carolina Biotechnology Center, told GEN.

That commitment has not always been matched with dollars. Last year the state held back part of its budgeted subsidy. To avoid a second straight year of reduced budgets, the center’s strongest argument with lawmakers may well be the growth of the industry it has done much to support. While overall North Carolina employment fell by 3.9% from 2008 to 2010, biotechnology employment rose by 4.1%, to 58,495 jobs. That’s up 9% from the 2008 figure of 53,615 jobs, furnished by Battelle and the Biotechnology Industry Organization (BIO) last summer.

Biotech and pharma companies continue to expand in the state. Last month Biogen Idec disclosed plans for a new 180,000 square foot building at Research Triangle Park (RTP), where it employs about 850 people, to consolidate all its administrative and patient services in the state.

Medicago is constructing a $42 million RTP facility where an initial 85 people will manufacture vaccines using tobacco leaves. Merck plans to add 310 jobs—250 of them before year’s end—to the 440 it promised over the next two years at its new Durham vaccine manufacturing plant.

Novartis expects to begin operations in 2013 at the $1 billion, 300,000 square foot vaccine manufacturing plant it completed in Holly Springs in 2009, with a planned workforce of 350. In December the company promised to add 100 more jobs in return for two state grants totaling $3.7 million. United Therapeutics plans to triple to 350 its workforce at RTP, where it wants to expand its site by 177,000 square feet. The space would allow expanded drug manufacturing, packaging, labeling, and warehouse operations.

North Carolina’s 538 biotech companies and other businesses serving them account for 226,823 jobs and generate a total of $64.6 billion in direct and indirect economic impact statewide, according to a report called Bridging the Gaps issued by the North Carolina Biotechnology Center in January.

The report named three shortcomings that hamper commercialization: gaps in early-stage and later-stage funding, both aggravated by a tightening venture capital market, and a shortage of executives with commercial life science experience. All three will require attention if biotech is to continue growing in North Carolina.

Last year, according to the MoneyTree’s quarterly report, the number of VC deals in North Carolina dropped to 10 from 14 in 2009. Yet, the amount of financing rose year-over-year to $112.6 million in 2010 from $110.35 million. MoneyTree recorded no North Carolina biotech deals during the fourth quarter of 2010, only one deal worth $6 million in the same quarter of 2009, and three deals totaling $81 million in Q4 ’08. 2008 saw the state attract $188.2 million in VC funding.

The center says one answer to the VC funding slide could be the Life Science Development Corp. championed by the life science industry group North Carolina Biosciences Organization (NCBIO). Sam Taylor, NCBIO president, told GEN the fund would finance life science companies using $100 million in a 15-year private investment from banks and institutions. He expected this would generate a return comparable to municipal bonds plus two to three points.

Investors would be guaranteed up to $100 million in state tax credits payable in case of a default, which Taylor said would be “very, very unlikely in the next five years, and very unlikely after that.” The fund is expected to make up to $70 million in loans capped at a maximum $20 million—down from $30 million when such a fund was considered in 2009—“and would probably have an effective minimum of around $2 million,” Taylor noted.

But prospects for the fund are uncertain, Taylor acknowledged. The 2009 measure passed the state Senate but died in the House of Representatives. Since then several lawmakers opposed to stoking economic development through state incentives have emerged as legislative leaders.

As for the shortage of executives with commercial experience, the biotech center says it has begun developing solutions with academic institutions, life science business leaders, and nonprofits. “Hopefully within six months to a year, we’ll have a program or two,” Peter Ginsberg, the biotech center’s vp of business and technology development, said to GEN. “We do have a very strong core of executives, but we need more.”

North Carolina will also need more workers as its biomanufacturing segment continues growing. The state has filled this need in recent years through its network of 58 community colleges and seven specialized centers. President Barack Obama recognized the effort in his State of the Union address this year, singling out Kathy Proctor, a biotech major at Forsyth Tech Community College in Winston-Salem. But Perdue wants the community college system to cut overall expenses by $32 million, or 2.3% of 2011–12 requirements. An expansion of training efforts is thus unlikely.

Maryland Calls to Invest in a New Fund

The biotech industry escaped the worst in the $34.2 billion budget proposed by Maryland’s Gov. Martin O’Malley (D) for the fiscal year starting July 1. Maryland plans to set aside $12.4 million for stem cell research grants, the same level as two years ago but only about half what was available in FY 2008, before the recession sparked four rounds of budget-cutting by O’Malley in 15 months.

In addition, Maryland plans to award $8 million in Maryland Biotechnology Investor Tax Credits next fiscal year. It represents the same amount as this fiscal year and $2 million more than was set aside in FY ’10. And while the Maryland Biotechnology Center, created in 2009 to advance the state’s life science sector, is due for a cut in FY ’12, it is less than 1% of this year’s amounts from the General Fund ($3.795 million) and special funds (a combined $2.776 million).

But the most significant action in Annapolis this legislative session concerns another O’Malley proposal favored by life science leaders. O’Malley’s “Invest Maryland” calls for insurance companies doing business in the state to pay $99.4 million.

In return they would receive up to $142 million in tax credits that could be claimed to offset insurance premium taxes starting in 2015 through 2019; up to 20% can be claimed each year. Half the insurance money would replenish the cash-starved Maryland Venture Fund with the rest to be placed with VC firms, to be chosen by a third party, that would also invest in biotech—particularly early-stage companies.

“We have the opportunity to help our businesses create thousands of jobs and inject hundreds of millions of dollars into Maryland’s venture economy,” O’Malley said earlier this year. He juxtaposed Maryland’s 14th place ranking in access to “risk capital and entrepreneurial infrastructure” by the Milken Institute’s 2010 State Technology and Science Index with the state’s second-place overall showing behind Massachusetts.

The state would net a quick windfall of $85 million by FY ’14, when the first $14.2 million in tax credits is given out. But as the funds start getting invested in later years, Invest Maryland will plunge into the red, generating a net loss to the state of $10 million in FY ’14, rising to $36.7 million in FY ’16 before the losses shrink through FY ’19.

Invest Maryland proponents expect the state to recoup those losses with new taxes and business activity from the start-ups. How much is hard to say since the analysis of the bill to create Invest Maryland doesn’t project how much money the start-ups would pour into state coffers. It estimates that 200 to 400 businesses will benefit over five years.

“What we will be getting back is 100% of the principal and 80% of the profits,” explained Karen Glenn Hood, a spokeswoman for the state Department of Business and Economic Development (DBED). “Granted that could take some time, given the life cycle of a lot of the bio companies.”

Invest Maryland would boost state investment in early-stage tech start-ups unable to land private funding, the purpose of the venture fund, which was created in 1994. The state poured $25 million into the fund, which it credits with producing $61 million in returns and 2,100 jobs. Over the years, lawmakers balked at additional spending, shriveling the fund’s investment volume to $4 million in FY ’08 and to $1.4 million this fiscal year. DBED has warned that absent more money, the fund will be unable to make new investments.

The existing venture fund sets aside 40% of its money for biotech companies and the remaining 60% for a broad mix of other technology firms. Hood told GEN no such ratio will be set for Invest Maryland, which is expected to afford the state greater flexibility in responding to the market, from consumer products to emerging technologies. “We do recognize that the tech and biotech companies will probably get, I wouldn’t say the majority of investments, but a significant portion,” Hood said.

O’Malley is counting on Invest Maryland to fund start-ups as Maryland’s VC market shows signs of slowing. Year-over-year, says MoneyTree report, venture financing rose 29% to about $104.6 million in 2010 compared with $81.1 million a year earlier. But the number of deals dipped to 22 from 24 in 2009. During Q4 ’10, Maryland netted only $2 million through one deal, compared with $59.1 million in nine deals during Q4 ’09.

Another start-up fund may emerge from the Technology Development Co. (TEDCO)—a state-created private nonprofit that commercializes university and federal lab discoveries. It has announced plans to create its own fund of between $50 million to $100 million for biotech and other tech start-ups this year. TEDCO would make its first investment next year.

A business-driven engine of future growth may yet emerge in Montgomery County, home to more than half of Maryland’s life science employers. The County Council last year approved a master plan designating more than 900 acres of land between Gaithersburg and Rockville for 17.5 million square feet of biotech companies.

The Great Seneca Science Corridor, however, isn’t likely for years to draw the scale of new activity anticipated by supporters. The economy has frozen development of new projects. Once recovery occurs, the ability of life science companies to expand in Montgomery County is limited since the science corridor was approved in phases tied to the expansion of mass transit into the area.

Development of Great Seneca, as with full funding of the North Carolina Biotechnology Center, will likely come once the economies of both states finally emerge past recession. State spending on biotech initiatives has indeed continued despite the weak economy, which enhances the prospects for lawmakers embracing at least scaled-back versions of the new funds now under review in Maryland and North Carolina.

Alex Philippidis is senior news editor at Mary Ann Liebert, Inc., and Genetic Engineering & Biotechnology News.

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