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Making life sciences companies GO and GROW: Time, money and community support critical to success

by Carol James

April 2001

These days, we often think of "high tech" as "high speed." But for high-tech firms in the biotechnology and life sciences sector, getting products and services to market requires a steady effort at a moderate pace.

"Time from launch to revenue stream is quite lengthy. We're talking about no less than five years, typically," says Pamela Hochman Norton, senior vice president at the nonprofit Massachusetts Biomedical Initiatives (MBI), which operates incubators in Worcester and Boston and has been incubating biotech companies since 1989.

A major factor in that longer time period is the need to address regulatory and other hurdles requiring specialized expertise, says Patricia Snider, managing director of BioVentures Development Partners in Cincinnati. Such hurdles include conducting clinical trials and securing U.S. Food and Drug Administration approval. When all is said and done, it may take 10 years to get a product to the market.

Although some technology incubators still aim to graduate clients within 12 months, biotech companies often remain in the incubator for a minimum of two to three years. And that pace has quickened. Hochman Norton says that in the early days of MBI, clients stayed much longer.

"Now it's too competitive, too expensive a marketplace to limp along hoping for something to happen," she says. "If they're not making progress by two to three years, they're not going to."

To make that progress, biotech companies also need some specialized support that other tech firms don't require. From facilities to community infrastructure, the conditions have to be just right to launch a life science firm.

At NBIA's 14th International Conference on Business Incubation, Snider and Robert Calcaterra, president and CEO of the nonprofit Nidus Center for Scientific Enterprise in St. Louis, described critical success factors for growing life sciences companies. NBIA recently contacted Snider, Calcaterra and six other biotechnology incubation program managers to learn about the fine points of incubating the life sciences.

Whether you're a mixed-use or technology incubator manager considering your first biotech applicant or are heading a biotech feasibility study in your community, if you're considering incubating life sciences companies, you'll want to read what these managers had to say.

Wanted: Cutting-edge research

A research base that produces innovations around which entrepreneurs can build technology companies is absolutely necessary to incubate successful life sciences companies. Most bioscience companies arise out of universities or other research institutions, Snider says. "If you don't have a strong [life sciences] research school already in the area … it's pretty hard" to set up a successful life sciences incubation program, she says.

When the research base is strong, the companies will come. St. Louis' Nidus Center, which focuses on plant science but can incubate companies centering around other life sciences as well, demonstrates that. St. Louis is the home of Washington University, a leader in human genome research and a major recipient of research funds from the National Institutes of Health, and St. Louis University, known for its research in virology. The Missouri Botanical Garden has more than 100 researchers worldwide and the Donald Danforth Plant Science Center will have some 100-125 researchers when it completes construction of its new facility this fall. The Nidus Center's sponsor, the Monsanto Co., has more than 1,500 researchers in agricultural and food-related sciences.

Companies come to Nidus from around the world because of the research, nascent venture capital and integrated strategy and networking infrastructure that's in place in the region, Calcaterra says. "We really nailed it, especially if you talk about plant sciences."

Carol Frankenstein, president of Cincinnati's nonprofit BIO/START incubator, agrees that a critical mass of research is key. Two research institutions, the University of Cincinnati and Children's Hospital Research Foundation, provide that crucial ingredient for BIO/START. The life sciences industry provides the market for university-based technology, she says. "That is how [a company] will get [its product] to market, by partnering with existing industry."

Deal flow for many life science incubators depends largely on technology commercialization — getting university or other public research out of the laboratory and into the marketplace. A region can measure how effective its technology commercialization is based on the total amount of licensing revenue, patents filed and issued, industry sponsored research, and number of companies formed around university technology.

Effective tech commercialization is critical to BIO/START's client biotechnology companies, Frankenstein says. "Most of our entrepreneurs are coming from the university environment" and have to license their technologies, she says.

Technology commercialization is equally important for the Quebec Biotechnology Innovation Centre (QBIC) in Laval, Quebec, where the critical research mass comes from the biotechnology programs of four universities, says Director General Normand de Montigny. Those universities provide about 80 percent of the technologies de Montigny sees at QBIC, where the board of directors includes representatives of several Montreal-area universities and their technology transfer offices. The rest of the technologies come from already existing companies or sometimes from scientists who have worked for large pharmaceutical companies and decide to pursue ideas of their own. Other incubators also refer projects with biotech content to the nonprofit, university-sponsored QBIC, Quebec's first and only biotechnology incubator.

Although effective technology commercialization can build solid companies, they don't necessarily grow locally. San Antonio, Texas, has the requisite mass of research, but research institutions and industries historically have licensed technologies to firms in other places, says Mary Pat Moyer, president and CEO of the for-profit TEKSA Innovations incubator and of her own company, INCELL Corp. She wants to increase the role of technology transfer in creating new companies in her region by bringing nonprofit, private and public research to TEKSA Innovations. To achieve that goal, private or public research institutions would transfer technologies to existing TEKSA companies or new TEKSA companies. Since TEKSA enters into equity and/or royalty agreements with its client companies, the incubator may offer its shares to participating research partners that are generating technology to transfer into TEKSA companies, Moyer explains. Having an equity position available provides an additional incentive for technology commercialization, she says.

In some areas, existing life sciences industry can provide a rich source of technologies for new companies. For example, about two-thirds of MBI's companies are industrial spin-outs and only about one-third come from academia, Hochman Norton says. The number of scientific firms in central Massachusetts and the Boston area creates a large pool of individuals with industry experience who catch the start-up bug.

In areas where life sciences' potential for economic impact is on the rise, incubation programs may want to consider that in their strategic plans. Arizona is starting to build a base in biotechnology and bioengineering, says Woody Maggard, president of the nonprofit Arizona Technology Incubator (ATI) in Scottsdale. "In our expansion plans, we're working very closely with Arizona State University so we're collocated with their bioengineering initiatives. We'll be able to have companies developing right next to where the research is occurring," he says. ATI will plan for the plumbing, layout and laboratory needs of biotech companies when it establishes additional sites.

Incubator developers and managers should do some research of their own in order to take full advantage of regional research strengths. For example, a 1997 Coopers & Lybrand study showed the nonprofit Fort Worth MedTech Center in Fort Worth, Texas, wouldn't have enough deal flow if it focused solely on biotechnology, so it expanded to include medical device and other high-tech companies. "We couldn't put all of our eggs in one basket," says MedTech President Warren Webb. "[The client pool] depends on the strengths of the community."

Capital ideas

Without money, a fledgling life science company doesn't fly far. "Just like any early stage start-up, [life sciences companies] have capital needs not met by typical venture capital firms, [and] fewer VC firms invest in life sciences," Snider says. Ohio, for example, has $4 billion in venture capital under management, but only 6 percent of those dollars are in funds that will consider a seed deal and only 4 percent in funds that will consider a life sciences seed deal, she says.

Communities without a large venture capital base can work to attract venture capitalists from elsewhere who have invested in biotechnology and other life science companies. "We've been working very hard building relationships with venture firms all over the country that have worked with our types of businesses," Calcaterra says, to get them to realize they can make deals in St. Louis that are as good as those found anywhere else. To achieve that level of credibility, Calcaterra has to do his homework: "We're not going to bring [a presentation to a VC] that [the VC] isn't going to be interested in." Local efforts to develop venture capital funds dedicated to life sciences also are bearing fruit. Last year Calcaterra anticipated three venture funds would raise $240 million; now it appears the total, including two additional funds, could reach half a billion dollars. Calcaterra's to-do list includes creating a preseed fund. "That's hard money to come by," he says, but necessary for companies to matriculate far enough to reach larger rounds of funding.

Early-stage funding, especially seed capital, also is scarce in Canada, de Montigny says, so QBIC and other incubators in the Montreal region have started to build a network of angel investors. The goal is to have angels invest in several projects in different incubators in the same year, de Montigny says. Toward that end, the incubators formed an association and are developing minimum standards for company screening that all of the incubators would meet. "Investors would have reasonable assurance that standards would be met in the way companies are selected," de Montigny says.

And, as one might expect, increasing sector activity can attract investment dollars. Recognizing the value of entrepreneurship, the City of San Antonio allocated $1.25 million for development of the San Antonio Technology Accelerator Initiative, designed to develop the city's technology infrastructure to promote entrepreneurial activity, create high-paying jobs and build wealth. A number of San Antonio investors who historically invested in larger ventures outside the community have become interested in local investment, and formed three new investor groups, Moyer says. "They've been investing in biosciences companies and that's exciting." The initiative, which has a biotechnology component, includes a program to bring together investors with entrepreneurs seeking help. "This is a long-range regional plan, not instant gratification," Moyer notes.

Aside from availability issues, the amount of money a company can raise also depends on the "name brand connections" it has on its scientific advisory board, Hochman Norton says. For example, a Nobel Prize laureate on a company's board helps balance risk from an investor's point of view.

Biotechnology companies also look for investors familiar with their lengthy time line and unusual fundraising curve. The developing life science company's spending cycle differs from that of other high technology firms. "At first you're spending little, staffing up and starting on a bench to prove [what you have]. Then you ramp up spending in orders of magnitude, especially in clinical trials," Hochman Norton says. "If an investor is not familiar with that, then [that investor] will be concerned when a company asks for $1 million one year and $10 million the next."

Infrastructure ins and outs

A community infrastructure that provides the support services and facilities start-up companies need is important in any field. However, life sciences companies have some specialized needs that require expertise and facilities not found everywhere. They need support from a community that's willing to provide resources that support these companies and that's accepting of biotechnology and biomedical research.

The science community still needs to educate people to assuage fears about cloning, HIV and other controversial research in some parts of the country, Hochman Norton and Moyer say. "Scientists need to take time to be in the community and to meet with the media to explain their work," Moyer says, particularly in areas such as cloning (creating something genetically identical, such as a gene or cell), where public misconceptions abound.

Keeping local politicians informed is another important aspect of educating the public, Hochman Norton says. MBI is availing itself of educational materials that several respected trade associations produce to let politicians know the science going on in these companies is safe to those in and around the firms.

Bioscience companies also need a variety of intangible, yet critical, services. These include an accessible, nearby network of scientific and academic experts and specialists, Hochman Norton says. MBI's central Massachusetts site in Worcester meets this need with nearby medical, veterinary and pharmacy schools.

Professional service needs include clinical trial and patent firms. Even if the community has several patent attorneys, "with life sciences technologies, sometimes [patents] are so complex and specialized, you have to search out the right patent attorney," Snider says, to get the most from a patent.

Inside the incubator, necessary infrastructure includes access to wet lab space and specialized equipment and facilities, all costly items. "They need a place where they can have shared equipment and specialized facilities built out in a form they can use for whatever technology they're working on," Snider says.

BIO/START provides laboratory space, with generic bench tops, and expects individual companies to fill in with specialized equipment or features that they need. Shared core facilities and equipment include glass washers, autoclaves, ice machines, an X-ray suite, CAD-CAM suite and a cold room.

Fort Worth MedTech Center has no labs of its own, but can provide wet and dry lab facilities through the incubator's relationship with the University of North Texas Health Science Center. And when the science center completes its planned new multimillion dollar biotech building, it will allocate 10,000 square feet, including wet and dry labs and offices, to the Fort Worth MedTech Center, Webb says.

Figuring out exactly what to offer in-house isn't always intuitive. MBI has learned from its history. The incubation program used to offer labs of 250 square feet to 1,200 square feet. The largest labs had room for 15 scientists, but a 1,200 square foot lab is 95 percent empty when a two-person company uses it, Hochman Norton says. More recent primary research shows the optimum lab size is 400 square feet to 800 square feet, she says, adding: "If you are focused solely on incubating small companies, you want to help them ... [reach] the transition to their next facility." So far, all of MBI's companies have moved to locations in Massachusetts, including many in the Worcester area. These companies are creating new jobs and contributing to economic growth, Hochman Norton says.

Although it just opened in 1999, by the end of its first year the Nidus Center had converted nearly a third of its lab space (some before it was outfitted) to fill an unanticipated need for sophisticated computer facilities. "One whole wing … is dedicated to computer technology," Calcaterra says. "What we've learned is that a lot of life science is tied to information technology." Project advisors just didn't recognize the emerging emphasis on computational biology, chemistry and genomics, and other computer-based sciences. The lesson is "be flexible. You don't have to fit the whole facility out at the beginning," Calcaterra says.

In terms of external facilities, life sciences companies need high-level services such as certified animal testing centers. To meet these needs, TEKSA Innovations and other life sciences incubation programs have contracts with local academic and military institutions for use of their animal testing or other facilities.

Incubation programs also can create alliances with local hospitals, schools or other research institutions to provide clients access to high-end equipment that may not be practical for an incubator to buy, often for a per-use fee. Such institutions may be eager to enter into partnerships, Hochman Norton says, because they "get to play a role in technology that gets to the marketplace and betters the practice of medicine."

These institutions also are potential sources of used, but still serviceable, equipment for incubators and their client companies.

Biotechnology and related sciences have additional infrastructure, permit and licensing considerations that many other firms don't, such as air handling and containment, hazardous waste disposal and security.

Access to – or lack thereof – these types of specialized expertise and facilities seriously affects life science companies' development timetables. For instance, getting a permit for disposal of hazardous waste can be a factor in getting a product to market. "Whether getting a permit takes three months or one year makes a significant difference in terms of time to market," Hochman Norton says.

Strategic partnerships can help incubators help their life science clients over some regulatory hurdles. For example, operating a radiation facility requires a Nuclear Regulatory Commission license. Monsanto's radiation license covers the Nidus Center, saving companies there the time and money it would take to get their own licenses. Monsanto trains incubator company personnel to use the radiation equipment and Monsanto personnel collect the incubator's radiation and biological wastes. The incubator meets Monsanto building codes, which exceed local codes, Calcaterra notes, creating a high-quality facility in waste handling, environmental health and safety.

BIO/START contracts for help with these issues. The University of Cincinnati provides policies and procedures for waste handling and disposal, trains employees and troubleshoots for the incubator, services that are "of great value to us and to our tenants," Frankenstein says.

De Montigny notes that life sciences companies will have to deal with these issues when they're on their own, a chapter of the infrastructure story that's still being written in some regions. In the Montreal area, for example, "it's not easy to have the company leave the incubator after three years" because there's nowhere to go, de Montigny says. QBIC's first three graduates built their own facilities, but many companies are not ready to make that investment. "What is needed now is a multitenant building in biotechnology as a next step" for incubator graduates, he says.

The real estate development community needs education on what bioscience companies require, says ATI's Maggard, so communities can have facilities available for companies to build out to meet their requirements. Not surprisingly, the down side is that these facilities are cost-intensive. However, the end result is well worth the investment.

"On a community basis, the availability of bio facilities is what enables the growth of the industry in an area as well as the link to larger bio companies by smaller, emerging companies," Maggard says. As an example, he cites Maryland, where a $250 million state investment in facilities in the 1990s helped secure Maryland's position as a life sciences development center.

And, "once you build a successful life sciences cluster, it tends to be very secure and stable," Calcaterra says. The life sciences bring a well-educated and well-paid work force (annual salaries average $69,000 in the St. Louis area), and the space where these companies locate becomes high-end, high-rent property.

Getting there isn't easy. "Developing a bio incubator has to be part of a broader economic development strategy and takes a real commitment by the area to be successful," Maggard says.

Making it work

Do you want to set up a life sciences incubator? Take a look at what critical success factors already exist in your community, Snider advises, noting that each community will have pluses and minuses. For example, quality of life issues such as commuting time, cultural attractions or sunny beaches have an impact when companies try to recruit people, especially when the recruits are in high demand. Accessible transportation for shipping products or bringing in venture capitalists also affects a company's potential success.

With life sciences in mind, Cincinnati took a close look at its community infrastructure in 1999. A life sciences task force compared Greater Cincinnati to 21 other regions with the goals of identifying the critical factors for life science industry growth (see “Keys to Life Sciences Industry Success” below), the region's strengths and weaknesses and how it compared to the other regions. The Cincinnati region ranked above average in technology commercialization effectiveness, life sciences industry infrastructure, access to transportation, and quality of life, and below average on its critical mass of cutting edge research, access to capital and entrepreneurial culture. The task force then developed initiatives focused on expanding the life sciences research base and university entrepreneurial culture to enhance commercialization, assuring availability of seed funding, creating a unified voice for the region's life sciences industry and making use of a vacant facility for life sciences research.

Other communities can follow Cincinnati's proactive approach to building on strengths and developing initiatives to overcome weaknesses. "A community needs to focus on a few initiatives in order to achieve success," Snider says. "Focus on the most critical issues and don't try to do everything at once."

Much like developing a life sciences firm, it just takes time.

Keys to life sciences industry success

Is a life sciences client in your incubator's future? Many industries comprise the life sciences sector, including biotechnology; pharmaceuticals; medical devices, instruments, equipment, software and supplies; research supplies, reagents and equipment; and contract research and manufacturing organizations. To see if your community can support life sciences companies, look at what it offers in these eight critical areas:

Cutting-edge research that produces innovations around which entrepreneurs can build technology companies. Achieving critical mass in this area requires a solid life science research base.

Access to capital, including seed and venture funds that support life science companies at all stages of their development. Life sciences companies can have difficulty attracting funds because of their lengthy time line and unusual fundraising curve.

Effective technology commercialization, the process of getting university and other public research from the laboratory to the marketplace. Check out amount of licensing revenue, number of companies formed around university technologies and other variables.

Skilled workforce can become an issue as companies expand and move out of the incubator. Specialized companies may have to recruit nationwide.

Access to transportation, such as having nearby hubs for business activities including shipping products and bringing in venture capitalists.

Industry infrastructure that includes access to professional services, such as patent and clinical trial firms.

Entrepreneurial culture, with people willing to take on the risk of starting and working for a company at a stage when there's a lot of risk and no money, and people with business acumen to work with them.

Quality of life comes into play when companies recruit people to a community. Cultural attractions, sunny beaches and other amenities can make a difference when recruits are in high demand.

This information is adapted from a 1999 life sciences task force study that Patricia Snider and Carol Frankenstein conducted and Snider presented at NBIA's 14th International Conference on Business Incubation.

Keywords: capital access, managing technology commercialization, regional capacity, specialized equipment/facilities, technology commercialization, technology incubator, university partnerships

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