An article on the risk of investing in the life sciences...
It's risky to bank on biotech: Companies move, fail before communities see any benefits
By Clayton Park
Journal Business Editor
Article published Oct 29, 2006
In recent years, economic development boosters both in Seattle and on the Eastside have increasingly focused their efforts on attracting biotechnology companies, citing their potential for creating high-paying jobs.
But banking on biotechs can be as risky as betting on dot-coms, or, for that matter, betting on racehorses.
One local stock analyst told the Journal recently that he and his colleagues refer to early stage biotechs as "casinos" because of their 90 percent failure rate.
But conversely they are also referred to as "The Promised Land" by analysts like Paul Latta of McAdams Wright Ragen in Seattle. That's what he calls biotechs that can successfully bring multiple drug products to market because of the profits they generate.
Biotechs that fail to reach the "promised land," however, are bound to either eventually disappear, along with the jobs they provided, or get sold, which often also results in layoffs.
Job cuts likely on Eastside
An example of the latter is Bothell-based Icos Corp., which earlier this month agreed to be sold to Eli Lilly & Co., the Indianapolis-based pharmaceutical maker, for $2.1 billion.
Lilly's CEO has already said his company intends to eliminate a yet-to-be-determined number of the 700 positions at Icos once the sale closes either later this year or in early 2007.
Many of those job cuts will likely occur on the Eastside, where Icos employs 500 workers at facilities in Bothell, Redmond and Bellevue.
And Icos, which developed the blockbuster anti-impotence drug Cialis, is one of the region's more successful biotechs.
Despite the drug's growing popularity, Icos' board of directors earlier this month unanimously voted to accept Lilly's buyout offer of $32 a share — less than half of what the stock was worth at one point in 2001.
Latta said Icos' inability to get other new drug products through the development "pipeline" after 16 years of trying was the likely reason for the board's decision to sell.
1-drug companies at risk
"It was kind of a one-drug company," said Latta of Icos, noting that the same was true of the region's other big biotech, Seattle-based Immunex, which produced the popular arthritis drug Enbrel.
Immunex, despite being the Puget Sound region's biggest and arguably most successful biotech at the time, agreed to be sold to Thousand Oaks, Calif.-based Amgen for $16 billion in 2002.
The sale of Immunex left Icos as the region's largest Washington state-based biotech, a distinction that will most likely now go to Seattle-based ZymoGenetics.
Amgen, which laid off some workers here shortly after its acquisition of Immunex four years ago, announced earlier this year plans to expand its Seattle operations.
The sale of Icos will benefit some of the company's investors, including Microsoft Chairman Bill Gates, who, if he continues to hold on to his 5.36 million shares until the deal closes, would pocket more than $171.5 million.
Shaky future for startups
But backers of biotech startups don't always fare as well with their investments.
Of the region's 26 largest biotechs listed in the Puget Sound Business Journal's 2001 Book of Lists, 12 are missing from the publication's 2006 list. Some of the companies that failed to make the list this past year have gone out of business or have been acquired.
Several of those on the Business Journal's current list were locally based five years ago but now have out-of-state owners.
The number of impending job cuts by area biotech firms rose this past week when London-based GlaxoSimithKline announced that it will close its vaccine-research lab in Bothell by the end of the year, which will eliminate 70 positions, according to a Seattle Times report.
Benefits outweigh risks
Despite the long odds facing early stage biotech ventures, industry observers and local economic development boosters say the benefits to the area that those companies provide, even if they are sometimes short-lived, far outweigh any the risks.
"It is worth it," said Maura O'Neill, the former president of Explore Life, a regional economic development group that teamed up with the city of Renton a few years ago in an effort to establish a "Science City" hub for biotechs on land that Boeing was thinking of selling off.
That effort got put on hold indefinitely when Boeing decided to hang on to most of its potential surplus property as orders for its Renton-built 737 jetliners began picking up.
O'Neill said even though Icos, and many of its jobs, will soon become history, the company "provided a terrific set of high-paying jobs over the last decade for this region."
Research attracts biotechs
The good news, O'Neill said, is that many of those soon-to-be-former Icos employees will likely elect to remain in the area and either go to work for other biotech companies, which will strengthen them, or perhaps even start up new biotech ventures.
As long as the Puget Sound region is home to outstanding medical research institutions such as the University of Washington and the Fred Hutchinson Cancer Research Center, it will continue to attract biotech and lifesciences companies, and/or birth new ones, O'Neill said.
The presence of the Gates Foundation and other institutions such as the Benaroya Research Institute, which is a leading diabetes research center, among others, also are helping to make this region a magnet for biotech and lifesciences ventures, said O'Neill, who now works as the chairwoman of an e-text book company and a part-time instructor with the entrepreneurship program at the University of California Berkeley.
"What we're missing in this region is a broad and deep commercialization eco-system," that would allow biotechs, once they get to the size of Immunex or Icos, to continue to survive, and perhaps acquire other companies, as opposed to becoming acquired, O'Neill said.
State fund supports biotechs
Jack Faris, president of the Washington Biotechnology and Biomedical Association, said the Puget Sound region is making progress towards creating a better support system for biotechs, which could improve their chances for success in the coming years.
"We should NOT assume that we won't be able to improve the odds," Faris said.
One future "tool" to help biotechs in this region is the state's new Lifesciences Discovery Fund, which has already been approved by the Legislature, and is scheduled to receive funding beginning in 2008.
In addition, Faris said, his association is working with other economic development groups to create some "comprehensive strategies" on how to help more biotech and lifesciences ventures become commercialized.
The Puget Sound region already has a "great tradition of entrepreneurship," as evidenced by the success of homegrown global companies such as Starbucks and Amazon.com, Faris said.
"We certainly have enough (ingredients) that if we do the right things with them, we can be absolutely assured of success," Faris said.
27,000 jobs in Bothell
Terrie Battuello, manager of the city of Bothell's newly created economic development division, said the city is already home to 164 professional scientific and technical services companies, including a number of biotechs and medical device makers.
Bothell, which has a population of 32,000, has approximately 27,000 jobs, thanks in large part to the presence of those biotechs and other professional scientific firms, Battuello said.
Battuello said much of the credit for why the city is home to so many biotechs belongs to real estate developer Roger Belanich, who got the ball rolling when he built the Canyon Park Business Center in the 1980s, one of the first of many business parks now in the Bothell/Woodinville area.
The city also has been working closely with the Snohomish County Economic Development Council and other groups to continue to attract employers to the area.
Battuello expressed hope that Lilly will continue to operate Icos' facilities in Bothell and keep at least some employees. "I wouldn't say that it's a given that they'll leave," she said.
The city is currently working on a downtown revitalization project to create some new "opportunity sites for private investments in Bothell," Battuello said.
'Science City' on backburner
Alex Pietsch, who heads Renton's department of economic development, neighborhoods and strategic planning, said while efforts to create a "Science City" have been put on the backburner for now, "we continue to be interested in the industries of this community's future.
"Clearly, biotechs and lifesciences will be a part of that," Pietsch added.
For now, the city is focusing on making Renton "more attractive to companies like that by seeing that major retail projects," such as The Landing, a proposed mixed used complex by Harvest Partners next to Boeing's 737 plant, "are done right."
"We hope that The Landing will be that catalyst so that lifesciences, aerospace, information technology and clean technology companies will want to come here," Pietsch said.
As far as the risky nature of biotechs, Pietsch said, "the good thing" about creating facilities to house those kind of businesses is that "if one company fails, another company can come in and use it."
Sooner or later, because of the city's close proximity to the growing biotech hub in Seattle's Lake Union area, a "science city"-like development is "going to happen in Renton," just as it's "already happened in Bothell," Pietsch said.
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