Bankrolling New Jersey Biotechs

Ed Silverman | November 16, 2011 | Health Care
Realigning a high-tech incentive program so that it only applies to biotechs could give NJ more of what it needs: high-quality, high-paying jobs

Over the past decade, Chip Baird has regularly relied on a state incentive program to help fund PTC Therapeutics, a biotech that does not yet sell any medicines but is developing a handful of treatments for various cancers, infectious diseases, and genetic disorders. By his estimate, PTC has garnered about $5 million, which he calls “real money” that would, otherwise, be hard to come by, especially when the sour economy has sent venture capital firms running in the other direction.

“All totaled, we’ve raised over $500 million [over the years], with about $200 million from venture capital and a little over $200 million from collaborations [with large drug makers], and roughly $100 million from grant funding,” says Baird, who is the chief financial officer at the South Plainfield biotech. “But this is an important piece. It’s somewhere between a small bridge loan and a major piece of financing . . . And it provides more funding to keep the kind of jobs we create, which are really the kind of jobs the state wants to retain — people with advanced degrees.”

The incentive has a rather chewy name — the Technology Business Tax Certificate Transfer Program — and has been available to qualified technology companies of all stripes. And it has proven popular, because unprofitable, but promising companies can turn net operating losses and R&D tax credits into capital. In effect, companies can “sell” their operating losses to pre-approved, profitable businesses, which can then take the losses as tax credits. It’s an old-fashioned win-win, because companies big and small gain, as well as the state — if good jobs are created and retained.

A Change In the Works

Now, though, a big change may occur. The Christie administration already reinstated $30 million in funding to the program, which was previously set at $60 million but was reduced as part of the huge round of budget cuts last year in Trenton. Not surprisingly, the replenishment was warmly received, but a more significant shift is being weighed and it could divide the competitive technology business community in the state — a recommendation to make the program available to biotechs exclusively.

Why? The state Economic Development Authority commissioned the New Jersey Institute of Technology to examine the program and found that the incentive has done more to generate hiring by biotechs, which is described as a key metric to gauge performance. And so the EDA has embraced the suggestion. The program is “effective in assisting young biotechnology firms in creating and maintaining high wage, high quality jobs in New Jersey, but is not effective in supporting sustainable employment in high technology firms,” according to a memo written earlier this year by EDA chief executive officer Caren Franzini to state treasurer Andrew Sidamon-Eristoff.

As usual, numbers help tell the story. The NJIT report found that annual job growth among biotechs that participated in the program between 2000 and 2004 rose dramatically — anywhere from 33.2 percent to 69.8 percent. But other technology companies yielded the exact opposite result — there was a decline in employment that ranged from 4.8 percent to 33.7 percent. The biotech growth, by the way, included jobs created by Celgene, the big gorilla among biotechs in New Jersey. But even when carving out the Celgene effect, biotechs still displayed positive job growth. Moreover, the report also estimated that 15 percent of biotechs would not be located in the state if the program did not exist.

Legislative Lock-in

Whether the Christie administration will embrace the recommendation is unclear. To become reality, the proposed change must be locked in by legislation. A spokesperson for the EDA says the agency will not comment while the proposal is under consideration. But the emphasis on biotech happens to occur at a precipitous time for New Jersey, which has seen thousands of well-paying jobs lost to the seemingly perpetual downsizing taking place in the pharmaceutical industry. Over the past several years, every big drug maker has shed scientists, salespeople, and other professionals as it eliminates or shifts work to other locales, including other countries.

One recent example involves Novartis, which maintains U.S. headquarters in New Jersey and is transferring oncology research from other venues to its suburban campus. At the same time, though, the drug maker is sending more chemistry work to India. Yet another drug maker to send employees out of the Garden State is Sanofi, which more than a year ago transferred oncology research, which was centered in Bridgewater, to Cambridge, MA, and recently disclosed plans to shift still more research and development work to the Boston area.

The outflow of work — including the many jobs that Merck is eliminating in the wake of its purchase of Schering-Plough — dwarfs the occasional good bit of news. Nearly lost among the gloomy headlines, for instance, was an announcement that Roche is expanding its Nutley facility to include a manufacturing operation to accommodate clinical trial growth. Nonetheless, such moves are overshadowed by the large losses, which are increasingly making a mockery of the decades-old slogan that New Jersey is the nation’s medicine chest.

Remaking the Incentive

For this reason, the biotech community is thrilled at the recommendation to remake the incentive. The additional funding would give New Jersey needed ammunition in the ongoing battle against other states — notably, Pennsylvania, Massachusetts and North Carolina — that regularly woo biotech and want to further develop their own mini-pharmaceutical industry. Moreover, the incentive program has yielded a 15-to-1 return on investment when biotechs participate, according to BioNJ, the state trade association, which argues the state has been getting a terrific deal through the initiative.

“It takes 10 to 15 years and $1 billion-plus, on average, to bring a drug to market. Will this money finish the job? No, but it will help companies secure funding,” says BioNJ president Debbie Hart. “It’s not the only reason companies stay here or come here, but there are so many that are interested in being in New Jersey and the incentive is very much a part of their thinking . . . And the return is in biotech. We need to consider whether or not funds are being frittered away in the technology sector. Why not maximize those returns?”

Her counterpart at the New Jersey Technology Council, Maxine Ballen, declined to comment, suggesting the trade association would prefer to vent out of the spotlight, although it is worth noting that the EDA’s Franzini Is a board member. However, Robert Chefitz, a general partner at the NJTC Venture Fund — one of whose limited founding partners is the New Jersey Technology Council — says that emphasizing biotech funding may make sense, given that financing for this sector has grown difficult. But he also believes the state should, as a matter of policy, remain more even-handed.

Helping the Neediest

The incentive “is an important initiative and it’s been very meaningful to both biotech and other technology businesses,” he says, adding that he has not seen the NJIT report. “If the state’s policy is to help the neediest corporation, it might make sense [to emphasize only biotech]. There’s plenty of capital for the next interesting Internet-based business model, but biotech dollars, specifically, are hard to come by . . . It’s an interesting policy debate, but in the end, I think money should and will go across a broad spectrum of tech companies. I would think the state would be better off having a more balanced approach. The state certainly isn’t biotech only and there are other sectors in the state economy that deserve support.”

One public policy expert, however, suggests the bet on biotech may prove worthwhile, assuming the NJIT calculations hold merit. A key issue is whether any resulting jobs remain in the state, given the increasing trend among life sciences companies to outsource a wider variety of work to cheaper locations, particular other countries such as India. Without some type of agreement to penalize companies that do not maintain employment here, the incentive may lose its luster.

“Around the country, these sorts of subsidies have had mixed results,” says Norman Glickman, an economist and an urban and public policy professor at the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. “Essentially, they’re making a big bet on biotech, but there needs to be some safeguard for the funds that belong to New Jersey residents, who are paying for this. Once jobs are created and the science produces new products, where will these be produced? Will these be outsourced? There should be clawbacks built into these programs.”

The NJIT proposal does not mention clawbacks, but does recommend the state issue warrants in connection with the incentive in order to generate additional revenue. One biotech executive, however, says that the big pharma downsizing has had a beneficial, if ironic twist — there are a large number of qualified people who are looking for work, which offers a biotech yet another reason to stay planted in New Jersey, beyond the state incentive program.

“More than once, the incentive was literally life saving to the company. Being venture backed, it’s not easy to get money if you need to go back for another round of funding,” says Elizabeth Posillico, chief executive officer and president of Elusys Therapeutics, which is based in Pine Brook. “It has made a big difference. But yes, we get contacted by other states all the time. They want us to relocate or ask if we would consider building a manufacturing plant. But one of the main reasons we’re committed to New Jersey is the talent pool. You really have to justify going through the whole disruption of moving. To just go some place because it’s cheaper may not make sense if it’s hard to get a quality workforce. That said, capital is an issue and everyone in industry is worrying about what’s happening. I think, unfortunately, government will have to do more to support these companies.”