Picking a Place to Grow

Point a finger at a map of the United States and try to find a state that's not competing to attract pharma and biotech business. It's nearly impossible. The story is the same in Europe and Asia. Around the world, countries, regions, and cities are trying to build their economies, and the life sciences are a key element in their plans.

The world's hunger for economic development creates plenty of opportunity for both Big Pharma and emerging companies. But with billions of dollars in corporate investment at stake, the question is how to identify the opportunities that will pay off best. Evaluating potential new business sites is no easy task. The variables are many, and their relative value depends on who's looking and why.

"You have to think about it differently across the value chain," says Mark Kozin, managing partner, US, LEK Consulting. "If you're talking about research, companies are looking for world-class scientific talent. When Novartis, Merck, and Amgen move to Boston, it's because there's a critical mass of scientists there. Research is a high-cost activity, so things that are farther down the ladder such as housing and transportation don't really matter that much."

Environmental Considerations

But for manufacturing, Kozin explains, costs become more important. And if the point of a new facility is to expand sales and marketing, there's a premium on locations with high unmet patient need and the ability to influence the regulatory path.

Anyone who has bought an engagement ring knows the "four C's" of diamond buying: cut, color, clarity, and carat. Except for the wealthiest buyers, the ideal diamond is always a compromise-smaller but more brilliant, better in cut but less perfect in color. Similarly, there are four C's in pharma site selection: capital, clusters, capacity, and commercialization. (See "Environmental Considerations" below and "Site Selection Criteria," page 60.) This article will help pharma executives categorize site location variables according to their companies' definition of value and pick the trade-offs that best meet their needs. It also offers expert insight from all sides of the industry to help put the decision making process into perspective.

Capital

Local, regional, and national economic development agencies continue to offer tax breaks, grants, and low-interest loans to attract companies. But savvy companies look beyond simple financial incentives. Instead of cash, they look for capital.

Capital comes in many forms, and for many pharma companies, the most important are human and intellectual: access to quality employees and to the research and new ideas associated with universities and research centers.

Follow the Money

A new study by Pennsylvania's Lehigh Valley Economic Development Corporation finds that 90 percent of pharma and biotech site consultants surveyed rank a skilled and educated work force as the number-one concern of companies choosing a new facility location. And that's true for companies of all sizes-start-up, emerging, or established.

Nothing better exemplifies the point than Pfizer's recent multi-year, 1,000-job, $400+ million commitment to expand the company's global headquarters in midtown Manhattan. "New York may not be the cheapest place to do business," says New York City Economic Development Corporation president Andrew Alper, "but it provides the best value, with a more productive work force and proximity to the financial, legal, and advertising communities. This is a business [pharma] in which intellectual capital is so valuable that the cost of real estate and labor is overwhelmed by the quality of ideas."

For regions that lack New York's unique assets, training programs are useful. In its 2001 report for the Biotechnology Industry Organization, the Battelle Memorial Institute (BMI), offers details of states' initiatives. "In the past six months, we've talked to several pharma companies that are having difficulty with certain kinds of production and technician-level workers and are looking for additional support programs," says Walter Plosila, vice-president and director of BMI's technology partnership practice. He points out that several community colleges have shown interest in revamping their curricula to serve that work force, particularly one in St. Louis, Missouri and several in California. And pharma is equally interested in having such curricula to meet their work force needs.

Site-Selection Criteria

Clearly, what sets regions apart in their ability to attract pharma business of any kind-research, operations, manufacturing, or marketing-are their life sciences educational and professional development programs. North Carolina serves as a model for other states to follow, as companies such as GlaxoSmithKline, Biogen, Eisai, and Novo Nordisk have proven by their presence and recent expansion in Research Triangle Park.

North Carolina's move to strengthen its academic programs for work force development was an idea that caught on-or was already exemplified-in other areas that wanted pharma and biotech manufacturing but lacked an employee base that would allow them to compete on the research level. That's true for many locales outside the United States, such as Ireland, which has become a manufacturing powerhouse; Singapore, which is working to gain that status; and Puerto Rico, which has done so well during the past 30 years that some experts speculate the island may soon reach its saturation point.

The focus on people and education doesn't mean that cash doesn't count. Companies, especially young ones, need access to investment capital. And investment capital often has surprisingly close ties to specific geographic locations. (See "Follow the Money.")

That trend is supported by Joseph Cortright and Heike Mayer in "Signs of Life: The Growth of Biotechnology Centers in the United States," published by the Brookings Institution Center on Urban and Metropolitan Policy in 2002. They wrote: "The availability of venture capital is contingent in part on the presence of local venture capital firms." Venture capitalists like to play a role in the management of the companies in which they invest, down to the level of marketing, product development, and other day-to-day operations. As a result, say Cortright and Mayer, "Venture capitalists strongly prefer to invest in and work with firms located near their offices."

Tony Nash, chief knowledge officer for New Economy Strategies, an economic development consulting company, uses Silicon Valley as an example of a region that demonstrates the high-value companies still place on accessible venture capital. "[In the Valley], the concentration of entrepreneurial investment per capita is nearly ten times that of Boston and twenty times that of Philadelphia/New Jersey. In 2002, GrowThink Research data show that venture investment per capita for the San Jose metropolitan statistical area was $1,724. That's definitely a magnet to cash-hungry entrepreneurs."

Does the difference in available investment dollars mean that Boston or New Jersey/Philadelphia is less innovative? "Not really," says Nash. "The University of Pennsylvania attracts more federal research funding than any other university in the country. And the velocity and capacity of innovation within Boston's university concentration speak for themselves." There's not a simple correlation between intellectual capital and investment capital. The maturity of technology counts. So does the availability of substitute investments and the concentration of potential investors.

In the long run, money follows opportunity. "If there is a significant mass of innovation within a new and unique technology in a region, capital will begin to reside locally," says Nash. "Austin, Texas and San Diego, California are good examples of that."

Clusters

Employees, ideas, and dollars are powerful in attracting business to a region. But when a locale has a critical mass of companies in a particular industry, the synergy enhances efficiency and accelerate innovation. Economists call such high concentrations of related businesses "clusters," and they point to them as extraordinary economic engines. For pharma and biotech companies, clusters can provide exceptional access to employees, suppliers, and innovative ideas.

One of the nation's most active life science clusters is in North Carolina's Research Triangle Park. Leslie Alexandre, DPH, president and CEO of the North Carolina Biotechnology Center, explains the kinds of needs that draw companies to a mature cluster. "They need to know that they have an ample supply of well trained workers with a strong work ethic and that they won't have any problems filling positions," he says. "For companies that have products ready to bring to the market, they need to know that there are biomanufacturing capabilities or that they will be able to develop their own in the region. Pharma companies, in particular, want to be near biotechnology companies, as biotechs are increasingly the source of new products. Many also want to be close to universities as another source of R&D."

The big life science clusters are attractive, but they also have a down side, according to the Battelle Institute's Plosila. "After a point in time, if everybody put everything in Boston or Silicon Valley, the companies would go broke, because they would have to pay exorbitant salaries so the employees could get decent housing. It's an escalating spiral."

Plosila sees the industry, and especially R&D, spreading from its traditional bi-coastal homes, partly because of changes in research funding. "More and more research and testing is coming out of academic health centers wherever they are in the country, especially since NIH money is being spread more widely than it was in the past," he says.

Cluster building has become a highly competitive game played by states, individual municipalities, and countries-from Michigan (whose Life Sciences Corridor has attracted 50 new companies to the state) to Singapore (where Biopolis, a 2-million-square-foot biomedical complex is scheduled to open this month) to India (where the area around Hyderabad is being promoted as "Genome Valley"). In its 2002 "New Hampshire Biotechnology Business Incubator Feasibility Study," management consultants at Rainey & Associates identified trends in state-level US initiatives. Chief among them were:

• use of tobacco settlement funds for biosciences

• increased state government funding of academic bioscience research centers

• increased focus on financing needs of biotech firms

• growth of state biotech trade associations and networks

• increased focus on work force development programs

The question today is whether state-level programs will be able to follow through on their plans and promises in a tight economy. There are attractive opportunities for companies in emerging clusters, but no one knows whether those clusters will reach maturity.

Capacity

It's easy to forget that even the most vital region can support only a finite amount of business development. Eventually, desirable employees will become scarce, the best locations will be taken, and the possibilities for further expansion will start to run out. Companies need to think about their future needs when they consider a potential site.

Puerto Rico, one of the most popular expansion sites, is an example of capacity overload. A lack of federal taxes made the US commonwealth attractive to pharma companies. According to Development Counselors International, 25 percent of all pharma products manufactured in the United States are shipped from Puerto Rico, and 16 of the top 20 selling medicines in the United States are produced there. In just the last four years, companies have poured nearly $2 billion into the island, creating thousands of jobs for its well trained work force. In March 2002, Amgen alone invested $800 million dollars in a manufacturing plant there.

In addition to tax incentives, economic development agencies worked diligently to boost education and training in industrial chemistry and biotechnology. In fact, Puerto Rico offered a doctorate in industrial chemistry before any stateside university did. The legacy of "Operation Bootstrap" set up Puerto Rico as the ideal partner for the emerging pharma industry of the 1970s. And because Puerto Rico is covered under the US federal government's Homeland Security Act, it offers the same benefits and security measures as the 50 states.

Olga Ventura, PhD, of PharmaBioSource, an operations and site selection consulting company, says that many US pharma companies that move operations to emerging international locations such as Singapore-where companies can go for ten years without paying corporate taxes-end up returning to Puerto Rico, where they are familiar with the legal and financial structures as well as the culture and languages.

But as much as Puerto Rico may be in its heyday, it is, after all, an island. There's only so much room to grow. Most of the land set aside for industry is owned by the Puerto Rican Industrial Development Company and most development is moving inland, because the coastal flatlands are nearly saturated. Some facilities are already blocked from expansion.

"Look at Wyeth in Carolina, Puerto Rico," says Rafi Maslaton, senior partner of operations management consulting company Tefen USA. "They have a Burger King in one area, McDonald's in another, a residential area behind the facility, and a major road in the front. So the facility can't grow beyond the four walls of the existing site."

Does that mean Puerto Rico is dead as a site for pharma and biotech companies? Hardly. What it lacks in elbow room, it makes up for in a constantly improving infrastructure that includes professional development and advanced educational programs as well as an intricate network of suppliers to pharma such as plastic and glass container manufacturers, equipment calibration companies, and services from janitorial to telecommunications. There's still plenty of value on the island, but companies need to be aware of the trade-offs.

Commercialization

Recently, facilities have sprouted up in places where human resources and economic advantages are not the top attractions. Instead, companies are locating in areas such as Brazil and other South American countries in which they see the best opportunities for speedy entry into the marketplace. That also goes for many European countries that represent important new markets for products currently available, for products about to enter the market, and especially for those being prepared for early clinical trials. PhRMA's 2003 annual membership survey reveals a trend in which companies are conducting more research overseas. The numbers have risen steadily since 1970, but they've grown even faster in recent years. In 2000, companies spent $4.7 billion on research outside the United States. That number grew 33.3 percent, to $6.2 billion in 2001, and tapered off to an estimated $5.7 billion in 2002.

Leontien Ruttenberg, a Boston-based area director for the Netherlands Foreign Investment Agency, offers an explanation for that trend, saying that the regulatory environment is simpler in the Netherlands than it is in the States and that companies can measure the start-up time for Phase I trials in weeks instead of months. She adds that, although the business climate there is similar to the one in the States, there is much less litigation, which streamlines the informed consent and protocol approval processes.

As a result, the Netherlands also has proved attractive to contract research organizations. "Kendle and Quintiles, two of the largest CROs, confirm that it is still very easy to get a protocol approved in the Netherlands," says Ruttenberg. She adds that the Netherlands' central location and trading heritage make it a sensible place to locate European distribution centers. In fact, 62 percent of all Fortune 500 companies, including Merck, Biogen, Abbott, and Amgen, have already done so.

Give and Take

By creating obstacles for companies' marketing and sales efforts, many US state governments are doing the opposite of what might help them bring in pharma business. A US Supreme Court battle ended recently in favor of a state government's right to control medication pricing. According to the decision, Maine-and other states waiting in the wings to follow its precedent-can enforce price controls on medications used by the poor and uninsured if those prices don't drop naturally within the next three years. In another case, Pfizer is pushing for Michigan's Medicaid system to drop restrictions on access to prescription medications if the state wants to keep the jobs associated with the former Upjohn facility in Kalamazoo. CEO Hank McKinnell was quoted in the April 28 issue of the Pink Sheet as saying: "I would prefer access and a pharma friendly state to tax package."

McKinnell's words confirm pharma's ultimate goal in its site selection decision making: that it do the best research with the best talent to create the best medicines that will benefit the most people. To do that, companies need well trained employees, a hospitable, well resourced infrastructure that allows them to expand and grow, and a business environment filled with opportunities rather than obstacles. In short, new clusters.

"The desire among states to do economic outreach in life sciences is still very high," says Kozin. "You see areas such as the Woodlands in Texas, which came from nowhere to get a fair amount of biopharmaceutical talent in companies because it has a combination of incentives"-low location costs up front and tax incentives on the back end.

He adds, "I think we're in a new reality, although short term, with state and federal budgets here and the economies in Europe where governments can't afford to do as much as they were doing when they were running surpluses. But they still want these companies because they have the potential of employing a lot of high-salary people."