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Arizona's Life-Sci Sector Faces Arid Future Unless State Contains Budget Cuts, Report Says

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Arizona’s life-sciences industry will be able by 2020 to pump more than $10 billion into the state's economy, generate some 25,600 jobs, and raise roughly $312 million in state and local taxes — but only if the state continues to follow the advice of the state Biosciences Roadmap and grows the industry, according to a recently released study of the sector’s economic strength.

The Economic Impact of the Arizona Biosciences Sector, released earlier this month, concluded that Arizona's life sciences sector can expect another 11 years of steady growth based on three measures of double-digit gains identified by a consultant for the Flinn Foundation, the champion of Arizona's life-sci industry that released the report.

The report came out as state lawmakers debate whether to extend into fiscal 2010 a series of spending cuts enacted in February that were designed to plug the $1.6 billion shortfall in the fiscal 2009 budget — and which have to date gutted a key funding source for Science Foundation Arizona, the nonprofit that promotes development of the state's biotech and other tech industries.

Between 2002 and 2007, according to the report, Arizona's life-sci industry saw a 24-percent gain in the number of jobs, a 57-percent rise in employee payroll, and a 7-percent jump in the value of economic activity carried out directly by the sector.

By 2007, Arizona's non-hospital life-sci sector grew into a $5.8 billion industry that generated about 30,000 direct and indirect jobs, and raised $177 million in state and local taxes, the economic impact report concluded. The report defines non-hospital jobs as agricultural sciences, bioengineering and biomedical engineering, biological sciences, medical sciences, and "other."

In addition, private and public academic research institutions, including the Translational Genomics Research Institute and the state's three universities, chip in another $773.5 million in direct, indirect, and induced economic activity, which together account for 6,215 jobs and add $26.3 million to state and local tax coffers.

The report also measured the impact of the state hospital industry, which accounted for $8.5 billion in direct activity — which swells to nearly $15 billion when indirect and induced activity is included — and nearly 71,000 of the 84,235 jobs within Arizona's broadly defined "bioscience" sector.

“This shows there's a pretty significant impact already. And it's not even a mature industry yet compared to some of the other technology clusters in Arizona," said Walter Plosila, senior advisor to Battelle Technology Partnership Practice, which prepared the study. As part of the report, Battelle studied Arizona's life-science cluster, which is anchored around the state’s largest cities of Phoenix, Tucson, and Flagstaff.

Plosila said a key purpose of the report was "to hopefully encourage public officials to see that even though it's an emerging cluster in Arizona, it already has a significant impact on the economy [because] some people within newer industries sort of go ho-hum and assume there's nothing there."

Plosila and Battelle prepared the 11-page study for the Flinn Foundation, the Phoenix-based nonprofit philanthropic endowment that has spent much of this decade promoting the development of a life-sciences cluster within Arizona anchored on its three major universities and major employers such as medical device makers Gore and Medtronics.

Med Devices is Arizona's second-largest life-sci employer; its payroll in 1997 was 4,955 people, and it registered the fastest rate of job growth over 2002, at 29.6 percent. The largest sector, registering a second-highest 24.3-percent job growth during the period, is research, testing, and medical laboratories, which employed 6,922 in 2007.

"For 2020, we want both of those areas to be developed into significant clusters," Plosila said.

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Those numbers are likely larger now due to the opening of some new facilities since then — notably the $175.3 million, 288,000-square-foot drug-testing lab opened last month by Covance in Chandler, despite protests from animal-rights advocates and others.

Covance has responded by noting its animal facilities will be better than those of many other companies, since primates are housed in group settings rather than in individual cages, and dogs will be able to exercise at dog runs.

'Draconian Cuts'

Battelle and Flinn released the report on April 7, during Biozona 2009, the annual conference of the Arizona BioIndustry Association. The report’s intended audience appeared to go well beyond the more than 250 life-sciences leaders who attended Biozona.

The Economic Impact of the Arizona Biosciences Sector came out as state lawmakers debate spending cuts that are expected to worsen in the coming fiscal year. "Additional fixes are very likely to be required for the fiscal year 2009 budget, and even more difficult decisions remain as we confront the realities of a $3.4 billion deficit for fiscal year 2010," Gov. Jan Brewer said in a Jan. 31 statement.

Among the $580 million in spending cuts approved by state lawmakers was the elimination of all $22.5 million in the state's 21st Century Fund, the source of funding for SFAz.

"We've been able to hold most of the things together, said William Harris, CEO of Science Foundation Arizona, or SFAz. "We have some private money that is trying to keep the activity going because of the importance of diversifying the state's economy," long based on cyclical industries such as tourism, real estate, and retail sales.

Harris would not disclose how much private funding SFAz is using, or the source of that funding. "I'm trying to not have to use private money for what the state money ought to be used for," he said.

Harris would not confirm reports in Arizona newspapers in which life-sci leaders claimed the cutbacks have already begun to stop research by startups.

TJ Johnson, CEO of High Throughput Genomics, told the Arizona Daily Star on April 5 that the company's research has been stopped "at third base" as a result of the spending cut. HTG and the BIO5 Institute use $6 million for research that consists of a grant from SFAz and a match by the company. The grant supported a collaboration between the partners and researchers from researchers at the Arizona Cancer Center pursuing therapies against breast, colon, lung, and skin cancers.

Additional cuts are possible by the time lawmakers adopt a budget for the 2010 fiscal year, which starts July 1.

"I think it's going to be a few more weeks before we know whether [the $22.5 million cut] will be rectified or not," Harris said in an interview. "We will run into a problem in the next say 45 days where if this is not resolved, then we'll have some serious negative spinouts."

"The difficulty is going to be recruiting really star talent to Arizona under that kind of a scenario," Harris added.

Given the prospect of the state continuing to struggle to balance its budget in the upcoming fiscal year, it is unlikely that the FY 2009 cut will be restored, he added.

Plosila said the effect of those cuts, if extended into FY 2010, would hurt not only SFAz, but the state's broader, and growing, academic R&D effort as well. He cited bioscience's accounting for 60 percent of the funding spent by SFAz last year.

"In 2008 we had the most progress of any year since the [NIH] Roadmap came out. That was primarily because of the new programs started by Science Foundation Arizona in the three areas," Plosila said. "If Science Foundation Arizona is permanently cut, then we're certainly not going to be moving in the right direction."

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SFA's funding was especially needed, he added, because of Arizona's longstanding dearth of local venture capital. During the first quarter, the Southwest region saw VC investment in medical-device startups nearly collapse from $56.8 million in 2007 to a single $2 million deal in the current year, according to the recently released quarterly MoneyTree Report [See story this issue].

"Clearly, Arizona's private bioscience industry has got the same problems of obtaining capital as anywhere in the country, maybe more so in some respects, although they've managed to grow in spite of not having a huge amount of venture capital in Arizona historically," Plosila noted.

Another source of startups — the state's university system — experienced a $142 million cut as part of the budget package, balanced in part by $500 million the state expects to receive from the American Recovery and Reinvestment Act signed into law by President Obama in February.

Earlier in fiscal 2009, Arizona State University eliminated 200 faculty-associate positions and froze hiring for most open positions. ASU also required employees to take unpaid furloughs ranging from 10 days for staffers to 15 days for administrators.

"I think Science Foundation Arizona is a catalyst and key to the state's future development. But I also think without a strong and effective education system the rest of it is not going to be as important," Harris said. "Right now, we kind of almost stand out nationally in terms of having some of the most draconian cuts going on in terms of the really good universities."

Plosila said the cuts would hurt Arizona's life-sci effort well beyond this fiscal year or next. "If U of A is affected, it could eventually — not overnight, but in the long term — it could help reduce the birth rate of new enterprises."

Higher education, as with K-12 education and social services, are vulnerable to cutbacks because unlike other spending categories, their budgets have not been frozen into place through voter referenda. Another factor in the cuts has been the ongoing financial and economic turmoil, which in Arizona has caused the state's housing industry — one of its surest economic engines — to all but collapse.

The economic impact report generated its numbers through IMPLAN, the economic input-output model that measures the value or production or sales activity, as well as employment and employee compensation. In addition to direct economic impact, bioscience activity was also studied for “indirect” effects such as spending within the life-sci industry, “induced” effects such as changes in spending by households, and “total” effects resulting from all three.

According to the report, the direct impact of economic activity in the non-hospital bioscience sector jumped from $2.1 billion in 2002 to $3.6 billion in 2007. During that period, the number of industry jobs grew 24 percent to 13,543 from 10,895, while the combined compensation of those jobs zoomed from $494 million to $777.8 million.

When total impact was measured, the value of non-hospital bioscience economic activity ballooned almost 62 percent, from $3.6 billion in 2002 to $5.8 billion in 2007. During that period, the number of jobs rose by almost 18 percent to 29,671 from 25,231; while employee compensation climbed from $949.5 million to $1.4 billion.

One total impact statistic the industry hopes to impress on state lawmakers: The amount of state and local taxes collected from life-sci businesses grew 34 percent in 2007 to $177.8 million $132.5 million five years earlier.

When the “bioscience” industry was expanded to include healthcare and hospital activity with the life sciences, the combined sector grew almost 47 percent between 2002 and 2007 to $21.2 billion from $14.5 billion, while the number of combined bioscience jobs grew nearly 11 percent to 155,631 in 2007 from 140,654 in 2002.

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