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Calif. BioCenter Expansion to Start in Spring; $5M Biomanufacturing Center to Rise Nearby

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A public-private life-sciences incubator in San Jose, Calif., will start work this spring on an expansion that will take a year to complete and cost $10 million over five years and nearly double its existing footprint, and develop a $5 million biomanufacturing center for startups looking to produce their own therapies.

The San Jose BioCenter will expand into 33,750 square feet on the first floor of 5941 Optical Court. The incubator currently occupies 36,594 square feet on the building's second floor.

BioCenter CEO Melinda Richter told BRN last week that three on-site life-science companies — Tacere, Aridis, and Devro Medical — will move from the incubator's second floor to portions of the first-floor space.

Expansion work will follow after the San Jose Redevelopment Agency finalizes construction documents and issues a formal request for proposals for general contractors, Julie Amato, SJRA's senior development officer managing the BioCenter expansion project, told BioRegion News earlier this month.

"At this point, we would anticipate probably beginning construction at some time in the spring of this year, and then finishing probably about a year from now, [in] January 2010," Amato said.

Amato and Abi Maghamfar, the agency's deputy executive director, spoke with BRN three weeks after the SJRA's board cut $500,000 from the $2.5 million it had set aside from its original capital budget for the fiscal year ending June 30.

Last month, citing the weak global economy, the SJRA trimmed its previously approved five-year budget into a two-year, $259 million spending plan that retained the BioCenter expansion, albeit with the half-million-dollar cut [BRN, Jan. 5].

That cut, Maghamfar said, will not affect the planned expansion, because the board last month also approved a new five-year, $1.1 billion capital-improvement program that authorized $10 million for construction and tenant improvements to the new first floor space — including the $4 million that has already been set aside in the agency's new two-year capital budget.

The agency plans to "close the gap with the other $6 million in different type of financing until other further budgeting actions are taken," Maghamfar said.

The SJRA, he said, plans to spread its costs by financing part of that outlay. A precedent for that exists: Mission West Properties of Cupertino, Calif., the owner of the building that houses the BioCenter, and the Edenvale Technology Park where the building is located, helped finance part of the development of the original bio incubator five years ago.

"Whether that methodology will be used as a part of this expansion is still in the works. We have no confirmation on that as of yet," Maghamfar said.

He said SJRA and Mission West are in "ongoing negotiations" in part over how to pay for cost overruns beyond the $10 million. "Like any other construction on a brand-new building, the landlord generally puts in some tenant improvement allowance," Maghamfar said. "There may be some additional funding coming in that respect, but nothing beyond that."

While acknowledging the ongoing global financial upheaval has made it more difficult to obtain capital, Maghamfar said the agency's relatively favorable bond ratings should allow it to obtain the financing it needs over the next few years.

"We are not concerned at all that we'd be able to secure proper financing here," he said.

Yet one bond rating agency, Fitch Ratings, has questioned whether the technology sector will remain strong enough over the next several years to advance the BioCenter expansion and all other projects planned for the city's 21 redevelopment areas totaling more than 8,000 acres — including the Edenvale Redevelopment Project Area that includes the 2,312-acre Edenvale Technology Park, where the BioCenter sits.

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Last October, Fitch downgraded from A to A-minus its rating on the 2008A series of San Jose's tax-allocation bonds for the 21 redevelopment areas, known collectively as the Merged Area Redevelopment Project, in advance of the city's Dec. 3 sale of $37.2 million of TABs.

The downgrade "reflected the relatively narrow debt service coverage following the new issuance, coupled with the negative macroeconomic environment that is likely to pressure assessed value of major taxpayers, and particularly unsecured property in the technology sector that dominates the Merged Area Redevelopment Project," Fitch said in a statement.

"Historically, the project area's unsecured personal property has been vulnerable to significant declines during economic downturns and may be subject to declines in the coming years in light of the current economic environment," Fitch added.

Said Maghamfar: "We are very comfortable and confident that our financing strategy is sound and that we'd be able to move forward."

In approving funding for the BioCenter expansion, Maghamfar said, the SJRA was fulfilling one of its goals and objectives listed in the 2008-09 spending plan: "Provide ongoing support" for the biotech incubator and three other city-funded incubators: the US Market Access Center, the former International Business Incubator that assists overseas-based life-sciences and other tech companies seeking to crack the American market; the Software Business Cluster; and the Environmental Business Cluster, which nurtures businesses in the cleantech sector, another priority of San Jose officials.

Opened in 2004, the BioCenter has 22 onsite resident companies and 15 "affiliate" companies that use the incubator's equipment for a fee.

According to BioCenter's Richter, the three life-sci companies scheduled to move from the incubator's second floor to portions of the first-floor space are:

Tacere, a developer of therapeutics for treating hepatitis C and other diseases. The company has a $145 million collaboration and licensing agreement with Pfizer, and a $60 million deal with Oncolys Pharmaceuticals for the HCV compound.
Aridis, a developer of dried biologicals administered in ready-to-use formats against pediatric infectious diseases. Its clinical-stage product candidates include Panaecin, used for treating lung, skin, and mucosal bacterial infections; and Aerucin, a human monoclonal antibody designed to protect against chronic lung infections by the pathogen Pseudomonas aeruginosa.
Devro Medical, a Scottish-based supplier of Australian purified collagen formulations seeking to expand in the US.

Richter said the BioCenter and SJRA work with incubator companies about to outgrow their spaces to help them relocate elsewhere in San Jose.

'Local Capacity Shortage'

Maghamfar also told BRN that the redevelopment agency and BioCenter this year will also pursue plans to build a new biomanufacturing center within the Edenvale Redevelopment Area.

"We are in the process of working on an RFP to solicit interest from interested biomanufacturing companies, probably in the next five to six months," Maghamfar said. "We're hoping to get some responses and conclusion by summertime."

Even before the formal proposal request is issued, at least two key decisions have been made on the project: The redevelopment agency board last month budgeted $5 million in its 2009-10 spending plan for the planned biomanufacturing center, while SJRA has ruled out building the biomanufacturing facility within the BioCenter's first-floor expansion space. However, it still hopes to find a site near the BioCenter, according to Maghamfar.

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Added Amato: "The reason there was never any intention to put that in the BioCenter expansion was simply because we were anticipating that the manufacturing facility would be larger than the expansion."

Maghamfar added: "We strongly believe that the Edenvale technology park would be the most suitable and ideal location. But then again we haven't crossed those discussions yet."

Other key questions about the project remain unanswered, such as where the center should be built, how much space it should contain, and what businesses would use it.

Planning for the biomanufacturing center comes six months after a consultant hired by the SJRA submitted to the agency board a $205,000 study recommending development of such a facility. PharmaBioSource of Wayne, Pa., estimated that a biomanufacturing center would contain 25,000 square feet of space, and would cost up to $23 million to build new, or up to $16 million if an existing building were retrofitted, in addition to the $8 million it would cost to equip the facility.

The 31-page report said that while the West Coast has the highest concentration of biotech firms in the nation, only 16 contract manufacturing organizations in the region can produce the drugs those companies have developed in market quantities — a market gap on which the BioCenter could capitalize.

"The lack of CMO production capacity today in the Western region coupled with the lack of plans for future capacity in the region indicate that this local capacity shortage will continue," the report observes. "As a result, many Western companies are forced to use biological CMOs outside the Western region, mainly in the Eastern US and Europe."

For its report, PharmaBioSource said it interviewed 25 West Coast biotechnology companies, of which 10 occupy space at the San Jose BioCenter. While the companies interviewed prefer to outsource their manufacturing, "Western regional companies are generally dissatisfied with the availability of qualified CMOs that they can afford," the report said. "They are also frustrated at not having the choice of a local CMO that can provide the required range of services.

"Furthermore, as smaller firms, they do not receive the attention of most CMOs," the report added. "They are eager to have access to a local CMO that brings a strong track record and manufacturing experience to the Bay Area."

The report recommended that the biomanufacturing center and surrounding land be owned by a developer that leases the facility to a CMO partner that would own the equipment, employ staff, and oversee all manufacturing and regulatory operations — with no direct involvement by the SJRA. The center would be a cGMP facility capable of producing drugs for human clinical trials, using both mammalian cell culture and microbial fermentation manufacturing systems.

"Annual revenues are estimated at $11 million to $13 million, with 10 percent to 20 percent in profit margins. This facility option has the highest revenue and profit potential. As a result, this option would likely attract interest from the greatest number and types (e.g., large and mid-tier) of CMO partners," the report concluded.

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