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Despite Impending $1B Life-Sci Boost, Mass Bio Sector Faces Challenges, Report Says

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Despite facing a $1 billion, 10-year funding windfall from the Massachusetts state government, stakeholders in the state’s powerhouse biocluster must surmount a series of competitive hurdles over that coming decade if the sector is to remain competitive, according to a recent report. [See feature story, this issue, for details on Massachusetts’ life science funding bill.] 
 
According to Super Cluster: Ideas, Perspectives, and Trends Shaping the Global Impact of the Massachusetts Life Sciences Industry, Volume 2, released last week by a panel of industry groups, top of the list of challenges is the Bay State’s slower-than-average bio-industry job growth.
 
Employment in the Massachusetts life sciences industry in 2006 grew 4.2 percent, or by 3,147 jobs, to 77,247 from 74,100 recorded the previous year. Between 2001 and 2006, the state’s life-science work force grew by 8 percent — no small feat in a state where overall employment declined by 2.5 percent during that same time frame.
 
The 8-percent life-science job growth was the same as California’s, and both states were slightly below the national life-science job average of increase of 8.3 percent. During 2006, Massachusetts led in the rate of life sciences job growth compared with California (2.4 percent) and the nation (2.2 percent), though California generated twice as many life-science jobs as Massachusetts that year, 6,364 compared with 3,169, respectively.
 
Job growth in Massachusetts’ “biotechnology” category, which includes pharmaceutical and biotech companies, jumped 28 percent between 2001 and 2006. Medical and testing lab jobs posted a 19-percent job gain, followed by teaching hospitals (16 percent), wholesale trade (12 percent), and two job-losing sectors, pharmaceutical (-3 percent) and medical device and equipment (-8 percent).
 
That’s just one of Massachusetts’ advantages cited in the Super Cluster report, which was released by the health policy think tank New England Healthcare Institute; the Massachusetts Technology Collaborative, which is the state agency responsible for developing innovation industries; the Massachusetts Life Sciences Center, which is the state agency that will oversee the life sciences initiative; and PricewaterhouseCoopers.
 
The state’s enviable set of strengths, according to the report, include a rising tide of venture capital investment in early-stage companies. Total private funding in state-based life-science companies rose 11 percent last year to $1.3 billion from $1.2 billion in 2006. In addition, the number of life-science companies winning VC funding rose last year to 133 companies from 108 in 2006, the report found.
 
But the stagnation of federal funding for research has taken its toll on Massachusetts. The state’s total in US National Institutes of Health grants dipped 4.3 percent between the federal fiscal years ended Sept. 30, 2005, and 2006, from nearly $2.3 billion to just over $2.2 billion.
 
Other challenges cited by the report include the need for stronger science and math education at the K-12 levels; the state’s high cost of living, including tax rates and housing costs; and growing competition from other nations for life-science employers and their jobs.
 
BioRegion News spoke last week to Jim Connolly, Northeast life sciences leader with PricewaterhouseCoopers and a report co-author, about its findings and the continuing challenges Massachusetts faces in growing its top-tier life sciences cluster.
 
Below is an edited version of that interview.
 

 
Why did total NIH funding for Massachusetts institutions dip during FY 2006? Did that reflect other states getting more competitive?
 
2006 is the first time, in at least 10 years, that the state actually went down in NIH funding. We have preliminary data on ’07 which suggests it’s about flat to maybe up slightly. But overall, the past two years, it has been flattish to down. That is something that certainly causes us concern. The reduction of federal dollars could be a real body blow to the industry, because these are the dollars that go into the academic research institutions – the MITs and the Harvards – that can lead to the next generation of companies in Massachusetts. It’s certainly a concern.
 
We haven’t seen the money going to other states. But I think to the extent that overall NIH funding flattens, and we aren’t getting what someone once referred to as our disproportionate fair share of NIH funds, we’re going take the disproportionate whack in Massachusetts. Something has to fill that breach. So hopefully, an initiative like the [Life Sciences Initiative] bill will be a step in the right direction in filling some of that breach that’s created by the flattening of NIH funding.
 
Another important finding in the report was the increase in the number of Massachusetts life sciences jobs. This year’s report, like last year’s, recorded a 20-plus percent gain in biotechnology sub-sector of life sciences jobs. How sustainable is that, when you consider that pharma companies have stepped up their layoff activity in recent months?
 
I think that’s a great question. I think there’s a fundamental difference between biotech and pharmaceuticals. I think a lot of the pharmaceutical layoffs you’re seeing are around sales forces, whereas the biotech employment is heavily focused on researchers. The biotech sector is really where the innovation is coming from. It’s not coming from pharmaceutical companies.
 
If you look at some of the [mergers and acquisitions] activity that has been going on lately, pharma companies have been coming to Massachusetts to buy their innovation. We’re selling our innovation. We make it from scratch in Massachusetts. That speaks well for the biotech sector in that we continue to be a hub of innovation.
 
I think the chilling you see in the pharmaceutical level, in terms of employment, really shouldn’t have an impact on Massachusetts. To the contrary, if you look at what the pharmaceutical companies have been doing in terms of where they’ve expanded their hiring – Novartis has expanded its hiring in Massachusetts. Wyeth is hiring a lot of people in Massachusetts. The pharmaceutical companies are realizing that Massachusetts is a great place to set up shop and build [their] innovation centers. So I think the pharma and biotech realm – the industries are often linked – I think they are fundamentally different, and I think the fundamentals around what’s going to drive hiring in biotech are still very good for Massachusetts. And I don’t think any of those plans for the pharmaceutical sector should affect us adversely at all.
 
The report also found that the percentage increase in Massachusetts lagged behind the life sciences increases of the nation as a whole, as well as of California. Can you explain why?
 
It’s very difficult to see what moves in trends year-to-year. Any change in one large business can move the needle there. I couldn’t speak to what’s moving the numbers in the short term. I think we have seen good job growth, and we are well positioned for additional job growth. We do think every state has a program for trying to attract these life sciences [companies] and pharmas. Everyone’s trying to replicate what we have.
 
Besides, you’re in a very competitive place competing for life sciences talent. In this day and age, we have a very mobile work force. All you need is a couple of acquisitions in one market – you saw [last] week where Millennium has been acquired. Their acquirers, Takeda and GSK [GlaxoSmithKline], said they’re going to keep those [Millennium] employees here. If that was not to be, that would move the needle on employment locally. So we need to continue to prime the pump, and have new companies growing up in Massachusetts, to kind of replace those that are getting acquired. I think if you were to look year-to-year, I would suspect some of the modulation in employment probably has to do with M&A activity.
 
Has that employment increase continued into 2007, let alone this year?
 
I don’t have the ’07 data, so I couldn’t speak to that. The data for ’07 is not finalized. We didn’t want to cite any data until the data sources themselves say it is the final numbers.
 
The report partially blamed job losses in the pharma and medical device areas on commoditization of products, resulting in outsourcing. Are Massachusetts companies looking at returning current manufacturing jobs, or creating new ones, in the state?
 
Biotech companies would generally prefer to set up their manufacturing close to where the science is being done. You look at a company like Genzyme [that] has a lot of their manufacturing done in Massachusetts. The challenge there is, it is an expensive state to do business. Other states, and other countries, are pushing hard to attract companies, to set up manufacturing – North Carolina in particular.
 
But I think an interesting dynamic you’ve probably read about is the recent issue around Heparin; it was manufactured in China and came into quality issues. That could have a chilling effect on companies’ plans to move toward low-cost manufacturing sites. While you can certainly save money, the reputational risk you run if you can’t assure quality is going to be a serious concern. While it’s too soon to say we’re seeing any trend, we know in talking to some of the folks in the sector, that concerns them. A lot of companies have made plans to expand manufacturing in China, because there’s a very well-educated workforce there, low-cost. But at some level, you have had a real concern lately, from the people doing the paperwork, around the challenge of having your manufacturing halfway around the world.
 
Does this issue explain the potential for increasing employment through downstream manufacturing that is discussed in the report?
 
I wouldn’t say they are entirely unrelated. I think I’d go back to my earlier point that a lot of this manufacturing is not pharmaceutical manufacturing. It is not easy manufacturing; it is very complex manufacturing. I think there are a lot of companies that prefer, if they can justify it from a cost standpoint, to have all of their complex manufacturing close to where the science is done. And I think that could benefit Massachusetts, provided that companies can get through the permitting and other issues here. … One of the issues you often hear around manufacturing is, while cost is a consideration, one of the bigger challenges of Massachusetts is getting through all the permitting hurdles to set up a manufacturing shop.
 
Why have investors shifted more of their VC funding to biotech as well as medical device companies? And how can the med device sector continue to draw steady investment given that sub-sector’s decline in jobs seen in the report?
 
There’s still a lot of great innovation coming out of Massachusetts in the areas of biotech and medical device. That’s where the VC money is really targeted. The VC money is more a measure of the companies of tomorrow rather than who’s building a medical device manufacturing facility. With some of our big medical device employers … the total employment in the sector is probably going to be more a function of what those larger medical device companies are doing. VC money is a better indicator of where the VCs believe all the great innovation is coming from. And they continue to flock to Massachusetts to fund some of the early-stage companies that are developing the next generation of products.
 
If you look at some of the companies that have developed the medical devices in Massachusetts, we’ve had a lot of success with small companies getting developed. But what ends up happening is, they tend to get acquired far more often than the biotech companies. Their exit is usually getting acquired by a Boston Scientific, by a Johnson and Johnson. They may not rise into visibility the way biotech companies and others do. This is still recognized as an area of great medical device and instrument innovation.
 
What significance should be placed on the report’s recording a slower decline in medical device sub-sector jobs for 2006 compared to 2005, going to about 8 percent from about 12 percent?
 
We’re actually trying to get under that number, because quite frankly it struck us as odd. Of the folks we had work on the report, no one could think of what would drive that: A company moving out of state? Or a company closing down a manufacturing operation? We don’t know whether that was some kind of odd anomaly. And bear in mind the numbers could have been affected by some companies changing their code, changing their designation after deciding: ‘We’re less of a medical device company and more of a biotech company.’ That can cause a shift.
 
We dug through the data because that just struck us as odd and inconsistent. ’05 to ’06 has to be some kind of an anomaly. We could not pinpoint any single issue that would have led to medical device employment declining the way it did between those two years,
 
Could you please discuss the overall increase in private investment capital for Massachusetts life sciences companies shown by the report? Is that strictly reflecting organic business growth in the state? Or is that a shift of money that otherwise would be invested in other superclusters or smaller states?
 
The increase in funding year-on-year, in life sciences and medical devices, seems to be fairly consistent with the increase in total venture capital funding. Total VC funding in 2007 versus 2006 is up about 11 percent, which is not far off from the overall increase in funding from ’06 to ’07.
 
If you look at regional investment and venture capital investing overall in life sciences, it doesn’t appear that New England is getting an increase in the share of total VC investment. But the shift you’ve really seen from, say, 2002 to today is the mix [of industry sectors]. Back in 2001 and 2002, a lot of the New England investment and the West Coast investment were much more focused on high technology – software, etc. And there’s been an enormous shift in the sectors in which the money is invested, from high technology to life sciences in the last six or seven years. VCs are seeing where the best opportunities for return are.
 
And when you look at the Chinas and the Indias and the growth there, we refer to it as kind of a double-edged [sword]. On the one hand, there’s a global threat there because they’re competing for life sciences talent. But on the other hand, they’re spending more on healthcare, so there’s a great opportunity for our local life sciences companies to expand their businesses over there as well. Right now, the VC money continues to flow into New England, as well as to the Bay Area and San Diego – those are the biggest areas, which life sciences venture investors view as the true cores of early-stage innovation.
 
The report cited Massachusetts’ high cost of living and relatively high-tax policies among the challenges that life sciences companies face if they wish to grow in the state. How should the state and local governments address those challenges?
 
The high cost of living, I’m not sure how we’re going to address that. It’s certainly seen as a factor. I think you can look at that a couple of ways. One is, given the high cost of living, and this is a sector that has high-paying jobs, would certainly suggest [that] this is a sector we have to support, because it actually produces the types of jobs that continue to support Massachusetts. But one of the reasons for the high cost of living is that a lot of people want to be here. Even in this sector, people flock to this supercluster to work here, because it’s really a hub and a cradle of innovation, and people want to be a part of it.
 
I’m pretty sure we’re not going to solve the weather issue [and] compete with California on weather. But if you look at the two other really large clusters, both of them in California – the Bay Area and San Diego – they’re also high cost-of-living, and I think it’s the same [challenge they face,] in terms of, people want to be here. I think our challenge will be [that] we need to keep what we have. A lot of states and other countries are trying to create their own clusters or superclusters. Every one has a program in place to build [its] own centers of excellence. Our supercluster is very difficult to replicate, but not impossible. So I think what we have to continue to do is support what we have. I’m not sure that overnight we’re going to be able to solve the high cost of living in Massachusetts.
 
Another challenge cited by the report is the need for improved transportation, especially more mass transit connecting Boston to suburban areas and the state’s emerging life sciences hubs, such as Worcester. Yet that will require more spending than the state says it is capable of carrying out any time soon. How should that issue be addressed?
 
One of the points I was actually pleasantly surprised by is, we had a question around, ‘What factors will cause you to leave Massachusetts if you were going to seek employees here versus elsewhere?’ We were surprised by what a small percentage … cited the commute as the reason. In the last survey over a year ago, the commute was cited by far more people as something that caused a lot of concern. I’m not sure why, whether the respondents [constituted a] broader [sample of life sciences executives] or not. But we were pleasantly surprised to see that commute was not cited by as many people as being a problem as it was a year ago.
 
If you look at the other [life sciences] markets, if you look at the Bay Area, it is no easy commute either. I think it’s a matter of where the companies want to be: Here, in the Bay Area and in other areas, the traffic is a function of people saying, ‘Look, if you’re going to be where the hot innovative companies are, where everyone wants to be, you’ve got to put up with things like traffic.’ So I’m not sure if it’s people getting resigned to the commute, or whether people feel there has actually been improvement over the past couple of years.

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