The home of the Hershey chocolate bar has a sweet spot of another sort for startup companies in the life sciences and other technologies — namely the 80,448-square-foot Hershey Center for Applied Research opened two years ago this May.
The facility is the first of up to a dozen buildings totaling 1.2 million square feet envisioned for a 165-acre campus near Penn State University's Milton S. Hershey Medical Center and College of Medicine.
Along with owner/developer Wexford Science + Technology — whose Pennsylvania presence includes the University City Science Center in Philadelphia — HCAR is also working on the next phases of its expansion.
According to Wexford, the Hershey Center for Applied Research plans later this year to start construction on six new technology suites of up to 7,500 square feet in the second floor of the existing building, and a $1.5 million project designed to accommodate growing demand for space by startups.
In addition, HCAR and Wexford are seeking federal and state funds to help them construct a $40 million, 100,000-square-foot second building at the center.
BioRegion News earlier this month spoke with Laura Butcher, HCAR's executive director, about the center and the broader challenge of nurturing and anchoring a concentration of life sciences businesses in a region of Pennsylvania located about 100 miles west of the state's traditional life-sci anchor of Philadelphia, and more than 200 miles east of Pittsburgh, which has grown its own cluster of startups using tobacco settlement funding.
Following is an edited transcript of that interview:
First, could you discuss HCAR's progress in the two years since its opening?
We’re about 65 percent occupied. Our current occupancy consists of several Penn State entities that came over and anchored the building; that academic presence is really essential in terms of developing new research park buildings. We have the Department of Pharmacology, which makes a lot of sense to be here, and the applied research center, because they work so closely with industry, as well as the tech-transfer office, and a sleep treatment and research center.
The concept is to fill the balance of the building with industry or research institutes that may be funded through federal or state dollars. We’ve had success on that front to date. We have four companies currently located in the research park. They all have ties in one way or another to Penn State. That truly is the hook to get companies to think about Hershey, Pennsylvania, as a good place to expand or relocate. And those companies range from a food science company that is actually a spinout of the Hershey company, to a medicinal chemistry company, to a medical diagnostic company.
What has made HCAR attractive to those early-stage life-sci companies?
In this region, south central [Pennsylvania], there is a good amount of activity within the early-stage segment, because of the support that we have here in the region for young companies. Whether that’s through the Life Sciences Greenhouse of Central Pennsylvania, or Ben Franklin Technology Partners, an angel network or venture capital network, where we really have to work hard is at those later segments.
If you look at the business life cycle, you’ve got your formation stage, and your concept-stage companies. And then in the emerging and growing mature stage, south central [Pennsylvania] is not a mecca for the life sciences industry. So we’re really building that critical mass of activity as part of what we’re doing here at HCAR. In order to do that, we have been looking at what our strengths are, and really promoting those to companies — things like the strengths of the Penn State College of Medicine, and being that they’re number one for diabetic retinopathy, for instance. They’re building a new cancer institute. We're leveraging these strengths and translating that into the private sector to attract companies.
Being that we’re only an hour and a half away from Philadelphia, and an hour and a half from Baltimore, I think we have a real value proposition for those later stage companies.
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What effect has the economic upheaval of recent months had on companies at HCAR?
What we’re seeing is that companies at those stages are just taking longer right now to make decisions because of the economy. We have a couple of examples of that right now, where the deals are just taking longer to close. On the early-stage front, the venture capital funding is more difficult to identify right now; however, the state programs that are robust in Pennsylvania are really in many ways making up for that lack of venture private sector investment right now.
How long are deals taking to close now, and how long was it previously?
To give you a case study: We have a Japanese clinical research organization, a phase 1 CRO, that was very, very close to closing a deal with us back in December of 2008. And because of the economy, they have delayed their decision by another year, because they want to wait out the recession. And they’re guessing that within a year, they’re going to be ready to pull the trigger. So it was a long process to begin with, most times. Companies certainly do not take these decisions lightly. And I think that what was a long process is becoming an even longer process by a year or more.
Are most or all of your startups tied to Penn State? Or can they come from another institution?
They all have Penn State connections, but they’ve come from diverse sources. One is a Penn State spinout company. It spun out of the Department of Pharmacology, which is located in our building and landed here. Another came from New York state, and they came here because of an SBIR grant with Penn State; they wanted the close proximity and access to the core facilities in the building, and the access to the [principal investigator]. Another one came from North Carolina because a faculty member was recruited to Penn State Department of Ophthalmology, and brought his company with him. And then the fourth one spun out of the Hershey company, the chocolate company, which is literally a mile away from us.
HCAR has had plans for as many as a dozen buildings. Is it too soon to be looking at some of those actually getting built given the influx of companies? Where does that effort stand?
The master plan was developed for 12 buildings totaling 1.2 million square feet. And I think our story is really interesting because the land here that we're on, the 165-acre parcel, is owned by the Hershey Trust Company. And in turn, the research park is going to, and is currently providing educational opportunities to the Milton Hershey School Trust, which is the beneficiary of that $6 billion trust fund that the chocolate maker set up.
The Hershey Company sees this investment, and they treat it as a real estate investment, as a way for South Central [Pennsylvania], and Hershey in particular, to transition from being a legacy economy that was fueled by manufacturing, to one that is fueled by innovation now. So they see this project as being one of the key engines to allow this region to compete in the global economy many decades down the road. There is a very long-term perspective for this project, from the fiduciary organizations.
We are in fact moving forward with the second building. It's fully designed from an architectural perspective. The land development plans have been approved. And we're in the process of identifying an anchor tenant for that. The other interesting thing is that we can do greenfield development, so if an R&D company is interested in having an 80,000-square-foot facility, we could do that build-to-suit here on part of our campus. But it would be done as part of the campus in an environmentally sensitive way, because we employ [Leadership in Energy and Environmental Design] principles here.
How big would the second building be?
It's going to be 100,000 square feet.
You noted that where you are isn’t by itself a major magnet for biotech, unlike other areas in the Philadelphia region. How does your area mesh with the Greater Philadelphia's broader life sciences effort?
Pennsylvania competes very, very well in the life sciences industry. In fact, Business Facilities magazine within the last six months named Pennsylvania the number-one state for the biosciences industry. Deloitte came out with a study recently that [showed Greater Philadelphia's life-sci cluster] number-three to the Boston and San Francisco areas. Part of that is because of the existing critical mass of activity in Philadelphia, Pittsburgh, and the Lehigh Valley.
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But part of it also is because of our commonwealth's commitment to the life sciences industry, a $2.8 billion commitment, and new funding coming online through the federal [American Recovery and Reinvestment Act].
When you put all that together, you put our location, our close proximity to Philadelphia together with our proximity to Penn State College of Medicine; our proximity to Washington, DC, the regulatory capital; New York City, the financial capital; access to international markets, and then this state support; [and proximity to] big pharma an hour and a half down the road, it really is a strong value proposition to make. And also, the cost is just a little bit more attractive here than you'll find in some of those metro markets.
One key advantage to the larger metro areas you cited is availability of workers. What efforts are taking place in and around HCAR to develop talent?
The workforce question we find is oftentimes at the top of the priority list for companies as they're making their decisions about relocation, or expansion. We don't have the level of workforce churn here in South Central [Pennsylvania] that you'll see in other metro areas like Philadelphia or Boston, for instance.
However, we do have a decent level of four-year degree students at the technician level, as well as graduate students coming out of the Penn State College of Medicine. But what we often have to do is supplement that by drawing workforce from the Philadelphia area to the South Central [Pennsylvania] region, and we often find that again, going back to the cost of living and cost of doing business here in bucolic Hershey that for some people, it's a very compelling option to come to South Central [Pennsylvania]. We're able to address that major need that industry has, but we have to get a little more creative than some other regions.
If you go ahead with the second building, what state funding can the park tap into? Can it use federal stimulus funding?
It's absolutely essential for us to have public investment for the second building. This first building had $5 million in Business and state funds from the commonwealth of Pennsylvania. The second building has a $4 million to 45 million gap. And the reason is that wet lab space is extremely expensive to build out. It can run $400 a square foot, easily. And in order to make that a viable option for leasing by not only early stage companies, but later-stage companies, those public investment dollars must be infused into the project, and [the resulting savings to HCAR and Wexford] passed on directly to the tenants in the form of reduced rents.
We're actively pursuing both state and federal funds. We are excited about the fact there are new federal funds coming through the ARRA that are targeted toward these types of projects that focus on job creation and innovation. And we're also applying for ARRA funds for the first building, to build out additional technology suites since our current suites are filled, so that we don’t have to turn away these young companies.
How much funding do you need for both the technology suites and for the second building overall?
The second building is a $40 million building.
At the first building, would you build out additional space or reconfigure part of existing space to accommodate the new tech suites?
It would be additional square feet. In the first building, the current technology suite space is on the first floor. This proposal we have into the [US Department of Commerce's Economic Development Administration] would be for six additional technology suites on the second floor. And similar to the current suites, they would be flexible, modular wet labs that range from 500 square feet to 1,000 square feet, with one-year commitments in terms of the lease, and 90-day out clauses. And the idea is that these companies come in here, and they're surrounded by ecosystem assets — capital, workforce, technical assistance. Once they pop, they'll take additional space, either in this building that we're in now, or in a future building.
The funding from the EDA or elsewhere is critical to making this work, because it still costs $150 a square foot to build out these tech suites. There's no way you can make it affordable to the young companies, and anywhere close to financially viable for the developer, unless you got these public funds in there.
How much funding will be needed for the suites?
It's a $1.5 million project, and we are requesting $750,000 from the EDA.
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How do you plan to raise the rest?
The rest would come through a private match through the developer, Wexford.
What's the timing of constructing the additional tech suites?
Our understanding is that the funds are going to be targeted toward projects fairly quickly, within the next three to six months, because the federal government does want to get these dollars on the street, creating jobs. So that really would be our timeline.
How much of the second building will need to be leased before Hershey and Wexford can proceed with construction?
It's an interesting question, and it's a question of timing. Traditionally, banks required that new buildings like this have 30 percent of the building pre-leased in order to break ground. But in this economic climate, it's more challenging. Today if we were to ask the same question to the banks, they would probably say, more like 60 percent pre-leased. But we feel that number is going to improve in the coming months.
How will the types of tenants drawn to Hershey change as a result of the new tech suites and the second building?
It is staying within the existing mission. We are the Hershey Center for Applied Research. We don't have life sciences or bio in our name. And that's for a reason. We do focus primarily on the life sciences industry because of our proximity to the Penn State College of Medicine. However, if a company does really well in cleantech and nanotech, advanced manufacturing and IT, we can certainly accommodate those types of companies as well. And in fact, with this past [year's] budget, Pennsylvania just created an [$850 million] Energy Independence Fund that's really going to spur cleantech. Certainly we could accommodate those sectors as well.
Right now we're 100 percent life sciences. I believe that we really do have to diversify. And the reason for that is the timeline to success in the life sciences industry is longer than just about any other industry. So I think we need to attract some companies and organizations that have a shorter timeline to market, in order to continue to develop at a good pace. I think it's good that our development guidelines provide for some flexibility. They say that any organization that locates into the Hershey Center for Applied Research has to be either focused on innovation, research and development, or entrepreneurialism. It allows us to cast a wide net, and I think with time, we'll start to see more diversity in our tenant mix.
What efforts has HCAR made to broaden its tenant mix beyond the Hershey area?
We're doing really well with having discussions with foreign-based companies that are considering entering the US market. I think the reason for that is, going back to Pennsylvania's state government support, the commonwealth has contractors in 17 countries overseas whose jobs it is to bring new companies into Pennsylvania.
We've tapped into that network, and right now, for instance, we're working with a New Zealand company that is interested in being operational at HCAR by mid-2010. And for these international companies, I think where we're more able to really differentiate ourselves is, we provide a turnkey solution for them. Oftentimes, the last part of the discussion is the real estate piece. And then we talk about the research hook, whether it's the [ability to carry out] clinical trials or sponsored research, or the talent. And then it's about capital: What kind of an incentive package can the state put together? We're playing that concierge role to package all of this for these international companies. It helps them be more confident that they're going to have a soft landing and not a crash landing in the US market. And maybe we're doing well in that arena because we do have to try a little bit harder here in Hershey. And these foreign-based companies really appreciate that approach.
Which areas of the world are international companies coming from?
In addition to New Zealand, Japan and South Korea in Asia, as well as Belgium.
To what extent are these companies tied to particular institutions in or around Hershey?
No. It comes from these international contractors who are working with companies that are ready to enter the US market. The timing's right. They've just been great funnels for lead generation for us. We've worked really hard to put together a turnkey solution for them, and I think the process is starting to pay off.
To what extent does this international presence tie into the overseas attraction efforts of existing parks in Pennsylvania, particularly University City Science Center in Philadelphia?
It's definitely collaborative. We have the same developer [as Science City]. Oftentimes, companies that are looking at HCAR or the Science Center will look at both. They're going to be different from one another based on the academic centers they are associated with, location, cost, whether it is metropolitan or in a cornfield. We're very supportive when it comes to showcasing the options to these companies.
The competition is pretty much nonexistent. It's actually a very supportive environment where we're just showing these companies the options. Our offerings are so unique; my motto is, 'Once you've seen one research park, you've seen one research park.'