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Small VC Haul, Tax Incentives Slow Colorado's Ascent to Heights of Biocluster Tiers

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Colorado is well on its way to hosting a growing life-sciences industry, but the state must build up its small-but-growing venture capital haul, and create more tax incentives before it can develop into a top-tier biocluster, the state's lifesciences industry group concluded in a recent report.

The Colorado BioScience Association's new Colorado Bioscience Roadmap 2008, prepared for CBSA by Battelle Memorial Foundation, acknowledged that the state has enjoyed growth in its cluster of life-sciences businesses, in academic programs and their accomplishments, and in state government subsidies intended to support the industry.

"While Colorado has made great progress since 2003, gaps remain that hinder the growth and development of the state's bioscience sector and its positioning in the increasingly global economy," according to the report. "Chief among these are a continuing need for additional sources of early-stage risk capital and a more robust technology commercialization and entrepreneurial support network with sufficient financing."

The state's bioscience employment base grew 6 percent since 2001 from 16,874 employees in 663 establishments to 17,856 people in 920 establishments in 2006. Much of that gain appears to have taken place in 2001, judging by 2002 figures published the following year in the state's initial life-sci blueprint, Colorado's Place in the Sun: An Action Plan to Grow Colorado's Bioscience Cluster, that listed a state bioscience industry of 17,681 employees in 604 establishments.

According to the most recent report, to grow further over the next five years, Colorado will need to ratchet up its availability of capital, especially at early stages; step up support to bioentrepreneurs and their companies; develop, attract, and retain people with the skills and education needed to fill life-sci jobs; build more research facilities; and build up life-sci specialties that will allow Colorado to stand out from other states and countries.

"Our main objective is a 'grow your own' philosophy," John Collar, CBSA's executive director, told BioRegion News via e-mail. "With continued support for our research institutions, we will be able to grow our already talented workforce which will attract companies, and also maintain the entrepreneurs that call Colorado home."

Collar spoke a few days after his association released the Bioscience Roadmap, a 51-page report updating the state's progress toward fostering life sciences-industry growth in the five years since the 2003 report.

The new report, released late last month, also laid out a five-year plan that called for the state to focus future life-sciences growth on three strategic areas or "technology platforms:" bioenergy, electronic medical devices, and pharmaceutical biotechnology.

Colorado can enhance the presence of these specialties in the state's life-sci industry, according to the report, by adopting its recommended five strategies: Ensuring availability of capital for bioscience companies at all stages of development; creating a robust technology-commercialization infrastructure to rapidly move discoveries into the marketplace; ensuring that Colorado can attract, retain, and produce individuals with the skills to meet future bioscience-workforce needs; promoting Colorado's position as a leading bioscience center; and making a long-term commitment to bioscience industry development.

Colorado was one of the few states to record year-over-year increases in the amount of venture capital invested in state-based biotechnology and medical-device companies during the fourth quarter.

MoneyTree Report showed Colorado had more than quadrupled its biotechnology VC bets year-over-year during the fourth quarter, zooming from $5.5 million to $23.5 million, despite a drop in the number of deals from four to two; and more than doubling its medical device and equipment financing year-over-year during Q4 '08, to $12 million in three deals from $4.5 million in two during Q4 '07. MoneyTree is a quarterly VC study by PricewaterhouseCoopers and the National Venture Capital Association, with data from Thomson Reuters.

Dow Jones VentureSource showed an even more dramatic year-to-year fourth quarter increase, to $35 million in a single biopharmaceutical VC, from $1 million in a single deal a year earlier. DJVS recorded Colorado as receiving $18 million in med device funding in the final three months of 2008, compared with $9.4 million in the year-ago period; though in a mirror image of MoneyTree, DJVS recorded two med device deals in Q4 '08 and three in Q4 '07.

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"Venture capitalists and large bioscience companies are beginning to recognize that Colorado is a national player in the biosciences, but there is still more work to be done. Through the research institutions and the over 900 companies in the state, there is an exorbitant amount of activity being conducted in the state, but many of these opportunities go unnoticed by venture capitalists on the coasts," Collar told BRN.

"While more attention is being given to the state, we would like to grow Colorado's industry as a national hub for bioscience and to do so, we need to continue to focus our attention on what great research and technology is being conducted in Colorado," Collar added.

One significant step in generating that attention, Collar said, will come on Sept. 17, when life-sciences leaders and investors from the state gather at the Ritz-Carlton hotel in Denver for the Rocky Mountain Healthcare Investor Conference, now being organized by CBSA and the Governor's Office of Economic Development and International Trade.

"We are currently working on the logistics for the conference, but we will have four tracks dedicated to biotechnology, medical device, diagnostics, and technology-transfer research being conducted in the Rocky Mountain Region," Collar said. "We are expecting to have about 30 presenting companies and also allocate time for one-on-one networking and discussions."

Launching the investor conference was one of 10 first-year actions listed in the report for carrying out the five strategies. The other nine include:

• Holding a Governor's Capital Summit to begin planning for a $250 million Fund of Funds;
• Implementing a statewide business development and entrepreneurial support network through CBSA;
• Identifying experienced bioscience executives willing to mentor bioscience entrepreneurs and emerging bioscience firms;
• Creating a CBSA Foundation to link life-sci companies with Colorado schools in crafting education initiatives that advance bioscience scientific literacy;
• Proposing legislation to create and fund a science teacher externship model program, projected to cost $600,000 annually;
• Beginning discussions and initial planning for the Colorado Bioscience Fund.
• Developing a business plan for the Colorado Drug, Diagnostic, and Device Development Institute;
• Proposing legislation creating tax credits for angel investors and investors in early-stage venture funds; and
• Proposing legislation to expand the biotechnology sales and use tax credit to medical device companies.

The $250 million "fund of funds" would leverage $750 million from investors, and would invest in privately managed venture funds that are headquartered in Colorado, or "agree to make a good-faith effort to invest in Colorado companies."

"A minimum of 30 percent of the total fund dollars [should] be invested in bioscience venture funds" with the focus being on funds that will address seed and early-stage financing gaps in Colorado's venture capital market, the report proposed.

As a model for Colorado's fund, the report cited Indiana's $73 million "Future Fund," which set aside 60 percent of its investments in the life sciences, targeted to specific technology platforms. The Future Fund is capitalized by public and private investors that include the Hoosier State's pension fund and teachers' retirement fund, Eli Lilly, Anthem Blue Cross/Blue Shield, and the endowments of four universities.

Collar told BRN the fund of funds "will likely be an item we delve into later on in the five-year plan."

"We believe that with more national attention drawn to the region through activities like the Rocky Mountain Healthcare Investor Conference we will be able to garner enough attention to make the fund-of-funds an obtainable goal for the state," he said.

To accelerate tech commercialization, the report recommended creating a Colorado Drug, Diagnostic, and Device Development Institute. The CDDDDI would work with university tech-transfer offices and entrepreneurs to identify promising technologies, help researchers form companies, and provide assistance to those that have products ready to be advanced toward US Food and Drug Administration review.

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"The ultimate objective of the Institute would be to create companies that are appropriately positioned for significant institutional (Series A) venture funding that will enable them to hire employees, execute the clinical development plan, seek partners, and enter into Phase I clinical trials," the report stated.

CDDDDI would cost $4 million to $5 million to create, the report projected.

The last two first-year recommendations have already been codified into bills now under review by state lawmakers.

House Bill 09-1035, introduced by Rep. Jim Riesberg (D-Greeley), would expand the categories of business eligible for refunds of up to $50,000 in state sales and use taxes paid on personal property for research and development to include medical-device makers, producers of biofuels, and other "clean" technologies that are headquartered in Colorado and that employ 50 or fewer full-time employees. Biotech businesses are already eligible for the credit.

House Bill 09-1105, introduced by Rep. John Kefalas (D-Fort Collins), would provide tax credits for angel investors in life-sciences startups, as well as startups working to develop biofuels and other alternative-energy technologies; aerospace; and information technology.

The credits would be 15 percent of the amount invested for each of the two years after the investment is made, up to a maximum total of $100,000. The state may grant a maximum of $3 million in credits during each year, which Colorado is projected to reach during the bill's first full year; the first-year cost has been pegged at $1.5 million when the bill is set to take effect Jan. 1, 2010.

Colorado can expect to reach the $3 million annual limit from the bill's first year, according to a Legislative Council Staff Fiscal Note, since the state received $460 million of venture capital investments in clean technology firms during 2008, according to Cleantech Group. Additionally, the CBSA recorded $276 million of VC investments in Colorado bioscience firms during the first half of 2008, incuding $158 million raised by a single company, cellulosic-ethanol producer Range Fuels.

That's a lot more than the $97.6 million in five biopharma deals, and $30 million in three medical device deals, that Colorado recorded in 2008; compared with $80 million in seven biopharma deals, and $54.9 million in seven med device deals during 2007, according to a report by Dow Jones VentureSource.

MoneyTree showed $123.2 million in 13 medical device and equipment deals for all of 2008, up from $44.05 million in seven 2007 deals. For biotech, MoneyTree listed $26.1 million in four 2008 deals, down from almost $80.5 million in 11 deals during 2007.

HB 09-1105 was expected to clear Colorado's House Finance Committee on Feb. 4. But with some panel members worried about losing state revenue — the state faces a $632 billion budget shortfall for the current fiscal year and a more than $1 billion gap for FY 2010, and faces uncertainty over how tax breaks will create new jobs — Kefalas had just five of the six votes needed for his bill to pass the committee and advance to the chamber's finance committee, he said.

Rather than risk defeat, Kefalas told BRN last week, he agreed to "lay over" the legislation two weeks, and will use the time to try to win a sixth vote for the bill, possibly through amendments that "address the fiscal impact." He said he could move to extend the time to Feb. 19.

"I think we can get it out of the finance committee," Kefalas said in an interview. "While we have tremendous support for it, we're very challenged in Colorado to do tax credits, especially when we have the revenue shortfall. Even $1.5 million isn't chump change."

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Complicating matters for the state is the fact that Colorado must cut $201 million from this year's budget via means other than taxes, such as spending cuts or not carrying out previously approved spending.

HB 09-1105 has already been amended once, with wording that spelled out the clean-energy technologies eligible for the tax credit.

HB 09-1035 is pending in Colorado's House Appropriations Committee after passing the Finance Committee in a 7-4 vote Jan. 27. That vote followed an amendment setting a July 1, 2014, expiration date.

Life-sci companies would also benefit from three other bills within the package also now under review.

House Bill 09-1001, introduced by Rep. Joe Rice (D-Littleton), would award tax credits to any employers who creates 20 or more jobs in Colorado — a figure that drops to 10 or more jobs for employers that locate in one of the state's rural communities. That measure is pending before the House Appropriations Committee after passing the House Finance Committee by 10-1 on Feb. 4, and the House Business Affairs Committee by 14-0 on Jan. 28.

HB 09-1001 and HB 09-1035 are two of four bills affecting life sciences that were part of a nine-bill "Job Creation Package" announced last month by Gov. Bill Ritter, elected in 2006 as the first Democratic governor to see Democratic majorities in both chambers of the Colorado General Assembly.

The other two bio-related bills in the package were filed in the state Senate.

Senate Bill 09-67, introduced by Rollie Heath (D-Boulder), would spend $2.5 million to revive a state guarantee investment pool of up to $50 million in new loans to small businesses, to be overseen by the Colorado Housing and Finance Authority.

And Senate Bill 09-31, introduced by Heath with a companion House bill by Riesberg, would award grants of up to $50,000 to technology-transfer offices at institutions of higher education, and up to $150,000 to early-stage clean-technology companies, for R&D projects involving biofuels and other renewable forms of energy.

Under SB 09-31, recipients would be required to match their grant awards dollar for dollar. One-quarter of the funding must go to higher-ed institutions, another quarter to early-stage companies, and the remaining half to academic-industry partnerships.

Colorado would fund the program by more than doubling the fee for collecting waste tires, from the current $1.50 to $3.25 — an increase the state projects will generate $5 million in FY 2010 and another $5 million in FY 2011. Both years, the state would set aside $76,747 of the $5 million to pay for a new state economic-development staffer to oversee the program — not counting health and pension benefits of $7,190 in FY 2010 and $7,200 the following year — and shell out operating expenses projected at $6,178 in FY '10 and $950 in FY '11, according to a State Fiscal Impact report on the bill.

On Feb. 4, the state Senate Committee on Business, Labor and Technology unanimously passed SB 09-67 by a 7-0 vote, moving the bill to that chamber's appropriations committee. A day later, SB 09-67 passed the Local Government and Energy Committee in a 4-3 vote and moved to Appropriations.

That vote came six days after the Joint Select Committee on Job Creation and Economic Growth voted 6-0, with four "excused," to advance the bill through the General Assembly. Colorado lawmakers have sought to boost the state's life-sci industry in recent years. In 2006, the Legislature created the Bioscience Discovery Evaluation Grant Program, and last year increased its funding to a total $26.5 million over five years, starting with the fiscal year set to end on June 30.

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The state's tight budget will likely make it harder to pass bills using state funds to support Colorado's life-sci industry this year, and perhaps longer-term, Kefalas acknowledged, citing his own 09-1105. At the same time, Colorado will have to continue offering incentives for the sector

"In the economic recession, what we're learning is that in a globally competitive market, any type of incentive that can help leverage additional resources is a good tool," Kefalas said.

Beyond FY 2010, the Roadmap recommended that CBSA should join with life-sci leaders in developing "a large, multipurpose fund that could strategically invest in bioscience infrastructure – including facilities, faculty, equipment, and capital – thereby able to allocate funding to the greatest demand at any given time."

Colorado "will need to invest several hundred million dollars over the next five years" to launch the fund, which the report likened to megafunds in other states — from the $1 billion, 10-year Massachusetts Life Sciences Act, to the Maine Technology Asset Fund, a competitive grant award program for R&D and commercialization in life science and other technologies, funded with $50 million in bonds approved by Pine Tree State voters last November.

The report also said CBSA should support current and proposed biofacility projects — from the $100 million first phase of the Colorado Science + Technology Park at Fitzsimons in Aurora, where developer Forest City Science+Technology Group plans to build more than 5 million square feet of life-sci space by 2033 [BRN, Sept. 8, 2008] to eight university facilities said to cost a combined $811 million [See list at end of article] — as well as ensure the state economic-development office include staffers designated to work with life-science businesses, and join that office and local economic-development offices in spending $500,000 to launch a marketing campaign to promote Colorado as a bioscience mecca.

Additionally, the report urged CBSA to work with regional business development groups to offer greater support to life-sci companies. "They will need additional resources that could be provided by state government or by regionally based organizations or their host institutions," according to the report, which pegged the expense at between $300,000 and $400,000.

That same money, CBSA said, could also be used to establish a Bioscience Executive Corps, whose members would serve as mentors to start-up bioscience companies.

The report also urged the creation of a Bioscience Industry Fellows Program to help place life-sci graduates and post-doctoral students in bioscience companies that would provide senior scientists to mentor the fellows at an annual cost of $375,000 for five fellows.

"The program could begin initially by funding one to two fellows annually. The number of fellows could be increased as the program demonstrates success in future years," according to the updated Roadmap.

Also recommended longer term was to extend BDEGP beyond five years — without setting a new timeframe or calling for a permanent program — as well as raising annual funding to $7 million a year from about $5.5 million.

Also recommended was for the BDEGP to provide 30 percent of its funding for "proof of concept" matching grants to technology-transfer offices within state research institutions, another 30 as matching grants to early stage Colorado-based bioscience companies, and the remainder for partnership efforts between the bioscience industry and Colorado research institutions toward commercialization of technologies. BDEGP awards grants of up to $150,000 to tech-transfer offices of universities and other research institutions, and up to $250,000 to early-stage companies.


Pipeline of Colorado University Projects

The Colorado BioScience Association's Colorado Bioscience Roadmap 2008 identified eight recent and proposed university life-science facility projects costing a combined $811 million that it said reflected the growth of Colorado's bioscience sector since the original Roadmap report appeared in 2003:

University of Colorado
• UC Denver Biomedical Initiatives, $275 million
• Colorado Initiative in Molecular Biology, $200 million
• Systems Biotechnology Building at CU-Boulder, $113 million
• Proposed new Science and Engineering Building at CU-Colorado Springs, $53 million

Colorado State University
• US Centers for Disease Control and Prevention, Division of Vector-Borne Infectious Diseases Lab, $80 million
• Research Innovation Center, a $50 million joint university/federal research lab complex
• Rocky Mountain Regional Biocontainment Laboratory, $30 million

University of Denver
• Nanotechnology facility, $10 million

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