Since its inception the Technology Park has embraced the strategy of creating a critical mass of technology focused companies in order to create greater value for the firms and Nebraska. In general terms, in order to locate in the Technology Park companies must be engaged in research, development, engineering, testing, or pilot production of a proprietary product or process. The exceptions are for complementary activities which provide essential support services or the headquarters (national or regional) of a technology based firm.
The importance of such an approach was recently brought home by a little publicized report prepared by former Undersecretary of Commerce Robert Shapiro and released by NGO World Growth. Using data from the National Science Foundation, Shapiro and his co-author Nam Pham found that employees at companies which are based upon proprietary products produce 72% more value per employee than their counterparts; make 44% more in salaries and benefits; and that technology intensive companies create jobs at a rate 140% higher than those which are not. The report, “Economic Effects of Intellectual Property - - Intensive Manufacturing in the United States” can be obtained at http://www.the-value-of-IP.org.
The Research Advantage portion of Nebraska’s tax incentives package enacted last year just became more accessible and of greater value to the state’s firms. Companies are no longer required to establish a base year of research expenditures against which subsequent activities are measured. As originally enacted, only those R&D expenditures which constituted an increase over the average of the previous two years’ spending were eligible for refundable credits.
Beginning in January, 2007, the State will provide a refundable credit equal to 15% of the federally allowable R&D credit as documented by a company’s federal filing. A Nebraska firm expending $100,000 on eligible R&D would be able to recover 23% through federal and state incentives (a 20% federal tax credit and $3,000 in State reimbursement). Nebraska’s approach provides increased value for early stage firms which may have little or no corporate income tax liability by giving a cash refund for eligible R&D expenses.
Development of the biotechnology industry continues to evolve requiring new strategies for long term success. During the 1980’s the first biotech boom largely went bust due to the long lead times (10-12 years for new human drugs) and expense (then estimated to be $800 million per drug) to launch a new product. Since then the cost of taking a new drug from discovery to full market commercialization has risen to approximately $1.2 billion and lead time has increased to 14 – 16 years. The cost of meeting regulatory requirements has pushed the threshold for many companies to undertake an IPO to $100 million in annual revenues. Given those costs, how can a startup biotech company hope to succeed?
The answer in part lies within the results of consolidation in the pharmaceutical industry. Those companies remaining have become so large that their future success lies more in commercialization than discovery allowing them to take advantage of their access to capital and economies of scale in providing later stage clinical trial support, pilot production, manufacturing, marketing, distribution and regulatory compliance services. The overhead associated with maintaining such a structure have made the large pharmaceutical companies less agile and therefore less likely to make the original discoveries of new products. With the growth of interest in biotechnology based products, the large firms are relying increasingly upon growth through alliances and acquisitions rather than organic development.
GlaxsoSmithKline, Novartis and Pfizer all have launched dedicated funds for alliances and venture investments. Earlier this year Pfizer opened their own life sciences incubator in LaJolla, California to nurture startups. Over the past four years Pfizer alone has committed approximately $2.8 billion to funding research alliances with academic institutions and emerging life science firms. Today Pfizer’s Strategic Alliances group has 56 people working from 6 locations scouting new technology opportunities; last year they completed approximately 800 agreements.
The implication for Nebraska based biotechnology companies is that success may mean creating strategies which align them with the priorities of well established pharmaceutical firms in order to access the technical and financial support necessary for product development. Local angel investors will need to become more sophisticated in understanding the niche growing companies can occupy. Mergers, acquisitions, stock repurchases and dividends will likely become more common means of achieving investor returns that cashing out through an IPO.
As clichéd as the statement is, the only constant remains change.