The NC Biotechnology Center, opened in 1989, provides support for fledgling life sciences firms in the state. Photo courtesy NC Biotechnology Center.
The NC Biotechnology Center, opened in 1989, provides support for fledgling life sciences firms in the state. Photo courtesy NC Biotechnology Center.

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By Rose Hoban

Driving through Research Triangle Park at night, it’s not uncommon to see the lights of the experimental greenhouses backlighting the trees.

Sam Taylor, head of NCBIO, said he’s worried about what cuts in both House and Senate budgets could do to the biotech industry in N.C. Photo courtesy NCBIO

Those lights, and those of other biotech companies that have made North Carolina home, have burned brightly over the past few years. However, proposed changes to state budgets at the General Assembly have people in the life sciences and research industries worried those lights may dim some.

At the top of the list of concerns are cuts made by the Senate in their proposed budget, which eliminates more than $12 million in funding for the North Carolina Biotechnology Center, as well as eliminating several tax credits used widely in the biotech industry.

Hits to biotech also come from the House.

“Both the chambers failed to extend the research and development tax credit,” said Sam Taylor, head of NCBIO, the trade association for the biotech industry in the state. “Thirty-eight other states have R&D tax credits. We’ve had one for as long as I can remember.”

Taylor said the research and development tax credit added up to about $44 million last year. He said other cuts to the budget are harder to put numbers to, such as a tax break on maintenance and repair of lab equipment. Formerly, businesses were charged only 1 percent sales tax for equipment, capped at $80 total. Now the fee goes up to the general state sales tax rate of 4.75 percent (with add-ons for county and municipal sales taxes), with a $500 cap on any sales taxes.

“It makes it harder for smaller companies to own and operate expensive research equipment,” Taylor said.

Filling the gap

One of the main purposes of the Biotechnology Center, established in 1989, is to provide grants and loans for biotech start-ups.

The N.C. Biotechnology Center, opened in 1989, provides support for fledgling life sciences firms in the state. The proposed Senate budget would eliminate funding for the center. Photo courtesy N.C. Biotechnology Center.

One particularly difficult period for fledgling firms – nicknamed the “valley of death” – is the time after grant funding for discovery runs out but before company leaders are able to take a product to market. Few venture capitalists, or even banks, will make loans at this point in a company’s development.

That’s where the Biotech Center has stepped in. The organization has given 239 business loans to 168 companies at that point in their development.

According to an analysis done in 2014 by the business analytics firm Battelle, 95 of those 168 companies are still operating in North Carolina, generating at least $1.9 billion and as much as $2.9 billion in revenues annually.

The same report calculated those revenues returned at least $45 million in state taxes and another $25 million in county and municipal tax revenues.

“North Carolina is a good example of states that create special initiatives,” said Brad Fenwick, a vice-president for academic publisher Elsevier, which presented on North Carolina’s research environment at the General Assembly in May. Fenwick, a veterinary pathologist, brought several ideas to market during his time in academia.

“I know that the private sector is increasingly risk averse,” Fenwick said. “They’re trying to control the risk, because if they don’t they get penalized by shareholders.”

Fenwick said R&D tax credits and loans made by organizations such as the Biotech Center “essentially help to reduce the risk threshold, and that allows industry to be more able to be engaged in taking a greater level of risk.”

Biotech flagging

Ted Voller, a professor at UNC’s Kenan Flagler School of Business, said the biotech industry is “hitting a real hard patch.”

Elsevier’s Brad Fenwick presenting at the NCGA in May about the research environment in North Carolina as Sens. John Alexander (R-Raleigh) and Josh Stein (D-Raleigh) look on. Photo credit: Rose Hoban

To start, federal funding for basic sciences research is shrinking, making the competition for dollars even fiercer among universities where the basic research gets done.

Then there’s less money for the next step, translating basic science into products. Voller said part of the problem is that most venture capitalists don’t have the patience to invest in biotech.

“Life sciences investments take five to seven years to produce the return [venture capitalists] want,” he said. “Venture capitalists want to see turnarounds in three to five years. So they’ve vacated that market.”

On top of skittish venture capitalists, the pharmaceutical industry is also going through some big changes. Gone are the days of blockbuster drugs producing hundreds of millions in annual profit.

Instead, Voller said, pharmaceutical companies are looking to buy smaller biotech firms along with their intellectual property rather than develop new drugs themselves. He pointed to the recent downsizing at GlaxoSmithKline, where last month the company announced plans to lay off 150 more workers, after 900 were let go last year.

“Right now, we’re dealing with significant market restructuring,” Voller said. “This is when we need to shore up life sciences in the Research Triangle Park, because it’s one of our most competitive sectors.”

Global competition

At the research presentation at the General Assembly in May, Barbara Entwistle, UNC-CH’s vice chancellor for research, told lawmakers the environment in North Carolina is enhanced by having strong ties between academia, industry and government.

[pullquote_left]Like what you read on NC Health News? Help make it possible. Make a donation today. As little as $5/ month will help keep us going![/pullquote_left]“It takes a team to do this,” Entwistle said, referring to the research and development that leads to innovation. “It’s really not possible anymore for a single person to go into their office or into their lab and by themselves come up with ideas and commercialize.”

She argued that an essential part of the team is academic institutions that draw the scientific talent to North Carolina, and that they require some level of state support.

“The very best faculty have lots of options,” Entwistle said. “If you are really good at what you do, you get an email once a week, at least, enticing you to come some other place.”

She said the competition for talent and money is no longer just among cities in the U.S., but among other countries trying to develop biotech industries.

“If faculty were to leave, you cannot replace them,” Entwistle said. “It’s more cost efficient to just keep them here and have them not pay attention to all those emails enticing them away.”

She and Fenwick made the point that the state’s investments in research and infrastructure make it the kind of place where it’s easy for top talent to come.

But layering university cuts on top of cuts to state incentives can start to erode that vibrant research environment.

“The universities, as much as they are a powerhouse, they do the initial research; they don’t do the translation and testing to make products ready for market,” Voller said. “You need a bridge.”

He called biotech the “goose that laid the golden egg” for North Carolina, but expressed concern about the “stability and vitality of the Research Triangle early-stage biosciences market.”

“The early-stage fundamentals are not being supported, and we could lose our competitive edge,” he said.

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