California Fights to Stay Atop the Heap in the Biotech Industry
After a dozen years of research and development, IDEC Pharmaceuticals of San Diego finally has its first product on the market, is turning a profit and is ready now to spend more than $100 million on a manufacturing plant.
In the next six months it will decide whether to build the facility down the interstate from its existing headquarters. But like other biotechnology companies, IDEC is tempted by an attractive proposal from another state.
California, says IDEC Chairman William Rastetter, “is a logical place to start new companies and expand old ones. . . . The exception is when you get to manufacturing. It is never a low-cost site for manufacturing.”
The Golden State’s burgeoning biotechnology industry, with its high-paying jobs and relatively low level of pollution, is the envy of other states. And many of those states are trying to lure firms away by offering a broad array of incentives, including cheap land, discounted rents and tax cuts.
But California, with more than 425 companies--a third of the country’s biotech businesses--has been battling back to maintain its hold on an industry that grew up around the state’s high-powered universities and research laboratories.
With the backing of Gov. Pete Wilson and legislative leaders, the industry has won a variety of tax breaks in recent years, some that apply to manufacturers generally, but others that are specific to biotech and emerging high-tech companies. Among the incentives for staying put: a doubling of state tax credits--to 24% of the investment--for conducting drug testing or other research at the state’s universities, scientific labs and hospitals.
Most recently, the Wilson administration asked the Legislature for $150 million to fund an infrastructure and economic development bank, which would help nurture the state’s biotechnology industry and other growing companies.
“There is increased competition from everywhere, and from some places that have not a shred of biotech but want it, like Texas,” said Julie Meier Wright, the governor’s former trade and commerce secretary. “Our industry is cultivated by economic development agencies all over the world.”
In fact, a growing number of states see biotechnology as fruit ready for plucking, now that many companies appear ready to advance from small start-up labs to full-fledged manufacturers.
Biotechnology is the application of the tools of genetic engineering--gene splicing, sequencing and cloning--to the manufacture of prescription drugs, medical diagnostic tests, vaccines, enhanced crops and other products. This is highly skilled work with salaries to match: an average of $67,000 in California, according to a recent industry survey.
So it should be no surprise that states such as Texas, Maryland, North Carolina and New Jersey are courting these businesses. And so are other countries, including Germany and Britain.
New Jersey, for example, is one of several states aggressively trying to snatch a bigger share of the country’s biotech business--building on its reputation as home to several major pharmaceutical firms. Not only does the state offer tax credits, it recently enacted a law that allows biotech and other emerging technology firms to sell the credits they can’t use immediately to other companies doing business in New Jersey.
Caren Franzini, executive director of the New Jersey Economic Development Authority, said the state has recognized the potential of this emerging industry--and knows it is not alone in doing so. “The whole country is in this competition,” she said.
Massachusetts, with 200 biotech firms, is second only to California in the size of its industry. And the state watched with alarm as some of its more successful companies chose to expand in New Hampshire and Rhode Island. And, like California, Massachusetts has responded to the competition by adjusting its tax policies--increasing tax credits for firms conducting research at local hospitals and universities; creating a research and development credit, and eliminating taxes that hurt the industry.
Biotech industry officials say a variety of factors affect decisions on where to locate as they expand. The availability of an educated labor force, the cost of land and a natural reluctance to move far away from a home base all enter into the mix, as does the prevailing state tax structure, although some critics of tax giveaways raise doubts about their impact.
“We keep saying that the big advantage of California in biotech is UC Davis and UC Berkeley,” said Lenny Goldberg, director of the California Tax Reform Assn., a group that opposes giving tax breaks to industry. “The point is that what matters is how we spend our money on education, not the tax credits.”
And a number of academic studies have concluded that state tax incentives are a minor and perhaps inconsequential part of the decision-making.
*
Ask the biotech companies and the answer is not quite so clear. Some say that seemingly small incentives can prove pivotal for companies that typically raise and spend $100 million or more over a decade to get their first products on the market.
For IDEC, which has just begun marketing its anti-cancer drug Rituxan, the choice is between building on Otay Mesa near the Mexican border or on a stretch of rent-free property near San Antonio.
“Texas has gotten very aggressive, with essentially free land for this type of project,” said IDEC’s Rastetter. “They’d let us use a 50-acre parcel as long as we operate a plant there. The other thing that makes Texas attractive is that labor rates are lower, and so is the cost of living.”
Rastetter said he was impressed when San Antonio’s economic development representatives took him to a golf course “lined with million-dollar homes you could buy for $200,000.”
On the other hand, IDEC could build on Otay Mesa in an enterprise zone offering a variety of incentives, including tax credits that could total almost $27,000 over five years for each qualified employee.
And the land is less than an hour’s drive from company headquarters. “I’d much rather get on I-5 [to reach a new plant] than get on American Airlines or Southwest,” Rastetter said.
Another successful San Diego company has already made its choice.
Stratagene manufactures lab testing kits and other devices widely used by researchers around the world. When the privately held firm began searching for a location for a plant that would double the size of its production and research facilities, it considered staying close to home, said Stratagene’s co-founder and chief executive, Dr. Joseph Sorge.
But late last year, Sorge decided to build an 80,000-square-foot facility on Texas’ Colorado River, not far from Austin and the University of Texas.
“Texas just had some features about it that were attractive. A good university in Austin. And I’d call Texas a business-friendly state,” Sorge said. “I think it is just difficult in California to offer the same kind of package other states can offer. There’s the normal high cost of land and other developer fees.”
In addition to cheap land, Texas has no corporate income tax. And to sweeten the deal even more, local government offered Stratagene’s subsidiary, Biocrest Partners, a low-interest, tax-free loan of $9 million and a partial exemption from relatively stiff local property taxes over the next 10 years.
Sorge said that before making his decision, he met with San Diego Mayor Susan Golding to discuss what the city might do to win the new plant. “She said, ‘We can put you on a fast track for approval,’ ” Sorge recalled. That meant that he’d have the necessary permits for construction in two months instead of four. “In San Diego we’d need a permit and there were development fees. In Texas there was no permit. We could just build the building.”
San Diego offered several other incentives to keep Sorge in town, including a 40% cut in water and sewage hookup fees, a site in a city-owned technology park and partial rebates of property and use taxes, said Maryanne Pintar, a spokeswoman for the mayor.
But the package was not enough to sway Sorge, even when added to the state’s various tax breaks. “I think we were able to obtain some kind of manufacturer’s tax break, but it was so small that it was insignificant,” Sorge said.
*
When industry giant Genentech in South San Francisco began planning a major expansion four years ago, its executives were skeptical that California could be competitive.
The company instructed its consulting firm, Arthur Andersen, to keep its identity secret as it canvassed the globe.
“We were looking at a quarter of a billion dollars, the largest biotech manufacturing plant in the world,” recalled Marty Glick, former Genentech treasurer, who co-chaired the site-selection committee. “What worried us was people calling board members and calling in favors and losing control of the process.”
When a Virginia congressman got wind of the firm’s identity, he arranged a meeting between Genentech representatives and top university officials who were trying to establish a biotech program in Virginia.
Officials with the California Trade and Commerce Agency also figured out that the anonymous company was Genentech. Led by then-agency Secretary Wright, the state began wooing the company--using the code name “Project Zebra” to protect the firm’s anonymity. California came up with a number of sweeteners, including a $10-million state grant to train 1,775 Genentech employees.
To underscore the state’s commitment, Gov. Wilson phoned Genentech’s then-president and CEO, G. Kirk Raab--and later met with him in the governor’s office, records show. In the end, the company decided to build its facility in Vacaville, where local officials promised to expedite permits and provide property tax waivers.
The company’s decision, Glick said, “made a strong statement to the world that California is open for business.”
No such carefully orchestrated effort was needed to win a major commitment from Novartis, an international pharmaceutical and agribusiness giant headquartered in Basel, Switzerland.
In recent months, the company has announced it will be building both its Institute for Functional Genomics and its Agricultural Discovery Institute in San Diego, a combined investment of $850 million.
Issues such as land costs and state and local taxes were not considerations in locating a major research facility in California, Novartis’ president, Dr. Daniel Vasella, said in a recent interview.
More important was the quality of the nearby scientific institutions, particularly La Jolla’s Scripps Research Institute--one of “a few academic institutions really at the top of the world,” Vasella said.
For those occasions when the lure of high-caliber science is not enough, the governor and the Legislature have enacted a number of tax incentives to encourage companies to grow here at home.
The firms can claim manufacturing investment credits for construction of special-purpose buildings--the “clean rooms” needed to develop and produce genetically engineered pharmaceuticals and other products.
*
Under a 1996 law, biotech companies producing prescription drugs qualify as “new businesses” and can carry over their investment credits for 10 years instead of eight, and they can carry forward 100% of their operating losses for eight years--instead of 50% of losses for five years, as most other companies are allowed. These incentives are particularly meaningful in an industry where most firms routinely lose money for years before marketing their first products.
And this year, the Wilson administration has proposed using a part of the state’s revenue windfall for the infrastructure and economic development bank, enacted in 1994 but never funded. The money would aid local efforts to attract business--providing credit guarantees on loans to build roads and sewage systems. A portion of the money could also be used to aid private companies directly.
Wilson asked for $150 million; a legislative budget committee has agreed to $50 million. The final amount will be worked out in this year’s budget process.
