State's future in biotech field is uncertain

THE BALTIMORE SUN

Genetic Therapy Inc. of Gaithersburg was to be honored this fall as the No. 1 pick in the "Fast 40" high-growth high-tech companies in Maryland. Then Genetic Therapy said in July it will be taken over by the Swiss drug giant Sandoz AG, whose U.S. headquarters border the scenic Passaic River in East Hanover, N.J.

Thomas P. Stagnaro became one of Maryland's best-regarded business leaders by nurturing 7-year-old Univax Biologics Inc. from nothing into a company that was expected to reach $100 million in sales by 1999. Gov. Parris N. Glendening put Mr. Stagnaro on the state's economic development commission. But he's moving to Florida, thanks to last week's deal to sell Univax to North American Biologicals Inc. of Boca Raton.

Six weeks, two deals, and almost half a billion dollars. With a few strokes of some pens, Maryland's nascent biotechnology industry has been transformed. And where that will take an industry in which state and local economic development strategists have invested years and millions of dollars, in hopes of home-growing an industry to serve as one of the state's job cornerstones for the post-industrial era, is not yet clear.

"Is it more challenging? It probably is. But that doesn't mean it's impossible," said James T. Brady, Maryland's secretary of business and economic development. "It's part of a long game. It's not for the faint of heart."

Only months ago, Maryland had a half-dozen biotech companies poised to turn profitable by about 1998. Less than a decade after most of Maryland's 68 biotech companies were formed, the 5,000 Maryland jobs in the industry, mostly in research, were set to blossom into many times more as the drugs the young companies are developing reached the market.

But everyone knew that the last two or three years before commercialization would be tough, because almost every company would have to raise tens of millions of dollars or more to build factories and sales forces to go with their research

teams. And everyone knew that one risk was that companies would need to sell out in order to raise the cash.

"Tom had a problem: They were separated from success by a bunch of dollars he had to get a hold of," a sympathetic rival biotech chief executive said, saying Univax took another hit in July when a different drug it was researching didn't work in clinical trials. "He is not the CEO any more, so I'm sure it's not something he spent every waking moment trying to engineer."

"I would like to pay back the state, but you've got to make those kinds of decisions," Mr. Stagnaro said. Univax still needed $50 million to get its first product on the market, and North American had a key factory already built and the financial muscle to do the rest.

What no one knew in June was that two leading Maryland biotech companies would go so quickly. No one knows now what will happen next.

The $150 million Univax deal will have one immediate impact. The Rockville company had been negotiating with the state for help in financing a dual-purpose manufacturing plant in Western Maryland, where Univax planned to make vaccines and to process human plasma to isolate antibodies used to make other drugs. Since North American is building a plasma plant in Florida, that part of the Maryland plan is off, Mr. Stagnaro said.

"That's definitely going to happen in Boca," said Mr. Stagnaro, who said the dual-purpose plant would have added 50 jobs that would have paid between $30,000 and $70,000 a year. "Those jobs are going to be lost to Maryland and that's unfortunate. But to duplicate [the Florida plant] would have cost $20 million."

But both Genetic Therapy and Univax say they are going to keep their research staffs in Maryland. Univax may even move North American's researchers here from Florida, but North American has only four scientists because it is much more active in selling plasma to drug companies than in researching its own drugs.

"We don't expect anything to move," Genetic Therapy Chief Executive M. James Barrett said. Genetic Therapy, which will still be at the top of the Greater Baltimore Committee's "Fast 40" list despite the buyout, doesn't have any products that the U.S. Food and Drug Administration has yet allowed on the general market, so its manufacturing needs are minor. Its staff of 160 is about 80 percent researchers.

But even though two Maryland biotech leaders will now report to headquarters elsewhere, and remaining biotech companies face the same obstacles that could force more mergers, most experts are still fairly optimistic about the Maryland industry's future.

They say that the jobs here will likely remain and that the state will continue to be a leading center for growth in biotech research, an area in which jobs often pay $80,000 or more a year.

The reason: In a research-based business, knowledge is power. The fact that scientists make the companies go, and that scientists who start biotech companies often come out of local research centers such as Johns Hopkins and the National Institutes of Health, means that the people whom the new corporate bosses have to please have roots here.

"Where intellectual property is the key issue, a lot of the assets walk away every night to go home," Mr. Barrett said. "The intellectual property businesses are critically dependent on the knowledge of the staff. You're far less inclined to make massive shifts in location."

Indeed, other biotech companies that made alliances with drug giants have kept their growth close to their original home.

Genentech Inc. was one of the first successful biotech companies, and the Swiss drug company Roche Holdings Inc. has owned a de facto controlling stake in Genentech since 1990.

Nonetheless, spokeswoman Kathleen Rinehart said, the company has added 900 jobs since 1990 and 90 percent of its 2,800 workers continue to work in the San Francisco area, where the company was founded.

Similarly, Chiron Corp. has been 49.5 percent owned by Ciba-Geigy Ltd., another Swiss drug company with U.S. headquarters about 15 miles from Sandoz's New Jersey office, since January. Yet spokesman Larry Kurtz said the firm recently committed to a 2.2 million square foot expansion of its Emeryville, Calif., campus that will concentrate Chiron's growth in the Bay area for the next 30 years.

"It's fair to say the intellectual capital is the source of value in these companies," Mr. Kurtz said. Chiron's staff wants to live in a stimulating environment such as San Francisco so much, and is so hard to duplicate elsewhere, that the company tolerates operating costs Mr. Kurtz says are probably higher than any U.S. area other than Manhattan.

Chiron may create new jobs in Maryland as well. Last week, the company announced a deal with Univax that could add up to 15 new drugs to Univax's product pipeline, which has only six major drugs under development now.

That research is to be done in Rockville, though how many jobs it will spin off -- and how soon -- is not yet known.

The tougher question is whether out-of-state control of Maryland biotech research will hurt the state's chances to attract the plants where the companies will manufacture the drugs once they are on the market. One leading economist said the takeovers may hurt those chances, but in some ways the deals may actually help.

"Now Jim Brady has some standing to call the chairman of Sandoz and go visit, and he ought to do it," said Charles McMillion, president of MBG Information Services in Washington. McMillion said once Sandoz has business in Maryland, the state may actually be able to attract expansion by other Sandoz divisions as well as keep Genetic Therapy.

Mr. McMillion said takeovers by financially stronger companies could also help Maryland compete against states that get their growth the old-fashioned way: by subsidizing it.

A Sandoz may be likelier to make decisions based on strategic factors such as the high numbers of scientists in the Washington area, or the proximity to Rockville-based FDA regulators, because it can get money to build factories without the state's help, Mr. McMillion said. Many future mergers will probably find Washington-area biotech firms as buyers rather than targets, said Bill Washecka, head of the high-tech practice for the accounting firm of Ernst & Young and co-author of an influential biotech industry annual report.

He said the trick for the state is to identify likely winners such as Human Genome Sciences Inc. of Rockville, which is developing drugs based on advances in genetic sequencing, and to give them early help with strings attached that make it prohibitively expensive for the company to leave Maryland.

Overall, though, Maryland's advantages -- and possible disadvantages -- in luring biotech manufacturing aren't much affected by the takeovers. Biotech executives such as Mr. Stagnaro say they want to keep manufacturing close to the research operations, especially at the early stages when engineers are still figuring out the best ways to make the new products.

But even companies that are still headquartered in Maryland have been willing to move manufacturing out of state for the right deal.

Martek Biosciences Corp. of Maryland bought a plant in Kentucky this year and MedImmune Inc. of Gaithersburg has announced tentative plans to manufacture in Ohio. However, MedImmune has met with Maryland government leaders to discuss a counteroffer to the financial incentives Ohio officials offered. Martek chief Pete Linsert has said the company moved manufacturing out of state because it got a used plant for about a third of what it would have cost to build here.

"It doesn't really matter where corporate headquarters are," said David Ramsay, president of the University of Maryland at Baltimore and an expert in the process of converting academic science into commercial products. "As communications get better and better, you don't have to have everything in the same place."

While the mergers move control of many Maryland companies' futures outside the state and could hamper the industry's growth in the state, biotech entrepreneurs and their enthusiasts in government and academia stress the gains that have already occurred.

Biotech already has created 5,000 Maryland jobs, and the buyers of Genetic Therapy and Univax agreed to pay $445 million for companies that didn't exist nine years ago.

"Maryland is going to get a lot of income taxes from this," said Mr. Barrett, who has scheduled sessions with accountants to help his staff hold down the government's share of the buyout. "All of our people had options."

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