The Baltimore-Washington area should be a top contender in the world of biotechnology and related technology-based businesses. But something is wrong.
The National Institutes of Health, The Johns Hopkins University, particularly its School of Medicine and Applied Physics Laboratory, and the University System of Maryland collectively represent the largest and most concentrated investment of public biomedical research dollars in the nation. The dollars directly translate into valuable scientific and medical progress, and countless commercial opportunities for the nation.
Yet of the nine urban municipalities that form the major league of biotechnology, the Baltimore-Washington franchise ranks dead last. Maryland needs to take a more balanced approach to nurturing this opportunity.
Venture funding and strategic partnering are two key elements found in most successful biotechnology companies. The mid-Atlantic area lacks a strong and regionally focused venture capital industry and, with the venture capital industry in turmoil, will not have one anytime soon.
While the inadequacy of venture funding and the high price of entry - from $500,000 to upward of $50 million for a round of financing for a single company - are crucial, strategic partnering becomes even more critical to the survival of young companies. Here, Maryland could do far more.
For example, the state Department of Business and Economic Development aggressively promotes venture capital but does little for strategic partnering. In the current economic downturn, promising start-ups have failed to raise money and are left high and dry.
The problem is that venture capital and biotechnology run on different clocks and have different needs. Venture funds are largely raised from institutional investors who, as limited partners, share directly in the success of the funds' investments. Typically, venture funds have a 10-year life span, with up to two additional years for distributions. To return value to the limited partners, managers often try to bring in returns within three to five years, while biotechnology companies can require eight or more years to develop their technology, clear regulatory hurdles and become profitable.
Despite this mismatch, the system worked well during the recent economic boom when initial public offerings were commonplace for companies still hoping to develop products. Now venture funds are finding it hard to raise capital and are under pressure from their investors to make up for losses. Nationally, venture funds are now focused on seeing that their existing portfolio companies survive long enough to return value; new investments are few and far between.
This is a good time to look for alternatives. In all walks of life, successful individuals often point to early mentorship as a key to their success. Companies are no different; mentoring for them can come through strategic partnering.
Some early-stage companies forge critical relationships with larger, established companies that may become their partners in research, product development, manufacturing and distribution. These relationships may bring investment capital and money for research and development, but they bring much more in the form of in-kind support.
Access to technical and management resources, experience and, sometimes, intellectual property resources often far outweighs funding in its importance to a developing company.
Just as important, the strategic partnership provides a seal of approval to an early-stage company that gives potential financial investors confidence in its eventual success. Because strategic partners are often in the same or related business area, they usually have a realistic understanding of the time required to develop products and clear regulatory hurdles, an understanding better matched to the needs of a developing company.
Finally, strategic partnering can sustain a young company during lean times. Forming such partnerships is again on the rise, just as it was during the downturn in the early 1990s.
Unlike mentorship between individuals, strategic partnering is, at its heart, financially motivated, particularly when the numbers are large.
In 2001, U.S. biotechnology companies raised $2.8 billion from strategic partnerships, roughly 28 percent of the $10.1 billion raised from all sources. Because established companies are accountable to their stockholders, they form strategic partnerships with early-stage companies to gain access to advanced technologies, potential products or intellectual property that will further their own business plans. To act, the financial incentives must be clear. Here's where Maryland's opportunity arises.
The state should develop a focused program of tax and other incentives to promote strategic partnering with Maryland biotechnology companies. For established companies outside of Maryland, making these incentives transferable - sellable to Maryland corporations - would be a key element in inducing them to invest intellectually, technically, and financially in the Maryland biotechnology industry. If properly structured, such a program could even provide inducement for an established company to locate new facilities in Maryland.
Just as Maryland has fostered venture capital investment in the past, it must also help its developing biotechnology industry forge strategic partnerships through a business development program that showcases and markets these technologies.
A good model for this exists.
For years, the British Department of Trade and Industry has sent a cadre of business development officials, termed international technology promoters, around the world to do just this. Empowered to operate with private sector-like freedom, their mission is to forge relationships between British companies, established or developing, and potential partners in other countries.
Such a program would be an important part of any Maryland initiative to foster strategic partnering.
The new, impoverished Ehrlich administration should grasp this opportunity. To move up in the biotech standings, Maryland will need to take a multipronged approach. Development of regionally focused sources of financing should be one prong. Fostering strategic partnering through incentives and proactive business development should be the other.
Gary R. Pasternack is an entrepreneur and director of the division of molecular pathology at the John Hopkins University.