PART TWO:  Empires of the Mind - Education, Research, and Commercialization: the Building Blocks of Biotechnology

February 2007

As featured in the January/February issue of Trade & Industry Development Magazine

By John Rees, Junior Project Manager, and Justin Sabrusula, Junior Project Manager

AngelouEconomics

Despite the overwhelming concentration of the pharmaceutical and research-based biotechnology industry, many American cities remain committed to making biotechnology an integral part of their economies. Despite formidable obstacles, specific strategies can increase the odds of realizing biotechnology development.

While biotechnology has traditionally been associated with pharmaceutical and drug developments, biotechnology has spread into many areas of the economy and increasingly affects agriculture and industry in ways not foreseen thirty years ago. With pharmaceutical biotechnology companies taking off in the biotech metros of the United States, agriculture is perhaps the next sector of the economy that will experience tremendous increases in productivity from the application of biotechnology. Biotechnology promises to reduce planting and maintenance costs, increase crop yields, and provide new products and sources of revenue for struggling farmers all with plants that require less water and fertilizer, reducing agriculture’s adverse effects on the environment.

Agricultural biotechnology applies life sciences insight to processing of agricultural products and organic and agricultural chemicals. This could be an enhancement of crop productivity, resistance to disease, or a genetic modification for added human health benefits. Nutraceuticals are the use of food or agricultural inputs to provide health and medical benefits, including the prevention and treatment of disease. The adoption of biotechnology in the agriculture sector is often driven by cost factors, whereas the pharmaceutical biotechnology industry is driven by a search for new products. Agricultural producers consume expensive inputs like oil for farm equipment and oil-based pesticides and fertilizers. Agricultural biotechnology not only reduces cost structures for agricultural production while increasing yields, but also allows for the production of some of the cheaper agricultural inputs, including bio-based pesticides and biofuels to power farm equipment. Agricultural biotech products include ethanol and biodiesel fuels, fertilizers and pesticides, biodegradable plastics, sustainable oils and other lubricants, and food additives.

Another driver of the increased use of biotechnology is the price and quantity of water consumed by irrigated crops like cotton, soybeans, and corn. Genetically modified crops can generally produce similar or better yields per acre than traditional crops while using significantly less water. This development is especially important in agricultural areas across the Great Plains, where the Ogallala Aquifer has seen localized drops in the water level of up to 150 feet., and in the Southwest where the Colorado River water used for irrigation is completely tied up in existing water rights.

Agricultural biotechnology is driven by large agribusiness companies, including ADM, Bayer, BASF, Cargill, ConAgra, Dow, DuPont, Monsanto, Smithfield Foods, and Syngenta. These corporations spend hundreds of millions of dollars generating new agricultural biotechnology, including pesticide and herbicide-resistant crops, drought-resistant seeds, new chemicals and chemical processes, and new biofuels production methods. Many companies focused on large-scale animal operations use biotechnology to enhance flavor in meat or to solve waste disposal problems. Similar to the pharmaceutical biotechnology sector, startup firms are very small and often consist almost entirely of a talented individual and a portfolio of patents. Startup companies’ business plans focus on commercializing their technologies, many including new applications for bio-plastics or enzymes for creating biofuels, and selling the technologies to the multinational agribusiness corporations.

The agricultural sector of the biotech industry is small in comparison with the pharmaceuticals and research, testing, and medical laboratories sectors. The Biotechnology Industry Organization and Battelle estimate that the agricultural feedstock and chemicals sector of the biotechnology industry employed 104,893 employees, a small decrease over 2001 employment. This estimate very likely undercounts the significant agricultural biotech development not classified under traditional chemicals and agricultural feedstock codes. While the agricultural sector of the biotech industry is small, wages are significantly higher than U.S. averages. The average annual wage in the agricultural biotechnology industry in 2004 was $63,383, 62% higher than the U.S. private sector average of $39,003, similar to other biotech sectors.

Like other sectors of the biotech industry, economic development of an agricultural biotech industry cluster ultimately relies on the talent available to start and staff companies. A prime measure of the attractiveness of an area for agricultural biotechnology is the availability of agriculture PhDs. Unlike pharmaceutical development, where the top 10 MSAs in the country, all extremely large metropolitan areas, not only capture the most venture capital and R&D funding but also produce the PhDs to fuel new biotechnology startups, agricultural biotechnology development is much more spread across the country. Education of agricultural PhDs, however, is concentrated in small college towns across the South and Midwest as opposed to the major metros on both coasts. More than four out of every ten agriculture PhDs graduate from schools in the top 10 MSAs.

All of the top 10 MSAs for doctoral graduates in 2005 were driven by large, land-grant universities, from North Carolina State University in Raleigh-Durham to Ohio State University in Columbus. This presents an opportunity for regions without a large pharmaceutical biotechnology presence to leverage their university assets to specialize in agricultural biotechnology. The presence of these large state universities, all with agricultural departments, focused research, and many with additional resources in other areas of biotechnology, are prime locations for agricultural biotechnology startups and relocations.

Site selection for Biopharmaceutical and Agricultural Biotechnology Companies

While the presence of research universities is a good proxy for biotechnology location, other site selection factors always come into play in determining the best location for a company, whether for a small startup company or a large relocating biotechnology manufacturer. Site selection consultants are often utilized to help companies determine the best location for a facility, and regions that understand the process and work to build the necessary assets for biotechnology companies will be most successful in the biotechnology arena.

AngelouEconomics employs a site selection process comprised of seven main steps:

1. Project setup/needs assessment
2. Determine incentives strategy
3. Issue a request for proposals
4. Evaluation of top locations and sites
5. Comparisons on cost of operations
6. Short-list communities and engage in closing negotiations
7. Final selection

Step 1: Project Set-up / Needs Assessment
It is important to determine project goals, facility needs, and site selection criteria in the initial phases of any site selection project. Primary criteria for biotechnology firms include an available workforce of science graduates and PhDs for research laboratories to available land for biofuels manufacturing facilities. Companies then initiate a 1-2 day brainstorming session regarding the scope of the project, desired outcomes, and timeframe. These meetings include top management, facility directors, financial executives, accounting consultants, and site selection consultants. Often, executives have early expectations on where their next facility or office is best suited – selections for biotechnology are often among the top biotechnology MSAs in the country. For most site processes, a discussion of incentives begins here, with the site selection consultants giving an early assessment of what incentives could be available based on similar type expansions and relocations. The most effective site selection efforts allow 6 to 12 months for the full evaluation, negotiation, and selection of a community, although biotechnology companies are often under pressure to complete site selection in considerably less time.

 

Step 2: Determine an Incentives Strategy
Most technology companies are moving at a pace too fast to allow for extensive exploration of incentives in their site selection decisions. For some, incentives are often the icing on the cake, sweetening the deal often after a decision has already been made. Emerging biotechnology companies are generally too small to derive the benefit of financial incentives or just don’t qualify. States seeking competitive advantages in attracting biotechnology firms should consider incentives which can attract small firms with fewer than 10 employees, as small firms comprise the vast majority of the biotechnology industry. In addition, as the largest driver of biotech firm location is availability of workforce, regions must be prepared to provide an adequate workforce or offer significant incentives for training a future biotech workforce for a company.

Other companies, such as pharmaceutical manufacturers, biofuels producers, or other related sectors know just how valuable incentives can be. New industries such as nanotechnology, biotechnology, and fuel cells, are now caught up in a virtual “incentives arms race” among states and communities. Biotechnology in particular is being pursued by almost every state with significant incentives for large-scale relocation. While the primary effect of incentives is to remedy a prejudiced or burdensome tax system, incentives often become a stamp of approval by communities that companies seek in their local public relations. More than ever, incentives are cash-based, where state and local governments commit funds to invest in infrastructure, workforce training grants, free land, and buildings. Many states are now choosing to deliver hard cash to a company in order to win these strategic projects and make a marketing statement to the world.

 

Step 3: Issue a Request for Proposals
If a biotech company desires to pursue incentives, it is important that its site selection representative issue a “Request for Proposals” to a large list of communities. This ensures that a full range of options are presented to the decision makers, and incentives negotiations can begin. Companies should present themselves to communities in a confidential fashion, using project code names and relying on non-staff to interact with local representatives.

 

Step 4: Evaluation of Top Locations and Sites
The technology company or its site selection consultant must do thorough research on its list of potential locations. Today, communities maintain much of their information on an economic development website. In fact, site selectors use the Internet to gain most of the information they need in their evaluation before any phone calls or visits occur. Communities should be evaluated for each of the criteria set out in Step 1: Project Set-up. Good site selectors will devise a weighted ranking system for all factors and rate communities on each.

For companies that require very specific sites for new construction, such as a medical device manufacturer, visits to a community must be conducted by an experienced engineering or site selection team. These individuals make drive-by evaluations of sites and typically get information from local authorities on their acreage, topography, soil type, zoning, geotechnical conditions, utilities, and access points. Often, the lack of sites and infrastructure may remove a community from a site selector’s review list. Technology manufacturers are increasingly focused on the supply of developed, “shovel-ready” sites in communities around the U.S., thus raising the bar for corporate recruitment. Many communities pre-certify their manufacturing site for specific uses such as semiconductor manufacturing or automotive manufacturing. An interesting biotechnology development is the use of former semiconductor manufacturing sites for pharmaceutical manufacturing due to similar site requirements and a surplus of semiconductor manufacturing facilities in the wake of an industry restructuring several years ago.

Utility evaluations are still important to some biotechnology firms, particularly those with sensitive manufacturing processes or a large data center requirement. The demands of the digital world result in the large consumption of power. Affordable, reliable electricity is of utmost importance, particularly for manufacturers or data centers. Biotechnology companies with large tissue databases, sensitive laboratory equipment, or other expensive assets will almost certainly require backup generators. Reliable telecommunications are equally important. Site selectors will evaluate brownouts, outages due to storms, power spikes and excess capacity for peak periods. After the recent massive blackouts in the northeast, reliability of the electric grid deserves greater scrutiny.

 

Step 5: Comparisons on cost of operations
Biotechnology firms vary in their attention to costs. Manufacturers and large consumers of electricity do thorough evaluations of the costs for various locations. This benchmarking analysis should cover the cost of labor, supplier purchases, air travel among locations, real estate costs, and tax costs. This analysis is generally done by the site selection consultant or an in-house financial analyst. Other biotechnology firms, especially those in the startup or small firm phase of operations will be more concerned with access to labor and availability of research facilities at an incubator or local university than real estate and tax costs, as evidenced by the location of so many biotechnology firms in the San Francisco and Boston areas, two of the highest-cost areas in the United States. Benchmarking the final communities for a variety of weighted scores can help determine where an operation would experience the lowest operating costs. Numerous factors are ranked and weighted for all areas in contention to determine which areas are best suited for the operation.

 

Step 6: Short-list communities and visit them
Once the initial analysis is completed, it is necessary to visit the short-list of candidate communities. These visits are meant to confirm the data sent by the community, visit prospective sites or buildings, and visit with local government, academic, and business leaders. The community visit is the most important part of the site selection process, and should be the determining factor in selecting a finalist city. Typically, a company will select a primary alternative, but have one or two other acceptable alternatives. This will allow more effective negotiations at the end of the process. Visits should generally allow one to two days per city in order to review thoroughly all the requirements in the selection process.

 

Step 7: Final selection
The final selection of a community often rests on one or two key requirements: the availability of a site, the availability of a significant talent pipeline, the desire of the CEO, a marketing goal, or an incentive. The winning city is almost certain to be the one which brought the most comfort and enthusiasm to the CEO and the executive team. Thorough evaluations by staff and consultants can provide strong guidance to decision makers, but not a final decision. Once a decision is made, a company should make every effort to maximize the publicity and exposure in the community in order to build goodwill and begin to attract the much needed technical talent that they will need.

 

Knowing the site selection process and the driving factors behind the biotechnology industry, cities and regions can recruit biotechnology firms with some foresight and strategy. While history has favored a few locations, biotechnology has become slightly less concentrated in the past decade. Cities that have created local biotechnology development have done so by focusing their efforts on specific biotechnology sectors. In the Midwest, for example, many smaller cities have successfully developed agricultural-based biotechnology markets. Other regions, lacking major universities or other major research strengths, have turned to pharmaceutical manufacturing. By placing all of its attentions and ambition on this specific sector of biotechnology, cities can benefit from biotechnology advances elsewhere. Additionally, as the leading biotechnology cities are among the most expensive places in the world to do business, there will be opportunities for communities that offer lower cost operating environments.

For cities wishing to develop thriving biotechnology industries, financial initiatives alone will not suffice.

Click here to return to Part One of the series Empires of the Mind - Education, Research, and Commercialization: the Building Blocks of Biotechnology