Biotech Financing / Ingram's Feb 2012


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Inside Biotech Spending
A look at how Kansas and Missouri are leveraging their successes to drive additional investment in the life sciences.

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Biotech Financing / Ingram's Feb 2012

  1. 1. If you look at the numbers without context, the two-state region enjoyed a mixed year of venturecapital funding success within the biotechnology sector in 2011. According to a new study byPricewaterhousecoopers and the National Venture Capital Association, venture capital fundingfor the sector soared in Missouri—to $133.7 million—compared to 2010 levels, while the figurein Kansas declined by nearly 19 percent.Those figures compare with a healthy 21 percent increase in life-sciences VC fundingnationwide. Missouri’s performance is welcome news to those who are trying to build a nascentbusiness sector here. But, as with the revenues of many a start-up company, it’s easy to gin upbigger percentages when the baseline is low.And, as Jeff Boily notes, it’s important to “put things in perspective so we don’t start drinkingtoo much of our own Kool-Aid here.” The president and CEO of the Center for Animal HealthInnovation in Olathe, Boily delves a little deeper into the numbers and notes that funding relatedto the animal-health firm Aratana Therapeutics had accounted for much of the Kansas-sideactivity “and that, to me, distorts the overall data,” he said.In the fourth quarter of 2011, for example, venture capital spending on the Kansas side involveda handful of deals, all related to mobile-application software development, but nothing in thebiotechnology realm.Across the nation, more than $7.5 billion in venture capital poured into 785 deals involvingbiotechnology and medical device firms, the financing study said. That’s significant, becauseventure-backed companies account for more than 11 percent of private employment in the U.S.—more than 12 million jobs—and life sciences accounts for nearly a fourth of that investment.Even more significantly, many of the companies in that sector are the kinds of small high-growthcompanies that Kauffman Foundation studies have shown account for a vastly disproportionateshare of job creation.The bi-state share of that national figure came to about 4 percent of the total. In terms ofinvestment deals that were struck, the two-state region accounted for only a little better than 1percent of all deals consummated. Those figures offer a sobering assessment of the region’s placerelative to biotechnology investment nationally.New England, by comparison, attracted $1.4 billion, and the real center of biotech fundinggravity in the country, Silicon Valley, commanded more than $2.2 billion. Combined, those two INGRAMS • February 2012 • Volume 38, No. 2
  2. 2. relatively compact geographical areas accounted for nearly half of all biotech venture capitalinvested in 2011.That leaves Kansas City fighting much of the rest of the nation—including the New York metroarea, the Chicago region and such big-name centers as the Research Triangle in North Carolina—for the other half. The upside for this region is that there’s a large, and growing, pool offinancing available if it can effectively make the case that investments here can be moreattractive than in other markets.But the issues facing efforts to build a life sciences sector here go beyond mere concerns aboutsecuring financing, say those involved in life-sciences fields. While the area boasts somesignificant venture capital and super-angel investor groups, Kansas City as a region is trying totap into the bigger pool of VC dollars nationally. That, say experts in the field, carries inherentrisks that out-of-market money could indeed fuel start-ups here—only to see successful youngcompanies relocated to coastal markets or larger financial centers and population bases.Not only could that effectively thwart efforts to create long-term job growth, it could sap the top-tier talent that the region has been working hard to attract from other, sometimes bigger, centersof life-science research.“There is a presence; we are getting some traction,” Boily notes. But for the early-stagecompanies, he asked, “how do we incite entrepreneurship, how do we get it going?”The challenge we face for attracting serious players among venture capitalists from outside theregion, he said, is that “they don’t have to leave their chair—there are so many opportunitiesright around them, and there is a preference for proximity to your investments.”One other challenge facing the region is the potential for fewer public dollars being committed tobiotech-related economic development. While his calls for a restructured Kansas tax code wouldattract more businesses, says Gov. Sam Brownback, the Angel Tax Credit shouldn’t be a part ofthe package. He’s asked the Legislature to eliminate that financing tool, which cost the state $5.7million in 2010.On top of that, Brownback has withheld $22 million slated for the Kansas Bioscience Authority,pending further review of the agency’s practices for encouraging life-sciences growth in thestate.The angel credit and the KBA have been considered keys to giving the Kansas side of themetropolitan area an infrastructural advantage relative to Missouri. The timing of bothdevelopments, coming on top of Brownback’s elimination of the Kansas Technology EnterpriseCorp., could serve to deter interested investors from outside, biotech executives say.“I believe we are entering into an era of uncertainty and that will impact the momentum that thiscommunity has created from a regional standpoint and a national perspective,” said KevinSweeney, chair of the Life Sciences Group with Polsinelli Shughart, who works in that sector. INGRAMS • February 2012 • Volume 38, No. 2
  3. 3. Patrick Woolley, who works with Sweeney on related issues at the firm, noted that the staterisked losing valuable momentum.“The public private partnership is invaluable,” Woolley said. “What we see is with the startupcompanies we represent, they get KBA money … that is typically matched by private equitymoney or angel money or venture capital, which is critical. A lot of venture capital people willnot invest unless there is some sort of state fund to help smooth out their investment. So I thinkthat’s critical, especially the tax credits. The ability to sell and transfer those tax credits has beensignificant to startup companies in Kansas.”On top of that, Boily said, the region simply needs to do a better job of marketing itsachievements if it hopes to attract more outside dollars.“The reality is that we are competing against a lot of other very potentially appealing deals”nationwide, he said. “We have a lot of marketing to do, talking about the talent and innovationhere, from academic institutions to companies starting up.”by Dennis Boone ________________________________________________________ INGRAMS • February 2012 • Volume 38, No. 2