North Carolina’s Biotech Industry: A Value Chain Analysis

Alicia Jolla Paul O’Shaughnessy PLAN 264

Executive Summary

Global outsourcing, increased foreign competition, and the loss of established industrial comparative advantages have forced U.S. firms to innovatively seek ways to keep abreast of the changing economic environment. Over the past decade, national headlines have reported dramatic fiscal and job losses in historic manufacturing such as furniture and textiles. Unfortunately, this trend has even affected high-tech, white-collar industries.

As the nation confronts this problem, economic development agencies are aggressively pursuing new opportunities for job creation. The biotechnology industry provides an opportunity for long-term sustained community development and job creation. “Few states are as well positioned as North Carolina for national and international leadership in biotechnology and economic gain from the industry’s growth,” (NC Biotech Center, 2004).

In a broad sense, biotechnology involves the use of organisms, cells, or molecules isolated from cells to make products and solve problems. Scientific breakthroughs, extensive research, substantial investments, and enhanced technology, has turned the biotechnology industry into a $40 billion dollar industry that continues grow (ncbiotech.org, 2004).

Biotechnology provides immense promise for the state of North Carolina. From an economic development perspective, biotechnology is well suited to the state’s resources and has the possibility to create not only well-paying white collar jobs but high wage blue collar employment which is less susceptible to global outsourcing. To facilitate the growth of this promising industry, North Carolina has created strategic alliances between firms, communities, government agencies, and educational institutions. These alliances have established an infrastructure that offers ongoing support and leadership for the biotechnology industry.

This project analyzes the structure and value chain of biotechnology industry and provides insight into some of the industries key functions and firms. Consistent with the industry in North Carolina, this report focuses on two main components of the industry: bio-pharmaceuticals and bio-agriculture. Specifically, this project provides: an overview of the biotechnology industry; analysis of the industry’s value chain, the identification of important policy and two case studies of biotechnology firms in North Carolina as real world examples of the value chain in action.

I. History of Biotechnology in North Carolina

Researchers would argue that biotechnology has been around sense the being of time; only its applications and technologies have changed. Since the first time the word “biotechnology” was introduced in 1919 by a Hungarian engineer, biotechnology has and continues to have a strong progression of innovations. In the 1950’s North Carolina saw an opportunity to take part in this rapidly growing field. Initially, North Carolina invested millions of dollars in creating an business park that was relatively cheap for companies to build facilities. This state-sponsored initiation sparked multiple other investments in the form of tax incentives and support organizations (Duke Capstone Course, 2004). At the forefront of these investments came the creation of the North Carolina Biotechnology Center by state’s General Assembly. This center was the nation’s first state-sponsored initiative to develop biotechnology. Thirty-five other states followed with biotechnology centers of various kinds (ncbiotech.org, 2004). The table below concisely indicates the history of biotechnology in North Carolina.

1958 The Research Triangle Park and the Research Triangle Institute is created in North Carolina.

1978 North Carolina scientists Hutchinson and Edgell show it possible to introduce specific mutations at specific sited in a DNA molecule.

1981 The North Carolina Biotechnology Center is created by the state’s General Assembly as the nation’s first state-sponsored initiative to develop biotechnology.

1996 Biogen’s Avonex is approved for the treatment of multiple sclerosis. The company builds a $50 million plant in Research Triangle Park, N.C., to manufacture the drug.

2000 The Charlotte research institute is created to help spur the creation of jobs in the biotechnology industry.

2001 RTI announces the first major breakthrough in thermoelectric research in 40 years by developing a new material that is 23,000 times faster than current technology.

2002 The North Carolina Genomics and Bioinformatics Consortium is created by the Biotechnology Center to unite 80 companies, universities and service organizations throughout North Carolina.

2003 Gov. Easley asks the North Carolina Biotechnology Center to develop a long range plan to help guide future state investments in biotechnology.

2004 Merck & Co committed to build a $300 million dollar facility that would provide over 300 jobs in the Research Triangle Park.

Source: North Carolina Biotechnology Center

II. Understanding Biotechnology

The biotechnology market comprises of all organizations involved in the development, manufacturing or marketing of products based on bio-molecular research (Datamonitor, 2003). There are a number of terms commonly associated with “biotechnology” and its related products. Some of these terms include: biomedical; biosciences; genetic engineering; and more generally life sciences. Researchers find these terms and definitions to be somewhat confusing because the terms biotechnology and bioscience do not really define an industry at all, at least not in the product-centered sense that SIC and NAICS codes define industries. Instead, these terms describe a set of technology-based platforms that are centered around, but not confined to, specific capacities in biological science (Regional Technology Strategies, 2003). The industry is closely aligned with the research and development aspect of the pharmaceuticals industry, which generates the industry’s main revenues. In the Unites States, the industry is regulated by the U.S. Food and Drug Administration (FDA), the Environmental Protection Agency (EPA) and the Department of Agriculture (USDA). To further define the industrial scope of biotechnology, the chart below details the main applications of the biotechnology. Healthcare Pharmaceuticals (therapeutic drugs, vaccines);

Diagnostics (Monoclonal antibody-based tests. Genetic probes and DNA amplification); Gene Therapy; Tissue Replacement

Agriculture New plant varieties for new or improved foods; Safer pest control such as biopesticides and pathogen-resistant crops; Improved livestock for food production; Veterinary disease diagnostics, therapeutics, and vaccines; Animal and plant “factories” to produce pharmaceuticals and chemicals

Food Processing Microbial starter cultures, enzymes, and vitamins; Food contamination test kits

Industrial Processes Organic Chemicals; Mineral Recovery; Bioelectronics; Waste-stream reduction; Environmental clean-up (bioremediation); Energy production; Enzymes (detergent, textile manufacturing, etc.)

New Understand of Biological Systems Understanding human disease, deciphering the human genome, sequencing genomes of microorganisms and plants

Laboratory Instrumentation and Techniques to Support Life Science R&D, and Manufacturing

Nucleic acid amplification technology; Combinational chemistry

Source: U.S. Industry and Trade Outlook 1998 (New York: DRI/McGraw-Hill, 1998)

III. Industry Focus Global and National Context

On a global scale biotechnology continues to rapidly progress. Since the biotechnology industry directly affects other industries such as healthcare and agriculture, developed countries have taken serious interest in this industry because of its potential to solve problems in everyday life. Developing countries are particularly interested in biotechnology’s potential to produce food and treat disease (NC Biotech Center, 2004). Outside North America, a sizable number of biotechnology firms exist in Western Europe and Japan. With global expansion of biotechnology countries such as South Korea, India, Taiwan, and Singapore have invested in this growing industry.

The United States continues to see great gains in the biotechnology industry. The U.S accounted for more than 70% of revenues and R&D spending for pubic biotech companies globally in 2002 (Mergent Web Reports, 2003). From 1992 to 2003 the U.S. biotechnology industry went from $8 billion dollars in revenues to $39.2 billion dollars in revenues. According to the Biotechnology Industry Organzation (BIO) the U.S. biotechnology industry employed 198,300 people as of Dec. 31, 2003 (bio.org, 2004). “Between 2000 and 2010, the US Department of Labor estimates that industries directly involved with biotechnology (such as drug manufacturing, health services, and agricultural services) will add approximately 3 million new jobs to the United States labor force,” (NC Biotech Center, 2004). Globalization

The effects of globalization have provided meaningful opportunities for the U.S.

biotechnology industry. As opposed to the recent trends in some other white collar industries that have seen jobs moving to foreign markets at the expense of U.S. jobs, offshoring that has occurred within the biotechnology sector has not been at the expense of employees in the United States.(Winston Salem Journal, 2004) Although there is not a concern for offshoring U.S. biotechnology jobs, there is concern that as the industry continues to grow, competition will increase, and offshoring may become a viable option for some U.S. biotechnology firms (NC Biotech Center, 2004). There has been some foreign competition from India, Ireland and Singapore, but ultimately, US biotech and particularly the Triangle have benefited from globalization. There is a large presence of foreign subsidiaries in biomanufacturing in the Triangle, such as Bayer, BASF, Syngenta, Esai, Novo Nordisk, etc. In particular, the US pharmaceutical and therapeutic market allows for wide discretion in pricing of product which does not exist in Europe or Japan. It is for this reason that foreign companies actively seek to have a significant US presence, and the Triangle has been very successful in attracting these companies.

The graphs/tables below provide information on the state of biotechnology in the U.S.:

U.S. Biotech Industry Statistics: 2000–2003* Year 2003 2002 2001 2000 Sales* 28.4 24.3 21.4 19.3 Revenues 39.2 29.6 29.6 26.7 R&D Expense 17.9 20.5 15.7 14.2 Net Loss 5.4 9.4 4.6 5.6 No. of Public Companies 314 318 342 339 No. of Companies 1,473 1,466 1,457 1,379 Employees 198,300 194,600 191,000 174,000 *Amounts are U.S. dollars in billions Sources: Ernst & Young LLP, annual biotechnology industry reports, 1993–2004.

Sources: Ernst & Young LLP, annual biotechnology industry reports, 1993–2004. State/Local Context

North Carolina creates about $3 billion dollars in annual biotechnology revenue. This amount is expected to progressively grow as researchers continue to find ways biotechnology can improve our crops, medicine, and environment. It is clear why the two main components of biotechnology (bio-pharmaceutical and bio-agriculture) fit so well within the North Carolina economy. “North Carolina recognized early that the science and applications of biotechnology fit remarkably well with the state’s natural resources and economic foundations (NC Biotech Center, 2004).

United States North Carolina Number of Companies 1,466 152 Number of Employees 194,600 18,500 Revenue $33.6 billion $3 billion

Source: Ernst & Young, 2003; NC Biotechnology Center

One reason the biotechnology industry has flourished in North Carolina lies within the state’s leadership. The North Carolina Biotechnology Center (NCBC) is an example of a state-

sponsored initiative to facilitate the growth of the biotechnology industry. Recently, NCBC partnered with the Golden Leaf Foundation to set up a massive training initiative for the biotechnology industry. “The availability of skilled workers is what will help to continue to bring new companies to the area. Through this initiative, along with the North Carolina Community College System's top-rated job training program, the state has also set up two new incubators near Universities in order to give first-hand training experience. These steps will help create a huge available workforce, which is why it is estimated that the biotechnology industry could employ 125,000 people by the year 2023,” (NC Biotech Center, 2004).

To understand North Carolina’s place in the national industry scheme, it is first important

to understand the major biotech centers which exist in the United States. Top of the list are San Francisco and Boston, which are the birthplaces of commercial biotech. This is where biotechnology first began and where the mature lead firms in biotechnology, with the exception of Amgen which is in Los Angeles, are located. There is also significant biotech activity in New York and Philadelphia as a result of the heavy traditional pharmaceutical presence that still resides in that area, and Washington has a lesser presence due to federal funding opportunities. The third area of biotech are the cities of San Diego, Seattle and the Triangle where a biotech presence has been essentially “grown”, and it is in this market segment where the Triangle should benchmark itself. Of the three cities, San Diego is the strongest with 31 biotech firms with 100 or more employees and $1.5 billion in venture capital funding. The Triangle is tied with Seattle for venture capital ($400 million) and patents (approximately 800) over the last decade. Seattle has significantly increased its presence, particularly in patents, over the last decade. According to the Brookings Institution, what has propelled the two biotech leaders, Boston and San Francisco, to the top of the heap is venture capital funding. For it to expand its commercial biotech presence, the Triangle will have to continue to successfully obtain venture capital funding from outside the state (Brookings Institution, 2002).

Labor Market Biotechnology, as a still developing industry, generally defies conventional SIC and NAICS code description. There are certain codes which do pertain to biotechnology activities, but unfortunately, there is extreme spillover from one job specification to another. In interviews with industry contacts, we were advised that such an analysis is not practical or informative for the industry. Shift share analysis is also somewhat difficult due to the reclassification from SIC to NAICS which changed definitions and classification categories. At the risk of assigning significance where there is none, the following graphic splits out employment in the sector by NAICS code and location quotients performed against national employment figures, as identified by the 1997 Economic Census.

Research labs are perhaps the least useful NAICS classification as research at major life sciences companies is entered into pharmaceutical manufacturing (sales would also fit into this category) and university research does not register. Testing is a bit surprising because the low location quotient directly conflicts with qualitative evidence we have received indicating that testing is where North Carolina has a huge presence. Only biomanufacturing fits the qualitative research gathered for this project in that its location quotient is very high relative to the United States average. Still, aggregate employment totals just around 11,000, which is 7,000 below what the NC Biotech Center estimates for biotech employment in the state.

Key Market Trends and Outlook for the Biotechnology Industry:

1) Investment in agricultural biotechnology is expected to increase: • “The increase in the world’s population, a slowdown in crop rate

improvement through conventional cultivation, and a decline in the area of land available for food production have caused the rapid adoption of biotech around the world.

2) Bio-phamarmaceutical industry is also expected to grow

• The ageing population has increased the global healthcare expenditure and expanded market opportunities for biotech drugs and treatments.

IV. Value Chain The biotech value chain in its simplest form can be drawn up into four distinct sections: Research, Testing, Manufacture and Sales. At each point in the chain, there are various needs and competencies possessed by different types of actors. Many actors possess competencies across levels; others may concentrate in only one. Lead firms in biotech tend to possess competencies in all areas, but often partner with other actors in one or more parts of the value chain.

Research There are two main sources for research in the biotech industry both nationally and in North Carolina: university research and private research conducted by major companies. Often, truly new research begins in the former and is commercialized in the latter because university research is not constrained by the idea of commercial viability and return on investment which occurs in private corporation R&D facilities. In fact, many major corporations, particularly life sciences corporations which are looking to biotech for new products, are not investing as heavily into new biotech research as they were some time ago because ROI on start to finish research in biotech (particularly genomics) has not been as high as was originally hoped. In particular, much of the excitement surrounding genomics and gene therapy has produced a lot of investment which has resulted in few commercially successful products. More often, private companies are looking to partner with university researchers on biotech drugs which have been developed to a level where commercial viability seems more certain (Craichy/Lindberg, 2004). This has put a heavier emphasis on university and publicly funded research as a driver for new ideas and products in the biotech industry. North Carolina is obviously well positioned in this regard. There are three major universities in the Triangle region which have wide ranging research competencies across a number of biotech sectors. Duke University has the well renowned Duke Medical Center and Duke's Institute for Genome Science and Policy, UNC has the equally prestigious UNC Hospitals, the UNC Comprehensive Cancer Center (for which it is building a $140 million new facility) and the Department of Cell and Developmental Biology, and NC State has the

Department of Agricultural and Life Sciences along with the Centennial Campus, a leader in public/private research partnerships and prospective home of the new Biowork training facility for the North Carolina Community College System. Many of North Carolina’s smaller biotech startups were born from university research. Another major actor which facilitates the transition from research to commercial product is the university office of technology transfer. Each major Triangle university has a technology transfer office which is responsible for taking university research and assisting its inventors in applying for patents and finding commercial partners. This office is responsible for negotiating the appropriate agreements so as to protect intellectual property rights of research that is being conducted at the university. In addition, the technology transfer office acts as the contact point for interaction between commercial actors and university researchers, which includes sponsored clinical research and research collaborations. The tech transfer office also tries to determine the best path to market for a prospective product, which can mean the formation of a new company or licensing technology to a private entity. Testing To understand the testing portion of the value chain, it is necessary to understand the regulatory process and preliminary testing which accompanies the approval procedure for a biotech drug. The first testing procedure is called “proof of principle” which effectively states that in a limited test, the desired biological effect was achieved. This is often used to obtain seed financing to enter into the actual regulatory stages of testing administered by the FDA. Also, a company must also file for a patent at this time to protect the use of the biological process that is to be tested. Before the drug can be submitted to the FDA, however, it must also undergo a process of preclinical trials. The results of the preclinical trials must be submitted by the company when applying for an Investigational New Drug Application (INDA), which is a formal request to begin human testing. Under the FDA approval structure, drugs for human use must pass three phases of testing. In phase one and two, the drug is administered first to healthy people to test its safety, then to people with the specific infliction which the drug is intended to treat to test efficacy. In Phase III, the most exhaustive and costly stage, the drug is applied to a wide group of afflicted patients in a randomized, double blind procedure using placebo. It is estimated that the cost of developing and testing a new drug for approval is between $500 and $800 million and that for every twenty drugs which enter clinical testing, thirteen will successfully complete Phase I, nine will complete Phase II and only one or two will complete Phase III, meaning that only 5-10% of drugs complete testing (Craichy/Lindberg, 2004; Standard and Poor’s, 2004). It is here in the earliest testing phase where there is the highest number of actors in the value chain, particularly in North Carolina. New drugs and treatments take various paths through the preclinical trial and FDA testing procedures up until Phase III. North Carolina has the highest concentration of Contract Research Organizations (CROs) in the country. There are currently 74 CROs listed on the NC Biotechnology Center’s website. CROs do work from actual lab testing to trial design to data analysis, any piece of the process which a drug sponsor cannot or does not wish to do in-house (Fierce Biotech, 2004). One such example of a CRO in North Carolina is Quintiles, a CRO which is based in Research Triangle Park. Begun in 1982 out of the work of a

UNC professor, Quintiles is a global leading CRO which does everything from biostatistics to patient recruitment to Phase I – III trial design. In addition to CROs, there is another set of actors in this early phase called “virtual companies”. Nascent biologics and therapeutics are often managed by “virtual companies” in the early stages of testing. These “virtual companies” use their management expertise to move new products from their initial research stage through the beginning trial and testing stages until they are commercially viable and can be partnered or sold to a major life sciences company to complete the development process (Craichy/Lindberg, 2004).

It is when the testing process reaches Phase III that the number of actors thins back down. Prospective therapeutics have two main paths: either sufficient funding and resources are obtained to complete a Phase III trial and begin manufacture independently or partner is found (often a larger life sciences firm) to complete the costly Phase III procedure and subsequent manufacture, should a treatment be lucky enough to reach that stage.

Although bioagricultural products do not meet with the same rigorous testing procedures

as do biologics which are meant for humans, new products must also be approved by the USDA before they can be sold commercially (Standard & Poor’s, 2004). Manufacturing Biomanufacturing is a very process specific, capital intensive procedure which does not allow for quick recalibration or a wide variety of generic product to be produced. Production runs are carefully orchestrated and require special technical equipment which may or may not be applicable for other procedures. In addition to the technical concerns of production, there are also regulatory concerns. The FDA applies rigorous testing procedure before any facility can be approved for manufacturing. Due to the time and capital intensive nature of beginning a biomanufacturing process, there is generally a backlog of production. Should one prospective treatment fail to achieve commercial approval, there are many more in the pipeline which are awaiting manufacturing capacity (Craichy/Lindberg, 2004).

Much of the manufacturing of bioprocesses is conducted by lead firms who have the existing equipment and funding, although more recently contract manufacturers have been appearing. In RTP, Diosynth has a major contract biomanufacturing plant which is the company’s only facility in the United States. Construction began on the facility in 1995, it produced its first clinical product in 1997 and was first inspected by the FDA for commercial production approval in 2001. KBI Biopharma is also in the process of constructing a contract manufacturing plant; construction on this plant was begun in 2003. For the time being, however, biomanufacturing is limited mostly to the lead firms and to those smaller firms which have secured financing to begin manufacturing their own biotech products.

Sales Once a product is approved for commercial use, it must find a proper market for successful sale. Often, this is one of the most overlooked pieces of the business plan; many times demand for certain products is assumed when in fact there is none. Marketing capability is very relevant for biopharmaceuticals. Established lead firms often have extensive marketing networks with established contacts in the medical community which can obtain commercial success for a product fairly quickly. This is another advantage of a lead firm and another reason why startup companies often choose to partner with a larger company. Lead Firms The definition of lead firms in the North Carolina biotechnology industry (for the purposes of this paper) is as follows: firms which tend to be larger in size and product array, have manufacturing capacity, significant financial resources, and presence throughout the value chain (either in North Carolina specifically or in the organization as a whole). The lead firms that we have identified are: Biogen IDEC, Wyeth Vaccines, Baxter Healthcare, Novo Nordisk, GlaxoSmithKline, Bayer Cropscience and Bayer Healthcare, BASF Agricultural Products Center and Esai. This identification of lead firms is sensitive to definition and is not meant to include all actors which create significant value in biotechnology in North Carolina. Almost all of these lead firms are subsidiaries of major life

sciences or biotech corporations. Only one such firm has what could be considered a headquarters in North Carolina, GlaxoSmithKline, and about half of these companies are foreign owned.

Lead firms in biotech are important for their financial resources, manufacturing capacity

and sales force. These companies often serve as partners that can bring a new product to market more easily because they have existing resources to complete the costly Phase III testing procedure, capacity to manufacture a subsequently approved product, and an existing sales force to market the product. Expanding the number and presence of lead firms in North Carolina increases the likelihood that new therapeutics and products will still create employment in the state should it be decided to partner with a larger firm to bring a product to market. As the graphic to the right shows, licensing to an outside partner often leads to job creation outside the state. Increasing the number of lead firms in the state would enhance the likelihood of job creation in North Carolina.

In conclusion, the graphical representation of commercial actors in the biotechnology

chain would look similar to the following chart:

V. Key Needs in the Value Chain Workforce There are three main subsets of the workforce which are the most important to engendering regional success across the entire biotechnology value chain. Starting chronologically in the product development process, professors and graduate school students are very crucial in the development of innovative research. The medical and agricultural intellectual community is responsible for most of the idea generation which occurs in the biotech sector in North Carolina. About one third of North Carolina’s biotechnology companies began from research in local universities (NC Biotech Center, 2003). Well-educated and well-respected faculty attract higher caliber graduate students which improves the quality and the quantity of research being done in the area, and thus, the potential for commercial development. In addition, these researchers often leave the academic community to start their own companies or become leaders in industry organizations. North Carolina is well positioned in this regard with each of the three Triangle universities and their faculty at the forefront of many medical and agricultural advances. Perhaps the most under recognized workforce need is entrepreneurs. Having an entrepreneurial workforce present in a community often proves to be an important factor in bridging the gap from concept to product. Researchers are often unfamiliar with the requirements for commercial success in the market place and the ability to tap into existing management experience makes going it alone a viable option. As is evidenced in the product development path referenced above, the ability to create a startup company is crucial to increasing the probability that jobs will remain in North Carolina from new technologies, and an entrepreneurial workforce is a key ingredient in making startup companies successful. Said entrepreneurs take on many forms. Often it is displaced or retiring executives of existing lead firms who are recruited to manage a new technology company. Other times managers of startups who failed to achieve commercial success on a previous technology are brought in to manage a new startup. The latter illustrates a very important point; it is not only enough to have entrepreneurs, but a region must also have an entrepreneurial culture which embraces risk taking rather than punishing failure. As noted earlier, very few new biological products and INDAs are ultimately approved and investment in the industry is a high risk, high reward undertaking. An entrepreneurial culture allows unsuccessful entrepreneurs to try their hand again with a new product rather than being punished for failure in what is a very difficult process. This recycling of managerial talent increases the likelihood of successful startup ventures which then develop into mature companies which then generate new managerial talent which may be added to the entrepreneurial workforce. North Carolina, and particularly the Triangle, is working hard to maintain and grow both its entrepreneurial workforce and culture. Institutions like the Council for Entrepreneurial Development and the Biotech Center work hard to aid and encourage new startups in their formation and growth as well as facilitate contact and communication between existing and would-be biotech entrepreneurs (Craichy/Lindberg, 2004). Finally, a region must have a workforce which is appropriately trained for biomanufacturing. Biomanufacturing is a very process specific and technical undertaking which requires precision and, more importantly, practical experience. Process in biomanufacturing must

first be painstakingly detailed and engineered, then submitted to the FDA for approval, then (should said process be approved) implemented without the slightest deviation from the original design and performed with the utmost attention to sterilization. Slight mistakes or deviations in procedure can render entire batches of product unfit for sale which can cost a manufacturer between $100,000 and $1 million. The painstakingly careful nature of biomanufacturing illuminates the need for a trained, experienced workforce. In a 1997 survey, biomanufacturing employers identified the most frequently absent characteristics which they desired across a range of various education levels including high school graduates, associate degrees and bachelors degrees. Obviously, each education level possessed desired traits which others did not possess, but the one category where every education level was lacking was in practical lab experience and, other than high school, expectations of an industrial environment. On average, the time required for new employees with no experience to become proficient in biomanufacturing operations is 1.2 years. However, new employees with prior manufacturing experience require 25-50% less time to be trained (Window on the Workplace, 1997). Traditionally, when a biomanufacturer performed a site selection, it would tend to select sites where a biomanufacturing presence already existed and cannibalize the local workforce (Craichy/Lindberg, 2004). North Carolina, through its leadership in the Biotech Center and the North Carolina Community College System, has identified this need for an experienced biomanufacturing workforce and responded with the Biowork education initiative. Under funding from the federal Golden Leaf tobacco settlement, NCCCS is providing a new education program to train applicants in biomanufacturing work with hands-on learning techniques such as site tours at local biomanufacturing facilities. The centerpiece will be a new biomanufacturing training facility on NC State’s Centennial Campus which will provide students with training access to equipment and procedures which they will encounter in real job situations (Seymour, 2004). This approach for creating an existing, “de-novo” workforce (rather than a workforce that needed to be cannibalized from competitors) is a first in the industry and should create a huge incentive for biomanufacturers in the state (Craichy/Lindberg, 2004). The following is a graphical representation of segments of biotechnology industry workforce needs relative to its place in the value chain:

Financing Financing is a constant need throughout the biotech chain. Different investors and different risk profiles need to be appropriately matched to their place in the chain and funding shortfalls at various chain locations need to be overcome. Initially, the chain begins with research and the earliest research is funded by research grants from various institutions. This source of funding is very important because it is a grant, not an investment or a loan, which allows the receiving entity to pursue more aggressive lines of research irrespective of forecasted commercial potential or profitability. This allows research institutions more flexibility and increases the probability of a truly new and revolutionary new procedure or product. North Carolina has a large competitive advantage in this area; state research grants to local universities and the Research Triangle Institute are around $2 billion which ranks only behind the Bay Area and Boston (Craichy/Lindberg, 2004). Assuming that a commercial possibility is discovered from this research, the initial funding gap becomes one of the more difficult hurdles to commercial success. Startup companies must look to angel investors (rich individuals with high risk profiles), smaller local venture capital firms and the Biotechnology Center. There is an oligopoly of small VC firms in the RTP area which do this investment; although Charlotte serves as a large capital markets center nationally, there has been little interest from venture capital in the area for biotechnology. Additionally, the failure to raise small amounts of equity capital locally can serve as a negative sign to potential investors further down the line. Together, these funding sources get a startup company through the early filing and testing procedures. Upon entering Phase III testing is when most startups need to turn to larger sources of venture capital, from which around 80% comes from outside the state (Craichy/Lindberg, 2004). Large sources of biotechnology venture capital are located primarily in the Bay Area and Boston (one of the main reasons for the heavy concentration of the industry in that area), and these sources as well as other sources have been successfully tapped by North Carolina firms (Brookings Institution, 2002). Following successful completion of Phase III, a startup encounters the late stage funding gap where it needs to construct manufacturing capacity. Construction of a manufacturing facility is typically an appropriate area for debt financing, but with no historical cash flows, such an investment is usually too high a risk profile for most debt investors to approve. Venture capitalists have usually run out of appetite for additional investment at this point and are looking for an exit to cash in their investment. An IPO is an option for a startup at this stage, but the IPO market can be very fickle and dries up from time to time. In the past election, a new measure was approved for the creation of a bond authority which would address this late stage funding gap (Craichy/Lindberg, 2004). At virtually any stage in the chain, partnering with a lead firm is also a financing option, and one which many companies and researchers choose. The following is a graphical representation of the value chain, its various funding stages and the respective investors which fund those stages:

VI. Case Studies

Syngenta Biotechnology Inc. (SBI)

Syngenta Biotechnology Inc. (SBI) is a biotechnology company in the Research Triangle Park that focuses on agriculture. SBI is apart of the broader Syngenta organization that is recognized as the world’s leading agribusiness committed to sustainable agriculture through innovation research and technology. In 2000 two successful agribusiness companies integrated to form Syngenta. Syngenta is a global corporation with sales at approximately $6.6 billion in 2003 and over 20,000 employees in more than 90 countries (syngentabiotech.com, 2004).

SBI specializes in “crop biotechnology” (bio-agriculture) and focuses mainly on crop genetics research. SBI researchers in the RTP area use a combination of science and cutting-edge technology to develop innovative solutions that help farmers, food companies, and other agricultural stakeholders (syngentabiotech.com, 2004). An affiliated company Syngenta Crop Protection Inc., has its headquarters a few miles away in Greensboro, North Carolina. Their primary focus involves providing the industry with weed, insect, and disease control products as well as leading environmental stewardship initiatives (syngentacropprotection-us.com, 2004). For the purposes of this case study, we will focus primarily on SBI.

As a component of a global organization, SBI’s goal is to be the leading global provider of innovative solutions and brands to growers and the food and feed chain (syngentabiotech.com, 2004). It is obvious that SBI is a good fit for North Carolina because of its close alignment with the agriculture industry. The primary functions of SBI include: plant transformation, improved animal feed, improved grain processing, cereal functional genomics, insect control, weed control, and disease control. All of these functions benefit North Carolina farmers in some capacity and aid them in staying competitive and creating innovative means to farm. Initially, SBI was established in North Carolina because Ciba-Geigy (a legacy company of Syngenta) established a biotechnology research facility in the RTP area in 1983. Recently, the sister organization, Syngenta Crop Protection Inc. decided to place in headquarters in Greensboro, North Carolina primarily because of the $2 million dollars in economic incentives provided by the City of Greensboro, Guilford County, Forward Guilford and the state. As a result of this placement, 110 new jobs were created in the Triad area (The Business Journal, 2003). This shows the supportive environment North Carolina provides for biotechnology companies. This strategy attracted and continues to keep companies like SBI in North Carolina.

SBI’s presence in North Carolina has had a positive effect on the economy. Obviously, SBI has created over 250 well-paying research jobs to the area. The public affairs director at SBI said, “Since the biotech group here doesn’t have commercial (external) operations, I don’t suppose the contribution to the North Carolina economy is as obvious as our US Crop Protection Headquarters in Greensboro. We would like to think however that Syngenta’s presence in RTP shows a commitment to biotech and the community.” SBI supports NC communities with various financial and resource donations. Typically, the company tries to focus contributions on food related activities/groups (e.g. NC Food Bank) and agricultural and/or scientific education.

In addition SBI has helped spawn the creation of local biotechnology firms. When Novartis and Ciba-Geigy merged to create Syngenta, it triggered a structural adjustment in the company, resulting in layoffs. These layoffs created opportunities for researchers to test their entrepreneurial skills and create smaller ag-bio companies. “Syngenta Biotechnology's Triangle operations have proven to be a fertile breeding ground for budding entrepreneurs. Scientists and others who have honed their skills at Syngenta and its predecessors -- Novartis and Ciba-Geigy -- have founded and are running a new crop of young ag-bio companies such as Athenix, Cropsolution and Paradigm Genetics,” (Aurora Funds, 2003).

Since SBI is apart of a global corporation, globalization in the form of off-shoring US jobs, has not been experienced. The public affairs director indicated that global pressures not only include other global competitors, but environmental activist as well. The ethical challenges that exist in ag-bio continue to be an uphill challenge most companies. Since SBI builds its foundation on being innovative in a globally competitive market, employees say that much of its activities are confidential until it has been released to the broader business community.

Biolex, Inc.

Biolex is an excellent example of state industry actors working together. The research which led to Biolex’s inception was discovered by a NC State professor who was recruited by the university with the help of a faculty recruitment grant from the NC Biotech Center. This professor found a method for injecting desired proteins into duckweed which would then produce the injected protein in a larger quantity.

According to the company’s website: “The LEX System™ is a complete set of technologies and capabilities that gives Biolex the ability to take a therapeutic protein all the way from amino acid sequence through scale-up of purified cGMP product suitable for clinical trials and commercial supply. The LEX System™ couples natural characteristics of the small green aquatic plant, Lemna, with advanced genetic engineering and protein recovery methods to create a transformational development and production technology with numerous competitive advantages over all other existing cell culture and next generation transgenic expression systems. The LEX System™ has been demonstrated to significantly enable hard-to-make proteins (such as peptides and cytokines) and monoclonal antibodies.” (biolex.com, 2004) The Biotech Center also provided some initial funding for the startup phases of the company along with Academy Funds, a venture capital firm started with the purpose of helping to commercialized research developed at NC State. The company also recruited managers from Bayer and Merix Bioscience, biotech companies located in the region (Craichy/Lindberg, 2004). Through successive rounds of venture capital financing with both local and outside venture capital partners and commercial partnerships with established firms such as Bayer, Centocor (a Johnson & Johnson subsidiary) and Debiopharm (a Swiss therapeutics manufacturer), it was able to open a new 4,500 sq. ft. manufacturing facility in Pittsboro this past September which it will use to produce product for its commercial partners as well as develop new therapeutics such as alpha interferon (for the treatment of hepatits), for which Biolex recently filed an INDA with the FDA (biolex.com, 2004).

VII. Key Policy Initiatives

Based upon our research, we recommend the following to encourage the sustainability of the biotechnology industry in North Carolina: Continue to Encourage International Partnerships

• Thus far, many of the biotechnology companies in North Carolina have made strategic efforts to form international partnerships with other foreign biotechnology companies. “In February, 2002, for example, North Carolina, through the leadership of the NC Center for Biotechnology, signed an 18 month agreement with the Indian state of Andhra Pradesh to collaborate and exchange information on biotech (Aurora Funds, 2003). Andhra Pradesh is a state known for its preeminence in stem cell, health, and agricultural biotechnology,” (Aurora Funds, 2003). These types of strategic partnerships help North Carolina compete in the global market.

Develop a Significant In-State Venture Capital Capacity

• North Carolina boasts the number two financial center in the United States and a growing economic driver whose prime requirement is funding. Unfortunately, these two centers are not interacting. What has characterized the most successful biotech centers in San Francisco and Boston is consistent access to capital, and this is also what is helping San Diego move to the top of the pack. and North Carolina is currently dependent on out-of-state sources for major venture capital funding. If North Carolina could tap into its existing financial center for funding, it would help to propel not only biotech, but other growing industries forward.

Continue to Fund and Advance the Biowork Program

• Biowork is a truly innovative and visionary workforce training program which will give North Carolina a significant advantage in site selections over other locations. Not only does it provide good jobs for a skill level where many jobs have been lost, it provides them in an area where there is a lower level of risk from global outsourcing.

Works Cited

“New Jobs Across North Carolina: A Strategic Plan For Growing The Economy Statewide Through Biotechnology.” North Carolina Biotechnology Center, 2004. “Window on the Workplace.” North Carolina Biotechnology Center, 2004. “Signs of Life: The Growth of Biotechnology Centers in the US.” The Brookings Institution, 2002. “CROs: Contract Research Organizations.” Fierce Biotech, 2004. www.fiercebiotech.com. “S&P Industry Surveys: Biotechnology.” Standard and Poor’s, August 2004. North Carolina Biotechnology Center Website. <www.ncbiotech.org/ncindustry/> Duke University, Markets, Management, and Capstone Course. Biotechnology < http://www.soc.duke.edu/NC_GlobalEconomy/biotech/> “Biotechnology in the United States.” Datamonitor. www.datamonitor.com “The Life Sciences Cluster: A Report to the Montana Governor’s Office of Economic Opportunity.” Regional Technology Strategies, 2003. “The North America Biotechnology Sectors: A Company and Industry Analysis.” Mergent Web Reports, 2004. http://webreports.mergent.com Biotechnology Industry Organization Website. www.bio.org, 2004. Biolex, Inc. website. www.biolex.com, 2004. (2004, Feb 12). “Statewide Approach.” Winston Salem Journal, pg A12. Retrieved from Lexis Nexis Database on December 7, 2004. Cited by www.soc.duke.edu/NC_GlobalEconomy/biotech/resources.html “New Jobs Across North Carolina: A Strategic Plan for Growing the Economy Statewide through Biotechnology.” North Carolina Biotechnology Center, January 2004. Syngenta Biotechnology Incorporated (SBI) Website. www.syngentabiotech.com Syngenta Crop Protection Inc. Website. http://www.syngentacropprotection-us.com/ Ranii, David. “Rich soil for ideas and startups.” Aurora Funds, April 10, 2003. “Syngenta Picks Greensboro for Crop Protection Headquarters.” The Business Journal, October 17, 2000.

Interviews Conducted Syngenta Biotechnology Inc. (SBI), Public Affiars Director, Elizabeth Claypoole (December 6, 2004) North Carolina Biotechnology Center. John Craichy and Rob Lindberg. Office(s) of Business and Technology Development. (December 2, 2004). North Carolina Community College System. BioNetwork Director, Susan Seymour (November 9, 2004). Emails: Kelly Craven, North Carolina State University, Genomics (November 29, 2004)