Market Information
United States

Market Overview of The Biotechnology Industry in the US Pacific Northwest States of Washington and Oregon

April 2002

Prepared for
The Canadian Consulate General in Seattle, WA
by Mark J. Sherwood
Industry Consultant
m.j.sherwood@att.net
360-769-2200

EXECUTIVE SUMMARY

The biotechnology industry in the United States continues to exhibit impressive growth. The industry more than doubled in size between 1993 and 2000, and even more growth is projected for the decade ahead. This growth will not occur uniformly throughout the industry, but will be highest in those regions of the country with the strongest cluster dynamics. The Pacific Northwest region, comprised of the states of Washington and Oregon, possesses strengths in most of the critical cluster factors, such as leading edge research institutions, highly skilled technical workforce, and sound business community. This region presents many commercial opportunities for Canadian firms, both in the biotechnology industry and in related support industries.

The biotechnology and medical technology industry in the Pacific Northwest is comprised of nearly 220 companies. These firms are concentrated in the greater Seattle area (over 80% of industry employment), with significant density also in the Portland area. Total industry employment in the region exceeded 17,600 in 2000, compared to total U.S. biotechnology employment of about 151,000 in 1999. The region's firms focus on four areas of product research and development: therapeutics (50%), diagnostics (31%), genomics and informatics (9%), and agricultural and environmental products (10%). Thirty-two of the region's biotech companies are publicly held. As of March 2002, these firms commanded an aggregate market capitalization of over $23 billion, compared to the U.S. industry total of $353.5 billion in 2000.

The Pacific Northwest biotechnology industry offers many avenues of commercial opportunity for Canadian firms. The sheer size of the basic research engine that resides in this region provides potential for engaging in various technology transfer activities, such as licensing and startup formation. For instance, the University of Washington consistently ranks among the top five educational institutions in the nation in receipt of federal research funds, particularly in the science and engineering disciplines. The region is also home to several other premier research institutions, as highlighted in this report. Several technology transfer assistance programs and organizations are active in the region, providing access to commercialization of the inventions from these research institutions.

Drug development activities also present opportunities for Canadian companies to form alliances with the biotechnology firms of the Pacific Northwest. The largest sector in the region is therapeutic products, and the immense resource demands required to develop therapeutic drugs opens opportunities for Canadian firms that can provide valuable products and services for these efforts.

Similarly, Canadian companies that can contribute value to the commercial efforts of the region's companies in the fast-growing genomics & bioinformatics sector may be able to capitalize on earlystage successes. This includes opportunities not only for Canadian biotechnology companies, in direct R&D collaborations and other business-to-business alliances with their U.S. counterparts; but also for Canadian firms in the computer sciences and telecommunications industries.

Several other strong cluster factors in the Pacific Northwest biotechnology industry serve to make the region attractive for commercial involvement from Canadian firms. The local venture capital community, while relatively small, is mature and well connected to the framework of industry companies. There is also strong support from the business community, including a very active industry association in Washington state.

However, there are also some concerns for the health of the region's industry. A serious shortage of suitable facilities exists in the region, especially in the high-demand centers of Seattle and Portland. Furthermore, the cohesive interactions enjoyed among Washington's biotech firms is substantially lacking in the Oregon biotech community. And a collection of certain attributes that are typically present in other successful biotechnology clusters are absent in the Pacific Northwest. These include factors such as actively supported research parks, company incubators, and publicly funded venture capital programs. Finally, the tax structures of both of the region's states are less friendly toward business development than those of other clusters. Canadian firms considering commercial activities in the region should be aware of these factors, both as potential pitfalls, and as factors which may provide opportunities for partnerships based on leveraging research dollars.

Nonetheless, the Pacific Northwest's biotechnology industry has grown over the past two decades to become one of the prominent clusters in the country. Despite the concerns just mentioned, many factors abound in the region to promote industry health and continued growth. Similarly, the region offers many opportunities for commercially successful activities from Canadian firms.

MARKET OVERVIEW

The United States is a world leader in researching, developing, and manufacturing biotechnology products for applications as diverse as pharmaceuticals, medical diagnostics, and agricultural chemicals. Yet, the biotechnology industry in the United States is still in an embryonic stage of development. The Biotechnology Industry Organization states that the industry more than doubled in size between 1993 and 2000, and the largest increase by far was in the last year of that period. Despite impressive relative growth in the previous decade, we are still seeing only the beginnings of the industry's potential. We have entered the century of genomics and proteomics, and the biotechnology industry now stands barely on the threshold of major breakthroughs.

The biotechnology industry is not spread evenly throughout the nation. Knowledge-intensive industries such as this tend to reside in clusters. A cluster consists of a geographic concentration of interconnected companies, specialized suppliers, service providers, and associated institutions. Successful biotechnology clusters have a range of different factors in place: strong academic research institutions; mechanisms for transfer of government-funded research to product commercialization; highly skilled workforce; availability of specialized facilities; access to earlystage capital; stable surrounding business community; and supportive public policy structure. Regions with high scores in these factors tend to attract entrance into the industry, both in terms of new startups and also the establishment of local entities by large outside firms. In the United States, a few regions concentrate most of the biotechnology firms. Strong clusters exist near Boston; Raleigh-Durham in North Carolina; New Jersey; Maryland near Washington D.C.; San Diego; San Francisco; and in Seattle and the Pacific Northwest.

The biotechnology industry is founded upon, and grows from continuing interactions with, worldclass basic research institutions. The Pacific Northwest is one of the fastest growing research areas in the world. The region also experienced strong growth of financial wealth during the past several years, providing a substantial platform for business development. Combined with its strengths in the other cluster factors, the Pacific Northwest offers good potential for success to biotechnology businesses.

This section of the report provides a description of the biotechnology industry of the Pacific Northwest. Within that context, areas of opportunity for Canadian biotech companies are discussed. Additional information is also provided for the newer, high-growth industry sectors of genomics and bioinformatics.

Industry Breakdown

The biotechnology and medical technology industry in the Pacific Northwest is comprised of nearly 220 companies. Of this total, 75% (163 firms) are located in Washington, predominantly in the Seattle area; the remaining 25% (54 firms), located in Oregon, are likewise concentrated in the Portland area. Please note that internet links to the companies and institutions that comprise the region's biotechnology industry can be accessed through the web sites of the Washington Biotechnology & Biomedical Association (www.WaBio.com), and the Oregon Bioscience Association, (www.Oregon-Bioscience.com).

The region's firms in this industry focus on four areas of product research and development: therapeutic products; diagnostics (including both devices and biotechnology applications); genomics and informatics; and agricultural / environmental products (including animal and marine applications). The biotechnology firms of the Pacific Northwest are distributed among these focus areas as shown in Table 1. Many of these firms are quite young-about forty percent were formed in the last five years. Even more recently, a sharp rise in the number of genomics and informatics companies has been fueled by the initial mapping of the human genome. For example, in Washington state ten new companies were formed in 2000, with four of them focused on genomics and informatics.

Employment statistics and demographics further demonstrate the diversity and vibrancy of the Biotechnology industry in the Pacific Northwest. Total industry employment in the region exceeded 17,600 at the close of 2000. By comparison, employment for the biotechnology industry in the entire United States was about 151,000 in 1999. The region's ten largest employers (i.e., fewer than 5% of the region's biotech firms) collectively provided 52% of industry employment. For example, the largest biotech company (Immunex/Amgen) alone employs more than 1,425 people. Conversely, about 75% of the region's firms employ fewer than 50 people each.

The geographic distribution of the region's biotechnology employment is presented in Table 2. About 88% of the industry's employees work for Washington state firms, the balance for Oregon firms. The higher figure for Washington, relative to the numbers of companies in the two states, indicates the more mature nature of the industry in Washington. For the region as a whole, the highest concentrations of employment are found near Seattle and Portland. Since the industry is driven, in large part, by access to such research institutions as the University of Washington and the Fred Hutchinson Cancer Research Center (both in Seattle) and the Oregon Health Sciences University (in Portland), this concentration it is not surprising.

Thirty-two (15%) of the region's biotech companies are publicly held. As of the end of March 2002, these firms commanded an aggregate market capitalization of over $23 billion. The total market capitalization of the U.S. biotechnology industry was $353.5 billion in 2000, according to the Biotechnology Industry Organization. Thirteen of the region's public firms had market caps of at least $100 million. A listing of these public companies, and their capitalization values, is provided in Table 3.

Note that beyond the listing of Table 3, a number of the larger biomedical firms in the region have recently exited the public market via acquisitions by other outside firms. In 1998, Physio-Control and InControl (both of Redmond, WA) were acquired by Medtronic and Guidant, respectively; ATL Ultrasound (Bothell, WA) was acquired by the Dutch firm Philips; and Heartstream (Seattle) was purchased by Hewlett-Packard Medical. Sanofi Diagnostics (Redmond, WA) was acquired by Bio- Rad Laboratories in 1999, and in 2001 PathoGenesis (Seattle) was purchased by Chiron and Rosetta Inpharmatics (Kirkland, WA) was acquired by Merck & Co. Perhaps the most noteworthy acquisition is currently in progress, that of Immunex by Amgen; that topic is discussed in more detail, below.

Aside from the above listed public companies and subsidiary firms, about 165 companies (over 75% of the total) are closely held by private investors. Sources of funding for these companies include venture capital and institutional funds. Venture capital plays a critical role for these firms, since product research and development in this industry is often lengthy and capital intensive.

Opportunities Across Industry Sectors

The healthy and growing biotech community described above affords many business opportunities for companies and organizations outside of the Pacific Northwest, including Canadian entities. These opportunities can take many different forms, as discussed in this section.

The Pacific Northwest biotech community holds potential for Canadian firms in various types of technology transfer activities, among all the industry sectors. Technology transfer is the process of transferring discoveries made at basic research institutions to commercial companies for development into products and services. This process is facilitated in the biotechnology industry by close working relationships among cluster members: the research institutes, emerging biotech firms, and established medical products companies. The process of technology transfer includes patenting a discovery, financing further development, creating a new company, and bringing the new product to market through working partnerships.

The Pacific Northwest is home to several premier research institutions. The leading research conducted at the University of Washington, Washington State University, the Fred Hutchinson Cancer Research Center, and Virginia Mason Research Center provides the technology base for Washington's biotechnology industry. Over half of the state's biotechnology and medical device firms are founded on technologies developed at in-state institutions such as these. In Oregon, the Oregon Health Sciences University, University of Oregon, and Oregon State University perform toptier experimentation in life science disciplines addressing diseases of both agriculture and an aging population.

The University of Washington consistently ranks among the top five educational institutions in the nation in receipt of federal research funds. In 1998, it was second only to Johns Hopkins University in total Federal Science & Engineering Support, at over $380 million. Also in that same category of funding, the Fred Hutchinson Cancer Research Center was fourth nationally among non-profit research organizations, receiving more than $102 million. Likewise, Oregon State University and Oregon Health Sciences University received over $73 million and almost $71 million, respectively. Furthermore, the level of NIH research grants in Oregon increased 53% between 1993 and 1998. For all categories of research funding, the University of Washington received $652 million in 2000; the Fred Hutchinson Cancer Research Center, $224 million.

The Pacific Northwest biotechnology industry also has several very active organizations that serve as technology transfer resources. Most of the research institutions discussed above have dedicated technology transfer departments (e.g., the University of Washington Office of Technology Licensing). Additionally, several free-standing organizations exist, such as Biostart (Portland), the Washington Research Foundation and Washington Technology Center (both in Seattle), and the Spokane Intercollegiate Research Technology Institute.

Technology transfer can be accomplished in several different ways; licensing and patenting from basic research are not the only two options. The University of Washington also has a very substantial industry funded research program, in effect a way for companies to contract with specific research groups. This program is the largest of any university in the country, and offers another means for developing and transferring technology to the private sector. All of these technology transfer mechanisms may provide avenues of opportunity for Canadian biotechnology firms to participate in the growth of the Pacific Northwest biotech community.

Drug development activities also present opportunities for Canadian firms. The largest sector in the region's biotechnology industry is therapeutic products. Drug development, due to its sheer size and revenue, presents an important means for Canadian companies to successfully form alliances with Pacific Northwest companies. The region affords a rich field of opportunities, from strategic technology alliances, to outsourcing collaborations for product manufacturing, and other types of partnerships. Additional opportunities exist for Canadian companies that can provide increased cost-effectiveness in the supply of components or services to the biotechnology business community.

The fast-growing fields of genomics and bioinformatics also provide many opportunities for Canadian firms: not only biotechnology companies, but also those in the computer sciences and telecommunications industries. Collaborations among these several disciplines will be required to commercialize the new findings from the human genome project. Canadian companies have tremendous opportunity in these fields to create partnerships with their Pacific Northwest counterparts. The commercial potential provided by these sectors is further amplified in the following sections.

Genomics / Pharmacogenomics

A revolution in medical science has been launched by the completion of the first draft of the human genome. Increased understanding of the total complement of human DNA will create an explosive growth in targets for new drugs. Anticipation of this has led to a large increase in genomic research in pharmaceutical R&D companies. Accordingly, the last several years have seen a tremendous expansion of commercial firms pursuing genomics applications and genome-based pharmaceutical research. In the Pacific Northwest region, four new companies were formed in 2000 alone that focus on genomics and pharmacogenomics. Combined with the areas of DNA Analysis and Bioinformatics (see below), this sector now consists of 17 firms in the region.

The activities of Pacific Northwest genomics firms range from providing basic genomics research services to developing genomics tools and testing platforms. For example, QIAGEN Genomics (Bothell, WA) is believed to be the world's first provider of commercial high-throughput SNP genotyping services. GeneLex Corporation (Redmond, WA) provides a broad array of genetic testing services, including DNA sequencing and forensic DNA testing. The region also is home to the Institute for Systems Biology (Seattle), which has developed large-scale facilities for DNA sequencing, genotyping, and proteomics. (Note that these research and testing activities also include components of information administration, as discussed below.) Regarding genomics tools, CombiMatrix (Mukilteo, WA) and Blue Heron Biotechnology (Bothell, WA) are developing biological array test platforms (e.g., DNA chips) for genomics-based drug discovery and other genomics research uses. Other regional firms are at the early stages of dedicated tools development.

The Pacific Northwest region possesses very strong cluster dynamics for this sector. It resides at the intersection of the several major research institutions already discussed, and a well-established and maturing community of core biotechnology pharmaceutical firms. This sector represents a rich field of opportunities for Canadian companies from not only the biotechnology industry, but also firms in the microelectronics industries, manufacturing firms with expertise in chip production, and precision medical components manufacturers. Alliances and partnerships should be available with new firms in the Pacific Northwest, at these early stages of development for a promising new collection of technologies. Furthermore, opportunities for technology transfer, in all the forms previously described, are available from research in this region.

DNA Administration and Bioinformatics

Closely associated with the above topics in genomics are the arenas of DNA Administration and Bioinformatics. The availability of human genome information is driving a paradigm shift in the very nature of pharmaceutical research. New techniques of bioinformatics are being developed to decipher the encoded genome information and to discern its implications for targeted drug actions, in contrast to the classic pharmaceutical discovery methods. Furthermore, the massive amounts of raw DNA sequence data from the testing activities described above require tremendously sophisticated information administration systems.

Several commercial firms in the Pacific Northwest region are dedicated to the development of these bioinformatics and data administration technologies. As part of its testing services mentioned above, GeneLex Corporation has developed data administration systems for its DNA testing to comply with FDA mandated testing for academic institutions, and has contributed to the validation of standard reference materials for the National Institute of Standards and Testing. Rosetta Inpharmatics (Kirkland, WA), has created proprietary technology that generates and analyzes gene expression data from DNA chips to provide comprehensive information about all relevant genes and targets within a cell. Founded as a Seattle-area startup just a few years earlier, Rosetta was acquired in 2001 by Merck & Co. Visx Labs (Seattle), and Genetic Information Management Systems (Portland) are developing software systems for genomic and proteomic data acquisition, analysis, storage, and distribution.

Despite the young age of this sector, there are high expectations for most companies engaged in these activities. Pharmaceutical companies spend about 22% of their R&D budgets on information technology, and the need for these new discovery techniques will continue to grow. Similar to comments above about genomics firms, the Pacific Northwest region possesses very strong dynamics for these information systems focuses, with comparable opportunities for Canadian biotechnology companies. In addition to the cluster components previously mentioned, the Pacific Northwest is also home to the information technology behemoth Microsoft. Moreover, the sensitive nature of much of the information in this sector may present opportunities for Canadian firms with expertise in IT security and internet security.

Contract Research Organizations and Clinical Trials

As of June 2000, forty-six biotechnology companies in the Pacific Northwest were conducting 240 clinical trials for candidate drug products. Thirty-six percent of the clinical trials were in Phase II and Phase III trials, the resource-intensive latter stages of the drug approval process. Of the 240 drug candidates, 93 are for cancer; 25 for autoimmune disorders such as rheumatoid arthritis and Crohn's disease; 23 for infectious diseases such as hepatitis and sepsis; and the balance for a variety of other diseases including AIDS, Alzheimer's disease, asthma, and cystic fibrosis.

Drug development and approval is an immensely arduous process. Ten to fifteen years are required to develop and commercialize one new drug in the United States, at an estimated cost of $400-$500 million. For every 5,000 candidate compounds that enter preclinical evaluation, only five compounds advance to human testing. Only one of those five is eventually approved by the U.S. Food and Drug Administration (FDA). This gauntlet requires a collection of clinical and regulatory professionals plus an infrastructure of test sites and documentation preparation systems that comprises essentially its own industry, adjunct to the pharmaceutical development companies themselves.

A number of companies and organizations provide these clinical trials services to the biotechnology community in the Pacific Northwest. These firms are above-and-beyond the scope of companies previously described in the breakout of industry sectors. Companies such as Northwest Kinetics (Tacoma, WA) and Statprobe (headquartered in Ann Arbor, MI, but active in Pacific Northwest clinicals) provide full contract research organization (CRO) services for setting up and monitoring all clinical trial activities. Quorum Review IRB (Seattle) and Western International Review Board (Olympia, WA) provide independent review of clinical trial protocols, in conformance with FDA regulations. Axio Research (Seattle) and Phase Forward (Kirkland, WA) provide customized clinical trial data collection and management services and software. Scientifica (Seattle), provides clinical writing services for the voluminous documentation that must accompany investigational new drug (IND) or new drug application (NDA) submissions. Additionally, the regional Organization of Regulatory and Clinical Associates (ORCA; Redmond, WA) provides educational and support services for professionals involved in the clinical functions.

Many of the basic research institutions previously mentioned serve as sites for these clinical activities. These include all the major Pacific Northwest university hospitals (UW, OHSU, etc.), plus separate clinical institutes such as the Fred Hutchinson Cancer Research Center, the Virginia Mason Research Center, and the Heart Institute of Spokane. The large and ongoing volume of clinical trials engaged by the region's biotech firms, at these institutions and others, provides opportunities for Canadian CRO's with expertise in clinical and documentation activities that conform to FDA regulations.

FUTURE TRENDS & POTENTIAL OPPORTUNITIES

Growth and Consolidation

The biotechnology industry has grown substantially in the past decade, yet it is poised on the edge of a dramatic new round of growth. As mentioned previously, the industry is still in its embryonic stage. Basic research programs continue to supply many new potential applications for life sciences technologies. In Washington state, industry projections call for employment to increase from about 15,800 in 2000 to more than 26,000 in 2005. In Oregon, the biotechnology industry is still small and growing incrementally. However, the research activities that fuel the biotechnology business are increasing in the greater Portland area. Local industry supporters look for a buildup of infrastructure and financing resources.

For the Pacific Northwest as a region, there is every indication that a new period of explosive growth is at hand. Much of this growth will take the form of increased commerce and employment by current firms, as they experience increasing levels of success in their current endeavors. Some of the growth will come from the formation of new startups via the transfer of new technologies from the research institutions. It remains to be seen how much net growth will occur in the number of firms, as company mortality offsets startup formation. Still another form of regional industry growth will be in the form of local subsidiary firms being fed by new parents. As with the case of startups, the important outcome will be net growth, wherein parent firms, collectively, pump in more than they extract. For example, in 2000 Boston Scientific removed its presence altogether from the region, after acquiring a Redmond, WA firm several years earlier.

Industry consolidation significantly impacted the region's medical device industry over the past few years. In the discussion above regarding public companies, it was noted that a number of the region's larger firms exited the public market during the period of 1998-2000, as the result of various outside acquisitions. Among these were Physio-Control, InControl, ATL Ultrasound, Heartstream, Sanofi Diagnostics, and PathoGenesis. Consolidation of medical device and biotechnology firms will continue well into the foreseeable future, driven by large pharma's need to diversify their product pipeline, and biotechnology company requirements for commercialization scale-up and ongoing capital investment. A recent example of the former was the acquisition of Rosetta Inpharmatics, in 2001, by the pharmaceutical giant Merck.

The ultimate acquisition of a Pacific Northwest biotechnology company is currently pending, that being the purchase of Immunex by Amgen. Announced in a December 2001 press release, the headline and its collection of sub-headings provide the gist of the bombshell story:

Amgen to Acquire Immunex for $16 Billion in Stock and Net Cash; Combines two of the world's fastest growing biotechnology leaders; creates unparalleled portfolio of blockbuster biotechnology drugs with Enbrel, Epogen, neupogen, and Aranesp; Amgen adds premier inflammation franchise to leadership position in nephrology and oncology; Amgen will have approximately $5.5 Billion in Pro Forma annual revenues and more than $1.5 Billion in net income in 2002; Acquisition of Immunex will increase Amgen's long-term product sales growth rate to low 30's and cash EPS growth rate to mid-20's driven by potential Enbrel sales of $3 Billion or more by 2005.

The press release also describes plans for Amgen to build upon the strengths that Immunex has established in its Pacific Northwest operations. This scenario is representative of consolidation dynamics in the industry, nationally.

Sources of New Companies

The primary source of new companies in this industry is the formation of startups based upon various kinds of licensing agreements for new technologies from the basic research institutions. This amounts to technology transfer as the foremost focus for these new firms. Other potential new company sources are spin-offs within the established industry. One notable example of that mechanism is the creation by Targeted Genetics, in 2000, of its subsidiary CellExSys. Another kind of company formation that has occurred recently in the region is the buyout, by a local management group, of a regional entity previously owned by an outside parent firm. Two large examples of this are the re-formation of Hollister-Stier Laboratories (Spokane) and the return of ZymoGenetics (Seattle) to local ownership.

Regarding the creation of new startups, the technology transfer process has previously been described as creating a new company to license a discovery, finance further development, and bring the new product to market. More than half of the region's biotechnology and medical device firms are founded on technologies from the area's basic research institutions. The region also has several organizations that serve as technology transfer resources, such as the Washington Technology Center and Biostart in Oregon. These basic "raw material" components of startup companies, combined with necessary financing as discussed below, yield an impressive track record for the industry in this region that will surely carry forward into the future.

Financing Strategies

Initial concept financing, venture capital and other private placements, and the public capital markets all play critical roles in this industry, due to the 10-15 year development periods typically required for the commercialization of a product. Early innovation grants are needed to fund the technology proofing phase that leads to a startup commitment. Specialized venture capital pools are required to support the protracted startup phases of the new biotechnology firm. Later, a relatively mature biotechnology company, even post-IPO, may still be years away from selfsustaining revenue streams. The working capital supplied by the public market, and additional private placements, is then just as important as the earlier venture capital.

The region has several programs for financing initial concept proofs. Washington Technology Center's Focused Technology Initiatives program provides technology assistance to Washington state companies from system proof of concept and prototype design to experimental analysis and technical feasibility evaluation of an emerging product. WTC also awards over $1 million through its Research and Technology Development Program annually to Washington state university researchers teamed with a Washington state company partner. Since 1996 WTC has awarded over $4 million to almost 50 companies in biotechnology and biomedical areas.

The Spokane Intercollegiate Research and Technology Institute awards Innovation Grants for funding the development of new ideas and prototypes, and has awarded $1.1 million to nine different biotechnology and biomedical projects.

In Oregon, the Oregon Research and Technology Development Account and the Oregon Life Sciences Fund provide seed funding for a wide array of technology companies including bioscience companies. The majority of the seed funding is dedicated to companies that have licensed technologies from Oregon universities.

Regarding venture capital, angel investors and the availability of other high risk venture funding are essential to the industry. With the collapse of the dot-com companies, VC firms are looking to diversify their holdings-especially into healthcare industry funds. Given the long lead time and high costs of commercializing a drug, choosing a partner and deal-making are more important than ever. It is paramount for a biotech company to find a funding partner with a similar strategic, cultural and organizational fit rather than forging into deals with short-term financial goals. A description of the region's private investment firms is provided in the next section.

Biotechnology's first entry into the public capital markets occurred with Genentech's IPO in October 1980. In the two decades since, the landscape of the U.S. biotechnology industry has evolved tremendously in terms of size and complexity. The year 2000 was significant not only for the arrival of dozens of genomics companies but also for the tremendous increase in proceeds and valuations stemming from IPOs across the industry. Thirty five healthcare funds raised a record $4.3B, almost double the $2.3B raised in 1999 and more than four times the 1996 figure. Analysts in the biotechnology industry are in agreement that IPOs will target a minimum of $300M in the foreseeable future. Companies that successfully complete an IPO will thus be more mature and better capitalized, consistent with current venture capital markets.

Thirty-two of the region's biotech companies are already publicly held. Only a few of these (e.g., ZymoGenetics, Seattle Genetics, and Northwest Biotherapeutics) completed their IPOs during the last several years. Nonetheless, this mechanism will doubtless be employed by several industry firms in the region, especially when general market conditions again become more favorable.

Investment Firms

The regional industry association directories list a cumulative total of twenty-one investment firms active in the Pacific Northwest biotechnology industry. Most of these are locally established and officed in Seattle, Portland and Spokane; others are larger national or international firms with a dedicated presence in regional industry investment. Beyond those firms explicitly listed, a review of the investment information from several regional biotechnology companies shows an even larger geographical net of investment firms with stakes in the region's industry.

Frazier & Company is a leading venture capital firm in Pacific Northwest biotechnology. Since 1991, Frazier Healthcare has provided capital to emerging growth companies across the entire spectrum of the healthcare industry, at all stage of development, from incubation to late stage. With four focused healthcare funds, Frazier has more than $750M of capital under management.

Pacific Horizon Ventures invests in companies involved in the life sciences and health care, particularly in early-stage opportunities where an originating lead investor is required. Since 1993, they have invested in over 25 companies.

Integra Ventures is an early stage life science VC firm that concentrates its investments in biotechnology and medical device companies in the Pacific Northwest. They invest predominantly in companies requiring less than $5M of initial capital.

ARCH Venture Partners provides seed and early stage venture capital for the commercialization of innovations in life sciences and other disciplines. The partnership's special expertise is to found, co-found, and build technology firms from startups. ARCH has built more than 90 successful companies, many of them from the concept stage. ARCH manages more than $700M, and has offices in several cities around the U.S., including Seattle.

Perennial Ventures invests in early stage companies, particularly companies developing tools applicable to the drug discovery process. This includes tools for the development and management of clinical information, diagnostic tools, and companies with novel platforms for proteomics and genomics.

OVP Venture Partners is the leading technology-focused venture capital firm in the Pacific Northwest, and the only firm with offices in both Oregon and Washington The firm makes equity investments in early stage technology-based companies; it has over $317M under management.

Profiles of additional local VC firms can be found on the web sites of the Washington Biotechnology and Biomedical Association, and the Oregon Biosciences Association, as previously identified.

In addition to local venture capital firms, Johnson & Johnson Development Corporation (San Diego), WR Hambrecht & Co. (San Francisco) and GATX Ventures (Farmington, CT) are listed as active investors in Pacific Northwest biotechnology. Also, MDS Capital Corporation (Canada's largest investment firm focusing on health care companies), maintains a regional office in Bothell, WA.

Partnerships and Collaborations: Selected Examples

While infusion of capital is essential to the early life (and mid-life!) of a biotechnology firm, often the formation of various kinds of alliances and collaborations are required for the eventual success and ongoing business health of these companies. This can be particularly important for a maturing biotechnology firm that has made it past the startup hurdles and is well along the 10-15 year pathway toward approval of drug products. New issues then begin to loom larger: higher-level clinical evaluations, production capabilities, and product distribution pipelines, among others. And the next generation of drug discovery and development activities must also be tended to.

These collaborations can take the form of licensing agreements, research collaborations, marketing agreements, supply agreements, and the establishment of joint venture entities. A large number of partnering activities has been undertaken by biotechnology firms in the Pacific Northwest, especially among the more mature firms. Several recent examples will serve to provide a flavor of these deals, and to demonstrate another aspect of the vitality of this industry.

Corixa Corporation (Seattle) has entered into numerous alliances for drug discovery and other R&D activities. During 2000 and 2001 alone, Corixa announced such partnerships with thirteen separate firms. Examples include collaborations with Kirin, Medarex, and Abgenix to discover and develop therapeutic monoclonal antibodies; with Organon to develop recombinant product for the treatment of rheumatoid arthritis; with Purdue Pharma to discover and develop therapeutic antibodies for cancer; and with Incyte for vaccine discovery. Corixa also entered into four marketing partnerships during the same period, exemplified by an agreement with Amersham Health to market Bexxar in Europe and with Medicis to commercialize Corixa's novel psoriasis product. Moreover, all these partnering activities have taken place amidst Corixa's merger with Coulter, completed in December of 2000.

Targeted Genetics (Seattle) created several partnerships, even while is was spinning out a new subsidiary (CellExSys) in late 2000. It acquired Genovo; initiated a product development collaboration with Biogen, and established a joint venture with Elan Corporation.

From 1999 through 2001, ICOS (Bothell, WA) entered into four collaborative relationships with other biotechnology firms, including the establishment of a joint venture with Texas Biotechnology.

Dendreon (Seattle) announced several collaborations in a short period in the fall of 2001: licensing agreements with Bayer and Geron; a development collaboration with Kirin; and a commercialization partnership with Gambro.

During 2000 and 2001, ZymoGenetics (Seattle) announced four separate research alliances or licensing agreements. Similar kinds of activities were engaged by firms like Cell Therapeutics (Seattle) and others in the region.

Certainly the most extreme "partnership" in the offing in the Pacific Northwest biotech community is the impending acquisition of Immunex by Amgen, as discussed earlier. Even in the midst of putting together this mammoth deal, Immunex was still active in creating several other alliances during the past year. Such collaborations continue to provide value, even for the larger players in the industry.

COMMUNITY SUPPORT

It was previously mentioned that successful biotechnology clusters have a range of different factors in place. Among these are active business community interactions and some supportive public policy structures. Regional strengths in these factors contribute to a healthy environment for businesses in the cluster. Several of these community support factors for the Pacific Northwest biotechnology are presented here.

Industry Associations

The Washington Biotechnology and Biomedical Association (WBBA) is a not-for-profit association of Washington state biotechnology and biomedical companies, research firms, and related organizations. It was founded in 1989 to "enhance the quality of life by promoting the growth and understanding of the biotechnology and medical technology industries within Washington state". WBBA is active in providing many avenues of networking and interaction among the diverse business and research organizations in the industry. It enjoys very active participation from industry members in Washington, and about 95% of the state's biotechnology firms are WBBA members. Furthermore, it works with the Governor's office to formulate and encourage implementation of a technology strategy for the state. The WBBA is an affiliate of the Biotechnology Industry Organization (BIO). The WBBA web site can be found at www.WaBio.com.

The Oregon Bioscience Association (OBA), also a not-for-profit industry association, was founded in1990 "to promote the growth and quality of the bioscience industry in the State of Oregon and ensure it achieves its full economic and social potential." The OBA web site can be found at www.Oregon-Bioscience.com.

The Biotechnology Association of the Spokane Region (BASR) is an affiliate of WBBA dedicated to promoting the biotechnology and biomedical industry in Eastern Washington.

Economic Development

A number of resources are available to promote development of the biotechnology industry in the region. Many of these are listed and accessible at the WBBA and OBA web sites as described above. These include links to the Washington State Office of Trade and Economic Development; county-level Economic Development Councils in Washington state; and links for Legislative Affairs in both Washington and Oregon. Likewise, state resources for technology transfer are available, such as the Washington Technology Center R&D Funding program or the Oregon Health Sciences University's Office of Technology Management.

The biotechnology community in Washington state enjoys a very supportive business development environment, with a high level of interaction among the industry members and the resources just mentioned. The Oregon biotechnology community, being smaller and less mature, is still working toward that same level of developmental support. In 1999, an ad hoc group known as the Oregon Biosciences and Medical Technology Alliance developed a bioscience strategic plan. The Alliance is made up of representatives from the Oregon University System, Oregon Health Sciences University, the City of Portland Development Commission, the Oregon Economic and Community Development Department, and private sector representatives. The Alliance submitted a proposal in 2001 to the Oregon legislature to provide funding from the State's tobacco settlement funds for hybrid university and industry research initiatives.

State Tax Incentives

Washington state biotechnology businesses receive benefits from a number of state tax programs. The High Technology Business and Occupation Tax provides for an annual credit of up to $2 million toward the Business and Occupation Tax obligation for businesses that perform research and development in biotechnology and electronic device technology, among other areas. The state also has a High Technology Sales and Use Tax deferral or exemption for capital expenditures related to R&D or pilot scale manufacturing facilities. Furthermore, there are sales and use tax exemptions available for constructing manufacturing or research facilities, and for purchases of manufacturing or research equipment, for companies in the biotechnology industry. A Job Creation tax credit is also available for each qualified employment position in companies with manufacturing or R&D activities that are conducted in an eligible area at a specific facility. All these tax benefits help the growth of the industry in Washington state.

Variants of these kinds of tax programs in Oregon include the Qualified Research Activities Credit, wherein taxpayers may receive a five percent credit (up to $500,000) against corporate excise taxes for increases in qualified research expenses and basic research payments in biotechnology, electronic device technology, and other fields. In the Strategic Investment Program, businesses involved in biotechnology and other technology areas are eligible for certain property tax exemptions.

FACTORS IMPACTING GROWTH

The case has already been made that the Pacific Northwest scores well in the major categories required for cluster establishment and growth. The region is home to some of the most prestigious biotechnology research in the country. It likewise produces a highly educated workforce with skill sets that are congruent with industry requirements. Early stage capital is available for firms with sound business plans and strategies. And the local venture capital community, while relatively small, is mature and well connected to the framework of industry companies. There is strong support from the business community and average governmental support. Nonetheless, the biotechnology industry in this region does face some issues of concern regarding future growth and business health.

One of the most serious issues is the availability of suitable facilities. The decision to site a biotechnology company is based primarily on proximity to research institutions, the ability to recruit and retain highly skilled employees, and the availability of specialized facilities. Such facilities typically include customized ventilation, electrical and mechanical systems, water handling, clean rooms, and even animal containment systems. These facilities requirements are very costly, which is a direct concern; the indirect effect of the cost is that these facilities are in short supply, regardless of who is footing the bill.

In the Seattle area, where over 80% of the region's biotech employees are sited, the shortage of facilities has become a serious problem for companies seeking room for start-up or expansion. Of course, this translates into a problem for the area's whole biotech industry, not just those companies. Whereas existing companies project aggregate needs for at least 300,000 square feet of additional space annually through 2005, at this writing less than 40,000 square feet of space is available for occupancy in the near term. The WBBA internet site contains a link devoted to updated facilities information.

In Oregon, there are approximately 188,000 square feet of existing building space available for bioscience companies to occupy. In 1998, the available dedicated wet laboratory space at these facilities was at 100% occupancy. Clearly, this situation presents a barrier to growth in the biotechnology industry in Oregon. The OBA web site also contains a link for facilities information; however, at this writing, that link simply listed the same information from the WBBA site about facilities in Washington state.

The shortage of these specialized facilities in the Pacific Northwest region is a major obstacle for startups and for existing firms seeking to expand, at least in the areas now most densely occupied. Just as importantly, this same factor is an obstacle for any new entrance by firms considering relocating to the area. Unless additional facilities become available, firms may be forced to locate outside of the primary research center areas, and possibly outside of the region, altogether.

Another factor that presents concern for growth is the area of technology transfer. This is ironic, since many praises have previously been sung about the strength of technology transfer activities in this region. Yet, without detracting from those positive comments, the crucial role played by technology transfer activities requires that any weaknesses be discussed. The main concerns for technology transfer in the region have to do with administrative capacity at the research institutions. According to one report issued by Washington state, the staff of the technology transfer office at the University of Washington should be expanded, and salaries should be increased sufficiently to retain senior staff. Additionally, funding for patenting is very limited. A similar report from the state of Oregon indicates that the technology transfer processes at Oregon's research universities are currently working at about the limits of personnel and funding. However healthy might be the receiving parties (the biotech companies), weaknesses from the supply side of the technology transaction will impede the industry from reaching its growth potential.

Beyond the specific issues described above of facilities and technology transfer, some general comments about growth obstacles can be made. Notwithstanding the many positive cluster dynamics in the region as a whole, the Oregon Bioscience Association's recent Benchmark Study cites concerns about the support structure for the biotechnology community in Oregon. It declares that "the Bioscience Industry in Oregon is fragmented. There are few cooperative efforts and no important unifying issues that engender cooperation. Companies in different stages of development and different business sectors have very different needs. The Oregon Bioscience Association provides representation and services to the industry, but it does not have the critical mass to be proactive in encouraging industry communication or cooperation. Industry membership in OBA is [only] about 25%." Certainly, this bespeaks some concerns for the growth and health of the industry in this portion of the Pacific Northwest biotechnology cluster.

More broadly, certain positive catalytic attributes of other successful biotechnology clusters are conspicuously absent in the Pacific Northwest region. Whereas several other regions in the U.S. boast actively supported research parks, company incubators, publicly funded VC firms, and such programs as directing tobacco-settlement funds toward life sciences technology development, the Pacific Northwest region consists of little or none of these activities. Furthermore, the business and operating tax structures of Oregon and Washington are not the most commerce-friendly in the country.

Other issues of concern may also exist, such as abound for all business communities. And the traffic congestion in the greater Seattle area is becoming the stuff of legend. However, issues such as these, while they are items to be aware of, do not appear to pose overt health concerns for biotechnology in this region. After all, such circumstances existed before the formation of this cluster, and its member firms have nevertheless grown and thrived for the past two decades to create this tremendously vital industry in the Pacific Northwest.

BIBLIOGRAPHY

Washington Biotechnology & Biomedical Association: 2001 Washington Biotechnology and Medical Technology Annual Report

The Business Journal of Portland: Oregon Bioscience 2001 Business Directory, March 30, 2001

Washington State Office of Trade and Economic Development:: Cluster Strategies for Washington, December 2001

Oregon Bioscience Association: Bioscience Industry Benchmark Study 2000

Biotechnology Industry Organization: The Economic Contributions of the Biotechnology Industry to the U.S. Economy, May 2000

U.S. State Government Initiatives in Biotechnology, 2001