Magazine Article | June 1, 2009

A Life Sciences Stimulus?

Source: Life Science Leader

By Cliff Mintz

Longtime biotech executive Dr. Leslie Glick has crafted a unique VC (venture capital) stimulus spending plan that he claims will lead to significant growth in the U.S. life sciences industry.

Soon after the financial meltdown began late last fall, J. Leslie Glick, Ph.D. (see sidebar on profile of Dr. Glick), who is a staunch supporter of capitalization and free enterprise, proposed the government provide stimulus monies to VC firms to ensure the continued growth and financial stability of the U.S. life sciences industry. In exchange for taxpayer investment in these firms, the federal government would become a limited partner (like other private investors in a firm’s funds) and share revenues generated from the firm’s investment portfolio. Government returns from these investments would be deposited directly in the U.S. treasury and used accordingly as seen fit by the federal government.

While dubious at first, the more I learned about the details of Dr. Glick’s proposal, the more his ideas made sense to me. I sat down with him to learn more about his unorthodox proposal and how it may help to stimulate the U.S. economy, improve innovation and competitiveness, and preserve America’s leadership role in the global life sciences industry.

Anyone who has spent time in the life sciences industry knows VC-backed companies are high-risk investments that are far more likely to fail than succeed. Why should the U.S. government use taxpayer dollars to invest in VC firms when, by all accounts, high-risk investments were largely responsible for the financial meltdown?

Glick: In 2007, around $56 billion of private capital was invested in emerging U.S. life sciences and high technology companies. Over $30 billion of these funds came from VC firms and approximately $26 billion from angel investors. Historical results reported by the National Venture Capital Association for the 20-year period ending Dec. 31, 2007 showed an annualized return of 16.7% to investors in roughly 1,860 U.S. VC and private equity partnerships. If the U.S. government had made annual investments of $10 billion in U.S. VC firms during that 20-year period, the $200 billion investment would have yielded a return of almost $1.5 trillion. In addition to these profits, federal government participation (as a limited partner in taxpayer-backed VC firms) would stimulate additional private sector investment in these firms, which could be used to start new companies or invest in existing ones that need additional capital to continue drug development.

In the investment world, it is generally acknowledged that 90% of all VC-backed companies will fail. However, the surviving 10% or so generate enough revenues to cover the losses of those companies that don’t make it. The returns on successful VC investments are much greater than those from conventional low-risk financial instruments. VC firms exist to fund high-risk but potentially very profitable ventures that otherwise would be capitalized.

Which VC firms would be entitled to receive federal funding under the VC stimulus spending plan, and how would the program operate?

Glick: VC firms eligible to receive federal funds would be those managing funds of $30 million or more that have been in business or operating for at least five years. Every year, each eligible firm would be entitled to receive federal monies based on the size of the funds that it manages (as compared with the total size of the funds managed by all of the firms that accept government stimulus monies). For example, if in a given year, the total size of the venture capital funds managed by firms accepting federal stimulus monies is $200 billion, then a firm that manages a $200 million fund would be entitled to receive .1% of the total federally disbursed money. This means that if, in a given year, the U.S. government allocates $15 billion for VC stimulus spending, a firm that manages a $200 million dollar investment portfolio would be entitled to accept as much as $15 million (.1% of $15 billion) in federal stimulus dollars. Based on our current financial situation, the U.S. government might want to consider investing $15 billion to $60 billion per year (over the next five years) to ensure financial stability and continued growth of the American life sciences industry.

The VC stimulus spending plan would be administered and overseen by the Department of the Treasury, the Department of Commerce, or another federal agency capable of managing the program. It is important to note that the federal government wouldn’t have the power to earmark or influence investment decisions made by VC firms that accept stimulus monies. All investment decisions and strategies would be in the purview of the general partners managing the government-backed firms.

Federal monies will be comingled with private investor funds to ensure that there is no preferential or differential use of federal vs. private investment capital raised by the firms. To that end, the U.S. government won’t be treated differently from any other private fund investor. The plan won’t succeed if the government chooses to administer or regulate the program like the stimulus programs it recently crafted for the U.S. banking and automobile industries. For this plan to work, the federal government must adopt a “hands-off” policy and allow the free enterprise system to operate.

While many biotechnology companies have been reported to be on the verge of bankruptcy and considerable consolidation has taken place, does the American life sciences industry really need a “bailout?” Shouldn’t struggling companies be allowed to fail based on the underlying principles of the free enterprise system?

Glick: Innovation through entrepreneurship is primarily responsible for the United States’ 35-year-long dominance of the global life sciences sector. Without investments of large sums of venture capital, the U.S. life sciences industry wouldn’t exist today. The current financial crisis is interfering with the ability of many VC firms to raise sufficient monies to continue to fund existing companies (with promising, new medicines) or start up new ones. In addition to stifling innovation, a shortage of VC investment capital is wreaking havoc on unemployment rates in life sciences-rich states like New Jersey, California, and Massachusetts and has the potential to adversely affect the U.S.’s GDP.

Thinning drug pipelines at many major pharmaceutical companies have forced them to become increasingly reliant — through licensing deals and mergers and acquisitions — on smaller biotechnology companies for innovative new products. At present, biotechnology companies (many of which have less than six months of operating capital in the bank) are finding it extremely difficult to secure additional VC funding to stay afloat. While this may allow pharmaceutical companies to purchase biotechnology companies at bargain basement sale prices, it will likely impede development of many promising, new medicines because, unlike big pharma, start-up companies are willing to put everything on the line to develop extremely risky but otherwise high-value new medicines and technologies. In other words, both pharma and biotech will suffer if the attrition rate of financially struggling life sciences companies isn’t slowed because there will be less overall innovation in the sector. It is instructive to remember that Genentech and Amgen — two of the world’s largest and most profitable drug makers — were once start-up life sciences companies. Imagine what the life sciences industry landscape would look like today if those two companies were never started! Allowing existing companies to fail and not starting new ones could adversely affect the overall health and continued evolution of the American life sciences industry.

Historically, VCs have been very selective when making investments decisions because they have limited funds and cannot afford to fund all “good ideas.” Do you think granting VC firms virtually unlimited access to taxpayer monies may result in bad investment decisions and possibly jeopardize the high ROI usually associated with venture-backed investments?

Glick: There are several reasons why infusion of large sums of taxpayer dollars into VC firms won’t result in reckless or bad investment decisions. First, only well-established and credible VC firms will be able to receive government stimulus funds. The onus will be on the federal government to ensure that eligible firms have been diligently vetted before they receive any taxpayers’ money. Second, according to the plan, government monies will be comingled with private funds raised from other limited partners. This will ensure government funds are not treated any differently than private investments. Finally, VC firms that make bad investment decisions and fail to deliver expected ROIs to their investors typically don’t stay in business for long!

Typically, 90% of all proposals evaluated by VC firms are summarily rejected without review, and only one or two of the remaining 10% are funded. If the federal government bolsters spending at VC firms through infusion of stimulus monies, many firms would be able to fund two to five promising companies rather than the usual one or two. This would foster innovation by allowing firms to invest in companies that would otherwise have been deemed too risky for investment. One or two big winners in an investment portfolio — even if other portfolio companies break even or lose money — will allow firms to provide the promised high ROIs to their investors.

How do taxpayers and the American economy benefit from the VC stimulus spending plan?

Glick: First, funding start-ups results in the creation of new jobs for skilled professionals in the areas of R&D, manufacturing, marketing, and sales and other people who help to support the life sciences industry infrastructure. Also, funding existing companies allows employees to keep their jobs. According to a recent report, scientists and managers typically make up 61% of the workforce at a fast growth venture-backed firm, as compared with just 15% that are created in the economy as a whole. Published national statistics suggest that venture investments have directly created about 12.5 million jobs since 1970, with an additional 15 million jobs created indirectly, resulting in one job created for every $12,309 of venture capital investment. Moreover, life sciences jobs are high-value jobs that offer considerably higher salaries and benefits than similar jobs in other economic sectors. Based on historical data, if the U.S. government were to invest $15 to $60 billion per year in eligible VC firms over the next five years, 1.3 million to 5.4 million jobs would be created.

Second, while mergers and acquisitions may benefit individual companies, the long-term effects of these transactions on the life sciences industry can be harmful, especially if new start-ups aren’t formed to fill the void. For example, it is not clear what impact, if any, Merck’s merger with Schering-Plough, Pfizer’s purchase of Wyeth, and Roche’s acquisition of Genentech will have on the long-term health of the American life sciences industry. Typically, during these periods of so-called creative destruction, new ideas, technologies, and companies emerge to replace the old ones — but only when there is sufficient venture capital to support them. Because of the severity of the current economic downturn, it is not clear whether or not there will be enough venture capital available to fund new companies to replace the old ones following the consolidation currently taking place in the American life sciences industry.

Finally, venture funds exist to finance high-risk innovative ideas, technologies, and companies. In exchange for investment capital, VCs are willing to offer their investors substantial profits and capital gains. However, in difficult financial times, VC firms have trouble raising sufficient investment capital and consequently become more risk-adverse and conservative in their investment strategies. For example, companies focused on personalized medicine and biofuels development — technologies that by all accounts represent the future of the life sciences industry — are currently experiencing difficulty securing venture funding. This is likely because the markets for these emerging technologies are still in their infancies. Thus, many VCs aren’t willing to gamble on these companies and are taking a “wait and see” approach before they will invest. Unless personalized medicine and biofuels companies can secure additional venture funding, many will fail and may ultimately jeopardize the ability of American life sciences companies to compete in these exciting new areas of research.

The federal government has historically taken a “hands-off” approach for the American life sciences industry. Do you think your plan, which calls for direct government investment in the life sciences industry for the first time in its almost 40-year history, might jeopardize its future?

Glick: Unlike most foreign, government-backed spending initiatives (which allowed governments to directly invest in biotechnology startups), the proposed VC stimulus spending program doesn’t permit the U.S. government to direct or influence investment decisions made by participating VC firms. Those decisions will rest solely in the purview of the general partners of the firms who oversee all investments and financial strategies. With this in mind, the federal government, like other limited partners, is a passive investor that relies on the experience and judgment of fund managers to make prudent investment choices. The VC stimulus spending plan will only succeed if the principles of the free enterprise system and capitalism are allowed to operate without federal involvement or oversight.

Is it possible that the lack of innovation that has been plaguing American life sciences companies for over a decade has been influenced more by a growing shortage of American life sciences talent rather than insufficient amounts of venture capital for investment purposes?

Glick: Unfortunately, we live in a country that is poorly educated and frequently misinformed about the life sciences industry and science in general. Much more needs to be done to improve American competencies in math and science if the United States wants to remain a dominant player on the global life sciences stage. One area that drastically needs improvement is preparation and training of life sciences undergraduates, graduate students, and postdoctoral fellows for jobs in the private sector. There is still too much emphasis placed on preparing these students for academic rather than industrial careers. Not surprisingly, many high school and college students choose not to pursue life sciences careers because they mistakenly believe that a Ph.D. is required for employment. While Ph.D.s still have their place at life sciences companies, their numbers are dwindling, and there is a growing demand for employees with undergraduate and master’s degrees.

While a poorly trained workforce may be partly responsible for the lack of innovation that has been pervasive in the American life sciences industry for the past decade, insufficient VC funds is what may ultimately affect the industry’s future. History suggests there will always be a small cadre of visionary entrepreneurs who are willing to tirelessly and relentlessly work to transform their ideas into realities. However, to be successful, they must have access to large sums of venture capital to start up and sustain operations. This is especially true for life sciences companies because it takes between 7 and 10 years to develop a new drug. The American life sciences industry wouldn’t be what it is today if there wasn’t unfettered access to venture capital over the past 35 years or so. The proposed VC stimulus spending plan will not only help stimulate the American economy, but will ensure the United States remains a dominant player in the global life sciences industry.

Addendum: Dr. Glick began crafting his VC stimulus spending plan last fall during the presidential election. The Obama Administration is aware of his proposal but has yet to comment on it. Dr. Glick was able to get his congressman to review the plan but was told that “it would never fly.” He continues to promote his VC stimulus spending plan and hopes to gain widespread support for it.

Profile: Dr. Leslie Glick

J. Leslie Glick, Ph.D. received his undergraduate and Ph.D. degrees from Columbia University and performed his postdoctoral studies at Princeton University. He later became a faculty member in the Department of Physiology at SUNY-Buffalo with a joint appointment at the Roswell Park Memorial Institute. During his five-year tenure at SUNY-Buffalo —which coincided with the emerging life sciences industry — he was “bitten by the entrepreneurial bug,” left academia, and founded a biologics manufacturing company called Associated Biomedic Systems Inc. (ABS), the first of three life sciences companies he would start in his career.

Dr. Glick left ABS in 1977 after eight years as its chairman and CEO and immediately founded Genex, a genetic engineering company that specialized in the manufacture of biotechnology reagents. In 1981, recognizing the growing importance of the biotechnology industry, Dr. Glick cofounded the Industrial Biotechnology Association, which later became the Biotechnology Industry Organization (BIO). He left Genex in 1987 and quickly founded Bionix, a diagnostics company where he served as Chairman and CEO until 1993. From 1993 to 2001, Dr. Glick was the editor in chief of Technology Management — a publication he founded, which focused on financial and best business practices of the life sciences and IT industries.

Since 1993, Dr. Glick has provided strategic planning, corporate development and fund raising services to numerous life sciences and IT companies. Also, as an angel investor, Dr. Glick has invested in companies he believes can develop new technologies and innovative medicines to fulfill unmet medical needs. During the past five years or so, he has authored numerous publications advocating novel approaches to raising venture capital and private equity for start-up and public biotechnology and IT companies.