Don’t Bank on Biotech Boom

Cleveland Plain Dealer - June 27, 2002

by Zach Schiller, in The Cleveland Plain Dealer

Only a few years ago, Gliatech Inc. was one of Northeast Ohio’s best known
commercial hopes in the growing biotechnology industry.

Now, it’s broke.

The failure of this small company, which sold a gel used to prevent
scarring after back surgery, was quickly dismissed by leaders of efforts
to build a biotechnology industry in the area.

True enough, any high-tech industry is going to have its casualties.
Gliatech’s bankruptcy indeed would mean little if there were many other
companies like it in the region. The trouble is, there aren’t. In fact, the
Beachwood company’s failure suggests a need to re-examine the model
that underlies attempts to build a biotechnology industry here.

That model goes something like this:
Brainy scientists at Case Western Reserve University, University
Hospitals or the Cleveland Clinic will come up with a discovery that
leads to a new therapy. Managers will be found to start up a new
company based on this research, and it will attract initial investments to
get off the ground. After they have established a track record for their
venture, they will seek to raise more capital by selling stock to the
public. The stock will rise, making them and other local investors rich and
creating a reputation that Cleveland is a place for entrepreneurs to
create new businesses and make money. This will happen again, and
again, until Northeast Ohio is home to a thriving biotech industry.

There’s just one problem. It’s not happening.

During the late 1990s and early into the new century, we missed the
biggest biotech investment boom in history. In the year 2000 alone, the
industry raised $33 billion in new funds and 56 companies sold stock in
initial public offerings (IPOs). Yet not a single Northeast Ohio biotech
company sold stock to the public for the first time.

Two companies tried, and saw the financing door swing shut before they
could jump through. One, software writer NetGenics, since has been
swallowed by a German rival. The other, Athersys Inc., has kept growing
as a private company, though it won’t be an anchor for high-tech
industry in the Midtown area as backers of such development in the city
of Cleveland had hoped. This month, The Plain Dealer reported that it
would be moving from its Carnegie Avenue location to expand in
Chagrin Highlands.

Athersys, which has raised $100 million in capital from private sources,
could well go public and become a more substantial company. That is yet to be seen.

Obviously, the development of more companies like it
can only benefit the region.

But realistically, how much can be expected from the IPO approach?
Can we look forward to another wave of investment as big as the last
one, and is it likely to produce enough results to be an important factor
in the local economy?

Truthfully, based on years of experience, the answer to those questions
is probably not.

Altogether, the local biomedical-products business is not a very big part
of the Northeast Ohio economy. And as of 2000, we had fewer biotech
workers than the national average – 86 percent as many, to be exact.

Even if the industry were to grow substantially, it’s unlikely to replace the
thousands of relatively well-paid manufacturing jobs that have been
disappearing from the region. As of a year ago, the number of jobs in
the pharmaceutical and medical-device businesses in the Cleveland Akron
area was 5,886. According to data from the Ohio Department of Job & Family
Services, that was an increase over six years of 991 jobs. 

That’s a nice increase until you realize that the eight-county area lost
nearly 25,000 manufacturing jobs during that period.

A study released this month by the Brookings Institution pointed out that
even in metropolitan areas where the biotech industry is concentrated, it accounts
for a small percentage of jobs.

Policymakers should keep this in mind when deciding on spending public resources
directly to promote this industry.

Full Article (PDF version)

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