Growing Arizona bioscience industry faces challenges
Friday, April 8, 2016
Arizona’s bioscience industry continues to grow, but a small venture capital stream and declining research funding pose challenges, according to a new report by the Flinn Foundation, a Phoenix-based organization that supports research and business activity in the sector.
Despite increases in wages and number of businesses, Arizona saw a lower percentage of national bioscience investment in 2015 than in 2002 – when the organization began tracking these economic indicators – although the industry’s share of venture capital increased slightly from 2014. Most of that money went to expanding or late-stage companies instead of startups.
Arizona’s bioscience industry, which includes hospitals, research universities, tech startups and medical-device companies like Ulthera Inc. and Medtronic Inc., generates more than $36 billion for the state’s economy, according to the Greater Phoenix Chamber of Commerce.
The bioscience community and the Flinn Foundation came together in 2002, when the industry was smaller, to create a set of growth goals called the Bioscience Roadmap. The organization updated those goals in 2014.
Risky, but growing, business
MaryAnn Guerra, CEO and co-founder of BioAccel, a Peoria-based accelerator for bioscience companies, said although businesses and research and development have grown dramatically, “it’s been pretty ugly” in the early-stage investment ecosystem.
“Just because you have a lot of research coming out of the universities, that doesn’t mean anything unless those research outcomes are grown to something that’s going to have an economic impact,” Guerra said.
In 2002, Arizona bioscience companies received about $110 million in venture capital, according to the report. That number cratered to about $20 million in 2012 and hovered near $80 million in 2014 and 2015. Meanwhile, the amount of venture capital in the broader U.S. ballooned in the same period, leaving Arizona with a smaller share of the pie.
Venture capitalists may find it risky to invest in bioscience companies, Guerra said, which means smaller firms and startups must find ways to validate whether markets exist for their products.
The lack of early-stage investment isn’t stopping job growth from outpacing the national bioscience industry:
● Arizona bioscience employment – 110,410 – has jumped nearly 15 percent since the Great Recession, compared to about 3 percent nationwide.
● Average annual bioscience wages in the state grew 2 percent between 2013 and 2014, from $60,864 to $61,823. Those jobs include professions such as doctors, bioengineers, biologists and veterinarians.
● In the research arena, Arizona’s public universities filed 81 bioscience patents in 2014 and 2015, up 72 percent from 2012 and 2013. They also launched 21 bioscience startups, a 23 percent increase over the same period.
Ruminder Dhillon, president at the BioAccelerator Holdings venture capital fund, said the disparate elements of the bioscience community have collaborated more over the last two years, helping drive growth.
“People are beginning to behave in a way that they should have behaved for a long time,” Dhillon said. “Things are changing. We’re just doing work right now that should have been done about 15 or 20 years ago, I think.”
He said BioAccel’s venture capital fund encourages collaboration by reinvesting in the growth of the broader bioscience industry.
Brad Halvorsen, executive vice president of the Flinn Foundation, said a reason the report shows a low amount of venture capital investments in startups may be the prevalence of largely unrecorded funding deals for business in very early stages. That phenomenon is difficult to quantify and not included in the foundation’s report, he said.
Venture capital funding was at a record high when the group started its bioscience roadmap project and began tracking indicators in 2002, Halvorsen said.
“It’s always been a challenge for Arizona every year,” Halvorsen said. “That’s one of the top priorities, that Arizona needs to improve its competitiveness in generating risk capital. There’s a good trend in the last three or four years showing that it is coming back in Arizona as it has been doing nationally.”
Research is critical
The amount of research funding flowing into Arizona also could impact the growth of the bioscience industry. Halvorsen said the state’s ability to attract research grants from the National Institutes of Health has dipped slightly in recent years.
Arizona’s share of all NIH grants has declined from a high of 0.82 percent in 2013 to 0.63 percent in 2015. In 2013, the state received about $182 million from the organization, but about $151 million in 2015, according to the Flinn Foundation.
While the small sample size means this may be more statistical fluctuation than reliable trend, Halvorsen called the decline concerning.
“The competition for these grants has become fiercely competitive, so it’s a harder environment to get funded,” he said. “Whether it’s other states that are excelling, or Arizona that’s not as competitive, we don’t know that for sure from the data that we have. But certainly the data is showing that our performance is starting to taper off and needs to be picked up again.”
Halvorsen said the looming expiration of the statewide sales tax funding education also could reduce public universities’ ability to conduct research.
The state allocates a portion of that revenue to universities for technology and research. Universities received more than $67 million from the tax in fiscal year 2015, and hundreds of millions more over the past decade, according to Arizona State Treasury data. The tax is set to expire in 2021.
Matt Ellsworth, vice president of communications for the Flinn Foundation, said research money is a critical foundation for the formation of new bioscience companies.
“There’s no hiding the fact that with the largest bioscience companies in the country, there’s a direct line to some of the great universities in the country,” Ellsworth said. “We have the potential to do the same thing here in Arizona as long as those universities remain strong.”
CORRECTION: An earlier version of this article incorrectly identified the amount of money the state received from the National Institutes of Health in 2013 and 2015. The state received about $182 million from the organization in 2013 and about $151 million in 2015.