A Port Authority Model for the Life Sciences 
Posted by Carlos on Jul 17, 2017

 

Countless electrons have been spilled in the promotion of the biotech and life science industries in and around New York City. Indeed, tremendous strides have been made, especially when it comes to lab space and related infrastructure. Experienced pharma executives are available, making them ideal sources of management talent. Even the VCs are dipping their toes in the local waters, looking for innovations coming out of the top universities in Manhattan and the surrounding boroughs.

Countless electrons have been spilled in the promotion of the biotech and life science industries in New Jersey. Indeed, tremendous strides have been made, especially when it comes to lab space and related infrastructure. Experienced pharma executives are available, making them ideal sources of management talent. Even the VCs are dipping their toes in the local waters, looking for innovations coming out of the top universities in Central New Jersey and the surrounding towns.

Countless electrons have been spilled in the promotion of the biotech and life science industries in Connecticut. Indeed, tremendous strides have been made, especially when it comes to lab space and related infrastructure. Experienced pharma executives are available, making them ideal sources of management talent. Even the VCs are dipping their toes in the local waters, looking for innovations coming out of the top universities in Southern Connecticut and the surrounding towns.

 

Do you see what we just did?

 

We live in a massive life science cluster, spanning three states, countless universities, and billions in NIH-funded programs.

State-focused governments and advocacy groups are focused on their own internal companies and constituencies. Opportunities to scale and collaborate are non-existent, as long as a state-centric focus is maintained.

Meanwhile, state borders are largely irrelevant to the millions of life science employees who commute to and from their jobs every day.

Is there a better approach that allows our region to quickly scale and attract more capital?

We think so. But an interstate approach is needed, and we may have a good model to follow.

Indeed, reading how each state organization describes itself is instructive (emphasis added):

 
NewYorkBIO supports the development and growth of New York State’s life science industry, and serves its members and the life science community by providing a network for public policy, industry advocacy, and community development.

Founded in 1994, BioNJ has been hard at work in its mission to enhance the climate for biotechnology in the state…BioNJ is single-minded in its commitment to the growth and prosperity of this industry within the state of New Jersey.

CURE links the life and healthcare sciences community in Connecticut to help identify and retain talent and to exploit new technology and innovation. We facilitate the build of a diverse understory of new companies to contribute to the economic strength of Connecticut and improve our quality of life.

Do you see a lot of overlap? We do.

Similar dynamics are taking place in the United Kingdom, where OBN and OneNucleus appear to offer similar services to the local life science community. Does the UK, with a population roughly similar to that of California plus Texas, really need two advocacy organizations, especially two so close to each other?

And what role does the Biotechnology and Biological Sciences Research Council play in all of this?

Would it make more sense to pool resources and capabilities?

Maybe.

 

The Port Authority Model

The Port Authority of New York and New Jersey (PANYNJ) was created by an Act of Congress in the early 1920s. It is a joint venture which oversees our regional transportation infrastructure: bridges, tunnels, airports, ports, trains, and so forth. The PANYNJ even has its own police department.

The brilliance of the PANYNJ is appreciated when one looks at what was happening prior to its existence.

New York and New Jersey were rivals when it came to domestic and international shipping, as freight handlers had the option of arriving and unloading either in New York or New Jersey, depending on their mode of transport.

In 1916, the State of New Jersey filed a law suit against the State of New York, with interstate freight commerce (and the resulting revenues) at the heart of the issue.

The Port Authority was established in 1921 through an interstate compact, a clause in the US Constitution allowing for agreements and legal cooperation between states, especially when that cooperation serves the greater public good.

Once established, the PANYNJ essentially separated itself from state politics and state competition, and instead focused on the greater public good. Infrastructure investments and improvements flourished, and freight and transportation operates far more smoothly.

There is no question that the PANYNJ has its issues. Our regional transportation system needs many improvements.

But conceptually, having an apolitical, uber-organization oversee an interstate network creates efficiencies which cannot be created between states. Indeed, the Tennessee Valley Authority was created for similar reasons. 

The Medicon Valley, which spans Northern Denmark and Southern Sweden, may be another comparable model.

 

What is the “greater good” in biotech?

Suppose for a moment that you are an investor in early-stage biotech companies. Your fund is located in Boston, but you are looking to make investments outside your immediate region.

The New York/New Jersey/Connecticut area is a logical place to look. And, Amtrak makes it very easy to travel from Boston to any of these three states.

Prefer flying? There are plenty of options into Newark, Kennedy, or (perish the thought) LaGuardia airports.

Does it make much of a difference to travel to one place or another?

Generally, no.

However, a single advocacy organization will have a larger pool of companies and universities to promote to the investment community. That investor is no longer receiving invitations from three states, each promoting their own agendas.

Instead, in our model, one larger organization is promoting carefully selected opportunities which fit what that investor is looking for.

In other words, rather than one organization from one state promoting one opportunity, a pan-state, regional organization may have multiple opportunities to promote, making it a far more attractive and compelling reason for that investor to hop on a train.

The best opportunities from a much larger pool will bubble to the surface. With proper marketing to the investment/licensing community, this will result in more investment in our mega-cluster.

With the right resources, a larger organization can prioritize investment opportunities based on the interests of investors and the industry, thereby attracting more capital into the region from outside the region.

 

Hipsters and Trees

Suppose you are a scientist living in Northeastern New Jersey, but working in a biotech start-up at an incubator in Brooklyn. Your commute is approximately 60 minutes.

You decide to take a new position at a startup based on technology licensed from Rutgers University.

Your commute is now…approximately 60 minutes.

Aside from a modestly more complex tax return (and we mean modest), the difference is minimal over the long run. We will assume you are willing to trade the hipster hangouts in Brooklyn for the leafy environs of Central New Jersey.

Differences in commutation may be an arguable point, depending on your start/end point. But still, if labor can move effortlessly across state lines, why can’t capital and other resources?

 

Structure & Financials

The current PANYNJ Board has 6 members from each state, subject to State Senate approval. Each of the 12 Commissioners work without pay for 6 year terms. For 2017, the PANYNJ budget exceeds $7 billion. Over 70% of the Income comes directly from tolls and related user fees. Operating Expenses and Capital Improvements are the two major expense categories. Importantly, The PANYNJ has the authority to issue bonds and collect revenue.

Can a similar structure be applied to biotech? 

Readers will know the typical life science venture fund is generally a 10-year limited partnership. Investments are made in the early stages of the fund, then exited later.

If all goes well, a few excellent investments will result in the partnership delivering above average returns, even when unsuccessful investments are accounted for.

For a biotech authority, a 10-year, investor-centric life span makes little sense.

But a debt-based investment fund could make a great deal of sense. Indeed, large, debt-based, patient pools of capital specifically for biotech (Fernandez, et al., 2012) have been described in the literature.

Such a capital pool could be seeded by the three states, supported by small membership fees, and collateralized by current and future returns. External investors, such as pension funds, could also participate. 

One caveat, however, is that a debt-based mega fund would need the flexibility to invest in companies and assets at any stage of development, from Seed through Product Royalty Monetization. Indeed, Fernandez, et al. tackle this issue in their paper. 

After all, If a university can issue a 100-year bond, why can’t a large, industry-focused, non-political, nonprofit?

Who loses?

State and local governments do not surrender power, prestige, and money easily, especially to a Federally-mandated compact. If the Federal government developed a BANYNJ, we would expect all three state governors to protest vehemently.

Regional advocacy groups will largely become redundant. It is possible that some of the executives from these groups may have roles to play in the BANYNJ. However, if the driving force here is the mega fund, then experts in financial engineering and management will be needed…and they are plentiful in our region. Other key skill sets required will be scouts to source opportunities, investors and consultants experienced in due diligence (again, plentiful in our region), and managers to oversee investees and support exits (again, plentiful).

Whether the local universities win or lose in this model is unclear. Given that the major universities in our region are state universities (Rutgers, SUNY, UConn), their willingness to play ball with each other could change significantly if it means being able to spin out more companies who, in turn, can tap into funds from the BANYNJ.

 

Will this eliminate interstate competition?

Not entirely.

This is because states will still compete with each other to spin out companies from their universities and establish them in their own states/local incubators.

A state will want to compete because of the underlying assumption that this new company will create jobs (taxpayers) and generate corporate taxes.

An uber-organization may be able to smooth this out, especially if it has the aforementioned pool of capital. Perhaps rules can be developed which “encourages” spinouts to remain in their home region for a certain period of time, as a condition to receiving an investment from the mega fund.

Individual states would still decide their own tax policies for these types of companies.

Is this even feasible?

It is difficult to think that contemporary politicians and advocates will readily surrender local power and resources to an interstate compact. Fake news will instantly materialize discussing Federal government takeover of local industry, even when the “takeover” is managed by impartial executives. Having complete transparency will not appease those making irrationally statements in mainstream media.

However, until politicians are elected who are willing to subvert their own political ambitions for the greater good, we will continue to see inefficiencies, a lack of scale, and our region continue to struggle to attract investors and grow. 

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