If You Build It, Will They Come?

This is a student paper from the 2010 final projects in the NIH Foundation for Advanced Education in the Sciences’ TECH 366 — Biotechnology Management. The students were asked to tell a story based on the course lectures, and to expand with general lessons on biotechnology company management.

If You Build It, Will They Come?
Derek Francis, PhD

Biotechnology Guru Steven Burrill is Planning to Build a Billion Dollar Biotechnology Center on an Elk Farm in Southeastern Minnesota.  Is it a Field of Dreams?

In March 2009, it was announced that a real estate development firm, Tower Investments, is teaming up with biotechnology financier Burrill & Company to build a biobusiness community on an elk farm just outside Rochester, MN[1, 2].  Elk Run, as it is to be called, will include homes, retail, schools, a recreation center, a hospital, and a biomedical research park.  When completed, the envisioned research facility will house 15 to 25 companies ranging from start-ups to publicly traded companies, employing up to 25,000 people[3, 4].  If that isn’t ambitious enough, the financier plans to raise $1B to fund the project in under a year.  The sheer size of the development, the short time frame, and the economic recession have led many to doubt the plausibility of the project.  As a native Minnesotan with interest in moving back, I was quite intrigued when I read about the proposed biotechnology center being planned in my home state.  This paper explores the current state of the biotechnology industry in Minnesota in an attempt to predict the ability of the Elk Run proposal to succeed.

Areas with thriving biotechnology industries, such as San Francisco, Boston, and San Diego, have several common characteristics.  These regions have strong local research centers with skilled laborers, willingness of the private sector to invest monetarily, and political support of the industry.  These regions with successfully established biotech industries are also the best suited to support the growth of biotech industry.  A successfully established industry attracts additional research, capital, and political support, which in turn promotes growth.  This was illustrated in a study by the Brookings Institution that found that 75% of the new biotech firms launched over the previous decade were formed in cities that ranked in the top ten in terms of established biotech[5].  Many cities and states have attempted to create a local biotechnology industry but have found that a lack of any of these crucial elements can result in failure.

The Current State of the Biotechnology Industry in Minnesota
Minnesota is home to two strong biomedical research centers, the University of Minnesota and the Mayo Clinic.  Minnesota also boasts a strong workforce, ranking #1 in high school graduation rate, #4 in the number of graduate level science and engineering students, and #1 per capita in medical technology jobs.  The state trails only California in the medical device industry, led by the world’s largest medical device company, Medtronic.  Despite having research centers and skilled labor, a 2002 study found that biotech commercialization in Minneapolis/St. Paul was well below the average of the US’s 51 largest metro areas[5].  One key factor contributing to the poor commercialization success is the lack of financial investments available in the region.  From 1995 to 2008, the state’s average share of biotech venture capital (VC) investments was roughly half the national average[6].  Not only has venture funding been poor, it is getting worse.  Recent data show that Minnesota hit a 14 year low in VC investments during Q4 of 2008[7].  Another factor contributing to the lack of financing has been the lack of government support.  The state government has refused to subsidize startup biotech companies and does not provide the tax benefits to angel investors as many other states do.  A particularly dreadful example is the Minnesota Investment Fund, which has a budget of roughly $1M per year compared to the $231M provided by Wisconsin’s Department of Commerce in 2008[8].  Politicians have in turn placed blame on the technology transfer departments within the research institutions.  The University of Minnesota built a biotech incubator called University Enterprise Laboratories (UEL) in 2004 hoping to spur commercialization of its technologies, but has yet to retain a single company using University research[9].  The Mayo Clinic has had some degree of success in commercializing its technologies, but of the 35 companies spun out of its technologies, only three have remained based in Minnesota[10].  Many of these companies are fleeing to neighboring states, such as Wisconsin, which have a more favorable funding outlook.

Elk Run Proposal
As stated earlier, the prospect of a billion dollar research center in rural Minnesota raised many eyebrows.  Many questioned how, or why, anyone would invest such a large amount of money into a completely undeveloped region.  However, the involvement of San Francisco based Burrill & Company has lent credibility to the project.  CEO Steven Burrill is a Midwest native who still has several ties to Minnesota and Wisconsin.  He was an early advisor to biotech giants Genentech and Amgen.  In 1994, he founded Burrill & Company, a venture capital firm that currently manages $950M in assets.  His annual State of the Biotech Industry report has been called “the bible for biotechnology[11].”  In 2002, he was named one of the country’s top biotech visionaries[11].  Burrill plans on securing the $1B funding from pension funds, institutional investors, and big corporations within the state such as 3M, Medronic, and Boston Scientific[4].  His company also has significant capital to invest, but it is unclear how much they are willing to personally invest.  One interesting caveat to the proposed fund is that it will be split between the biotechnology companies and the real estate development team.  $500M will provide as many as 25 companies with $20M each.  The other $500M will go towards the commercial real estate development.  The project has drawn praise from many local politicians, and state and local governments have already invested $15M to provide the infrastructure needed.  Others, however, are less than optimistic about the region’s potential to become a major biotech hotbed.  Many local venture capital firms describe Minnesota as a risk adverse state, particularly during the current recession.  Many seem to agree that raising $1B is nearly impossible, even for someone with Burrill’s credentials.  “I’m not getting a good sense that there is a workable business model here.  This thing defies gravity, in my view,” says Peter Bianco, director of the Life Science Business Development unit at Halleland Health Consulting[11].  Randy Olson, the former GM of UEL, said “There is a risk profile here that is probably off the charts[11].”  Burrill disputes claims that companies will not want to move to rural Minnesota.  Citing the troubled economy, he says “It’s a tough time to be a company, which makes this little thing that we are doing at Elk Run very, very attractive.  If I stand on a street corner at Elk Run and wave around $500M, people will come,” he said[10]. He is convinced that Minnesota has what it takes to be a national player in the biotech industry.  “Elk run is geographically and strategically positioned in a uniquely propitious way,” he said[6].  “Minnesota sits at the intersection of predictive and preventative medicine.  But there has been no catalyst to ignite it here[11].”  For example, Mayo Clinic has been collaborating with IBM’s Blue Gene supercomputer to mine Mayo’s 6 million electronic patient records for disease trends in large populations[11].  Burrill envisions that companies will soon have the ability to create computer chips that will “tell you your blood pressure is too high, your cholesterol is too high, time for you to you’re your pill, time for you to go to the doctor[3].”    Some have argued that building a biotech hub in the proximity of the Mayo clinic is insufficient to ensure that Mayo technologies will move in, citing the lack of any kind of contract between Mayo and Elk Run.  “There has to be a greater tie other than the geographic location,” says Jay Hare, who tracks VC investing[1].  Burrill counters that “there will be enormous synergy between things in Mayo that we can accelerate the development around and build companies around” and says after working with Mayo on various projects since 2005 that “I would put us in the best friends category[10].”  Mayo spokesman Adam Brase says of the project “We do support the concept of a biomedical accelerator that could create new companies and develop new therapies.  If we can have more of that in our area, the better off any medical organization is going to be[1].”

Progress and Assessment of the Future
Burrill initially declared that he would raise $1B by the end of 2009.  By July 2009, he said that he had “one big commitment”, but “no checks yet.”  In late July one prominent local investor, Vance Opperman, declared that he was not interested[12].  As the self-imposed deadline of December 2009 approached, Burrill began to express “disappointment” from the “push back” of local investors.  Unconfirmed estimates suggested that by December 2009 the fund contained anywhere from $0-250M[13].  By creating a “hybrid” investment fund mixing real estate with biotechnology, Burrill may have confused or frightened away potential investors.  When questioned about this, Burrill admitted that he was considering splitting the fund into two separate entities[13].  In February 2010, it was announced that the weak economy was forcing the developer to alter construction plans[14].  As of May 2010, no construction has begun at the site, and Tower Investments is now facing foreclosure on part of the land purchased for development.  Despite the recent troubles being faced by the Elk Run project, an interesting trend has emerged within the state.  Over the past few months, a large number of smaller venture capital funds have suddenly formed in Minnesota, each targeting early stage biotechnology companies[15-17].  One such fund, Coordinate Capital LLC, is clearly connected to Burrill & Company[15, 18].  Burrill is the chair of Coordinate’s board of advisers, and the firm lists Elk Run as an “affiliate”.  In addition to the recent increase in venture capital funding, the state also passed a five year, $50 million tax credit angel investor credit in hopes of spurring early stage investment in startup companies[19].  Additional legislation is being pushed through the state legislature that would create a stronger, more concentrated high-tech economic development authority[20].  The local governments are also advertising financial assistance in the form of grants, bonds, and seed funding.  Additionally, the University of Minnesota has revamped its Office of Technology Commercialization and is planning construction of a 60,000 square foot building as a first step in creating a planned $750M Minnesota Science Park that it hopes will rival Research Triangle Park in North Carolina[21].  This commercialization center would likely compete with Elk Run for a variety of resources.

Conclusion
It remains to be seen whether or not Elk Run will succeed, or even launch for that matter.  Minnesota has historically lacked the financial and political support needed to give rise to a prominent biotech industry, and even the infusion of a billion dollars would not be sufficient to create an industry overnight.  It seems, however, that by simply declaring his intention to invest in the region, Steve Burrill may have provided the spark necessary for these things to change.  The past year has seen the state of Minnesota begin to position itself to build a significant biotechnology industry.  Perhaps Burrill’s assertion that Minnesota will become the next big thing in biotechnology will become a self-fulfilling prophecy, with or without Elk Run.

Citations
1.    Lee, T. 2009. Developer, investor OK Elk Run biosciences project. In Star Tribune, Minneapolis.
2.    Stachura, S. 2009. Officials announce $1 billion Elk Run Project. In Minnesota Public Radio.
3.    April 10, 2010. Elk Run Investor Hopes to Redefine Medicine. In WCCO.
4.    Lee, T. 2009. Elk Run investor raising $1 billion. In Star Tribune, Minneapolis.
5.    Mayer, J. C. a. H. 2002. Signs of Life: The growth of biotechnology Centers in the US. Brookings Institution Center on Urban and Metropolitan Policy.
6.    Lee, T. 2009. Developer, investor OK Elk Run biosciences project. In Star Tribune, Minneapolis.
7.    Lee, T. 2009. Venture capital spigot taps out to 14-year low in 4th quarter. In Star Tribune, Minneapolis.
8.    Lee, T. 2010. Former Pawlenty aide now university champion.  Not as weird as you think. In MedCity News.
9.    Stubbe, G. 2009. UEL still finding its feet. In Star Tribune, Minneapolis.
10.    Grayson, K. 2009. Burrill seeking $1B for Elk Run, but “no checks yet”. Minneapolis St Paul Business Journal.
11.    Lee, T. 2009. Can biotech boom in state? In Star Tribune, Minneapolis.
12.    Lee, T. 2009. Opperman to Burrill: Good luck but no thanks. In Star Tribune, Minneapolis.
13.    Lee, T. December 21, 2009. Wanted: Money for $1 billion Bioscience Project.  Contact Steven Burrill. In Medcity News.
14.    Lee, T. 2010. Bad economy forces Elk Run developer to alter biotech plans. In MedCity News.
15.    Lee, T. January 18, 2010. New Minnesota biotech fund seeks $25 million with a little help from Steve Burrill and yours truly. In MedCity News.
16.    Lee, T. February 18, 2010. Affinity Capital and Triathlon Medical Ventures plan new $10M early stage fund in Minnesota. In MedCity News.
17.    Lee, T. March 2, 2010. Upwind Medical Partners to create $8 million early stage fund. In MedCity News.
18.    Lee, T. 2010. New Minnesota biotech fund seeks $25 million with a little help from Steve Burrill and yours truly. In MedCity News.
19.    Lee, T. 2010. Minnesota Legislature passes historic angel tax credit. In MedCity News.
20.    Lee, T. 2010. Minnesota seeks its own “Third Frontier”. In MedCity News.
21.    Lee, T. 2010. University of Minnesota and developers plan $20M venture fund to anchor major science park.

About the author:
Derek Francis is a post-doctoral research scientist at the National Institutes of Health with an interest in all aspects of biotechnology.  He may be reached at francisd3@ninds.nih.gov.