Layoffs could spur Delaware's bioscience industry
AstraZeneca is shrinking in Delaware.
Chemours is planning layoffs.
DuPont Co. is preparing to make $1.6 billion in cuts by the end of next year. Those reductions began last week when now-permanent CEO Edward Breen laid off as many as 100 workers in the company's Sustainable Solutions business – including some in Wilmington – and halted a planned IT upgrade project, ending work for 300 contract workers.
In the coming months, Delaware could lose thousands of well-paid, highly educated workers, downsizing that could put a significant dent in the state's economy.
Or, bioscience leaders say, this could be the opportunity Delaware needs to grow its next big employers.
"The one unique thing Delaware has right now is access to available talent," said Chris Yochim, chair of the Delaware BioScience Association. "If you can create real incentives for entrepreneurs in this space and foster a culture of innovation, a lot of that talent will stay here and become part of the next wave of economic growth."
The big question now: Will Gov. Jack Markell and the General Assembly have the stomach to bet on unproven bioscience startups – particularly if those gambles mean chasing fewer potential jackpots in the manufacturing and financial services sectors?
A renewed focus on the life sciences could stem the immediate impact of job losses at AstraZeneca, DuPont and Chemours, by continuing the state's legacy of innovation and increasing high-paying employment, said Mike Bowman, president of the Delaware Technology Park and a central figure in the state's bioscience industry.
"Startups can be risky, but those investments are less expensive than the whale hunting the state's doing now," Bowman said. "That bigger stuff, going out and trying to bring existing companies here, I can't think of one thing that has worked."
Markell said his strategy has worked to "bring plenty of companies from outside."
The governor pointed to some recent examples, including a $1.9 million grant approved in 2014 that encouraged Wilmington financial services company Navient to add 200 jobs, bringing its Delaware employment to about 800. Other successes, Markell said, include Uzin Utz, a German flooring company that plans to add 25 jobs near Dover thanks to $418,000 grant approved in 2013 and ABGroup Packaging, an Irish bag manufacturer approved for a $253,000 grant this year to bring nearly 90 jobs to the Newark area by 2017.
Yet the state also once provided space for startups, partnerships with universities and a stream of seed funding that helped bioscience companies establish a foothold here. But during the past decade, bioscience leaders say, the state has largely neglected the sector in favor of propping up the manufacturing and financial service sectors hard hit by the Great Recession.
"We could have taken that same money and made 20 smaller plays on the organic growth game that, in my opinion, fits the kind of Delaware most people actually want," Bowman said.
Bernice Whaley, director of the Delaware Economic Development Office, insists the Markell administration has supported the state's bioscience industry – while also fighting to recover thousands of jobs lost to the recession.
Two of DEDO's 20 largest Strategic Fund allocations under Markell went to bioscience companies: An $11.1 million grant in 2011 to Incyte, a Wilmington-area cancer drug maker, and a $3 million award in 2012 to Fraunhofer USA Center for Molecular Biotechnology in Newark.
In the current fiscal year, Markell has only $10 million in the state's Strategic Fund, used by DEDO to attract new companies, retain existing businesses and spur job creation.
"Investing in life science is great, but it's not going to be an immediate job creator," Whaley said. "And when your focus is getting people back to work, you have to look a little more short term."
Jobs in bioscience come only after a company survives the financial challenges of developing a product, overcomes regulatory hurdles and proves scalability, Bowman explained.
"That's my problem with the state metrics," Bowman said. "It's all one note related to jobs. Where's anything else?"
Now is the time to invest, he said – before highly skilled workers flood the market.
"It's all about having more bets on the table," he said. "The more bets you make, the more likely one of them will hit."
A shining example
Bioscience companies have helped absorb DuPont layoffs once before.
Incyte, a pharmaceutical company headquartered in Alapocas, is widely hailed as one of the state's biggest success stories. The company expects to end 2015 with more than $500 million in net product revenue from sales of Jakafi, the first and only drug approved in the United States to treat patients with two rare blood cancers – myelofibrosis and polycythemia vera.
Incyte employs about 525 people at the former Wanamaker building off Augustine Road, and plans to hire another 400 in a new office building the company wants to build nearby. Those employees pull down an average salary of about $150,000.
But Incyte, founded in California in the late 1980s, didn't come to Delaware fully formed. And it wasn't lured by high-dollar incentives from DEDO.
In 2001, it came looking for talent.
"Incyte started as a genetic information business and basically sold databases to researchers working in gene therapy," said Paula Swain, the company's executive vice president of human resources.
Once that business began to wane, the board of directors sought to transform Incyte into a fully integrated drug discovery company.
Their first move was to hire CEO Paul Friedman, the former president of DuPont Pharmaceuticals Research Laboratories, who became available after DuPont sold the business to Bristol-Myers Squibb for $7.8 billion.
Friedman said it only made sense to launch Incyte's new business model on the East Coast.
"Hiring good medicinal chemists is very difficult," said Friedman, who led the company until early 2014. "But I knew there was a lot of available talent right here. They worked for me at DuPont Pharma and many of them didn't want to go to Bristol Myers. I knew who was good and who wasn't, so we were able to build our roster very quickly."
Tapping into a talent pool of former DuPonters proved to be the key to Incyte's success.
"Incyte had about $500 million in its bank account, but no amount of money alone would have done it," Friedman said. "You need good experienced people and we were able to find them here. That gave us a huge leg up."
First, the new business had to find space and Incyte initially was unable to find anything suitable in Pennsylvania or Delaware.
Company officials eventually settled on an unused building at DuPont's Stine-Haskell Research Center in Newark, yet the two sides were unable to come to terms on a lease. Bowman, a former DuPont executive, and Bob Dayton, the current head of Delaware Bio who then worked for the state economic development office, called in a favor from former governor and newly minted U.S. senator Tom Carper.
"At that time, I was like a recovering governor," recalled Carper, who managed to broker a deal between the two companies.
Ten former DuPont Pharma employees soon joined Friedman and Swain, who previously led the division's human resources department. Within a year, the company added another 60 biologists and chemists.
In 2002, Incyte secured $1.2 million in state grants to equip its new laboratory and research facility. But it would take nearly a decade before those research efforts paid off, with Jakafi in 2011 winning approval from the U.S. Food and Drug Administration.
In late 2012, Incyte received a second grant from the state – $11.12 million to help fund 266 new jobs, nearly doubling the company's workforce.
The investment remains one of the Markell administration's largest outlays from the Strategic Fund.
But by that point, Bowman noted, "Incyte was an obvious play. Most of these life science companies need 5 years to scale up and 10 years before you know whether they've arrived or plateaued."
That's why elected officials, who tend to measure time in four-year political terms, have not made bioscience a larger piece of Delaware's portfolio, Bowman and Yochim contend.
"If you're going to build a life science industry, it's a very long-term commitment," Yochim said. "It can't be one-and-done by any means. That's not to say you shouldn't have some desire for quick wins, but you've got to have staying power if this space is ever going to pay off."
Rise of an industry
Incyte is far from Delaware's only success in the bioscience sector.
More than 350 bioscience facilities, collectively employing about 8,200 workers, were tallied in a 2014 report commissioned by the international trade group Biotechnology Industry Organization (BIO).
Those businesses include research and testing laboratories, medical device and lab equipment makers, genetic therapy pioneers, early-stage drug developers and companies that provide those business with chemicals and biological agents.
Some have experienced tremendous growth in recent years.
QPS, a bio-analytical contract lab in Newark's Delaware Technology Park, was launched by DuPont Pharma alum Ben Chien in 1995 with three employees. Today, the $120 million company employs 260 in Delaware and another 1,170 worldwide at offices in Europe, India and Asia.
Many more are small shops with 10 employees or less. But even the smallest tend to pay well. The average annual wage offered by Delaware's bioscience industry is about $118,000, the BIO study found.
That's nearly four times Delaware's per capita income of about $28,000. By comparison, workers in the state's finance and insurance sector average $90,000 per year, while Delaware factory workers average $58,000.
It was bioscience's growth potential – rather than salaries – that convinced the Carper administration to pursue the sector in the 1990s, giving the first big push to what was then a relatively non-existent industry in Delaware.
"One of the economic principles we tried to abide by was the need to diversify," said Carper, who now serves as Delaware's senior U.S. senator. "At the time we were so heavily dependent on DuPont, autos and financial services. We wanted to broaden the base of our economic activity so no matter what happened to the economy globally, we would be able to maintain our employment."
Robert Coy, who led DEDO from 1993 to 1998, said bioscience seemed like a natural fit, given the wealth of assets in the region.
"There were a number of pharmaceutical and biotech companies headquartered in around Philadelphia that we thought we could attract," said Coy, who now leads an Ohio-based venture capital firm called CincyTech. "We knew there was talent in the area because DuPont still had a pharmaceuticals division and was just beginning to develop a new agriculture-focused biotech business. And we felt southern Delaware's ag sector would be able to benefit from any developments in biotech."
DEDO generated seed funding for the new industry by investing in venture capital firms that could evaluate and finance promising companies. The agency then encouraged many of those fledgling businesses to locate in the new Delaware Technology Park.
The park was launched in 1991 in a single building off Wyoming Road in Newark to provide affordable space and mentoring for startups. Today, it consists of five buildings and houses about 50 small companies. Over the years, tenants in the park have created more than 16,000 jobs with 25 companies "graduating" to their own locations.
The Carper administration also attracted the Fraunhofer facility that is now the largest of seven research institutes throughout the country operating under the Fraunhofer USA umbrella, employing about 100 scientists and pharmaceutical manufacturing experts.
The University of Delaware began developing the Delaware Biotechnology Institute in the late 1990s. Located in the Delaware Technology Park, the institute houses more than two dozen faculty members and facilities for five of the school's colleges. It also promotes academic and industrial partnerships, coordinates high school science competitions and helps train science teachers throughout the state.
Carper also helped convince the newly formed AstraZeneca to establish its North American headquarters in Fairfax in 1999, thanks to a $40.7 million package of grants and tax credits, along with $70 million in road improvements near the facility. In exchange, AstraZeneca pledged to increase its workforce at the site from 2,400 to 4,000 by 2004.
The pharmaceutical company's employment hit a peak of 5,000 workers in 2005, only to have patent loses and a global recession lead to a major restructuring. Today, AstraZeneca has about 2,400 workers in Delaware,
"Bioscience really can pay off but you have to have the patience for it," Coy said.
A shifting foundation
Delaware may have lost much of its patience for the slow developing bioscience sector on Sept. 15, 2008, the day financial services firm Lehman Brothers' submitted the largest bankruptcy protection filing in U.S. history, sending the Dow Jones into a tailspin. By then, the state already was reeling from AstraZeneca's contraction combined with the loss of 400 jobs at Invista's nylon plant in Seaford in 2004. Another 3,000 job losses followed MBNA's acquisition by Bank of America in 2005.
The bleeding continued after Markell was elected.
Chrysler's Newark assembly plant shut down in late 2008 following a year of gradual layoffs – ultimately putting 2,100 workers out of jobs.
By the time the new governor took office, Delaware's unemployment rate was just under 8 percent. That rate would top out at 10 percent in late 2009 after General Motors' Boxwood Road plant near Newport closed, resulting in 550 job losses.
"At the beginning of this administration, the effort was to diversify," said Whaley, who served as deputy director for her predecessor, Alan Levin. "But the downturn was so severe, we quickly welcomed any opportunity for jobs that presented itself, particularly in the areas where so many people were becoming unemployed."
One of the main tools the state used to turn the tide came in the form of $213 million in jobs-related grants and loans extended through the Strategic Fund since 2009.
As of March, three out of every four dollars, roughly $162.7 million, had been awarded to just 20 companies. More than half of that amount was approved for manufacturers, while nearly a quarter was approved for banks and insurance companies.
Those investments did result in some wins.
The Delaware City Refining Company, for instance, received $42 million in state grants and loans – incentives that facilitated the shuttered refinery's sale from Valero to PBF Energy, which eventually restored about 600 jobs that had been lost in early 2010.
But the high-dollar outlays also led to some failures.
Fisker Automotive pocketed $21.5 million in taxpayer funds before filing for bankruptcy protection in late 2013. The 2,500 jobs the company promised to create at the former General Motors plant near Newport never materialized, even though the company opened a manufacturing plant in California this summer.
Newark fuel cell maker Bloom Energy has consistently missed hiring targets set when it was approved for a $16.5 million taxpayer-funded grant in 2012. Last month, the company confirmed that only 224 workers have been hired – well short of the 600 it had promised to create by 2015.
Legislation approved in 2011 gave Bloom a 21-year guarantee of minimum revenues from Delmarva Power for all output from a 30-megawatt fuel cell operation in Delaware. In exchange, the company accepted economic development requirements that included building a fuel cell manufacturing plant in Newark.
While Bloom's job targets have not been met, the premiums cost Delmarva's roughly 305,000 customers in Delaware $37.1 million during the first year of full-capacity service in 2014 – adding $54.65 to typical residential bills that year.
Ongoing support
Markell and Whaley said the state's improved unemployment rate – 4.9 percent in September – demonstrates how its investments in manufacturing and financial services have paid off.
JPMorgan Chase recently announced it would bring 1,800 jobs with an average annual salary of $65,000 to Delaware by 2019. DEDO promised to award JPMorgan Chase $9 million in Strategic Fund grants over three years after the bank refurbished a former AstraZeneca building off of Concord Pike to handle back-office operations.
"Look at our job growth versus other states in the region," the governor said. "It's not even close."
Delaware's job numbers have grown 11.6 percent since January, 2010, according to the U.S. Bureau of Labor Statistics. Maryland, Pennsylvania and New Jersey all recorded growth of less than 10 percent in the same period.
Delaware's investments in finance do not mean bioscience has gone untended, Whaley said. Since 2009, the administration has provided $35 million to Delaware's bioscience sector in addition to the Strategic Fund grants extended to Incyte and Fraunhofer.
Those funds include:
- A $3 million, 10-year loan extended to Bowman's Delaware Technology Park for a 10,000-square-foot "wet lab" incubator built in the Phase II building at the University of Delaware's Science, Technology and Advanced Research (STAR) campus on the site of the former Chrysler plant. That project is the first expansion of the technology park in nearly 16 years.
- A $3 million, 12-year loan to Delaware State University for the Optical Science Center for Applied Research. The 28,000-square-foot facility that opened last month houses laboratories where researchers are helping to search for life on Mars, find treatments for sickle cell anemia and better detect early-stage cancers.
- Hologic, a Massachusetts-based women's health company with labs in Glasgow, was approved for a $1.1 million grant in 2012 to help fund a $14.8 million expansion that was slated to bring the local employment to 160. Hologic declined to release its current employment numbers in Delaware.
- CD Diagnostics was approved for a $500,000 grant the same year to move from Wynnewood, Pennsylvania, to Claymont in exchange for a vow to reach 170 employees by 2016. The company now employs about 100 workers split evenly between Delaware and Maryland.
- Up to $1 million a year to Fraunhofer and Delaware Biotechnology Institute's CAT Program, which connects researchers with industry.
- Annual contributions of $1 million a year to university-hospital partnerships largely funded by the National Institutes of Health. Those organizations include the Delaware Center for Translational Research, a group that recruits new investigators and develops community outreach programs, and the IDeA Network of Biomedical Research Excellence (INBRE), which helps expand research activities across basic, translational and clinical areas throughout the state.
Last year, Markell signed a bill that doubled a state tax credit to help small businesses with the cost of inventing new products and processes.
"I don't blame the bioscience industry for wanting more," Whaley said. "But it's been a rough couple of budget years, so we've had to look at revenue neutral things and use the Strategic Fund to support them where we can."
Markell noted his administration has increased the state's investment in the Biotech Institute and made a "significant investment" in the wet lab incubator space at STAR Campus.
"From what I'm told, it's already filling up," he said of the wet lab. "Maybe we ought to be doing more of that."
But, he said, tough choices have to be made with limited resources.
"No one can say they're doing everything," he said. "We live in a world where we have to make choices. We don't have the resources to do everything."
Calling for a new approach
That current level of support won't be enough if the administration wants to take full advantage of the talent pool likely to spill out of DuPont, Chemours and AstraZeneca, Bowman said.
"I don't think they get life science," he said. "Jack [Markell] is a business guy, but he's not really a life science guy. Alan [Levin] certainly wasn't. I don't think he ever loved this space."
Bowman said the state's strategy should be less about grants and loans for job creation and more focused on developing a critical density of bioscience companies.
Providing more lab and office space with subsidized leases would lower the hurdle many startups face while still in their infancy, he said.
Small loans with lengthy repayment terms – based on solid science rather than job creation or net income – would allow early-stage pharmaceutical companies to bridge the funding gap between clinical trial phases, Bowman said.
Delaware lawmakers, he said, also should be willing to consider bold, sweeping changes similar to the state's 1981 Financial Center Development Act, which eliminated ceilings on interest and fees for consumer loans and made the state a national hub for the financial services sector.
"We made a huge bet on banking once," said Tracy Shickel, a former Gore executive who now runs the bioscience marketing firm GreenKite. "If you have a legacy of changing laws, what's to say you can't do that again?"
Yet Delaware may be falling behind when it comes incentives offered to bioscience companies.
"I do think Delaware is late to the party when it comes to adopting the kinds of statewide economic development programs that are readily available in Pennsylvania and growing in state like Ohio and Maryland," said Stephen Tang, CEO of the University City Science Center in Philadelphia.
Former and current organizations at the Science Center have created more than 40,000 jobs in the Greater Philadelphia region, generating $64.5 million in annual city and state tax revenue. Much of the Science Center's success, Tang said, is attributable to state programs applied to certain geographic areas.
The Keystone Opportunity Zone, for instance, provides eligible companies with significant state and local tax exemptions, while the Keystone Innovation Zone provides eligible startups with up to $25 million in tax credits that can be applied to their own tax bill or sold to other companies, providing an invaluable source of revenue before a marketable product or process has been developed.
"Entrepreneurs are very shrewd and looking to locate in places that are not only attractive from a tax standpoint but also somewhere that's going to give them a clear advantage when it comes to growing bigger," Tang said. "I think if Delaware wants to make strides in that market, it's got to be more competitive."
Bob Dayton, Delaware BioScience Association's executive director, said he will meet with legislators in the coming weeks to discuss legislation enacted in other states, such as angel investor tax credits and a program similar to the Keystone Innovation Zone.
"We're making some progress and have some bi-partisan support," he said. "We have to be patient because sometimes it takes a little while, but I feel we have a 50-50 shot of getting something through [the General Assembly] in 2016."
Bowman is less optimistic.
"We go down to Dover every summer and hold a luncheon for the General Assembly," he said. "This year, we had maybe one or two legislators stop by. It was sad."
State lawmakers, he said, have little interest in the bioscience sector, while the governor's office does little to champion the industry.
"The administration isn't beating our drum and the General Assembly doesn't understand us," he said. "When the state is silent – I mean really silent – that's a real concern."
Contact business reporter Scott Goss at (302) 324-2281, sgoss@delawareonline.com or on Twitter @ScottGossDel.