In many ways, the Wisconsin biotechnology industry is poised for continued growth. The industry, which grew by 3% in the six- year period that ended in 2009, continues to benefit from the University of Wisconsin-Madison’s standing as the third largest research institution in the nation, with more than $1 billion in annual research expenditures.
The recently opened Wisconsin Institutes for Discovery are designed to promote the type of university and private sector research collaboration favored by federal granting agencies.
The state remains on the cutting edge of scientific discovery, as evidenced by UW-Madison’s recent development of a defined surface that can help grow stem cells on larger scale.
State biotechs continue to be courted by large pharmaceutical firms, some of whom have established internal venture funds. Pharma giants are looking to replenish their internal drug development pipelines through the acquisition of biotechs in the process of developing therapies, or other pharma businesses with drugs hitting the market, or by licensing early-stage drug compounds. The latest example is Teva Pharmaceutical Industries, which recently visited Madison and met with six Wisconsin firms.
There are, however, at least two snags that could undermine the industry — the lack of venture capital deployment in Wisconsin and legal challenges to embryonic stem cell research and other intellectual property.
Venture Adventure
Prior to the recession, Wisconsin was making headway with angel capital deployment, and much of the credit was given to Act 255, a state law that provided tax credits to investors who commit capital to eligible companies. There are 23 angel investor groups to help early-stage companies, but early-stage venture funding remains the single largest impediment to biotech growth, according to observers. Wisconsin ranks in the middle of the 50 states when it comes to attracting venture capital, not high enough for a state with 640 bioscience businesses that employ 24,000 people — with average annual earnings of more than $69,000.
Several proposals have emerged to increase growth capital, but the idea of using state bonding authority to create a fund appears to have the interest of Gov.-elect Scott Walker, who recently endorsed a capital fund that is part of a public-private partnership. Others question whether the Legislature is willing to create such a fund. “People are really high on this idea of a bond issue that would provide a fund of funds for venture funding, but that depends on whether the state has got the stomach for something like that,” noted Carl Gulbrandsen, managing director of the Wisconsin Alumni Research Foundation. “I don’t know, in this climate, whether they are going to find that.”
Skeptics cite a series of examples of funds used for other purposes: Tom Hefty, retired CEO of Blue Cross, chaired economic growth councils for Gov. Jim Doyle and former Gov. Tommy Thompson. He thinks the best alternative is an existing statutory authority within the Wisconsin Housing and Economic Development Authority. WHEDA was given bonding authority in the 1980s to raise funds for small business and agriculture. With minor changes, Hefty believes it’s possible to use the existing authority for venture capital formation. “I would argue that venture capital helps small businesses,” stated Hefty, a co-chairman of the Be Bold Wisconsin report on competitiveness.
A similar strategy was employed in Ohio’s Third Frontier Fund, which was approved by voters as a Constitutional Amendment. “That means that the money raised by the bonding can only be used for those economic development purposes,” Hefty noted. “There is considerable skepticism in Wisconsin that bonding will be used for the purpose intended.”
In Ohio, a single referendum can change the state Constitution. In Wisconsin, the Constitution can only be amended by passing the proposed amendment in two consecutive legislative sessions before it is submitted to the voters. “To achieve what Ohio did with what we call a ‘lock box’ for economic development would require three years in Wisconsin, whereas it only took six months in Ohio,” Hefty said. “This is why existing bonding
authority under WHEDA has emerged as a favored option.”
Several capital formation plans involve the State of Wisconsin Investment Board, which has contributed $125 million since 2000 to in-state venture funds, but is looking into ways to develop a new portfolio with coastal investors. Vicky Hearing, a spokeswoman for SWIB, said the current environment has created opportunities for limited partners to identify local companies that fit the investment focus of top-tier venture capital groups and “build relationships with those funds.”
Legal Wrangling
In 2009, President Obama signed an executive order reversing the Bush-era restrictions on human embryonic stem cell (hESC) research. Earlier this year, federal judge Royce Lamberth blocked the executive order, ruling it violated a Congressional ban on funding research when a human embryo is destroyed. While Lamberth’s ruling is reviewed, it has been stayed by the U.S. Appeals Court for the D.C. Circuit, meaning the research can continue. Yet uncertainty remains for researchers in university and private sector settings. “I think it exists for anybody receiving National Institutes of Health funding,” said attorney Greg Hartwig, a partner with Michael Best & Friedrich.
In an op-ed piece in Genetic Engineering Biotechnology News, Chris Parker, chief commercial officer for Cellular Dynamics International, wrote that if the Court ban on hESC research is not overturned or addressed legislatively, projects will have to be re-designed or shut down. While CDI works extensively with adult stem cells, Parker said hESCs are still the stem cell benchmark for pluripotency, the ability to become any cell in the human body.
Hartwig agreed, citing recent papers that found reprogrammed adult stem cells sometimes remember the kind of cell from which they came. “I think there is still more science that needs to advance with respect to adult stem cells,” Hartwig said. “I think the embryonic stem cells can also play an important role in serving as a reference point as the science advances on the adult stem cells.”
Also in the legal world, there have been several Court challenges to what constitutes patent-eligible subject matter. One is the Myriad Genetics case, which pertains to whether genes and isolated DNA are patent eligible. In a challenge brought by the American Civil Liberties Union in New York, a district court judge ruled that type of subject matter ineligible for patents, and that ruling has been appealed. The case involves research, conducted at the University of Utah and licensed to Myriad, resulting in the discovery of two gene mutations implicated in breast and ovarian cancer and the eventual development of commercial genetic tests to determine cancer risk.
“The ACLU argument is that genes are found in nature and therefore should not be eligible for patents — the thought being that it actually slows research and medical progress,” Hartwig stated. “The counter to that is that the subject matter covered by the patent is not just naturally occurring. The DNA is being isolated and researchers are figuring out consequences, so that is an added step that should be eligible for patent protection. If you don’t provide some sort of economic incentive for universities and researchers to invest time into identifying things that can be useful for medical purposes, they are not going to do it.”
Another case, Prometheus Laboratories vs. Mayo Collaborative Services, involves the validity of diagnostic claims. The gist of the Prometheus case is whether methods for diagnosing a particular end disease, not just therapeutic methods of treatment, should be patent eligible. The case was on its way to Supreme Court, but was sent back to the Court of Appeals for the Federal Circuit and bears watching locally.
“I think diagnostics and diagnostic methods certainly come into play in Madison,” Hartwig said, “particularly with what’s going on at the university as well as biotech companies.”
Patented Approach
The backlog of patent applications is another issue with an economic impact, but the severity depends on who you talk to. United States Patent and Trademark Office Director David Kappos pegs it at 708,000 applications, with the goal of cutting the number in half.
Hartwig said reducing the backlog would lead to business formation and job creation. Part of the problem, he added, is that Congress has been diverting patent fee revenue from the patent office to other areas. “The main problem with the backlog is that the longer it takes to get a patent, the more difficult it is for start ups and emerging companies to obtain financing because investors want to see issued patents,” he noted.
At the moment, there are 6,129 patent examiners, which have led to calls for restructuring. In hopes of cutting the average patent review period from three years to one, a move that could boost business formation and exports, Secretary of Commerce Gary Locke has hinted the Obama administration is looking into the creation of regional patent offices.
Shane Brunner, an attorney with the intellectual property firm Merchant & Gould, believes regional patent offices would boost technology transfer. The idea is to build a critical mass of patent examiners in cities with a more affordable cost of living than the nation’s capital. “Washington is the center of political power,” he noted, “not an innovation center.”
More uncertainty has been caused by Congress’ inability to reauthorize the Small Business Innovation Research funding bill. Bryan Renk, executive director of BioForward, the trade association representing the state’s biotech industry, sees reauthorization as one area of compromise between Democrats and Republicans. “I can’t quite figure it out, but they don’t seem to get it done,” Renk said. “The level of funding is one issue, and the parameters around funding is a second issue.”
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