In an industry notorious for long — and expensive — development cycles, Tetra Discovery Partners LLC has a decided edge: a burn rate of almost zero, according to its founder.
The two-year-old Grand Rapids-based drug discovery firm, which is developing treatments for depression and Alzheimer’s disease, operates with virtually no overhead. It conducts research at low-cost wet lab spaces in the Grand Rapids SmartZone and the Southwest Michigan Innovation Center in Kalamazoo. Tetra’s president, Dr. Mark Gurney, works directly with the Grand Valley State University cell and molecular biology lab for his discovery process, and then tests the drugs at the Western Michigan University animal research labs.
The “distributed development model,” as Gurney calls it, also allows Tetra to work with collaborators in Wisconsin and Washington, D.C. Tetra has only five employees, including Gurney.
“If we created that infrastructure within one company, it would cost many millions of dollars to hire the people, buy the equipment, rent the space,” Gurney said. Instead, he’s taking advantage of state-funded incubators like the Grand Rapids SmartZone and the SMIC, as well as the university systems here. “The infrastructure for start-ups in Michigan fits the distributed model well.”
Gurney isn’t alone in his thinking. Michigan is emerging nationally as a good place to start a drug or medical device company because of the infrastructure and other business assets that have been developed for the life sciences sector over the past decade.
With venture capital investing for life sciences down nationally Michigan’s mix of state-funded programs, research universities and manufacturing capabilities is proving attractive to entrepreneurs. And, as the number of successful exits from Michigan life science investments grows, there’s also an expanding class of newly liquid investors and executives prepared to take another bite at the life-sciences apple in Michigan.
In particular, Michigan appears poised to take advantage of companies like Tetra, that use a distributed drug development model to create the next generation of drugs and treatments at a relatively low cost.
What’s more, with the state’s strong manufacturing expertise, driven by the automotive industry and huge industry players such as Stryker Corp., West Michigan is rapidly developing a medical device cluster that could one day rival Boston, Minneapolis and San Diego.
Certainly, Michigan has a rich history of developing drugs and treatments through major pharmaceutical companies that have roots in both Kalamazoo and Ann Arbor. Parke-Davis, Warner-Lambert, Pharmacia, Upjohn and Pfizer have been major players in the state. Only Pfizer remains, albeit with a scaled-down animal research operation and manufacturing in Kalamazoo.
Springing up to take big pharma’s place in Michigan are companies such as MPI Research, the largest single-site preclinical contract research organization in the world. Led by former Upjohn CEO William Parfet, MPI is using the traditional bricks-and-mortar approach to drug discovery, safety evaluation and bioanalytical services.
Another example of the new drug development underway in Michigan can be found at Metabolic Solutions Development Co. in Kalamazoo. MSDC is developing novel small molecules (mTOT Modulators) to treat metabolic diseases associated with age-related mitochondrial dysfunction, especially insulin resistance and type-2 diabetes.
“Metabolic Solutions has 16 employees, but its financial impact is staggering,” said Dale Grogan, managing director of the Michigan Accelerator Fund. “Almost all the money it has raised is spent on wages and subcontracting. At some point, if this drug company gets into the FDA approval process and makes a pill, it will create a lot of jobs because then you’re into manufacturing.”
Another natural fit for Michigan’s life sciences sector is medical devices, said Don Beery, director of the West Michigan Medical Device Consortium. His nascent group represents 23 of the state’s medical device companies. His membership does not include Stryker, the $8.3 billion medical equipment giant in Kalamazoo with more than 20,000 employees worldwide.
Beery describes his members as “the supply chain of medical devices.” They do not provide branded solutions to end users but are equivalent to the auto industry’s Tier 1 suppliers. Collectively advanced medical technology and medical device makers employ nearly 15,000 people in Michigan, according to a 2010 study from Battelle.
In addition, life sciences jobs have what’s called a multiplier effect of roughly 3.5, meaning each life sciences job creates three-and-a-half more jobs in the general economy. By this equation, medical device companies have created more than 50,000 additional jobs.
“In general, I think Michigan is well-positioned in medical devices because of core competencies we’ve developed in the automotive skill set,” Beery said. “The auto industry’s skills include engineering, processing and manufacturing. There are some 15,000 parts in the typical motor vehicle, which is built to operate for 10 years across incredible temperature extremes. It is a remarkable feat when you think about it.”
This strong auto heritage, and its impact on the medical device sector, was cited by Battelle as making Michigan one of the next medical device hubs. The research company described Michigan as one of the fastest-growing life sciences states in the country that employs more than 39,000 people in nearly 1,600 companies. Its largest major subsector is bioscience-related distribution with more than 11,000 jobs in 2010 and growth of 13 percent overall since 2001, well above the national growth rate. Two other subsectors — medical devices and equipment and agricultural feedstock and chemicals — have each added jobs in Michigan in recent years despite employment declines at the national level. Battelle also said Michigan benefits from having a range of established suppliers and service providers that have been serving the medical device industry for years.
One of those longer-term medical device suppliers is MedBio, a seven-year-old Grand Rapids ISO 13485:2003 certified contract manufacturer for the medical and biotech industries. The company specializes in precision injection molding, medical device assembly and medical device design support. MedBio employs 73 people at a certified ISO Class 8 clean room and offers product assembly in certified ISO Class 7 clean rooms at a 45,000-square-foot facility north of Gerald Ford International Airport.
“In medical devices, we have a core group of companies in the area,” said MedBio CEO Christopher Williams. “A big OEM, like Johnson & Johnson, can come to West Michigan and get everything done on their product in Grand Rapids and Kalamazoo. It’s a little unusual. Only places like Minneapolis, Southern California and Massachusetts have been able to provide this turnkey service in the past. Our cluster is still a little small, probably 2,000 to 4,000 jobs, but we’re growing rapidly.”
Top researchers and executives in these startups can make upwards of $100,000 a year (compared with $200,000 a year at employers like Pfizer), making life sciences jobs the “gold collar” positions described by former Michigan Gov. John Engler, who committed Michigan to the life sciences path when he launched the Life Sciences Corridor a decade ago and provided universities and SmartZones (state-supported tech incubators) with $50 million a year from the Michigan Tobacco Settlement. That funding level only lasted a few years before the state went into a deep recession and the Michigan Legislature siphoned off a big chunk of that money to fill holes in the state general fund.
Under former Gov. Jennifer Granholm, the life sciences startups that grew from the basic research funded by the Life Sciences Corridor were commercialized by the 21st Century Jobs Fund, again funded by the Tobacco settlement money, but on a much reduced scale.
Some $140 million has been invested through the 21st Century Jobs Fund since 2006, of which about half went to life sciences companies, said Martin Dober, senior vice president of entrepreneurship and innovation for the Michigan Economic Development Corp.
About $30 million of the loan program has been returned to the state through the sale of companies it funded, Dober said. The list includes HandyLab Inc., sold for $275 million, and Accuri Cytometers Inc., sold for $205 million.
“When you look at the life science industry in Michigan, and the type of companies we’ve invested in, we’ve had good exits,” Dober said. “The state has made sizeable returns. In some cases, those were companies acquired by out-of-state firms (as was the case with both HandyLab and Accuri). Jobs are important, but the generation of wealth aspect is important too. Because when you have people who are successful, many of those people go on and recycle that wealth.”
Dober pointed to Roger Newton, the founder of Esperion, an Ann Arbor drug development company sold to Pfizer in 2004 for $1.3 billion, by far the highest exit that any life sciences company in Michigan has ever had.
Esperion developed anti-cholesterol drugs, including the very popular Lipitor that generated some $10 billion in sales. The sale put about $19 million in Newton’s pocket, and also made millionaires out of several other Esperion executives. They responded by investing in several biotech companies in the state, and took seats on the boards of some of these same startups.
In 2008, Newton led a team that bought Esperion back from Pfizer. Now he is nurturing his former company in a state-backed life sciences incubator in Plymouth, Mich.
Investor Grogan said on the west side of the state, Mike Jandernoa, the former CEO of Allegan-based generic drug maker Perrigo Co., cashed out some of his Perrigo stock to co-found Bridge Street Capital to invest in promising startups. Like Newton, Jandernoa is investing money he made in the life sciences industry back into the industry in hopes of creating even more life sciences companies.
“We need 500 Mike Jandernoas and 500 Roger Newton in Michigan,” Grogan said. “We need to balance the three-legged stool of innovation, capital and talent. Innovation: we’re good at that. We’re getting more of the capital to fuel innovation. But talent, that’s the shortest leg of the stool. We just don’t have enough serial entrepreneurs who have been there and done that yet. As Michigan develops more life sciences startups, hopefully we will lengthen the talent leg.”
Jobs aren’t the only way to measure the return on investment for Michigan’s life science industry. If you look at it from a private equity perspective, life sciences has done well, said Mike DeVries, managing director of EDF Ventures, an Ann Arbor-based venture capital company that specializes in life science investments. DeVries is based in Grand Rapids so he can keep an eye on the rapidly growing life sciences sector in West Michigan.
“I can point to five deals in the state that netted at least a $2 billion total exit,” DeVries said. “But when you look at the money invested in Michigan life sciences companies, it is less than $500 million. I’d say four [times] is a fair amount of exit value.”
DeVries describes life sciences as a good fit for Michigan.
“There are a large number of people in this state capable of starting and running life sciences companies,” he said. “Medical devices are a good fit too. Not because of the manufacturing presence, just because in this region of the country there are a lot of medical device opportunities. Stryker, Thermo — both have spun out startups, more on the services side.”
Jack Ahrens II, general partner at TGap Ventures in Kalamazoo, said moving away from pharmaceuticals has actually been a good step for the Michigan economy.
“I was never a big fan of thinking we’d become the next Boston,” Ahrens said. “Drug discovery takes a long time and doesn’t employ a hell of a lot of people. When we get something that looks promising, it usually is acquired by one of the big drug companies and gets moved out of here. Medical devices are much more manufacturing-oriented. Drug services too. Both will create a lot more jobs for Michigan.”
A good investment
Don Parfet, a former Pharmacia and Upjohn executive who now is general partner of Apjohn Ventures in Kalamazoo, also specializes in life sciences investing. He served as founding CEO of Afmedica (sold for $23.4 million) and serves as chairman of the board at ProNAi Therapeutics, a company developing cancer treatments. His long career gives him a unique perspective on the value of the life sciences sector to Michigan.
“I would say yes, life sciences have been a good investment for the state,” he said. “When you step back and reflect on the fact that the NIH through competitive grants programs awards well over $500 million a year to early life science discovery research at our major universities in the state, we’ve got to be in the top five or six states in country to earn these awards.”
Following his logic, Parfet said the money the federal government invests in basic research at state universities then is commercialized by investments made by the state through the 21st Century Jobs Fund and by VC’s like him. Commercialization then equals jobs.
“These awards are not declining,” he said. “MSU, WSU, UM, the new medical schools all are increasing our research activities. But you have to remember that life sciences investing is longer term and less fickle than other types of technology investing. It just needs to be organized to sustain it over a longer period of time. What’s the upside? We haven’t cured diabetes, cancer, or arthritis yet. We may if we continue to make investments in life sciences.”
Mike Brennan is senior technology writer at MiBiz. His day job is editor and publisher of MITechNews.com