Biotech Center faces severe cuts in McCrory budget

dranii@newsobserver.comMarch 21, 2013 

Jay Strum, the president of drug-development startup G1Therapeutics in Chapel Hill, is grateful his company recently obtained its second $250,000 loan from the N.C. Biotechnology Center.

G1 has managed to raise money from the private sector as well, attracting $600,000 from Durham-based Hatteras Discovery in September. But developing new medicines takes so much money that, like many startups in this sector, it relies on state-funded loans as well as federal grant dollars to advance its experimental drugs. The company, which has three employees and six contract workers, is focused on drugs that would protect bone marrow, kidneys and other organs from damage caused by chemotherapy and radiation.

“I think it’s really important for the Biotech Center to have the ability to help startup companies like ourselves,” Strum said. “Particularly in this area, there isn’t a whole lot of funding for small companies.”

But Biotech Center officials say their ability to make those loans would be undercut if the budget unveiled Wednesday by Gov. Pat McCrory wins the approval of the state legislature. McCrory’s budget calls for cutting the center’s appropriation for the fiscal year that begins in July to $7.2 million – $10 million less than it received in the current fiscal year.

“It’s likely that businesses looking to locate to North Carolina will focus on other states where funding and incentives for life science companies are more readily available,” Norris Tolson, CEO of the Biotech Center, said in a statement.

McCrory spokeswoman Kim Genardo defended the proposed cutback.

“The N.C. Biotechnology Center should be able to continue operations with $7.2 million per year,” she said.

Genardo added that the governor is taking “a fresh look” at all state-funded nonprofits, including the Biotech Center. And the Biotech Center in particular is being scrutinized in light of the governor’s plans to reorganize the state Commerce Department.

She added: “Do they remain private nonprofit and is that the best (situation) for them? Or does the N.C. Biotechnology Center need to be folded into the university system?”

Art Pappas of Pappas Ventures, a Durham venture capital firm that invests in life science companies, said he is “surprised at the radical cuts that are being proposed in sectors that drive so much value back into the state.” Pappas is a member of the Biotech Center’s board and a former chairman.

North Carolina – and the Triangle in particular – is widely considered a major hub for the biotech industry, but Pappas is concerned about the long-term impact of slashing the Biotech Center’s budget.

Given that competing states are taking steps to enhance their biotech industries, “I think it could affect our rate of growth,” he said.

The Biotech Center is in essence a support organization for the life science industry – which includes pharmaceutical, biotech and medical device companies as well as contract research organizations that help drug companies develop new medicines. Founded in 1984, the center supports research, education and economic development efforts, among other things.

According to the Biotech Center, the life science industry in North Carolina includes more than 500 companies with more than 58,000 employees. Their average salary: $78,000.

“They are high-paying, big-impact jobs,” said center spokeswoman Robin Deacle.

Operating under the governor’s proposed budget would force the Biotech Center to put on hold or cancel most, if not all, of $23 million in commitments it has made, including loans to startups and research-and-development grants to universities and nonprofits, Deacle said. Although that money has been committed, the funds are parceled out as the recipient meets specified milestones. A loan, for example, can be tied to completion of a drug study.

The center has set aside the $23 million in cash to cover those commitments, Deacle said, but would need to divert funds elsewhere if the governor’s budget cuts come to pass.

It’s unclear exactly what the budget cuts would mean for future loans and grants.

“I think we do know that, fundamentally, we would have to scale back the programs we administer,” Deacle said. “There would be so many fewer dollars available.”

Deacle said the center hopes to convince state legislators that the governor’s budget proposal isn’t the way to go.

The biotech center says that for every dollar it loans to startups – it doesn’t provide outright grants to businesses – the recipients raise $117 in additional funds. That includes federal funding, investments from private investors and the purchase price if a company is acquired.

The center has budgeted $2.45 million for loans to businesses in the current fiscal year. Since its inception it has loaned $22.2 million in loans to 145 companies, which in turn have created more than 2,800 jobs.

“The great majority of the loans are fully repaid despite the fact that most of our loan portfolio companies are at an early stage of development,” Deacle said. Interest rates on the loans is set at 1 percentage point higher than the prime rate; currently, that’s 4.25 percent.

Arbovax, a Raleigh company developing new vaccines, has received more than $600,000 in loans from the Biotech Center. This week the six-employee company announced that its vaccine for dengue fever, a deadly and growing tropical disease, is poised to begin clinical trials.

CEO Malcolm Thomas said his company is probably too far along to qualify for any more loans from the center, but he laments what major cutbacks would mean for the next generation of startups.

“I think it would be really sad for biotech in this state,” Thomas said. “We really need to capitalize on the knowledge and the resources we have here.”

Ranii: 919-829-4877

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