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An update on Pennsylvania’s tobacco-settlement payoff

We all know what to do when life gives us lemons, but how about a windfall in the form of a potential $11 billion from the nationwide tobacco litigation settlement?

Well, one thing that Pennsylvania did in 2001 with its share was take $100 million and create three "life-sciences greenhouses" to help commercialize the medical technology germinating in labs around the state. In the Philadelphia area, that meant the launch ofBioAdvance with $33.8 million in tobacco money.

Organized as an independent nonprofit organization in 2002, BioAdvance started the $20.3 million Greenhouse Fund to invest in start-up firms tackling cancer, Alzheimer's disease, and other serious conditions. The goal was to provide amounts from a few thousand dollars to $1 million to firms at an earlier stage of development than venture capital firms were willing to stomach.

Eight years after making its first seed-stage investment, BioAdvance can point to a number of things blooming as a result of its Greenhouse Fund:

It has funded 41 companies - all local.

Those companies have attracted $415 million in subsequent venture capital and other funding.

Seven from its portfolio were acquired by other companies for a total of almost $1 billion.

And one company completed an initial public offering last August raising $43 million.

But for BioAdvance president Barbara S. Schilberg, one goal has not been met: New products reaching the marketplace to help patients. "That's the ultimate measure of success," she said.

That may happen yet. Currently, three products from three companies have completed Phase III clinical trials, the last step needed before seeking Food and Drug Administration approval.

Avid Radiopharmaceuticals Inc., which had submitted a new drug application, or NDA, for its Amyvid imaging agent with the FDA last year, is working to address regulators' questions about training programs for doctors who will read scans of patients at risk for Alzheimer's disease. Those discussions followed an FDA advisory panel's rejection of Amyvid in January.

NuPathe Inc. submitted its NDA for Zelrix, a patch to treat migraines, and expects the FDA to complete its review in late August. NuPathe, of Conshohocken, went public last year.

Finally, Yaupon Therapeutics Inc., of Radnor, is preparing to file an NDA for a treatment for a rare skin cancer in mid-2011.

Still, whenever a state sets up an economic-development program, the number most closely watched is the number of jobs created. When BioAdvance was created, the state set the bar at 2,200 jobs created directly by its portfolio companies. According to the latest annual report on file with the state, companies funded by BioAdvance have created 885 jobs.

There are a couple of ways to interpret that figure. First, Schilberg pointed out that those job numbers represent only direct employees, excluding the contractors and consultants so prevalent in drug development today. Many biotech and specialty-pharmaceutical companies start out as "virtual" companies, contracting out much of the work that must be done. Only after a drug approaches FDA review and certainly once it receives market clearance do companies hire more direct employees.

The other thing to consider is that many of these jobs were created as the global pharmaceutical industry has been consolidating. Pfizer Inc., which acquired Wyeth, cut 680 jobs in the region in 2010. AstraZeneca P.L.C. has been eliminating 550 jobs from its operation in the Wilmington area.

The loss of job security in Big Pharma has prompted some executives and scientists to try entrepreneurship, Schilberg said. That partly explains how BioAdvance received more than 100 requests for funding last year when it has little money to invest.

BioAdvance is an "evergreen" fund, which means that the investment returns it generates don't get sent off to outside investors, but are channeled back into investments in new companies. Its cumulative total return is about $11 million. Once it reaches about $33 million, BioAdvance must share those returns with the state government.

Its biggest winner right now, arguably is Avid Radiopharmaceuticals. Not only did Eli Lilly & Co. pay $300 million up front for the company in December, it agreed to keep the operation in Philadelphia. Avid employs more than 50 people in its offices in the University City Science Center. As Schilberg noted, employment could rise there should the FDA approve its lead product.

Protez Pharmaceuticals Inc. was an early success for BioAdvance after Novartis AGacquired it for $102 million in cash in June 2008. But Protez's Malvern operations were shut in 2010, when Novartis discontinued development of Protez's antibiotic compound. While it was a setback, the founders of Protez have been active in several other local life-sciences start-ups, including JDP Therapeutics Inc., a Lansdale specialty-pharmaceutical firm, and VenatoRx Pharmaceuticals, an antibacterials developer in Exton.

One of the biggest challenges for anyone starting a company is raising outside capital. Drugs, devices, and diagnostics are particularly expensive to develop. Venture capital has generally shouldered the risk of covering heavy losses incurred by life-sciences firms during development in exchange for the prospect of lucrative returns from an IPO or sale of the company. But venture capital itself is a shrinking sector.

"The valley of death has worsened, not improved, since we got started," Schilberg said, using a phrase from the venture capital industry for high probability that a start-up will collapse before it attracts the $2 million to $5 million needed to continue to develop the technology.

"We are particularly concerned about the lack of risk capital because our region needs to create more new companies to retain the talent" locally that have been separated from ongoing restructuring at Big Pharma companies, she said.

Since its start, BioAdvance has fielded 725 requests for more than $1 billion in investment. "The demand dwarfs our capabilities and underscores the need for more risk capital in the region," Schilberg said.

In the absence of venture funding, BioAdvance has been helping its portfolio companies pursue grants from the National Institutes of Health and other funding sources. "It is ironic that we were established to serve as the 'post-grant' capital, and now most of our newer companies are using our funding to get to the point where they can get grants," Schilberg said.

I hesitate to point out that a potential source of capital still exists: the tobacco settlement funds will flow to Pennsylvania and other states for 12 more years. BioAdvance and the greenhouses in Pittsburgh and Harrisburg each receive tobacco-settlement money to cover many of their community-outreach efforts, events, and other annual expenses.

Pennsylvania has received $4.57 billion from the master-settlement agreement with the major cigarette companies over the last 13 years, including $330.84 million in April. But shifting more of that windfall to the life-sciences greenhouses for new investment funds probably won't fly in a Harrisburg battling over another tight state budget.

Also, tobacco money was the original source of funding for the state's adultBasic plan that provided health insurance to those who cannot afford private insurance and don't qualify for Medicaid. Calling the program "unsustainable," the Corbett administration dropped adultBasic in February, prompting protests and litigation.

With post-recession and post-financial crisis hindsight, it's amazing that even $100 million of the multibillion windfall was directed toward supporting innovative companies.

Nearly eight years after she joined BioAdvance, Schilberg said she remains enthusiastic about the science emerging from Philadelphia region's deep, diverse life-sciences ecosystem. "We're operating in a wonderful environment," she said. "If we had more money–"

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Kristen Fitch

Senior Director, Marketing