Up, Up, and Away

Another promising local tech startup is leaving Pittsburgh for Boston. Why? As Willie Sutton never said, because that's where the money is, and moving is what the money wants.

Cori Shropshire's P-G report on the impending departure of Logical Therapeutics does a good job of pointing out some of the other problems that keep Pittsburgh biotech/biomed startups on the launch pad for other destinations:

(1) Depth. Boston has it; Pittsburgh doesn't. "Moreover, biotech firms are risky, so it's difficult to persuade experienced workers to relocate to Pittsburgh without guarantee of success, [Logical Therapeutics co-founder Carolyn] Green said. In Boston, there are several hundred companies where workers can go if a venture doesn't work out, she said." I've written about this before.

(2) Infrastructure that supports biotech operations. "Despite the University of Pittsburgh Medical Center's global reputation in basic research and clinical trials, particularly in drug development, 'What's missing is the expertise in designing and carrying out early tests for new drugs, managing the federal regulatory process and manufacturing material used in clinical trials,' [Logical Thereapeutics c-founder Dr. Mitchell] Fink said." I may not have blogged about that problem before, but I've certainly heard about it in private conversations. Pittsburgh has a lot of magnificent scientists, and Pitt and UPMC are getting better at pushing technology into the private sector. But the regulatory gauntlet is daunting, and there aren't enough people in town who are trained to manage it.

Updated and extended with most of the text of a comment that I left on an earlier Pittsblog post:

Is LT's departure fair to PA taxpayers, in view of PA-subsidized investments in the firm? One thing to note is that PA taxpayer money in LT (or in any private co. with university-developed technology) may be dwarfed by indirect money coming from the federal treasury. Pitt and UPMC take in several hundred million dollars in federal grant money each year, a huge chunk of which goes into biotech/bioscience research. I don't know how much federal money went into the technology that LT is developing, but federal indirect cost reimbursement funds facilities that likely housed much of the early work.

Federal law (Bayh/Dole) gives university researchers using federal funds the right to patent and license resulting inventions; the researchers split licensing proceeds with their employers under the terms of policies set by the employers. Here, that means Pitt and UPMC. State interests usually end up taking a back seat to federal policy. Biotech investing is a particularly high-stakes version of poker, and state-related investment funds are playing with public money. But they are investors nonetheless, placing bets with their investments and hoping to win a hand or two. Returns are never guaranteed.

The question in my mind isn't whether the PA funds are entitled to their money back, but whether they should be playing at all, given the amounts that they are able to invest, and the stakes. Are they are playing at a table where they don't have enough cash to compete effectively over the long term? Biotech and biomed investing is a long-term game, and every play is risky. While LT is leaving with PA money and has chance to succeed elsewhere, would we as PA taxpayers be happier if it stayed in Pittsburgh -- and was more likely to fail? Personally -- no. Remember, you're a federal taxpayer as well as a PA taxpayer. When you combine your taxpaying hats, that's the point at which you should ask whether you're getting a fair deal while the government invests your betting money. In some ways yes, you are, and in some ways no, you're not. I'll save more for a later post.


10 Responses to "Up, Up, and Away"

Amos_thePokerCat said... 6/14/2007 5:17 PM

This is a little different that other moves. Currently, Logical Therapeutics is a company of only two people, and a mail drop.

Other than payments to the UofPitt, how fast can 2 people burn though $1.7M?

Anonymous said... 6/15/2007 9:42 AM

I don't remember there ever being a vote about whether or not public and philanthropic money should go into biotech, or even a debate. Economic development funds are spent to benefit the larger community. It would be interesting to see what would happen if there were a larger debate about how funds were spent and the expectations of community benefits.

Anonymous said... 6/15/2007 10:07 AM

I know there are a lot of biotech companies that do stay. It'd be interesting if you did a blog about the ones that stay and why they stay, how succesful they are etc. Sort of a companion piece to today's blog.

I'm no expert on the matter but the impression I get is that a lot less of them are leaving compared to, say, ten years ago. So the question is what's the difference? What makes a company stay versus leave?

Jefferson Provost said... 6/15/2007 11:28 AM

@Anon942: I don't know what kind of "vote" you're talking about. Philanthropists give away their money however they see fit.

As for federal funding. The National Inistitutes of Health (NIH) fund an enormous amount of basic bio and biotech research. Their budget is voted on by Congress. The provision allowing universities to own patents on the result s of federally funded research they perform is the Bayh-Dole act, a law passed by congress. In addition, every federal research funding agency, including the NIH, is required by law to allocate a portion of their funding for small businesses in the form of Small Business innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants.

I'm sure there's a similar legal foundation for any state funding of biotech, though I don't know what it is.

If you mean that you never voted on it, well, the USA and Pennsylvania aren't direct democracies. California is drifting toward a direct democracy and so far it doesn't seem to be working out too well (IMO).

BTW, for those who care about federal funding of bio and health care research, be aware that the President's proposed 2008 budget cuts funding to NIH by $500M, and the budget the house passed doesn't increase funding enough to keep up with inflation.

Anonymous said... 6/15/2007 2:38 PM

The state puts a significant amount of money into biotech, largely as a result of the tobacco settlement. The Allegheny Conference set biotech as a regional priority for both public (especially state) and foundation funding. The philanthropies do have the option of spending money any way they want, but many are investing in regional economic development under the mantle of that it is a consensus civic goal. Unless you're on the Conference executive committe, you saw that decision reported to you as a done deal.
The issues that Mike raised concerning biotech as a good regional investment strategy are the ones that should be publicly debated quite regularly. That debate also needs to include some sense of choices and alternatives that could be selected or dropped.
The Pittsburghers whose money is funding these projects are looking for these economic development investments to bring back their sons and daughters, or provide for their children in the near future. Are they getting an honest understanding of their choices in how their money is spent, or how others spend money on their behalf? Are they getting an honest prediction of the benefits they can reasonably expect?

Mark Rauterkus said... 6/15/2007 3:00 PM

I blog about this posting at http://rauterkus.blogspot.com/2007/06/pittsblog-backs-into-liberty-discussion.html

Anonymous said... 6/15/2007 5:28 PM

It seems odd that this blog is questioning the spending on high-risk opportunities, when past discussions have been about how the region doesn't take big enough risks. If you don't take the big risks, you won't get the big rewards. But...if you are going to take such risks, you need to come to the plate fully ready to play ball. If the region needs more specalized talent to realize biotech opportunities, then it has to do whatever it takes to bring such talent here. Where there is a will, there is a way. Otherwise, the rewards won't materialize, and it should get out pf biotech and put its money elsewhere.

Mike Madison said... 6/15/2007 8:14 PM

To be clear:

Big rewards require big risks, but (i) is it the role of the public treasury to be financing those risks? and (ii) if the public treasury is going to put money in, should it put in money in little bits and pieces in biotech/biomed, when big rewards -- and biotech/biomed is nothing but potential for big rewards -- require big, big chunks of cash up front?

jet said... 6/16/2007 11:40 PM

>Infrastructure that supports biotech operations.

Or that supports any sort of high-tech startup at all. Everyone in the bay area complains about Fry's Electronics, but we all shopped there late at night or on weekends when we needed a critical piece of computing equipment and couldn't wait to order it and have it shipped.

Not only is there nothing approaching Fry's in the greater Pittsburgh area, CompUSA closed all but one of it's stores.

I can't imagine doing any sort of high-tech startup here and playing the "order-it-from-Amazon" game.

Anonymous said... 6/20/2007 7:02 PM

Logicals move is only about risk and reward. their investors job is to manage risk. with so many uncontrollable risks in drug development, one they can control is location. the only way vc will take a risk is if they perceive other risks outweigh it.

So here is a scenerio for you. If Pgh were serious about growing biotech, it would create large funds capable of investing in biotech (like the PLSG wanted to do, but Harrisburg shot it down). Pgh has many large company's whose pensions funds could become instittional investors in large VC funds - giving thema voice at the VC table. All large investors put a small percent of their funds in higher risk alternatives such as private equity funds. If they did it enmass, that would get attention. the risk of losing large institutional investors could outweigh the risks of recruting talent to Pgh. UPMC invests in VC funds to be sure. So has Pitt - but where are our corporate heavy weights? where is the state pension funds? union pension funds? Logical's investors combines manage more than 100 billion dollars - these are not light weight groups or unknown funds. they would be much more likley to be swayed by their own investors then by the whinin of the post gazette.
if you want to play with the big boys you need to play their game their way - and play to win. Pgh is not prepared to play to win. Boston clearly is.

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Pittsblog 2.0 is written by Mike Madison, a law professor at the University of Pittsburgh. Send email to michael.j.madison[at]gmail.com. Mike also blogs at Madisonian.net, on law and technology. Chris Briem of Null Space drops by from time to time.

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