From The Editor | May 6, 2014

State Of Innovation: The Next U.S. Medtech Hotspot

By Jim Pomager, Executive Editor

Minnesota. California. Massachusetts.

Ask someone to list the top U.S. states for medtech activity, and these are the names you will usually hear (in some order). And for good reason — many of the biggest and most-recognizable companies in the industry are based in these three states, and much of the world’s medical device and diagnostics technology originates from them.

But another state has quietly positioned itself to join the ranks of the medtech elite. It is home to 600+ firms in the medical device and diagnostics sector (per Pennsylvania BIO), including the U.S. headquarters of giants Siemens Healthcare, B. Braun, Synthes, and Olympus. It employs more than 22,000 people in medtech jobs — more than any state outside the “big three” (and only 1,700 fewer than mighty Massachusetts) — according to data published by AdvaMed. Over $13 billion of the state’s economy is attributable to the medical technology industry.

Which state is it? I’ll give you two final hints: 1) Along with Massachusetts, it is one of only four U.S. states that designate themselves as “commonwealths”, and 2) I’m sitting in the state as I type this.

That’s right — it’s Pennsylvania, the next big thing in U.S. medtech.

I can understand if you’re skeptical. I was too, at least until I spent three straight days running around the state last month, visiting and talking with numerous medtech companies during a whirlwind media tour of the Pennsylvania life sciences industry.

Organized by the Pennsylvania Department of Community and Economic Development (DCED), the trip enabled me (and a group of other journalists) to tour the facilities of four different device and diagnostics companies, which ranged in size from startups to a multibillion-dollar corporation. We also visited two incubators supporting medical device commercialization and a cutting-edge academic research center. In between the site visits, we had the opportunity to meet with dozens of representatives from other Pennsylvania device makers, research centers, and organizations supporting medical technology development.

Though exhausting, the tour was also extremely enlightening. It provided an intimate and near-complete view of the entire device development continuum — from fundamental research to manufacturing and commercialization — on a localized level. It also allowed me to witness how a unique blend of factors can coalesce into an environment where medtech innovation flourishes.

7 Reasons Why PA Works For Medtech Companies
During my conversations with executives and other industry members during the tour, there were seven recurring themes about why Pennsylvania has been so successful at attracting, developing, and retaining medical device companies.

1. Location, location, location
By far, the most common explanation given for why medtech companies set up shop in Pennsylvania is its strategic location. The state is positioned within a day’s drive (500 miles) of 40 percent of the U.S. population, 60 percent of Canada’s population, and six of the 10 largest markets in the United States. The greater Philadelphia metropolitan area, within the state’s borders, is the fifth-largest in the state with 6.3 million residents.

If you need to meet with the FDA, it’s a reasonably short trip to Washington, DC (how reasonable depends on where you are in the state).  The same goes for New York City, if you have a business meeting with Wall Street investors, for example. It’s not crazy-far (a short flight) from the medtech hubs of the Midwest, and most of the top pharmaceutical companies in the world have U.S. headquarters either in Pennsylvania or neighboring New Jersey and Delaware (for those of you working on combination devices).

The area is loaded with other resources that are useful in running a medical device business — research universities, medical schools, teaching hospitals, large healthcare systems, contract researchers, contract manufacturers, and more. Maureen Mulvihill, Ph.D., president and CEO of Actuated Medical, told me that one of the big reasons her medical device company settled in State College was the town’s proximity not only to Penn State University’s College of Medicine (in nearby Hershey), but also to the Cleveland Clinic (Cleveland), Johns Hopkins (Baltimore), and other regional academic medical centers.

2. Rich talent pool
Pennsylvania has a world-class system of colleges and universities, many of which specialize in biomedical research and engineering. Some of the bigger names include Penn State (in State College, where we visited the impressive Huck Institute of the Life Sciences), the University of Pennsylvania (Philadelphia), the University of Pittsburgh, Carnegie Mellon University (Pittsburgh), Lehigh University (Bethlehem), Temple University (Philadelphia), and Jefferson Medical College (Philadelphia), though there are literally hundreds of others. Each year, these institutes of higher education graduate thousands of scientists and engineers ready to contribute to the state’s medical device industry and infuse it with new ideas.

In many parts of the state, industry is collaborating with local academia to begin preparing students for life science careers as early as middle and high school. One creative example is in Central Pennsylvania, where the Bedford County Technical Center, a shared time career and technical school, has formed a partnership with Lampire Biological Laboratories (Ottsville), a company specializing in polyclonal and monoclonal antibody development, cell culture devices and services, and blood-derived products. Lampire helped build and equip laboratories at the school, and consulted on biotechnology curriculum to better prepare students for careers at Lampire and other regional life science organizations.

Another recent, somewhat unexpected source of talent for the Pennsylvania medtech industry was the state’s pharmaceutical industry. Over the past several years, Pennsylvania-based pharma manufacturers have laid off thousands of employees, many of whom are now finding jobs in the medtech sector. This career shift often takes place via life science incubators like the Pennsylvania Biotechnology Center and University City Science Center that I visited on the tour (more on this in a moment). The DCED is supporting such transitions, having recently provided $750,000 in funding for a program to help match researchers, executives, and other displaced pharma industry employees with available positions in the state, in medtech and other industries.

3. Nurturing environment for continuing research and entrepreneurship
During our tour of the Pennsylvania Biotechnology Center of Bucks County, chief business officer Nelson Carvalho reported that the while the number of new inventions reported by universities has increased 50 percent over the last three years, 97 percent of those inventions will never make it to market. In a state that ranks fourth in the nation in academic R&D expenditures (according to Pennsylvania BIO), lawmakers, universities, and corporations are working together to ensure that important discoveries make it into the hands of people who need them, by fostering ongoing research and improving technology transfer.

One way they are accomplishing this is through the Biotechnology Center and other regional business and research incubators, where spinoffs from local educational institutions (and others) can take root and grow. These facilities provide researchers and entrepreneurs with inexpensive lab and office space, shared equipment and resources, business support, an intellectual community, and, perhaps most importantly, a collegial environment. Mike Dugery, president and CEO of Advanced Vertebral Solutions, said that he regularly interacts with other device makers at the Biotechnology Center, discussing issues like the device tax and regulatory requirements. And several companies we met there said the opportunity to collaborate with researchers from other disciplines (e.g., pharma and biotech) was a big draw.

Here are just a few centers for research and entrepreneurship in the state:

  • The Pennsylvania Biotechnology Center of Bucks County (Doylestown) is home to 50+ organizations, including eight medical device companies. Unlike other incubators, the center does not have a time limit on its leases, so researchers can invest as much time necessary to develop their technologies.
  • Founded in 1963, the University City Science Center (Philadelphia) is the oldest and largest research park in the U.S., and has “graduated” more than 350 companies. Its new Quorum facility provides a dedicated space for entrepreneurs and innovators to gather, connect, and participate in special educational programs.
  • The Wistar Institute (Philadelphia), the nation’s first independent nonprofit biomedical research facility, focuses on fundamental research, particularly in the areas of autoimmune disorders, age-related disorders, and cancer. Wistar has been a designated National Cancer Institute Cancer Center for the last 40+ years.

In addition to supporting many such facilities, the Pennsylvania government offers other incentives to encourage research and entrepreneurship in the state, through vehicles like the Research & Development Tax Credit and the Discovered and Developed in PA Program (D2PA).

4. Ample funding and support
Pennsylvania doesn’t just support incubators and provide R&D tax breaks to stimulate entrepreneurship and technology transfer; it also provides capital directly to medical device and other life science companies in the form of grants and other direct funding.

Several of the medtech startups we visited on the tour had (at one time or another) received grants from Ben Franklin Technology Partners (BFTP), an initiative of the DCED. Since its establishment in 1982, BFTP has invested more than $170 million to help more than 1,750 entrepreneurs, startups, and early-stage and established companies grow their businesses. In fact, the program this week committed close to $1 million to nine early-stage companies in Southeastern Pennsylvania, including a diagnostics company, a medical device maker, and a healthcare technology company.

Three Pennsylvania Life Sciences Greenhouses also provide early-stage and follow-up funding and support to promising life science ideas: BioAdvance (Biotechnology Greenhouse of Southeastern Pennsylvania), the Life Sciences Greenhouse of Central Pennsylvania (LSGPA), and the Pittsburgh Life Sciences Greenhouse. Established through funds from the state’s settlement with the tobacco industry, the greenhouses identify life science researchers and entrepreneurs with great potential and help them bring their ideas to market. To date, the Greenhouses have funded nearly 200 companies and projects, which in turn have produced 175 different life-saving technologies.

DCED promises that the support will be ongoing. Earlier this year, Pennsylvania launched the Innovate in PA program, which enables the DCED to sell up to $100 million in tax credits to insurance companies in the state. Revenues generated by the sale will support BFTP and the three greenhouses.

5. Low cost of doing business
Pennsylvania Governor Tom Corbett was named 2013 Governor of the Year by the Biotechnology Industry Organization (BIO) for his contributions to building the life science industry in the state.

Possibly the biggest contribution Corbett has made during his tenure is creating a favorable tax climate for businesses. According to Business Xpansion Journal, taxes haven’t been raised in Pennsylvania over the last three years, the corporate loans tax and inheritance taxes on small businesses have been eliminated, the cap on net operating losses has been raised (to $4 million or 25 percent of Pennsylvania taxable income for 2014, and $5 million or 30 percent for 2015 and beyond), and a $5,000 startup business tax deduction has been implemented.

Pennsylvania also boasts a manufacturing tax exemption. Manufacturers with a facility located in PA are exempt from taxation on property (materials and supplies) incorporated into the manufactured product, and on property and equipment used “predominantly and directly” to produce the product.

In general, it is less expensive to run a business in Pennsylvania than it is in many competing states. For instance, Class A office space is considerably cheaper in the Philadelphia area than it is in the other large metropolitan regions of the Northeast, including New York, Boston, and Washington, DC. Philadelphia is also more affordable than other top-10 U.S. metro areas like Los Angeles, San Francisco, Chicago, and Houston.

6. Abundant, inexpensive energy
While the use of “fracking” (hydraulic fracturing) has been a point of contention in Pennsylvania (and elsewhere), there can be no debate about the effect the state’s natural gas boom is having on energy prices. The cost of wholesale electricity in Pennsylvania has plunged more than 40 percent in the past five years, thanks primarily to the increased use of natural gas as a power generation source. And purchased gas rates have dropped by more than 50 percent during that timeframe.

Natural gas isn’t the only natural resource driving Pennsylvania’s low-cost and less-volatile energy prices. The state is rich in oil, coal, nuclear, hydropower, wind, solar, and other renewable sources of energy.

7. Transportation infrastructure
Coming all the way back around to the subject of location, it doesn’t matter how close your facility is to important markets or sites if you can’t quickly move products, supplies, or people to/from them.  Fortunately, Pennsylvania has a multimodal transportation network that connects the state’s companies with the rest of the country and the world. It contains a well-connected system of interstate highways, national passenger rail lines, Class I freight railroads, regional and international airports, and seaports.

Speaking of ports, the U.S. Army Corps of Engineers is currently dredging 112 miles of the Delaware River between the Port of Philadelphia and the Delaware Bay. This project will deepen the channel from 40 feet to 45 feet, allowing it to handle larger vessels coming from the Panama and Suez Canal. The dredging is expected to be complete by the time the expanded Panama Canal opens in 2016.

Why Should You Care?
If you are looking to start a medtech business, move a medtech business, or open a manufacturing facility, U.S. headquarters, or East Coast office, Pennsylvania should definitely be on your short list for site selection. B. Braun Medical SVP and CFO Bruce Heugel summed it up nicely during our visit to his company’s 450,000-square-foot manufacturing center in Allentown: “Many best of breed medical device companies are already here, and more global players will come — it’s just a matter of time.”

If your company is based in Pennsylvania, what are your impressions of working in/with the state? If not, why did your company pick another state? Please share your opinions in the Comments section below.

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