<figcaption>THE FUTURE OF FEDERALISM? States take the lead role over government in funding. Credit: © BROOKS KRAFT/CORBIS</figcaption>
THE FUTURE OF FEDERALISM? States take the lead role over government in funding. Credit: © BROOKS KRAFT/CORBIS

Lately, individual states have become more interested in the ramifications of life sciences research and more assertive in forming policies that affect it (see "The State of Science Funding," The Scientist, March 2006). Both large and small states are now spending billions of dollars to support bioscience research and infrastructure (for examples, see www.battelle.org/news/06/default.stm). This "new federalism" in life sciences policy is directly linked to the combination of powerful economic incentives, and slowed or stalled federal initiatives related to healthcare and funding for R&D.

Clearly, state and federal governments must work together to develop coherent policies that simultaneously use scarce funding resources wisely, promote better health outcomes, and encourage economic development. Here's how:

Encourage understanding of the relationship between direct funding for basic research and the need for infrastructure....

Recognize that successful technology transfer does not necessarily translate into immediate regional economic gain.

Underpinning many state life sciences policies are four key assumptions: 1) a direct linear relationship exists between research capacity and commercialization; 2) states can, and should, fund research that the federal government finds unpalatable; 3) technology transfer can be made more efficient, and 4) states that encourage transfer of technologies from home institutions will realize direct economic gain. These assumptions are at best only partially true, particularly in a global economy.

Even among states that attract the largest shares of research funding, commercialization success is variable. A recent report from the Milken Institute analyzing university biotechnology transfer and commercialization found that successful commercial activity requires effective tech transfer, a culture of entrepreneurship, and appropriate venture capital. The top five universities using this index (Massachusetts Institute of Technology, the University of California system, California Institute of Technology, Stanford University, and the University of Florida) all have robust or rapidly growing venture capital communities. Although the University of North Carolina ranked 25th, it is part of the strong commercial culture in Research Triangle.

Continue cooperative workforce development efforts between state and Federal governments at all levels.

A robust life science sector requires a continuum of employees, ranging from technicians through senior management. State and federal policies are more often aligned than not on this point, but both sides would benefit from cultivating a deeper understanding of how federal funding influences the development and movement of top scientists, and from greater recognition of the role business management talent plays in the success of emerging companies.

With the National Institutes of Health and the National Science Foundation providing the majority of training grants, federal policy has a significant impact on what students study and where. Federal policies also indirectly affect the movement of more senior talent, usually by creating new centers that, in turn, attract top-tier talent. States have moved to more directly influence the movement of top-tier funded scientists through "eminent scholars and stars" programs such as the Georgia Research Alliance. These programs can have significant local impact, but proponents should recognize that they might not necessarily translate into commercial activity.

Beyond the desire to attract and train senior scientists is the need to manage talent. Recognizing this, states have responded with executive-in-residence programs, combined MBA/PhD programs, accelerator programs, and the like. State governments are in a better position to provide support for novel programs focused on development of scientific and management talent; they can leverage federal support for doctoral or postdoctoral training with tuition remission programs for students taking MBA or related management classes. Moreover, considerable state-driven activity promotes workforce development at the technician level; often, these programs are fed by, and/or developed in cooperation with, federal Department of Labor programs designed to retrain and retool workers from waning, legacy industries. Future programs should focus on technical workforce development starting as early as high school, since workforce retraining of legacy workers may not be as effective.

States should seek to establish vehicles for the independent vetting and funding of companies at their earliest and most vulnerable stages.

The venture capital and overall business climates are of critical importance to life sciences startups. States must ensure that incentive programs complement federal R&D expenditures and align with federal tax policies. For example, several states have adopted matching programs for Small Business and Innovative Research (SBIR) grants, while others have leveraged state funding for larger federal initiatives. From a tax policy standpoint, states can have tradable R&D tax credits and tradable NOL (net operating loss) carry-forward features.

State policies less easily influence private equity markets, as the venture community is sensitive to a wide range of factors, including venture economics, geography, industry sector, and stage of business development. Still, many states are taking novel approaches to enhance the attraction of venture capital. In Pennsylvania, the Life Sciences Greenhouse program and Health Venture Account Program are highly effective at focusing seed and venture capital along with business services to promote commercialization. More states should consider using a portion of their funds from tobacco suit settlements to catalyze research commercialization, as these independent organizations have the talent to vet commercialization in their respective states. Some, like Maryland, have direct state venture funds, which generate direct as well as indirect returns (from successful companies providing tax revenues). A potential downside to such funds is the need for annual appropriations, which are often affected by political and budget pressures.

Federal policies generally do not govern where venture funds invest or reside, but recent federal policy has restricted SBIR funding from startups whose equity is held 51% or greater by venture funds. This policy is at odds with state programs that are trying to enhance the success rates of SBIR funding and to attract venture funds. Several federal legislative initiatives are currently in debate to address this issue. The best solution is to allow venture-backed funds that meet the other criteria for SBIR and STTR (small business technology transfer) programs to compete for these important nondilutive grants; this requires a legislative fix at the federal level and is crucial for developing life sciences companies.

A final approach to capital formation used by states is via bonding. Such bonding can be linked to the general good faith and credit of a state (e.g., California Stem Cell Initiative) or to some form of annualized income stream. However, reliance on one technology, regardless of how promising at the research stage, may not translate into commercial success and economic returns. A broad portfolio of research and commercialization activities is a better way to approach this.

States should form, at a high level of responsibility, a science advisory board to help sort through some of the major issues in state policy and actively foster relationships at the federal level.

A few models for the harmonization of federal and state goals do exist. They include PharmaStart (California), the Critical Path program (Arizona), Life Science Greenhouses (Pennsylvania), Edison Partners (Ohio), and Tedco (Maryland). None of these models can do everything necessary to mitigate the need to balance research and health concerns with economic development issues.

Individual states cannot duplicate the breadth and depth of policy initiatives of national agencies such as the NIH, NSF, Centers for Medicare and Medicaid Services, and the Food and Drug Administration, nor should they try. They should, however, create a mechanism for senior-level input at the cabinet or gubernatorial level from objective, knowledgeable scientific advisors, and pursue partnerships with federal agencies as they forge ahead.

Melvin L. Billingsley is president and CEO of the Life Sciences Greenhouse of Central Pennsylvania, where Michele M. Washko is vice president for strategic services. mbillingsley@the-scientist.com

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