The Midwestern city of Kalamazoo lost its pharmaceutical anchor but scrambled to keep its scientists. Is there a lesson for other regions - and researchers?
On a spring morning in April 2003, thousands of people reported to work in Kalamazoo, Mich., to find that their future with their new employer, Pfizer, the largest pharmaceutical company in the world, was on the line. In hindsight, Pfizer's 6,300 employees in this small Midwestern prairie town should have seen the layoffs coming. Before acquiring Pharmacia in a $57 billion deal earlier that month, the company had no major ties to Kalamazoo. Pfizer's headquarters was in Big Pharma country on the East Coast, and it had notified Kalamazoo officials in a letter that layoffs were imminent.
But pharmaceutical research in Kalamazoo wasn't just a job; it was a way of life. For more than a century, southwest Michigan scientists had been conceiving, testing, and producing new compounds in Kalamazoo County. Long before Pfizer came to town, or Pharmacia, there was The Upjohn Co. (see timeline below), the namesake of W.E. Upjohn, the man who would become Kalamazoo's first mayor. "We were convinced that Pfizer was going to see the light and see what a stellar operation we had in Kalamazoo," says Phil Burton, a scientist who had been there for 20 years. "And boy, were we wrong."
Pfizer announced that it was eliminating research and development operations in Kalamazoo, slashing some of the city's highest paying jobs, and moving them to places such as California and Connecticut. The 1,200 jobs that would disappear in the months ahead was a devastating blow to Kalamazoo - a city of 77,000 people with 24% of its residents living in poverty. It had a history of losing companies: Checker Motors, makers of the iconic Checker cab, stopped production in Kalamazoo in 1982; Gibson Guitar, another local company, moved to Nashville, Tenn., two years later. The city's General Motors stamping plant closed its doors in 1998, eliminating more than 1,000 jobs, and the area's paper mills began closing a few years later. Now the city was facing perhaps its most troubling economic loss yet, the loss of its educated upper-middle class.
Kalamazoo's impending job cuts were part of a pharmaceutical trend that continues to this day. According to Chicago-based outplacement firm Challenger, Gray & Christmas, the industry has lost some 87,000 pharmaceutical jobs globally since 2000 as large pharmaceutical companies have merged and consolidated. Job shedding reached a peak of 28,519 in 2003, according to the Challenger study, but 2005's totals nearly topped that, says John Challenger, as companies faced drug recalls, legal problems, and increased generic competition. To make matters worse, industry analysts say Big Pharma's drug pipeline has run dry. There are few blockbuster drugs on the horizon, no big money makers about to hit the market, and potentially no end in sight to consolidation, say industry observers.
In 1886, William Erastus Upjohn founded a company in Kalamazoo based on a machine capable of making a readily dissolvable pill. The Upjohn Pill and Granule Co. became a fixture in the city, and Kalamazoo became a company town. Over the next 100 years, Kalamazoo helped produce everything from penicillin to Rogaine. By 1995, Forbes magazine estimated that the family's shares alone were worth $1 billion.
But at the same time, the company was struggling, facing stiff competition from generic drugs, expiring patents on profitable products, and pressures wrought by an increasingly global economy. It laid off 2,400 of its 16,500 worldwide employees between 1993 and 1995, and then did what an increasing number of pharmaceutical companies were doing: It merged. The decision marked the end of an era in Kalamazoo and the beginning of new struggles that continue there to this day.
October 1995Upjohn shareholders approve the merger with Pharmacia, clearing the way for Pharmacia (the world's 18th largest pharmaceutical company) and Upjohn (the 19th largest) to become the 9th largest pharma company. The company becomes Pharmacia & Upjohn and moves its headquarters from Kalamazoo to Europe and later to Peapack, NJ. About 500 local jobs disappear over the next two years.
October 1997Pharmacia & Upjohn announce they are pulling its North American sales and marketing teams out of Kalamazoo. The city loses approximately 600 jobs and begins to gird for more changes.
Pharmacia & Upjohn announce plans to merge with Monsanto to compete in a fast-consolidating industry, and speculation soon begins on what will happen to the new company's holdings in St. Louis, Chicago, Kalamazoo, and New Jersey.
Pharmacia & Upjohn finalize its merger with Monsanto, removing the Upjohn name from the company title and choosing New Jersey as its headquarters. By June that year, the last Upjohn family member with an active role in the company - the great-grandson of W.E. Upjohn, Donald Parfet - announces he is leaving the company.
December 2001Celebrex, an anti-arthritis drug put on the market in 1999, comes to Pharmacia as part of the Monsanto merger and becomes the company's first true blockbuster. Sales for the drug reach $3 billion for the year. Industry insiders praise Pharmacia for its big year while Pfizer begins to eye its competitor.
July 2002Pfizer, the maker of Viagra and employer of some 4,200 people in Michigan, announces a $60 billion deal to purchase Pharmacia, which at the time employs about 6,300 people, and another 1,000 contract workers, in Kalamazoo County. The region braces for consolidation, transfers, and perhaps layoffs, while state leaders start trying to convince Pfizer that Kalamazoo is a good place to do business. By April 2003, state and local leaders have devised $635 million in incentives to keep Pfizer in Michigan. According to Barry Broome, the executive director of Southwest Michigan First at the time, the package is "unprecedented."
April 2003Pfizer announces it will transfer research and development operations from Kalamazoo, eliminate cancer research at its Ann Arbor campus, and close another research site in Holland. By the end of the year, nearly 1,200 local people have lost their jobs in Kalamazoo County. Workers in Chicago and San Francisco also take hits while Kalamazoo's Pfizer workforce shrinks to about 5,000 people, mostly in manufacturing jobs.
July 2005Pfizer announces a three-year plan to cut costs and increase efficiency worldwide, hoping to save $4 billion by ceasing discovery and development in Kalamazoo, consolidating its veterinary medicine research team just outside of town, eliminating more jobs in Holland, and moving still more work from Ann Arbor to Connecticut. Pfizer, which employs more people in Michigan than in any other place in the world, promises to keep a strong presence in Michigan. However, once again, the state prepares itself for yet another work force reduction.
Consolidation will continue in corporate research and development in Big Pharma, explains Ross DeVol, director of regional economics for the Milken Institute, a think tank in Santa Monica, Calif. "The question is: How much is there going to be?"
And where? DeVol says life science employees in New Jersey, the suburbs of Philadelphia, and other places where many of the big pharmaceutical companies have their headquarters should not be surprised about headcount changes in the industry. New Jersey, says DeVol, might be the most vulnerable, given Merck & Co.'s announcement last fall to layoff 7,000 workers in Pennsylvania, Georgia, and at home in the Garden State. Local leaders have taken notice. Christopher Marra, executive director of New Jersey's Morris County Economic Development Corporation, says the employee redistribution from mergers and acquisitions threaten his county's 24,000 pharmaceutical jobs more than almost any other market change. "That probably causes more job loss here than actual downsizing," he says.
That's why Kalamazoo is relevant. The Pfizer merger, and the job loss that followed, may have hit the city hard. Local leaders were ready for it, though, and the swift response by Southwest Michigan First, a local economic development group, may now serve as a model for how other communities might save their human capital from going elsewhere. "It's not just about the governor making an edict," says Peter M. Pellerito, a policy consultant for the Biotechnology Industry Organization (BIO) in Washington, DC. "A lot of responsibility for making it happen is at the regional level, the local level. I'm talking about county economic development agencies. I'm talking about Southwest Michigan First."
Nevertheless, challenges remain for Kalamazoo. Leaders there aren't happy with just holding on to the local Pfizer talent they kept from leaving town. Kalamazoo wants to become a life science cluster, carving out its own slice of an industry where revenues have more than quadrupled in the last decade, according to Ernst & Young. This means not just keeping pharma people already based in Kalamazoo, but attracting new entrepreneurs to the city. And that, according to some observers, may simply be too much to ask.
"We [in Kalamazoo] did a great job of providing an environment for really good ideas to be developed, and it still has potential to bear fruit," says George Erickcek, a senior regional analyst for the W.E. Upjohn Institute for employment research in Kalamazoo. "But if you think down the road, the question is: What about the second wave? That's going to be the challenge for Kalamazoo."
Kalamazoo has a lot going for it. According to the 2000 US Census, roughly 32% of Kalamazoo residents have a bachelor's degree or better, almost the same percentage as Boston. (For comparison: Chicago has 25%, San Francisco 45%, Philadelphia 17%, and in similar Midwestern cities: Cleveland has 11%, Cincinnati 26%, Detroit 11%, Grand Rapids 23%.) A local symphony and an art institute are found there, attractions not often seen in comparable cities. Downtown sparkles at Christmastime. Bronson Park, located in the heart of the city, is a town center straight out of the 1930s. And, plans are being made for the future. Bill Johnston, chairperson and president of Greenleaf Trust who recently oversaw the renovation of the Radisson Hotel downtown, says he wants to build a sports arena next.
Johnston, a high-school football coach turned stockbroker, is part of Kalamazoo's upper crust, the segment believed responsible for an anonymous pledge made last November to the city's public-school students. The Kalamazoo Promise will award scholarships to any state university for graduating public high-school seniors. The program, expected to cost donors millions in the years ahead, is seen as a way to attract people to Kalamazoo, which, despite its positive attributes, has its fair share of poverty and other problems, some of which may be tied to its losing some of its anchor companies. Downtown streets are often empty, storefronts vacant. At rush hour on a weekday, one can walk the pedestrian mall downtown - the first such mall ever built in the United States, in 1959 - and see only a few scattered souls. What hustle and bustle this area has is predominantly in Portage, to the south around Interstate 94, and also the rural townships surrounding downtown. There, chain stores stretch out for miles and the city's pharmaceutical scientists make their homes.
"It seemed like a good place to raise kids," says James McKim, who had his PhD in biochemistry and molecular toxicology when he took a job with Pharmacia & Upjohn in 1998. The divorced father of three says he had no plans to leave when Pfizer announced in April 2003 that his eight-person in vitro toxicology-screening group had been eliminated.
"After I talked with my group, I think I went home and cried," McKim recalls. "It was pretty traumatic. I didn't know how I was going to move and still see my kids."
Enter Southwest Michigan First, the organization that formed in 1999 to advocate for the Kalamazoo area. For years, the group and its executive director, Barry Broome, had seen this day coming. "I think the community realized we had to be proactive," explains Craig DeNooyer, a local businessperson and one of the founding board members. "Life as it had been for the last 20 years wasn't what it was going to be for the next 20." Broome quickly helped secure $5 million in state funding for a 58,000-square-foot innovation center, an incubator for startup life science companies. Construction began on a building that would end up costing some $13 million. Innovation forums were held, venture capital money raised, and, just months before Pfizer announced its cutbacks, Southwest Michigan First launched its "Stick Around" campaign. Broome wanted to save Kalamazoo's potentially departing human capital.
"It was on the radio," recalls McKim. "They were trying to promote: 'Hey, if you're a scientist, and you have an entrepreneurial spirit, we want to talk to you.' It reminded me of World War II: Uncle Sam wants you. It was like Uncle Barry wanted you and come on down and talk to him right now."
Most of the 1,100 people affected by the Pfizer cuts left town, hired away by other companies or reassigned within Pfizer to other cities. Pharmaceutical sales representative Don Kingery took another job with Pfizer, only to see that position eliminated in 2004. Steven Vroegop, an R&D scientist, couldn't get a job and, not wanting to leave, started doing floor repair to stay busy. Robert Kilkuskie, another R&D scientist doing infectious disease research, took a job in Virginia, leaving his family behind in Kalamazoo, while others, such as McKim and Burton, answered Broome's call.
"Many of us were reluctant entrepreneurs," says Robert Forgey, a discovery operations administrator, who was transferred to Kalamazoo by Pharmacia in 2002. "We wanted to stay in the area. We wanted to build something, yet we didn't know how we were going to raise money. Many of us were just finding out what the Midwestern venture capital environment was like. There was a lot of naïveté that went along with that."
McKim, not knowing what a business plan was, bought software at a local Best Buy store, hoping to learn. Jay Goodwin, a colleague of Burton's, says he, too, needed help and turned to a Business for Dummies book purchased at the local Barnes & Noble store. "I had four of those books," Goodwin says.
Help did come from Southwest Michigan First. The group started by sitting down with these fledgling business people, coaching them to think about the business behind their scientific ideas. "At the beginning, it was: 'What's a business plan? What's a product? Who's a customer?'" says Innovation Center CEO Doug Morton. "It was Business 101." The group also lobbied Pfizer to help departing scientists. Broome says he wanted to send this message: "It wasn't going to be good for Pfizer's reputation to be responsible for the demise of a small city in the Midwest." Pfizer responded. The pharmaceutical giant set aside $30 million to help local start-ups, a move that company spokesperson, Rick Chambers, says wasn't just charity. The money helped create partners, Chambers says, in an era of increasing pharmaceutical outsourcing. In the meantime, the state, which has spent more than $220 million on life science growth since 2000, responded by setting aside $2 million earmarked to help former Pfizer employees become entrepreneurs. Kalamazoo was determined not to be another burned-out Midwestern city, like its neighbors long abandoned by other major industries.
"Everybody in Kalamazoo said, 'Nobody's ever going to call us the F-word.' You know what the F-word is?" Broome asks. "Flint," he answers for himself, in a nod to the Michigan city some 130 miles from Kalamazoo that was devastated by General Motors layoffs in the 1980s.
The 14 businesses now up and running inside Southwest Michigan First's innovation center represent a cross-section of the R&D minds that Pfizer left behind. McKim and a partner formed CeeTox, a contract research organization (CRO) focused on evaluating new drug candidates and identifying toxicities so that safe drugs can get to the market faster. Burton and Goodwin, colleagues at Pharmacia for about a decade, started another CRO named ADMETRx that same summer at the Innovation Center, while Forgey and another Pfizer refugee launched ProNAi Therapeutics.
A biopharmaceutical company, ProNAi started at the Innovation Center in August 2003 with one room and no lab benches and an idea to develop new drugs that will target specific genes involved in diseases, such as non-Hodgkin lymphoma. The idea got the attention of not only the Innovation Center officials (who asked ProNAi to pay just one dollar for the first six months of rent), but also investors. Last October, based on the success of its early drug candidates to treat cancers, the company received $4.25 million in private investments. "It could be gigantic," enthuses Forgey, who expects the company to grow from five employees to 10 by the end of 2006, and who says other companies in the building are also in the hiring mode.
Johnston, the hotel developer, estimates that Southwest Michigan First has received $62 million since 1999, most of it from private investors. By the end of the first quarter of 2006, Patrick Morand, the managing director of the group's new venture capital fund, says he expects to begin dispersing some of the $50 million in its coffers. The goal is to attract the best ideas and the best scientists to Kalamazoo by giving them the funding they need.
"I think 10 years from now we'll see 8,000, maybe 10,000 jobs coming out of this," says Ron Kitchens, who replaced Broome as executive director of Southwest Michigan First last year when Broome took a job in Phoenix. "But it's all going to be back-loaded. We're going to go five or six years and get growth of 25, 100 jobs a year."
The growth, says DeVol, is out there. In a Milken Institute report in 2004, he estimated that the biopharmaceutical industry would add 122,000 jobs by 2014 and some $60 billion in real output to the US economy. But, the competition for those dollars is strong. "Every state," says Morand, "has a life science play." And not every state can win by becoming the next Boston or San Diego. "It's the nature of a hub," says Scott Wallsten, resident scholar at the American Enterprise Institute, a Washington, DC, think tank. "There can only be a small number of them." (See Eight Ingredients to Build a Life Sciences Hub")
Moreover, the attempts to become a life science or biotech cluster aren't confined to the United States. "It's just as big of a fad internationally as it is here," says Wallsten. Indeed, Ernst & Young issued a study in 2005 that reports international growth in the industry is exploding as companies look to become more efficient and competitive by exploring options far from home.
Increasingly, companies are going international through alliances, mergers, and acquisitions. Ernst & Young reported that the number of cross-border alliances grew by 14% in 2004, a trend that is expected to continue as developing countries, such as China and India, work to get a slice of the pie. These countries will benefit from resources already in place in the United States and other countries, Ernst & Young concluded. Joe Cortright, author of a 2002 report for The Brookings Institution about biotech clusters in US cities, says these countries face problems similar to Kalamazoo's: They lack experienced biotech venture capitalists and top managerial talent.
Kitchens knows this, yet he is undeterred. Last year, he hired a New York City marketing firm to help Kalamazoo tell its story (see Can You Host the Next Biotech Hub?), and in the year ahead he hopes to begin attracting the next wave of startups, out-of-town entrepreneurs who have never set foot in Kalamazoo. "It's not an easy task, that's for sure," says Morand, the manager of the $50 million venture capital fund, who has been courting new talent. "This is not a known community." Even some locals don't pay much attention to the startup companies on the edge of town. In a forum held in downtown Kalamazoo in December 2005, which focused on the 2006 economic outlook in western Michigan, a panel of local economists talked about the need to shift to a knowledge-based economy. But they didn't mention the new startups even once.
"I think Kalamazoo is a great town," says W.E. Upjohn Institute's Erickcek, one of the panelists. "I think people are impressed by what has been created to support entrepreneurs. But we are away from the excitement, away from the clusters of pharmaceutical activity ... We're trying to develop that cool sense of place, which many people would say is necessary for a knowledge-based economy. But we're not the North Side of Chicago. We're not Harvard Square. We're not that really, really exciting place to be. That's our size."