19 May The Making of Chicago as a Biotech Cluster
On May 15, I had the opportunity to attend an exciting Chicago networking event that was organized by Women Advancing Biosciences. The event featured a presentation by professor Alicia Loffler, who is the director of the Kellog Center for Biotechnology at Northwestern University.
Loffler’s presentation addressed the key biotech clusters in the U.S. and the core ingredients needed to make these clusters grow and prosper.
Her presentation was a summary of data from the Brookings Institution’s 44-page report entitled “Signs of Life: The Growth of Biotechnology Centers in the United States,” which was issued in June 2002 and included key findings from Michael Porter of Harvard University, who is the expert on comparative and competitive advantage and clusters.
As Loffler remarked on this report, which summarizes biotechnology research and commercialization in the 51 largest U.S. metropolitan areas, there are nine key biotech clusters in the U.S. that comprise 75 percent of U.S. biotechnology. They include the following metropolitan areas (in alphabetical order):
2. Los Angeles/Orange County
3. New York/Northern New Jersey
4. Research Triangle (Raleigh-Durham/Chapel Hill, N.C.)
6. San Diego
7. San Francisco/Oakland/San Jose
9. Washington, D.C./Baltimore
According to the Brookings report, five of the above nine centers (Boston and San Francisco as the traditional leaders, which are followed by the rapidly growing areas of San Diego, Seattle and Raleigh-Durham) have accounted for:
1. 75 percent of new venture capital in biopharmaceuticals in the past six years
2. 74 percent of the value of the research contracts from pharmaceutical firms
3. 56 percent of the new biotech businesses formed during the 1990s
Together with the other four areas, the nine areas represented:
1. 60 percent of all NIH spending on research
2. Almost 67 percent of all biotechnology-related patents
3. 95 percent of the research alliance dollars
4. 75 percent of the biotech companies with 100 employees or more
As for the other 42 metropolitan areas, the Brookings report divides them into three groups:
1. Research Centers
Four metropolitan areas with research activities above average but below average in commercialization (note that three of the four are in the Midwest):
Detroit/Ann Arbor, Mich.
2. Median Metropolitan Areas
28 metropolitan areas that have some biotechnology research and commercialization but at levels well below the average . The Midwest features seven cities in this category:
3. Columbus, Ohio
5. Kansas City
7. Minneapolis/St. Paul
3. No Significant Biotech Research and Commercialization
10 metropolitan areas that have no significant biotech research activities or commercialization. The Midwest had one city in this category:
Grand Rapids/Holland, Mich.
What is a Cluster?
According to Porter (who I was lucky enough to have as a visiting professor during an M.B.A. program that I started in the late 1970s while studying at the Universidad Técnica Federico Santa María in Santiago, Chile) in his November-December 1998 Harvard Business Review article on “Clusters and the New Economics of Competition,” a cluster is a geographic concentration of interconnected companies and institutions in a particular field.
Clusters include governmental and other institutions (such as universities, standards-setting agencies, thinktanks, vocational training providers and trade associations) that provide specialized training, education, information, research and technical support.
“A cluster’s boundaries are defined by the linkages and complementarities across industries and institutions that are most important to competition,” Porter wrote. “Clusters promote both competition and cooperation. Rivals compete intensely to win and retain customers. Without vigorous competition, clusters will fail.”
According to Porter, clusters affect competition in three ways by:
1. Increasing the productivity of companies based in the area
2. Driving the direction and pace of innovation
3. Stimulating the formation of new businesses, which expands and strengthens the cluster
Porter also recommends that governments working with the private sector should promote cluster formation by reinforcing and building on existing and emerging clusters rather than attempting to create entirely new ones.
Another perspective on clusters (not just biotech here) was recently published by Forbes in its May 26, 2003 article on “Cluster Creation” by Ross Devol, who is the director of regional and demographic studies at Milken Institute . According to Devol, there are four key ingredients in successful clusters:
2. Human capital
With reference to innovation, knowledge is shared more efficiently in close proximity. The resulting economic activity tends to cluster geographically and is less likely to escape to other regions.
A leading measure of this is patenting activity. Devol says Rochester, N.Y. (Kodak land) is No. 1 among the nation’s top 50 metropolitan areas with 2.3 patents per thousand workers versus 1.5 in the San Francisco Bay area and 0.8 in San Diego. Another key metric is academic R&D relative to total employment . In this category, the leaders are Raleigh-Durham, Boston and Greater Washington, D.C.
In the realm of human capital, talent and experience draw ambitious companies. A composite score based on a weighted average of advanced and bachelor’s degrees ranks Greater Washington, D.C. as the most educated metro area in the U.S. followed by San Francisco, Denver and Minneapolis.
Another metric is percent of the workforce (managerial, professional and technical jobs) with the resultant ranking Washington, D.C. (48 percent); Hartford, Conn. (46 percent); and Minneapolis-St. Paul (45 percent).
In globalization, success turns on the ability to exploit international opportunities. Two metrics here are the share of recent immigrants as a percent of the working population and the export sales per manufacturing employee. In the first metric, San Francisco is the leader (26 percent) followed by Miami (17 percent), New York (15 percent), Los Angeles (12 percent) and San Diego (5 percent).
In the latter metric, Seattle is the leader ($129,000) followed by Miami ($127,000); Richmond, Va. ($86,000); and San Francisco ($80,000).
The dynamism ingredient focuses on the ability to start and sustain companies. Although the number of new businesses created is a good metric, Devol states that a powerful measure is the number of IPOs per $10 billion of gross metro product. The leader here is San Francisco followed by Seattle, West Palm Beach and Boston.
Another metric is the number of jobs in fast-growing companies as a percent of total employment. The leaders here are Orlando, Las Vegas, Charlotte and San Francisco.
If we cross the above with the Brookings study, there certainly are some common metro areas that stick out. Still, there are a lot of surprises. Also, we must take into account that much of the Brookings study was based on data accumulated during the late 1990s, which was then analyzed and from which conclusions have been drawn.
But what has happened since? According to the Forbes article, the bad news is that the biotech clustering effect around the leading centers has concentrated even more, which we can see below:
Life Science Firms
VC Money Raised
SF Bay Area
However, you pay a price for operating and living in these areas (or do you?). An April 15, 2003 ranking by Genetic Engineering News of total annual costs to operate a biotech company’s facility looked at the cost of operating a 100-worker biotech R&D center for 48 American cities:
Rank Biotech Facility Location Annual Operating Cost % vs. Leading Area
1 San Jose, Calif. $12.1 million 100% 2 San Francisco $11.9 million 98% 3 Fairfield County, Conn. $10.7 million 88% 4 Boston $10.6 million 88% 5 Nassau/Suffolk Cty, N.Y. $10.3 million 85% 6 Princeton, N.J. $10.2 million 84% 7 Chicago $10.2 million 84% 8 Philadelphia $10.1 million 83% 9 San Diego $10.0 million 82% 10 Middlesex/Somerset, N.J. $10.0 million 82% 19 St. Louis $9.2 million 76% 22 Cleveland $9.2 million 76% 28 Madison, Wis. $9.0 million 74% 29 Milwaukee $9.0 million 74% 30 Kansas City $8.9 million 73% 33 Raleigh-Durham, N.C. $8.7 million 72% 34 Columbus, Ohio $8.7 million 72% 35 Des Moines, Iowa $8.7 million 72% 36 Minneapolis-St. Paul $8.7 million 72% 48 Montreal, Canada $8.0 million 66%
Note: Cities displayed in red are in the Midwest
Is Chicago and the Midwest a Cluster?
In Loffler’s presentation, the argument was presented that Chicago doesn’t yet have a biotech cluster. During the Q&A afterward, I suggested that our relevant biotech cluster was not the city of Chicago but the entire Midwest, which when lumped together would appear to have the critical mass seen in other areas.
She responded that the cluster must be geographically concentrated to have the positive cluster effects and that by driving several hours or flying by plane to another area defeats the benefits of this concentration (the interplay of both competition and cooperation that increases productivity).
Well, while anyone who has been to Boston knows there is an intense concentration of companies in Cambridge, many companies can’t afford Cambridge’s high rent (and the lengthy rush-hour commute) and have moved to the suburbs and Worcester, which can be at least an hour away.
Likewise, the San Francisco Bay area is extensive when one takes into account not only south San Francisco but San Jose and Oakland. These areas can often be at least an hour or two away from each other.
So let’s draw a radius of about two hours from Chicago. What do we get? We certainly get the almost 80 companies in the Chicago metro area, another 50 or more in the Madison and Milwaukee areas and those around Champaign-Urbana and Peoria. An additional two hours gives us Indianapolis and Kalamazoo (and even Ann Arbor), which adds perhaps another 100 companies to our “enlargened” cluster.
I agree with Loeffler that you can’t use the entire Midwest as a biotech cluster since you would dilute the concentration effect, but if we wrap in an area of a four-hour radius from Chicago (by car of course!), you are probably approaching more than 230 companies (not to mention all the large life science companies and major universities).
What is probably still missing in the equation is the number of VCs working in the life science arena and sufficient government involvement and incentives to stimulate this cluster (although Wisconsin and Michigan are certainly doing their part to stimulate fast growth in life science company and job creation). Just some food for thought.
Michael S. Rosen is the vice chairman of human health at the Illinois Biotechnology Industry Organization (IBIO. He can be reached at email@example.com . This article has been syndicated on the Wisconsin Technology Network courtesy of ePrairie , a user-driven business and technology news community distributed via the Web, the wireless Web and free daily e-mail newsletters. They can be found at www.eprairie.com