Honing the Edge

A bio border battle

  • Article by: THOMAS LEE , Star Tribune
  • Updated: March 23, 2011 - 4:52 PM

Part 1: Wisconsin has biotechnology investment down to a science, bounding ahead of Minnesota with a broad, tax-friendly strategy. Coming tomorrow, part 2: Badger State's tech boom.

Harry Norris, president and CEO of Rapid Diagnostek. The company was started in Minnesota but moved to Hudson, Wis., because the state’s tax credits enabled Wisconsin investors to back the company.

Photo: Glen Stubbe, Star Tribune

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HUDSON, WIS. - Rapid Diagnostek is one of Minnesota's most promising start-ups in biotechnology. The company has raised about $2 million to develop a portable device that can quickly diagnose diseases by analyzing blood, urine and saliva. Rapid Diagnostek was recently named a finalist in the biosciences category in the Minnesota Cup, an annual state competition for entrepreneurs.

Only one problem: Rapid Diagnostek is based in Wisconsin.

Last year, the company moved its headquarters from St. Paul just across the river to Hudson, Wis. The state's generous tax breaks for angel investors -- individuals who typically pump $5,000 to $300,000 into a start-up -- allowed Rapid Diagnostek to secure a better deal across the border.

"It's real simple," said founder and chief technology officer Dick Van Deusen in his Hudson office. "We could get the money here and not over there," referring to Minnesota.

As football fans and players prepare for Saturday's showdown between Wisconsin's Badgers and Minnesota's Gophers at the new TCF Bank Stadium, it's obvious to those close to this industry that the biotech rivalry between the two states is just as spirited. And that Minnesota is the underdog.

When it comes to innovation, especially in biosciences, Minnesota is quickly falling behind its neighbor. Besides Rapid Diagnostek, a highly touted drug start-up spun off from the University of Minnesota called VitalMedix Inc. also moved to Hudson because it could not find financing in its home state. U officials also warn that a planned biotech start-up from renowned scientist Dr. Doris Taylor might leave Minnesota if it can't find local inancing.

The flight of promising homegrown biotech start-ups to Wisconsin does not bode well for Minnesota, a state that depends heavily on medical technology for economic growth and well-paying jobs. While Minnesota is one of the world's top producers in heart-related mechanical devices like stents and pacemakers, experts predict biotechnology -- the use of DNA to predict and diagnose diseases and develop lifesaving treatments -- will drive medical innovation over the next century and beyond.

Wisconsin has become the regional biotech equivalent of traditional high-tech powerhouses like Boston, Silicon Valley and Research Triangle Park in North Carolina, thanks to strong political support, an influx of investor capital and what is arguably the most formidable university technology transfer program in the country.

"Wisconsin is a very exciting place," said Peter Bianco, a former executive with Nerites Corp. and a current scientific advisory board member at Flex Biomedical in Madison. "You just get this sense of forward motion. Wisconsin is doing something right. I would like to see Minnesota do the same."

Bianco, now director of life science business development at Halleland Health Consulting in Minneapolis, said Wisconsin is poaching talent to create biomedical technology that can't be easily replicated.

Minnesota has poached some talent of its own. Biotech guru G. Steven Burrill, a University of Wisconsin-Madison alumnus, is trying to raise a $1 billion fund to create a bioscience center in Pine Island, Minn., that will spin off technologies from the U and Mayo Clinic.

Tim Mulcahy, the U's vice president of research, is a former vice chancellor of research policy at the University of Wisconsin-Madison. Under his tenure, the U has revamped its once-moribund technology transfer office, boosting licensing income and spinning off six start-ups since 2006. The school is also constructing a $292 million "Biomedical Discovery District" to speed the commercialization of university medical research.

But despite the recent progress, Minnesota lacks a comprehensive strategy like Wisconsin to pull it all together, Mulcahy said.

"We've done a good job running the first leg of the relay race," Mulcahy said. "But who are we going to pass off the baton to?"

Consider the competition:

•Since 2007, three biotech start-ups that spun off from the University of Wisconsin-Madison fetched $1 billion from outside buyers, a greater value than the 107 companies that the University of Minnesota spun off over the past 25 years.

•University Research Park (URP) in Madison currently hosts more than 115 companies, with 95 percent of them originating from the University of Wisconsin. The University Enterprise Laboratories in St. Paul is home to about 25 companies, none from the U.

•Wisconsin's most recent state budget more than triples the annual pool of credits for angels and venture capitalists from $11.5 million to $37 million. Minnesota has no such credits.

•Wisconsin boasts 22 angel groups that collectively spent $15 million on 53 local deals in 2008 alone. Minnesota has no comparable statistics on angel financing.

"How is Minnesota going to catch up?" said Rapid Diagnostek CEO Harry Norris. "They need a quantum leap to catch up."

Minnesota, of course, is home to a world-class research hospital in the Mayo Clinic and major medical device firms like Medtronic, Boston Scientific Corp., and St. Jude.

But analysts say the Badger State is light years ahead of Minnesota in creating biotech companies, thanks in large part to the Wisconsin Alumni Research Foundation (WARF) and University Research Park (URP).

WARF, a nonprofit group that manages intellectual property for the University of Wisconsin, oversees assets of nearly $2 billion. The organization holds equity stakes in about 40 university-related start-ups and maintains nearly 500 licensing agreements.

Money talks

While WARF and URP are crucial factors to the state's biotech success, Accelerate Wisconsin, a comprehensive series of tax incentives to encourage innovation, tie it all together.

"We have great institutions that have grown up over the years," said Wisconsin Gov. Jim Doyle. "We had a lot of pieces to this. What it really needed was an overall vision and overall game plan to put all of those pieces together. With Accelerate Wisconsin, and how we changed tax laws, we really worked in a coordinated effort to shore up the areas that we needed to improve."

Despite facing a $6.5 billion deficit, state legislators passed a budget that boosted angel investor tax credits from $5.5 million to $18.25 million and venture capital credits from $6 million to $18.75 million. To further sweeten the pot, Wisconsin now allows out-of-state investors to accumulate tax credits and sell them to anybody with a Wisconsin tax liability. The budget also allows investors to write off 100 percent of their capital gains taxes, up to $10 million, if they reinvest that money in another Wisconsin start-up.

By contrast, fierce political disputes over how to close a $5 billion budget deficit foiled attempts to offer similar tax credits to Minnesota angel investors this year. Republican Gov. Tim Pawlenty, who supports angel tax credits, nonetheless vetoed a bill passed by the DFL-controlled Legislature that contained investment credits but also tax increases that he staunchly opposed.

Yet, encouraging biotech innovation -- even during a recession -- has proven to be a nonpartisan issue in Wisconsin, said Doyle, a Democrat. What also helped? The tax credits actually work, the governor said. Last year, angel investors spent $15 million on 53 deals in Wisconsin compared with just $1.74 million and 11 deals in 2003, according to the Wisconsin Technology Council.

"The results were demonstrable," Doyle said. "We knew it worked. My biggest challenge in this huge economic downturn, and the state's budget problem, is to not back off the things that are working. The consequences in the long run would be much worse than making it right now."

Wisconsin's tax credits alarm many in Minnesota. "Even if Wisconsin takes a couple of companies a year, that's significant," said Joy Lindsay, president of StarTec Investments, an angel investment firm in Bloomington. "It's not only Wisconsin's tax credits. They seemed to have gone further and set up an environment to help investors and entrepreneurs. We don't have that."

The Pawlenty administration is weighing ways for the state to invest millions of dollars in a start-up the U plans to spin out later this year based on the work of Taylor, a renowned expert in tissue regeneration.

Pawlenty plans to support angel tax credits again in 2010, said spokesman Brian McClung. Pawlenty also has funded the Minnesota Partnership for Biotechnology and Medical Genomics between the University of Minnesota and the Mayo Clinic and Hospital and signed into law "Bioscience Zones" that provide tax exemptions for bioscience companies in the Twin Cities and Rochester. 

While Mulcahy says he hopes the Taylor start-up will stay in Minnesota, the U will do what's best for the company's survival.

"Technology does better when a company is located near the inventor," Mulcahy said. "How do we compete with Wisconsin? We're thinking about planting the seeds of an innovation ecosystem. But sometimes, you have to put it in someone else's topsoil."

Thomas Lee • 612-673-7744

  • about this series

  • A continuing series on innovation in Minnesota.
  • related content

  • Tim Mulcahy, University of Minnesota vice president for research

  • Rapid Diagnostek

  • HONING THE EDGE LOSING OUT TO WISCONSIN'S BIOTECH MIRACLE

    First of two parts

    To read the Honing the Edge project, go to www. startribune.com/edge

    For more information and analysis, go to the Patent Pending blog at www.star tribune.com/blogs/pending.

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