Philadelphia Business Journal

$140 million plus for Pa. tech innovation
October 5, 2012

by John George

Two suburban Philadelphia legislators introduced a bill last week designed to generate at least $140 million for cash-strapped biotech firms and other high-tech companies in Pennsylvania.

The legislation, introduced in the House by state Reps. Warren Kampf, R-Chester/Montgomery, and Joe Hackett, R-Delaware, calls for the creation of the “Innovate Pennsylvania Program” that would create a pool of state money that would be used to invest in high-tech industries and spur job growth while promoting entrepreneurship.

The program would not rely on any additional general fund expenditures.

Instead, the bill would allow for the auctioning of $175 million of deferred insurance premium tax credits to insurance companies obligated to pay the tax in Pennsylvania.

The insurance companies will not be allowed to claim the tax credits until the fourth year after the auction to provide the state with time to invest the proceeds in life sciences and tech companies. Those investments would, in theory, be used by companies to expand staff and to leverage additional private-sector investments. The result would be increased employment and tax revenue for the state that would generate additional revenue for the state, or at least offset any loss if the credits sell below face value.

The funds raised from the auction process would be used by the state to invest in technology-oriented businesses through its network of regional Ben Franklin Technology Partners and the state’s three life sciences greenhouses including BioAdvance, which has offices in Philadelphia and Radnor. The organizations are dedicated to helping launch and nurture startups.

“The economic downturn and the competition for jobs across the nation require us to come up with new and out-of-the-box ideas,” Hackett said. “The Innovate Pennsylvania Program is a prime example of how we can partner with the private industry to jump-start our economy.”

Kampf said because of “economic constraints,” the state’s investment in high-tech industries has been reduced from $53 million prior to the recession in 2008 to $14 million in 2011.

He noted states including New Jersey, Maryland, Ohio, New York, Colorado, Tennessee and Georgia all have programs in place — ranging in dollar value from $50 million to $200 million — to attract technology-based businesses.

“We have to be aware of those efforts and compete ourselves,” Kampf said. “These [high-tech] companies have good track records and this is a good time to put more resources into the mix. There is a good chance more venture capital money will follow.”

Sam Marshall, president and CEO of the Philadelphia-based Insurance Federation of Pennsylvania, said the insurance industry supports the program.

“It’s an efficient way to raise money,” Marshall said.

Not all insurance companies will choose to participate, he said.

“It will be an economic decision [for insurers],” he said. “It’s not some ‘gee-whiz’ great deal for us, it’s more an alternative way to pay your premium taxes. … It’s more a reduction in present value than a discount [on the tax payment].”

Marshall thought the program was a “creative approach” to economic development. “It’s also a creative approach to how to best use insurers’ premiums taxes,” he said. “Insurance companies are a very stable taxpayers to the Commonwealth of Pennsylvania. Our premium taxes are not based on profit or losses. They are paid every year.”

Christopher P. Molineaux, president of the Pennsylvania Biotechnology Association, said additional state support would help keep Pennsylvania as a hotbed for life sciences companies.

“Life sciences is a huge part of Pennsylvania’s economy,” Molineaux said. “The state has 2,200 life sciences companies (pharmaceutical manufacturers, biotech firms, and medical- and diagnostic-device companies) that employ about 79,000 people directly. We risk losing out to other states that have put together incentive programs to try to attract our talent and companies. This bill gives a much-needed shot in the arm to the innovation investment community.”

With Big Pharma companies laying off thousands of workers and outsourcing much of their drug discovery and development work, Molineaux noted, displaced scientists and executives are looking to start their own companies to perform the clinical testing and laboratory services sought by larger firms.

“This type of financial model can help fuel those type of startups and keep those people here,” he said.

Molineaux said the bill is modeled after a program in Maryland, but the difference is Maryland had to create a new authority to distribute the funds. Pennsylvania, he said, already has the Ben Franklin Technology Development Authority and biotechnology greenhouses in place.

“We can implement it immediately [if the legislation is enacted into law],” he said.

Under the proposed legislation, 93 percent of the money raised by the auctioning of the tax credits will be deposited into the Ben Franklin Technology Development Authority (BFDTA) fund and the remaining 7 percent will be split evenly among the greenhouses. Sixty percent of the BFDTA money would go to a venture investment program within the authority and the remaining 40 percent would go to the regional Ben Franklin Technology Partner organizations.

Pennsylvania Life Sciences Greenhouses in Philadelphia, Pittsburgh and Hershey — created by the state in 2001 using a portion of Pennsylvania’s tobacco industry settlement funds — have provided funding to 225 companies statewide, creating nearly 3,300 jobs. Funding from the Ben Franklin Technology Partners, from 2006 to 2010, helped with the formation of 145 companies and the creation of more than 6,000 jobs.