In August 2008, Amicus Therapeutics invited the media and state officials to its headquarters in Cranbury to help celebrate the hiring of its 100th employee. A parade of speakers, including Amicus president and CEO John Crowley, Governor Jon Corzine, and Congressman Rush Holt, stepped up to sing the company’s praises.
It was no small moment for Amicus, a biopharmaceutical firm that had started seven years earlier with seven employees—or for the state of New Jersey, which has been hungry for any good news about the pharmaceutical business.
Amicus was launched in a few thousand square feet of leased lab and office space at a state-owned technology “incubator” site in North Brunswick. Today, Amicus is acknowledged within the industry as a star player in the high-stakes game of biotechnology. The company occupies 50,000 square feet of renovated space at the Cedar Brook Corporate Center in Cranbury; raised $225 million from investors, including $75 million via a May 2007 initial public offering; entered into a multimillion dollar strategic partnership with Shire Human Genetics Therapies, a subsidiary of Shire PLC, a British manufacturer; and, most recently, announced that it had gained FDA approval to begin a Phase 3 trial for its lead investigational drug, Amigal, a new treatment for a rare genetic disorder known as Fabry disease. The workforce also continued to grow; Amicus is now up to 124 full-time employees.
The achievements of Amicus have been impressive and, in time, could help reshape the future of the pharmaceutical industry in New Jersey, which has long been dominated by such giants as Johnson & Johnson, Merck, Wyeth, Hoffmann-LaRoche (Roche), and Schering-Plough. Still, Amicus and its fellow high-risk/high-reward biotech companies have a long way to go before their cumulative impact on New Jersey’s economy and job market can equal that of Big Pharma, which long ago earned New Jersey its calling card as the nation’s medicine chest. As recently as 2006, the state’s pharmaceutical workforce totaled nearly 69,000 employees, according to the New Jersey Department of Labor and Workforce Development. The same year, at a time when the state’s gross domestic product was approximately $465 billion, the overall impact of the pharmaceutical and medical technology sector topped $27 billion.
In recent years, however, the pharmaceutical business has been battered by a series of problems—a global recession, slow growth, declining stock prices, the development of fewer major new drugs, and the expiration or impending expiration of patents on some of its most lucrative blockbuster drugs.
Such factors have accelerated a long-standing trend toward mergers and acquisitions among the biggest companies. Before the year is out, three major mergers—Merck and Schering-Plough; Pfizer and Wyeth; and Roche and Genentech—will greatly alter the face of Big Pharma in New Jersey. Collectively, these new combinations will likely cost the state three corporate headquarters and thousands of jobs.
The first shoe fell in January, when Pfizer, based in New York City, announced plans for a $68 billion acquisition of Wyeth, headquartered in Madison with research and development facilities in Princeton. As a company, Pfizer will face a potentially huge loss in worldwide sales once its blockbuster cholesterol drug, Lipitor, goes off patent in 2010, permitting other drugmakers to manufacture a less expensive generic version. Lipitor, the world’s best-selling drug, was responsible for about $12.7 billion in revenue worldwide in 2007.
In part to prepare for the impending decline in Lipitor revenue, the company has decided to sharpen its focus on biopharmaceutical research. Pfizer plans to split its post-acquisition R&D organization into two divisions, one focusing on biotechnology research and the other on more traditional pharmaceutical research. The new biotech division will be led by Mikael Dolsten, now president of Wyeth Research and senior vice president of Wyeth itself.
This could spell good news for the 450 people now working in the Wyeth Princeton Research Center, although, prior to announcing the Wyeth acquisition, Pfizer had already made deep cuts in its R&D staff and could do so again after the merger.
But the future is unclear for the 860 employees at Wyeth’s Madison headquarters. If Pfizer abandons the Madison site, it could relocate Wyeth employees to New York City or lay off the entire Wyeth workforce—potentially catastrophic for Madison and the entire state.
Mary-Anna Holden, the mayor of Madison, says she met with Pfizer executives in an effort to convince them to stay in Madison. So far, she says, Pfizer has been noncommittal. Holden is also working with state officials, including Caren Franzini, CEO of the Economic Development Authority, and Jerry Zaro, chief of the Governor’s Office of Economic Growth, to sweeten the pot.
The industry was still digesting the Pfizer-Wyeth news when Merck, based in Whitehouse Station, and Schering-Plough, based in Kenilworth, announced their merger plan in March. At the time, the companies sounded all the right notes, including this one: “The combined company will have a product pipeline with greater depth and breadth, and numerous promising drug candidates.”
Operating under the name Merck, the merged companies would have a worldwide workforce of approximately 106,000 employees, including about 14,500 in New Jersey. But the merger plan calls for a 15 percent cut in staffing worldwide. According to a source at one of the companies, as many as 5,000 New Jersey jobs could be lost. A Merck spokesperson said she was “not in a position to speculate” about the cuts.
After the merger, which is expected to close during the fourth quarter, pending approval by the Federal Trade Commission, the new company will be headquartered in Whitehouse Station and run by Merck president and CEO Richard T. Clark; Schering chairman and CEO Fred Hassan is expected to depart.
As the two companies combine operations, the deepest job cuts should hit redundant administrative functions, including human resources, IT, and finance. Other functions may be relatively safe. For example, Schering-Plough’s consumer-products marketing team is expected to remain largely intact, since Schering-Plough is strong in consumer products and Merck is not. As for the Kenilworth facility, the town’s mayor, Kathi F. Fiamingo, says she has “no formal information” about Merck or Schering’s plans. However, she speculates that some part of the operation—perhaps R&D—will stay in Kenilworth.
Roche presents a different scenario. In March, Roche, a Swiss-based healthcare giant, completed its $48 billion acquisition of Genentech. (It already owned 56 percent of the biotech company.) At press time, Roche was in the process of moving its U.S. headquarters from Nutley to South San Francisco, where Genentech is based.
Currently, Roche has 3,150 employees in Nutley, including almost 600 researchers investigating specific disease biology areas, as Roche refers to them. Roche says it intends to relocate 128 researchers who now work in a California research and development center to Nutley. Other R&D hires are also planned for Nutley, which a company spokesperson says “will remain a major site for research and development.” Additionally, says the spokesman, “members of several global groups such as Pharma Partnering and Investor Relations” will be based in Nutley.
The net effect, some say, will be a loss of administrative and other jobs to California, but a gain of higher-paying R&D positions in New Jersey. “At the end of the day, I think this will be a positive story for the state,” says Zaro.
But the process of integrating the two companies is still unfolding and the final picture remains unclear. Joanne Cocchiola, the mayor of Nutley, has received assurances from Roche that the company “will do its best” to retain as many Nutley employees as possible, but she admits she is worried about potential job losses.
The cumulative impact of these three mergers will no doubt be painful for the state’s already ailing workforce. The HealthCare Institute of New Jersey (HINJ), the state’s key trade group for the Big Pharma and medical-device industries, reports in a survey of 22 of its members (including employees of the medical-device industry) that the number of life-science jobs in New Jersey slipped in 2008 for the first time in almost a decade to fewer than 60,000. HINJ President Bob Franks, a former four-term New Jersey congressman, attributes the slide to “global economic downturns” and “significant changes to the business model.”
For many Big Pharma companies, one notable business-model change has been a radical rethinking of R&D strategy, which in the past was largely blockbuster driven.
“When I was at [Bristol Myers Squibb] back in the 1990s, the prevailing strategy was captured in the acronym OSB—Opportunity Seeking Blockbuster,” says John Crowley, now the charismatic leader of Amicus. “We wouldn’t even develop a program if it didn’t have a billion dollars revenue potential.”
As long as such blockbuster drugs remained on patent, their manufacturers could count on huge profits. Once off patent, however, the drugs were no longer cash cows, since other drugmakers could now make less expensive or generic versions. In the case of Schering-Plough’s Claritin, for instance, the company took a double hit when, in 2002, its mega-selling antihistamine not only lost its patent protection, but also received the FDA green light to be sold over-the-counter at still lower prices. Schering-Plough countered with prescription Clarinex, a new version of its original drug.
But the era of the blockbuster drug may be drawing to a close as companies look for new scientific breakthroughs in areas like genetic analysis and biomarkers (such as the PSA test for prostate cancer), which could help researchers develop whole new classes of pharmaceuticals.
And because there are fewer traditional blockbuster drugs in development, companies have begun to place a greater investigative emphasis on specialty or so-called orphan drugs, those used to treat rare diseases that afflict fewer patients. In the process, they’ve also moved from an almost exclusive focus on chemical or small-molecule discoveries, like Lipitor and the asthma drug Advair, to a sharper focus on proteins, peptides, and other large-molecule products—the stock-in-trade of the biotech sector.
This has led to partnerships with, or acquisitions of, companies that already have the right drugs in their pipelines, including many biotech firms. “Rather than doing the inventing themselves, they buy inventions,” says James W. Hughes, a close observer of the industry and dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers in New Brunswick.
Johnson & Johnson’s acquisitions of Centocor in the late 1990s and Cougar Biotechnology this summer are cases in point. So is the Roche acquisition of Genentech. In fact, Roche announced in June that it would sever its ties to the Pharmaceutical Research and Manufacturers of America, the national Big Pharma trade group, and retain Genentech’s involvement in the biotechnology industry’s national trade group, the Biotech Industry Organization.
This merger and acquisition process has been going on for almost the entire history of the industry, of course, although in the past the goal was to buy traditional blockbuster drugs rather than a biotechnology pipeline.
In 1996, for example, Novartis, in East Hanover, was created through the merger of two long-established Swiss companies, Ciba-Geigy and Sandoz Laboratories, also with U.S. headquarters in New Jersey; in 1999, Warner-Lambert, itself the product of a merger in the 1950s, combined with American Home Products, a marriage that was quickly annulled when Pfizer made a successful bid for Warner-Lambert, thereby acquiring the rights to Lipitor; and in 2003, Pfizer, already the biggest of the Big Pharma companies based on sales, purchased the medical research division of Pharmacia, giving Pfizer ownership of Celebrex.
This history of mergers and acquisitions also includes attempts to reduce overhead and consolidate operations, which has often meant giving the heave-ho to workers seen as redundant.
The same dynamic is at work today, and not just in New Jersey. “All of pharma is getting smaller,” says Les Funtleyder, a healthcare strategist at Miller Tabak & Co., an institutional trading and asset management firm in New York City. “There are workforce reductions everywhere in the U.S.”
The uncertainty in Big Pharma is one reason that companies like Amicus are so important to the future.
“The start of our Phase 3 trial with Amigal is a milestone for Amicus,” Crowley said at the time of the announcement. Crowley, who became president and CEO of Amicus in the same year it moved to Cranbury, is the subject of a 2006 book detailing his quest to find a successful treatment for Pompe disease, a neuromuscular disorder that afflicts two of his children. A movie based on the book, starring Harrison Ford, is in production.
Assuming Amigal is ultimately approved for use, Amicus will need to sell it in the United States at a premium price to recoup its development costs and make a profit, says Amicus COO Matthew R. Patterson. (As part of its partnership with Shire HGT, Amicus has granted the British subsidiary the right to sell Amigal and other drugs in its pipeline, once approved, outside the United States.)
Other Jersey-based biotechs look promising despite the hard economic times. “There’s a long list of biotech companies that are doing especially well,” says Debbie Hart, president of the trade association BioNJ. Among publicly traded companies (most biotech start-ups are privately held), she mentions Medarex in Princeton—which Bristol-Myers Squibb recently announced it would acquire; PTC Therapeutics in South Plainfield; and ImClone Systems in Branchburg as companies “well-positioned” for the future. Collectively, New Jersey’s 32 publicly traded biotechs accounted for an estimated 6,115 jobs in 2007, according to BioNJ’s latest industry survey. Revenues that year topped $3.2 billion, an approximate 113 percent increase from 2005.
That’s the good news. On the flip side, the achievements of companies like Amicus, Medarex, and others are by no means universal within the biotech industry. In fact, times are especially hard for start-ups.
Like most new companies, biotech start-ups have typically scrambled for the first few years to keep the lights on and the staff paid while pursuing their big dreams. But the recession has made that perennial hurdle even harder to clear.
“For many smaller biotech firms, capital has really dried up,” says analyst Funtleyder, author of Healthcare Investing: Profiting From the New World of Pharma, Biotech, and Healthcare Services (McGraw Hill, 2008). “And even if these smaller companies do have innovative products, it’s often difficult these days to get adequate funding, whether from a venture-capital, private-equity, or state source.”
The scarcity of investment capital has proven problematic for all but the star players in the biotech sphere. “Yes, we will lose some firms and some areas of research as a result of this economic crisis,” acknowledges Hart. Amicus chief Crowley, a member of the BioNJ board, is far blunter: “I think it is possible that in one or two more years we will have half as many biotech companies in New Jersey as are in existence today.” By his own trade group’s numbers, that would mean a drop to roughly 120 public and private firms, from a high of 238 companies in 2008. If this scenario unfolds, the state not only risks shedding biotech-related jobs, but also losing a pool of innovation that would be hard to replace.
The changes in Big Pharma—coupled with biotech’s challenges—are sure to affect state and municipal government revenues. Further, the community groups, arts foundations, and charitable organizations that have long benefited from Big Pharma’s largesse could also take a hit.
Based on 2008 estimates, HINJ members, including some biotech firms, contributed almost three-quarters of a billion dollars in state withholding, income, and franchise taxes, corporate business tax, and other payments. Local governments benefited from $129.2 million in property taxes.
In the case of property taxes, Rutgers’s Hughes does not think pharmaceutical consolidations will necessarily result “in an actual loss of taxable property,” since firms could find other uses for their existing properties or other companies could take them over. But, he acknowledges, consolidation could result in personnel reduction and less taxable income. The impact of consolidation and layoffs on state taxes will be more direct, because of declining revenue from withholding, corporate business taxes, income and franchise taxes, and so on. New layoffs would also add to already high unemployment-benefit costs.
There are people in and outside of government who think that these dire developments need not happen, at least not in the way that some observers have predicted. Alert to change, they nevertheless reject the idea that the sky is falling. Instead, they’ve intensifed their efforts to trumpet New Jersey as the place to be, now and in the future, for both the pharmaceutical and biotech industries.
Among other things, boosters say, New Jersey still has a sizable pharma/biotech footprint; an impressive 24 companies in the Fortune 500; a highly skilled, highly educated workforce; a wide vendor network—law firms, ad and marketing agencies, investment companies, clinical research facilities; a strong New York/New Jersey/Pennsylvania consumer market; an abundance of good schools and top-ranked universities; an array of cultural activities; and a sophisticated transportation nexus.
“You simply can’t duplicate what we have here anywhere else in the country,” says Office of Economic Growth chief Zaro. “That gives us an enormous competitive advantage.”
One company emphatically in agreement with this sentiment is Bausch & Lomb. In a July ribbon-cutting ceremony attended by Corzine, Zaro, and other state officials, the company announced the opening in Madison of its new global pharmaceutical headquarters, which will result in the creation, as the B&L release put it, of “70 new full-time, high-paying jobs in New Jersey.”
Still, a number of thorny issues need to be addressed if New Jersey hopes to remain a business magnet. HINJ’s Franks singles out New Jersey’s high cost of living, a catchall under which he includes residential and commercial real estate prices, escalating property taxes, and high corporate taxes, among other things.
The challenge, Franks says, is to find “the appropriate balance” between cost and quality of life. The latter, he says, is rich and robust but very expensive to maintain. “We’re approaching a tipping point,” Franks cautions. “If taxes rise any higher, that would be viewed very negatively by those looking to make new investments here.”
The one-time politician is reluctant to offer a list of fixes, especially in an election year. But he’s far less reticent on one issue that has long concerned him—the state’s regulatory process. “It takes forever for state regulators to issue building and other permits,” he says. “My industry is prepared to meet any standards the state imposes, but once an applicant has qualified, the permit should be issued.” This foot-dragging, Franks says, costs pharmaceutical companies money, since it prolongs the time before they can bring a patented drug to market and can cut into their window to exclusively market that drug.
Then there is the matter of funding. New Jersey attempts to address the issue with a range of programs and incentives for start-up companies, including a network of incubator sites around the state. One of these, the Technology Centre of New Jersey in North Brunswick is where Amicus Therapeutics got its start. But money is tight—and officials who would like to do more often can’t.
Still, there are reasons for hope.
“One of the groups that have been largely ignored is the angel investors across the state and the country,” says Dr. Peter R. Reczek, executive director of the state Commission on Science and Technology, which nurtures fledgling tech companies. (Reczek’s own budget was cut this year.) Such informal investors, often affluent individuals, says Reczek, may “represent a larger pool of potential investment money than the venture capitalist community.” His role is to put the angels together with worthy companies like the state’s biotech start-ups.
Another positive sign is the “dislocated worker strategy” being pursued by Bio-1, a federally funded workforce development program located in the School for Management and Labor Relations at Rutgers University. Bio-1’s partners include industry groups such as BioNJ and HINJ, pharmaceutical and biotech companies, colleges and universities, and government and nonprofit entities.
The dislocated worker strategy has three prongs, explains Bio-1 executive director Mary Ellen Clark. First, Bio-1 is spearheading an effort to make displaced employees from Big Pharma available—on a temporary, contractual basis—to cash-strapped biotechs in need of scientific and technical expertise.
Second, in cooperation with the Rutgers Center for Management Development, it is promoting a mini-MBA program in biopharma innovation—a program designed to assist displaced pharmaceutical executives and others in creating new business opportunities. And third, as part of its effort to excite young people about the bio-sciences, Bio-1 is encouraging pharmaceutical employees with expertise in math and science to consider filling vacancies in these areas in New Jersey’s secondary schools.
Ideas like these could help to keep intact the state’s pharma and biotech workforce.
That’s the hope. If nothing else, it suggests that New Jersey won’t relinquish its title as the nation’s medicine chest without a fight.
Charities and communities could take a hit if pharma firms depart:
The companies that have long made New Jersey the nation’s medicine chest have also been big contributors to the community chest in the Garden State.
In 2008, the HealthCare Institute of New Jersey’s member companies contributed $221 million to organizations and services directly benefiting New Jersey, with more than half of that amount in the form of product contributions. Of the non-product contributions, the biggest beneficiaries were health-related facilities and associations, followed by universities and educational organizations.
One HINJ member, Schering-Plough (including the Schering-Plough Foundation), was responsible for about $10 million in charitable giving in 2008 and has “a similar amount “budgeted for 2009, according to spokesman Fred Malley.
In a report issued in August 2008, Schering-Plough indicated that its beneficiaries that year included the New Jersey Performing Arts Center in Newark (which received $250,000 as part of a $1 million grant for 2007-2010), the Liberty Science Center in Jersey City ($120,000), the Boys and Girls Club of Union ($50,000), and Caldwell College in Caldwell ($25,000).
But Malley would not comment on what “may or may not happen” after Schering’s planned merger with Merck.
The specter of losing three Big Pharma headquarters is particularly ominous for the towns that host those companies. “Companies that move their headquarters tend to become less involved in the public life of the state they leave behind—less involved in their former communities,” says James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers.
Affected towns could include Kenilworth (Schering-Plough), Madison (Wyeth), and Nutley (Roche). Kathi F. Fiamingo, the mayor of Kenilworth, acknowledges that Schering has been a “tremendous corporate citizen,” supporting many causes in her town.
“It would be very hard for some of these towns to do what they do without help from companies,” adds Tim C. McDonough, mayor of Hope Township and president of the New Jersey State League of Municipalities, a voluntary association of elected and appointed officials.
Correspondent Wayne J. Guglielmo reports on health issues for New Jersey Monthly.