Tuesday, March 20, 2012

California & Stem Cells (CIRM)

The stem cell debate has had me fascinated for years now, and the related subject of stem cell economic and business development - as best embodied by California's initiative to raise and spend $3B has gotten a disproportionate share of my posting attention.

So, I can't resist linking to a very good Washington Post article discussing how CIRM is at a crossroads. (CIRM is the resulting California agency to nurture stem cell science.) 

(Nutshell: half-way into it's funding, there is debate about whether the initiative has been worthwhile, and if there should be a subsequent multi-billion dollar bond issuance to further support CIRM. Read the WaPo for a very even treatment of the issue.)

I think the CIRM initiative has generally been a dud - a product of real estate bubble-era thinking mixed with an urge by Californians to snap back at federal policy makers - but is it ever smart to go into debt for economic development in a scientific area? 

Whether CIRM winds down or is given new life (and funding), California has a lot of new lab space because of CIRM, and a lot of additional research PI's who will all be aggressively pursuing NIH and other grant funding. It hadn't occurred to me until now, but if you forget the promises of amazing stem cell developments perviously made by CIRM backers, you could attribute the merit of the $3B bond offering to pumping up California's academic community.

All California needs to do then, is to generate increased annual non-California research support by an modest figure to economically justify the CIRM initiative. Let's say the $3B raised resulted in $4B in new lab construction. (Much of the construction of CIRM-sponsored facilities required matching commitments from the sponsor institution.)

If the interest rate on the CIRM bonds is 5% (a reasonable assumption), annual interest payments are ~$150M. I'm simplifying the tax and economic dimensions, but if the $4B in new labs generate $800M in annual ex-California research support (i.e NIH, etc.), you could argue that between direct tax benefits to California's treasury and indirect employment, the annual return is break-even.

guess: 50% of annual research ultimately being salaries @ 10% avg payroll tax = $40M in direct taxes

Using E&Y's biotech job multiplier of 2.9x yields another $1.16B in annual California payroll, and another $116M in annual revenue to California's treasury. 

Total annual tax revenues: $156M. Annual bond interest: $150M. 

Not to suggest that the system is perfectly virtuous, with the biotech investment paying for itself on a jobs created basis - there are economic leakages at many levels, but the kicker here is that the research centers will be inventing new IP that will result in substantial capital gains over time, and therefore increased tax revenues for California.

Consider Pharma's average ratio of market value to annual R&D of 18X, which suggests that $800M in annual R&D in California institutions could generate $14.4B in market value, though that the spin-out process is less efficient at converting R&D to market value, and that smaller entities have lower ratios. (But…..pharma is arguably less efficient at R&D than biotech.) 

If taxable entities in California own 10% of the $14.4B in annual value generated, that's another $140M in annual capital gains tax revenue for California.

This analysis is all built on spurious assumptions, and there has always been a gigantic gap between economic development expectations and reality, but the point here is that CIRM - or any other biotech-focused economic development could be defensible strictly on an economic basis.

(postscript: it looks like California might do something like this again - there is a proposition to raise cigarette taxes to fund cancer research.)

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