BIOPHARMACEUTICALS IN MASSACHUSETTS. Special Industry Report by MassDevelopment and the Massachusetts Alliance for Economic Development

Transcription

1 BIOPHARMACEUTICALS IN MASSACHUSETTS Special Industry Report by MassDevelopment and the Massachusetts Alliance for Economic Development 75 Federal Street I Boston, MA I massdevelopment.com 25 Research Drive I Westborough, MA I massecon.com

2 This report summarizes the competitive advantages that make Massachusetts a leader in the biopharmaceutical industry. It contains original research conducted by MassDevelopment and the Massachusetts Alliance for Economic Development (MAED). TABLE OF CONTENTS Section I Industry Clustering Section II Competitiveness Factors Section III Tax Cost Comparison Table A Assumptions Used in Tax Cost Comparison...12 Table B Summary of Tax Cost Comparison The report includes statistics for the life sciences industry in Massachusetts, with special emphasis on the biopharmaceutical industry, at the state and substate regional level. In addition, it draws upon information from outside sources to compare Massachusetts with other states and metropolitan areas for a variety of competitiveness criteria. This analysis includes: industry clustering information, workforce and educational characteristics, indicators of success and innovation, industry linkage information, and compensation comparisons for relevant occupations. In addition, the report examines tax costs for three hypothetical companies to provide some perspective on how Massachusetts stacks up to other states. State corporate income taxes, workers compensation and unemployment insurance taxes, and tax incentives are discussed for six leading biopharmaceutical states California, New Jersey, New York, North Carolina, Pennsylvania, and Massachusetts. This analysis shows that not only can Massachusetts refute its reputation as a high-tax state, but also it is, in fact, extremely competitive for biopharmaceutical manufacturers.

3 Section I Industry Clustering Statewide Analysis Original research for this report identified 487 life sciences companies in Massachusetts, employing a total of 43,683 workers. Based on each company's self-description and analysis of the company's activities, we classified each company as biopharmaceutical, medical devices, or related life sciences. Of these companies, 320 were classified biopharmaceutical companies; 112 were classified as medical devices companies; and 55 companies were identified as businesses closely tied to the life sciences. Life Sciences Industry in Massachusetts Sector Companies Employees Biopharmaceuticals ,577 Medical Devices ,520 Related Life Sciences 55 7,586 Totals ,683 Source: MassDevelopment and the Massachusetts Alliance for Economic Development (MAED) analysis. Local-Level Analysis The MassDevelopment/MAED analysis of Massachusetts biopharmaceutical companies provides evidence to support an industry preference for clustering. The location breakdown demonstrates, unsurprisingly, the industry preference for locating near the education and healthcare center of Metro Boston. Below is the breakdown of biotechnology companies by region, as well as the municipalities hosting the largest number of biopharmaceutical companies. Distribution of Biopharma Companies by Region Region Companies Metro Boston 185 Northeast 74 Central 51 Southeast 9 Western 1 Grand Total 320 Cities with Largest Number of Biopharma Companies Region Companies Cambridge 82 Woburn 25 Worcester 23 Boston 22 Waltham 21 Lexington 14 As companies move from research and development into production, many have decided to locate manufacturing operations near their existing research and development. In fact, a key site location driver for pharmaceutical businesses, such as Novartis and Merck, looking for a manufacturing location is the large number of smaller, innovative biotech companies in Massachusetts. Other key decision factors include the availability of highly skilled employees, university medical centers, teaching hospitals, and strong industry clusters that allow for collaboration. Massachusetts is strong in all these areas. Massmeansbusiness.com 2

4 Metropolitan-Area Comparison The Brookings Institution report, Signs of Life: The Growth of Biotechnology Centers in the U.S., ranks Metropolitan Statistical Areas (MSAs) by several criteria, including the number of Life Sciences R&D businesses and employees. Because it makes use of U.S. Census Bureau data, Signs of Life uses a somewhat rigid approach to identifying the Life Sciences R&D companies. In its analysis, the Brookings Institution counts firms classified under NAICS classification , described by the Census Bureau as: Establishments primarily engaged in conducting research and experimental development in medicine, health, biology, botany, biotechnology, agriculture, fisheries, forests, pharmacy, and other life sciences including veterinary sciences. Signs of Life is thus especially important for showing the importance of the Boston Area as home to a leading cluster in the Life Sciences R&D arena. The study finds that when the above definition of Life Sciences Research is used, the Boston Area ranks second in the nation in terms of employment and fourth by number of businesses. Top MSAs by Number of Life Sciences R&D Firms and Employment Metropolitan Areas Employees Establishments New York, NY - Northern NJ 14, Boston, MA 11, San Francisco, CA 9, Washington, D.C. - Baltimore, MD - VA 7, San Diego, CA 7, Seattle - Tacoma - Bremerton, WA 5, Philadelphia, PA 4, LA - Orange Co., CA 4, Raleigh - Durham - Chapel Hill, NC 3, Source: Signs of Life: The Growth of Biotechnology Centers in the U.S., The Brookings Institution. Industry Linkages The pharmaceutical and biotechnology industries share a wide range of overlapping activities the pharmaceutical industry includes manufacturers using techniques and products developed by biotech companies; the biotech industry includes companies engaged in drug discovery, research, and the production of biologically engineered foods and medicines. While pharmaceutical manufacturers have traditionally used a chemistry-based research and development method, biotechnology businesses use biology as the starting point for their R&D. Other companies are using advances in genetics and bioinformatics to sharpen research techniques and to find more efficient ways to identify compounds that might be suitable for development into pharmaceutical products. Biopharmaceutical companies can benefit from locating near the Massachusetts center of biotechnology research because they will find themselves in the midst of industry innovation. 3

5 Massachusetts hosts several other industries with important linkages to the biopharmaceutical industry. Healthcare First and foremost, biopharmaceutical companies take advantage of the region s high concentration of healthcare-related industries, most notably the Boston Area s numerous teaching and research hospitals. Scientists and physicians in our hospitals inspire the development of innovative solutions to the problems encountered by healthcare givers worldwide. Researchers in our hospitals lend their expertise in guiding the development of new therapies and treatments. Higher Education Over 100 colleges and universities provide companies in the area with a steady stream of highly educated and motivated workers. Medical Devices The medical device industry is also prominent in Massachusetts, and thrives on the interplay between Massachusetts traditional manufacturing know-how and innovations produced by our life sciences community. Plastics Another industry prominent in Massachusetts is plastics. Several of the companies identified as life sciences related are actually producers of plastic products designed and manufactured specifically for biotechnology laboratories. This kind of synergy further strengthens the case for Massachusetts, expanding its role as a biopharmaceutical manufacturing center. Creators of new technology requiring specialized equipment will find a large community of suppliers nearby. Financial Services Massachusetts is a leader in the financial services industry. Locating near this regional center gives biopharmaceutical companies immediate access to capital, as well as financial and business advice, important considerations for young technology-driven companies and manufacturers alike. Information Technology Massachusetts historic leadership in information technology and data management gives our companies an edge in finding local solutions for their informatics-intensive work. Massmeansbusiness.com 4

6 Section II Competitiveness Factors Examining the outstanding cluster of universities and research institutions in the state is the first step in evaluating Massachusetts competitiveness in biopharmaceuticals. Research Facilities Harvard Medical School, Children s Hospital, Brigham & Women s, Beth Israel, UMass, Joslin Diabetes Center, and Mass General provide opportunities for collaboration with research and development units of biopharmaceutical businesses. Cluster of Universities Harvard, Massachusetts Institute of Technology, Northeastern, Tufts, Boston College, Boston University, the University of Massachusetts, Worcester Polytechnic Institute, and the Massachusetts College of Pharmacy and Health Sciences, and many others provide opportunities for collaborative research, technology transfer, and a large pool of talented potential employees. Massachusetts has the largest concentration of colleges and universities in the world. Workforce Characteristics in Top States As can be seen from the tables below, Massachusetts compares very well with other top biopharmaceutical states in regard to educational attainment in the populace. In fact, Massachusetts ranks first in two important categories percentage of labor force age 25 and over with a four-year degree and the percentage of those with a graduate or professional degree. Degree Earners in the Workforce Source: U.S. Census Bureau. 5

7 In addition to the high percentage of degree earners in general, Massachusetts also excels in producing science and engineering PhDs. According to the National Science Foundation, Massachusetts ranked fourth in the nation in Science and Engineering PhDs earned in However, on a per-capita basis, Massachusetts produces more Science and Engineering PhDs than any other state, a testament to the quality and breadth of our institutes of higher learning. Science and Engineering PhDs Awarded per 100,000 Residents, 2001 Source: National Science Foundation. More important for the biopharmaceutical industry, however, is that Massachusetts produces more Biology PhDs per capita than any other state. Many of the young scientists in Massachusetts go on to form companies to commercialize their research, and many win patents for their groundbreaking innovations. In 2001 alone, Bay Staters were issued 3,972 patents (all kinds), putting the state third on a per capita basis, and confirming the Commonwealth s reputation as a source of invention and innovation. Biology PhDs Awarded per 100,000 Residents, 2001 Rank State Number 1 Massachusetts Vermont Maryland Connecticut Iowa New York North Carolina Utah New Hampshire Missouri 2.3 Source: National Science Foundation Survey of Earned Doctorates. Patents Awarded per 100,000 Residents, 2001 Rank State Number 1 Idaho Vermont Massachusetts California Connecticut Minnesota Delaware New Hampshire New Jersey Colorado 47.8 Source: U.S. Patent and Trademark Office. Massmeansbusiness.com 6

8 Even more impressive than the amount of general patents awarded to Massachusetts innovators is the Boston Area s claim to life sciences related patents. The following table shows that, among the most important technology centers in the United States, Boston Area scientists received the greatest number of life sciences patents per 100,000 residents in Life Sciences Related Patents per 100,000 Residents, 2000 Source: U.S. Census Bureau, U.S. Patent and Trademark Office. The number of degree earners and our success in winning patents show that Massachusetts produces brainpower. Looking at worker productivity shows that our brainpower allows us to produce more with less. The Gross State Product is the value of all the goods and services produced in a state during a given year. This number, divided by the state s labor force, gives an indication of the average worker productivity in the state. In Massachusetts, the worker productivity for 2001 was $85,737, second among the top states for biopharmaceuticals. High worker productivity is a reflection of Massachusetts highly skilled workforce. It also explains the continuing success of many technology and science-based companies in the state. Worker Productivity New York $92,574 Massachusetts $85,737 New Jersey $85,621 California $77,730 Washington $73,998 Virginia $72,504 North Carolina $68,328 Maryland $67,748 Pennsylvania $67,250 Source: U.S.Census Bureau, U.S. Bureau of Economic Analysis. 7

9 Salaries for biopharmaceutical professions are quite competitive with other states. Average Annual Salaries for Selected Biopharmaceutical Industry Occupations CA MA NC NJ NY PA Industrial Production Managers $75,030 $73,780 $64,280 $84,340 $78,230 $63,480 Biomedical Engineers $73,980 $65,790 $50,940 $76,980 $67,480 $61,450 Chemical Engineers $91,450 $70,710 $70,240 $78,490 $77,030 $61,570 Industrial Engineers $68,090 $65,170 $58,640 $66,130 $59,890 $58,560 Biochemists and Biophysicists $63,650 $66,990 $61,060 $67,210 $60,240 $53,360 Chemical Technicians $36,370 $38,730 $36,330 $41,400 $34,650 $37,660 Source: Bureau of Labor Statistics Occupational Employment and Wage Estimates, Funding for Innovation Biopharmaceutical innovators in the Boston Metro Area attract an enormous amount of funding for basic research that leads to progress in the life sciences. One of the most important sources of this funding is the National Institutes of Health. In 2001, the Boston Area attracted a greater percentage of NIH funding than any other metro area. This further strengthens the argument that the region s human capital, tradition of innovation, and research infrastructure combine to create an environment where ideas spark innovation, and knowledge-based companies find success. Massachusetts companies have also been successful in winning Small Business Innovation Research grants from the U.S. Small Business Administration. This program recognizes the need to assist entrepreneurs as they bring their ideas to market. But it isn t just public money that flows into Boston-Area companies. Venture capitalists recognize the fertile ground for research and invention in the Bay State, and they participate energetically in helping to grow the already large base of leading life sciences companies. Top Cities for National Institutes of Health Funding, FY 2001 Boston $1,215,200,004 New York $1,062,872,344 San Diego $754,538,037 Philadelphia $659,091,430 Baltimore $618,177,078 Seattle $588,456,872 Los Angeles $475,036,590 Houston $435,250,804 San Francisco $407,314,864 Chicago $384,092,707 Total SBIR Awards for FY 2001 State Total Awards Total Dollars California 933 $258,581,108 Massachusetts 633 $167,527,467 Pennsylvania 167 $42,635,988 New York 163 $38,270,470 New Jersey 126 $31,296,151 North Carolina 60 $13,735,619 Source: U.S. Small Business Administration. Source: National Institutes of Health Office of Extramural Research. Massmeansbusiness.com 8

10 Despite the downturn in the global economy, Massachusetts biopharmaceutical businesses have continued to secure financing. According to the PricewaterhouseCoopers MoneyTree Survey, 39 Massachusetts biopharmaceutical businesses have closed on $640 million in funding since the beginning of In fact, for the first quarter of 2003, Massachusetts received over 28% of the VC funding allocated to biopharmaceutical businesses. And Massachusetts continues to rank first in venture capital investment per capita. Biotechnology Venture Capital Financing, State Amount Percent of total California $7,652,410, % Massachusetts $2,998,297, % Pennsylvania $899,106, % New Jersey $890,500, % North Carolina $831,010, % Washington $810,186, % Maryland $515,510, % New York $457,001, % Texas $440,879, % Virginia $112,437, % Source: PricewaterhouseCoopers MoneyTree Survey. Outside Reports Acknowledge Our Competitive Advantages Development Report Card for the States 2002 Survey gives Massachusetts straight A s in performance, business vitality, and development capacity. Massachusetts is among only five states with straight A s in this ranking. American Electronics Association Cyberstates 2002 Report - Massachusetts ranks fourth in the nation in terms of the number of high-tech workers. Progressive Policy Institute New Economy Index 2002 ranks Massachusetts first in the nation overall. Also topping the list in 1999, Massachusetts boasts a concentration of software, hardware, and biotech firms supported by world-class universities, such as MIT and Harvard, in the Route 128 region around Boston. Milken Institute State Science and Technology Index 2002 ranks Massachusetts first in the nation. 9

11 Section III Tax Cost Comparison Although many still believe the old story that Massachusetts is not competitive in regard to taxes, this is simply no longer the case. This sketch of tax costs shows that Massachusetts compares very well with five key competitor states (California, New Jersey, New York, North Carolina, and Pennsylvania), using three types of criteria (state corporate income tax, workers compensation and unemployment taxes, and tax incentives) for three different sizes of businesses. This study uses a 20-year horizon for analyzing taxes for the medium and large companies, and a seven-year horizon for the small company. (The shorter horizon for the small company is due to the expectation that it has no income, may be supported by venture capital, and is likely either to evolve into a much larger business or to be absorbed into a larger company.) Taking the case of the large biopharmaceutical manufacturer as an example, this cost comparison shows that even though the corporate tax rate in Massachusetts is higher than in four of the other five states, the Massachusetts Single Sales Factor method of tax apportionment effectively reduces the company s state tax to the point that Massachusetts becomes the most competitive of the six states regarding state tax burden. Brief Explanation of the Single Sales Factor Companies typically must pay taxes to any state in which business is conducted. Each state, though, decides how to determine the tax owed to that state. Three criteria that are used to determine tax owed are the percentage of the company s property located in the state, the percentage of the company s payroll located in the state, and the percentage of the company s sales that occur in the state. Some states, such as Delaware, Rhode Island, and Vermont, weight each of the three criteria equally in determining apportionment. This is Equal Weighted apportionment. Other states, such as Arizona, Florida, and Maryland, weight the sales component twice as much as the other two factors. This method is called Double-Weighted Sales apportionment. Four of the five competitor states compared here (California, New Jersey, New York, and North Carolina) use the Double-Weighted Sales apportionment method. Pennsylvania triple-weights sales. The Single Sales Factor apportionment method used in Massachusetts considers only the percentage of sales occurring in the state to determine income attributable to Massachusetts. The location of property and payroll are completely disregarded. Massachusetts, then, avoids penalizing manufacturers for maintaining property and personnel in the state. This makes Massachusetts a particularly suitable location for companies with many workers and large capital investment, but disproportionately little revenues originating within Massachusetts. Massmeansbusiness.com 10

12 Analysis of State Corporate Income Tax Burden A calculation was made for each state to find the state corporate income tax burden over 20 years. Assumptions about the hypothetical companies are listed in Table A. Comparisons among the states were made for the medium and large companies. (Income taxes and tax credits are not particularly useful for the small business case because of the assumption of little or no income and, thus, little or no corporate income tax liability.) Analysis of the results demonstrates the effect of the Single Sales Factor (SSF) in Massachusetts. Even though the nominal tax rate might lead one to believe that Massachusetts would make one of the highest tax demands from companies, it turns out that the SSF reduces significantly the tax burden in Massachusetts. For the medium-sized company, the Massachusetts income tax burden is $14 million less than the nearest competitor over a 20-year horizon. For the large company case, the income tax savings of locating in Massachusetts totals nearly $29 million. (See Table B for a summary of net tax.) Analysis of Workers Compensation and Unemployment Insurance Each state creates its own regulations regarding Workers Compensation (WC) and Unemployment Insurance (UI). States set their own rates, which vary widely across the states. Workers Compensation rates also vary according to occupation. This study calculates UI and WC using each state s rules, and totals the amounts over 20 years (over seven years for the small company case). The results show that Massachusetts WC rates are the lowest of the six states under comparison. UI rates are also very competitive, with Massachusetts requiring the third-smallest payment in the case of the small company. In fact, when UI and WC costs are combined and totaled over seven years (the analysis horizon for the small company case), Massachusetts is the second-most cost-effective location, lagging North Carolina by less than $4,000. Analysis of Tax Incentives Tax incentives vary widely from state to state. Different rules regarding seemingly similar programs often create very different outcomes across state borders. Nonetheless, it is still possible to consider three important types of tax incentives for the six states under comparison. These incentives are Investment Tax Credits, Research and Development Tax Credits, and Workforce Training Tax Credits and Grants. Under the simplifying assumption that these incentives are taken at the beginning of the analysis horizon, Table B shows that Massachusetts competes very well in the medium and large company cases. The Conclusion The tax incentives offered in Massachusetts, combined with the effect of the Single Sales Factor and competitive UI and WC costs, make Massachusetts a very cost-effective location for businesses. Over a 20-year horizon, the total net tax advantage to locating in Massachusetts is over $12 million for the medium company, and more than $21 million for the large company. 11

13 Table A Assumptions Used in Tax Cost Comparison Small Biopharmaceutical Company Income $0 Jobs Created 20 Number of Job A 18 Number of Job B 0 Number of Job C 0 Number of Job D 2 Medium Biopharmaceutical Company Income $100,000,000 In-State Sales, Payroll, Property 7%, 30%, 30% Property Value $50,000,000 New Equipment Investment $150,000,000 Net Worth $75,000,000 Jobs Created 205 Number of Job A 150 Number of Job B 15 Number of Job C 10 Number of Job D 30 R&D Expenditures $5,000,000 Large Biopharmaceutical Company Income $200,000,000 In-State Sales, Payroll, Property 7%, 30%, 30% Property Value $630,000,000 New Equipment Investment $350,500,000 Net Worth $837,900,000 Jobs Created 350 Number of Job A 210 Number of Job B 40 Number of Job C 30 Number of Job D 70 R&D Expenditures $10,000,000 For all companies, Job A represents a life sciences production worker (Workers Compensation code 4825) with a salary of $80,000 per year. Jobs B, C, and D are management and administrative positions (Workers Compensation code 8810) with salaries of $120,000, $150,000, and $50,000, respectively. Corporate Income Tax Rates are: California 8.84%; Massachusetts 9.5%; New Jersey 9%; New York 7.5%; North Carolina 6.9%; and Pennsylvania 9.99%. Massmeansbusiness.com 12

14 Table B Summary of Tax Cost Comparison Summary of Business Costs over 7 Years for Small Company Massachusetts California New Jersey Unemployment Insurance $33,264 $25,480 $92,120 Workers Compensation Insurance $95,004 $189,042 $183,260 Net Totals over 7 Years $128,268 $214,522 $275,380 Difference from MA $86,254 $147,112 Summary of Business Costs over 20 Years for Medium Company Massachusetts California New Jersey State Tax Burden $13,300,000 $32,708,000 $33,300,000 Unemployment Insurance $974,160 $746,200 $2,697,800 Workers Compensation Insurance $2,404,800 $5,476,800 $4,569,600 Credits and Grants $8,500,000 $9,846,000 $19,928,130 Net Totals over 20 Years $8,178,960 $29,085,000 $20,639,270 Difference from MA $20,906,040 $12,460,310 Summary of Business Costs over 20 Years for Large Company Massachusetts California New Jersey State Tax Burden $26,600,000 $65,416,000 $66,600,000 Unemployment Insurance $1,663,200 $1,274,000 $4,606,000 Workers Compensation Insurance $3,585,600 $9,163,200 $6,713,600 Credits and Grants $19,275,000 $22,650,000 $44,111,956 Net Totals over 20 Years $12,573,800 $53,203,200 $33,807,644 Difference from MA $40,629,400 $21,233,844 13

15 New York North Carolina Pennsylvania $48,790 $26,040 $38,640 $215,068 $98,448 $158,592 $263,858 $124,488 $197,232 $135,590 -$3,780 $68,964 New York North Carolina Pennsylvania $27,750,000 $27,780,000 $32,367,600 $1,428,850 $762,600 $1,131,600 $5,390,400 $2,534,400 $4,156,800 $8,162,500 $1,144,500 $955,000 $26,406,750 $29,932,500 $36,701,000 $18,227,790 $21,753,540 $28,522,040 New York North Carolina Pennsylvania $55,500,000 $76,197,000 $64,735,200 $2,439,500 $1,302,000 $1,932,000 $7,960,000 $3,840,000 $6,403,200 $18,782,500 $2,214,000 $1,600,000 $47,117,000 $79,125,000 $71,470,400 $34,543,200 $66,551,200 $58,896,600 Massmeansbusiness.com 14

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