Race for the Prize

Athersys, Cleveland's great biotech hope, is threatening to leave town. Should we care?

American Hi-Fi, with Fallout Boy, Early November, and Trouble Is Grog Shop Friday, March 28

A year ago, Athersys stood for Ohio pride. Governor Bob Taft invited the biopharmaceutical company's chief executive, Gil Van Bokkelen, to his 2002 State of the State address. Taft wanted a real, live Third Frontiersman on hand as he introduced his $1.6 billion initiative to boost research and technology endeavors. Athersys, Taft noted, held two patents and 130 jobs.

"Gil, thank you for your ingenuity and for creating high-paying jobs in Ohio," he said.

The governor's address was not the first celebration of Athersys. In 1997, The Plain Dealer ran a long feature about the company's first discovery -- a synthetic human chromosome. With manufacturing in decline, Athersys is often held up as the kind of outfit the region needs to nurture: a rose among rusty thorns.

Now the rose is looking for richer soil.

In March, Athersys officials said they needed an infusion of $250 million. Athersys hoped to attract a substantial chunk of the money from Cleveland medicine's Big Three: Case Western Reserve, University Hospitals, and the Cleveland Clinic. Company officials said that $10 million apiece would be fine, but $25 million would be great.

The company also let it be known that Minneapolis-St. Paul, Pittsburgh, and North Carolina's Research Triangle had sent a welcome wagon. The dalliance with Minnesota took place over a four-hour dinner at the governor's mansion.

A message was delivered: Pay up, or we're packing up. (Athersys did not respond to interview requests.)

The Big Three, however, are unwilling to plunge such sums into a company that hasn't made a lick of profit in eight years. Nor did they enjoy having "their noses tweaked" for all of Cleveland to see, says state Senator Eric Fingerhut (D-Cleveland). UH will not comment, though a spokesman did offer glancing criticism of Athersys's play. "That can work for them, and that can work against them," Eric Sandstrom says. "If you're one of those institutions that doesn't like to negotiate in public, well, there's a problem."

Meanwhile, government leaders panicked.

Ohio Director of Development Bruce Johnson promised a package to assist with the construction of new headquarters at Chagrin Highlands. Fingerhut, Mayor Jane Campbell, and state Representative Jim Trakas (R-Independence) attended a strategy session of business and political leaders. "I think this is as fully important a moment in our economy as the LTV crisis was," Fingerhut says. "I think we need to go all-out."

When LTV was in its death throes, the governor outlined a $110 million package to keep the furnaces hot. The bid to keep Athersys in Cleveland won't be as large, but it won't be insignificant, either. The state, county, and city were to have delivered a package to the company on April 2.

The future of chromosomes is certainly brighter than the future of cold-rolled steel. Yet when LTV teetered on shutdown, 3,200 local jobs were in peril. Athersys's staff couldn't fill a Warehouse District nightclub. "It's never going to have more than a couple hundred working for it," Trakas admits.

But say this for the company: It knows how to generate buzz.

Gil Van Bokkelen and John Harrington came to hunch over microscopes at Case Western Reserve after completing their doctorates at Stanford. They moved to Cleveland at the invitation of Dr. Huntington Willard, a Case professor and the director of the Research Institute at UH. Willard was lured away from Stanford in 1991 with the promise of a $15 million genetics department.

Van Bokkelen and Harrington saw enterprise in discovery. After their artificial chromosome breakthrough, the two started Athersys. They later developed a technique to induce genes to produce proteins, which orchestrate the body's functions. Master the protein, the thinking goes, and master the disease.

Since the human genome was sequenced, companies have rushed to patent genes that may or may not unlock a life mystery. Athersys's technique is special because it activates genes at random, and thus doesn't infringe on patents -- at least theoretically. "They have a very nifty way of queuing the human genome database for answers," says Ron Cohen, CEO of Acorda Therapeutics, a biotech company developing therapies for spinal cord injuries.

The business world took note as well. In the fall of 2000, Red Herring magazine forecast the Athersys technique to be "the new killer app." The company agreed to provide cell lines to Pfizer and Bristol-Myers Squibb. Investors may not have fully grasped the science, but "without infringing on patents" sounds sweet in any circumstance. Athersys raised more than $100 million in private equity.

Since its founding, the company has not suffered from lack of aspiration. "We've defined our goal as becoming the most highly valued biopharmaceutical company in the world," Van Bokkelen once declared. "And that seems like a very ambitious goal, and it is."

The president and CEO, Van Bokkelen has emerged as a strong community leader, appearing at conferences and Quiet Crisis roundtables. The way Van Bokkelen speaks of Northeast Ohio's quality of life and community fabric, you might guess that he's an Ignatius grad, not a West Coaster. He was liked in return.

Goodwill notwithstanding, Athersys was too late for the disco days of the tech revolution. An initial public offering was planned for the fall of 2000. Yet by then, the markets had already begun their sink. Capital, once so easy to come by, took scarce. There were 68 initial public offerings of biotech companies in 2000. The following year, there were six.

Athersys withdrew its stock plan. The late '90s were done. No one was going to one day wake up a scientist and go to bed a millionaire.

It figures that Cleveland would target biotechnology. With the Clinic, Case Western Reserve, University Hospitals, and the NASA Glenn Research Center in town, the region doesn't lack for big brains or Bunsen burners.

The old economy isn't going to get it done. Cuyahoga County lost 11 percent of its high-wage manufacturing jobs last year, according to the Council for Economic Opportunities in Greater Cleveland.

The problem is, with health care spending expected to reach $2.8 trillion by 2011, it's hard to find a city in the U.S. that isn't pinning hopes to the restorative power of molecules. Yonkers, New York, got a $4 million grant from the feds to convert a vacant building into a biotech center. The University of Nevada in Las Vegas got $2.6 million from Uncle Sam for its biotech center. Trans Ova Genetics is threatening to bolt Iowa for the more hospitable business climate of . . . South Dakota. In 1999, the economic development council in Tyler, Texas, bought 120 acres to build a biopark.

Tyler has fewer residents than Parma and is 100 miles from the nearest big city.

Yet in Cleveland, bioscience is discussed as if it were a secret recipe. "Biotech is where the computer industry was in about 1970," says Paul Nickels, a spokesman for BioEnterprise, a business accelerator started by the Big Three. "It will be huge in coming years, and Athersys has great potential to be what is often called an anchor company."

Whatever its future, biotech's present impact on the local economy is minimal. Policy Matters Ohio released a study showing that the drug and medical-device industries, while growing, constitute just 0.004 percent of employment in the region.

With job volume lacking, biotech's boosters emphasize quality. "They're going to be high-end jobs," Trakas says. They do pay well, though not extravagantly so. Governor Taft in his State of the State address said that the average Athersys worker made $51,000 a year. The average income on Cuyahoga County tax returns filed in 2000 was $47,294.

Athersys may, of course, hit gold. Political and business leaders dream of a "liquidity event" that would flood the region with money. Tim Mueller, the City of Cleveland's chief development officer, says that Amgen, a Southern California company, was in Athersys's position 15 years ago. Today, Amgen has revenues of $5.5 billion and thousands of employees. "That's what makes this thrilling to us," Mueller says.

Amgen, however, is the exception. The biotech sector, like the dot-com field, is littered with collapse.

Alliance Pharmaceutical's blood substitute, for instance, was once heralded on the front page of USA Today. But when the company needed to borrow $3 million recently, the terms were commensurate with loan sharking: 100 percent a year.

San Diego-based Advanced Tissue Sciences delivered sheets of human skin cells to Pentagon employees hours after the 9-11 attack. Last fall, the company filed for bankruptcy. It couldn't get the cash it needed to stay in business, says Abe Wischnia, Advanced Tissue's former director of investor relations. "They didn't need to raise $200 million -- they only needed to raise $20 million, and they couldn't do it on terms that weren't onerous."

Wischnia says that, once upon a time, all a company needed to raise money was an interesting story. Today, "the potential investors are like sharks in the water. If they smell blood, they're going to want a very steep price." The situation is so dire, some companies are selling for less than the cash they have on hand.

Nor can biotech upstarts with product development deals with pharmaceutical giants rely on those to save them. Big Pharma is allowing smaller companies to waste away. "The technology and the patents don't disappear when a company dies," Wischnia says. "They just get cheaper to buy."

Athersys does have assets. The company made headlines in December when it licensed the commercial rights to stem cells derived from the bone marrow of adults. The cells, discovered by University of Minnesota researchers, are hoped to be as potent as embryonic stem cells, but without the ethical baggage.

The deal made the pages of The New York Times. Dr. George Muschler, a Clinic orthopedic surgeon active in stem-cell research, says the Minnesota license holds promise. But the technology is also just "one of about six strategies" for prompting stem cells to repair tissue and treat disease.

Lorelei Davis, a vice president of the Cleveland-based Frantz Medical Ventures Fund, is also reluctant to declare the Minnesota cells a blockbuster. For one thing, the Bush Administration's restrictions on embryos doesn't extend to Canada and Europe, leaving fewer limits on research abroad. "I don't know that it's going to be a unique technology, particularly, but I could be wrong," says Davis, who has a Ph.D. in molecular biology.

In any case, Athersys is not believed to have what investors most covet -- a moneymaker ready for the short term. "Right now, the flavor of the month is companies with late-stage clinical opportunities," Cohen says.

Fingerhut hoped the state would be "creative" in enticing Athersys to stay. The Taft Administration fulfilled his wish. What the company needs most is cash, not tax abatements or a new highway exit. To that end, the Ohio Department of Development talked about using the billions in state pension and workers' comp funds to invest. "We certainly are encouraging folks to take a good, strong look at Athersys," Director Johnson says.

But the Ohio Public Employees Retirement System, for one, doesn't make large equity investments in private companies. The potential reward of a bet on Athersys is great, but so too is the risk of loss. "Imagine giving your money to somebody, and you're not going to know until the end of a 10-year period what you've got," says Tom Sherman, the retirement system's lobbyist.

Even Johnson seemed to realize that it would be foolish for pension funds to roll the dice on something like Athersys. "It takes an extraordinary amount of supervision in order to make these investments wisely," he said. "The average investor probably shouldn't. And certainly these large funds don't tend to make very company-specific investments, because these types of companies require such attention."

Athersys has already received a handsome amount of charity. Van Bokkelen and Harrington opened shop in an incubator managed by Enterprise Development, a nonprofit subsidiary of Case Western Reserve. When Athersys outgrew that space, it moved into an incubator sponsored by Enterprise Development, Cleveland Tomorrow, and the Edison Biotechnology Center, a division of the Ohio Department of Development. The incubators afforded the company office space and business services on the cheap.

The Edison Biotechnology Center, now known by the more whooshy-sounding name Omeris, also provided cash. Athersys received $50,000 grants in 1996 and 1998. It's also received job-creation tax credits worth more than $200,000.

There's more. As part of Taft's Third Frontier, Ohio is spending $350 million of its tobacco-settlement money on bioscience projects. Athersys is a subcontractor on a Case study of gastrointestinal cancer that received $10.2 million.

Athersys benefits indirectly from other programs. The state subsidizes BioEnterprise, a de facto Athersys PR firm. For investors in high-tech companies, the state provides tax breaks ($8 million worth to date) and even cash. A handful of Ohio venture capitalists have received six- and seven-figure direct payments from the state for investing in companies like Athersys.

"The state has been very good to Athersys, I think," says Dorothy Baunach, the director of NorTech, a division of Cleveland Tomorrow.

Baunach says it would be a shame if Athersys left -- a unanimous sentiment in the scientific community. "We certainly don't want to lose a company that's grown up here," says Dr. Paul DiCorleto, the chairman of the Clinic's Lerner Research Institute. "Their success here should attract other companies. This region needs that initial success."

Yet Big Three officials are quick to add that the work will go on, regardless of Athersys's participation. Case, UH, and the Clinic have requested $19.5 million from the state to build a Center for Stem Cell and Regenerative Medicine. Athersys's name is on the grant request. "Our hope is that they will stay here and work together on this project," says Christopher Coburn, the man responsible for commercializing research at the Clinic. "But we feel strongly about the request, even if they aren't in."

Coburn, for one, is more cautious about bioscience's ability to rejuvenate ailing economies. It's a line he's heard for 15 years. "This sense of a big payoff has been out there for a long time."

He advocates a strategy of moving quickly, with the realization that no gains may be realized until well into the future. And the more companies there are, the better the chances of one succeeding. "I think the challenge for the community is to get as many opportunities in flight as possible."

In the meantime, state and local leaders can be expected to push a big pile of chips behind Athersys. "The reason it's important to the state is that it will potentially employ hundreds and thousands of Ohioans some day, if they're successful," Johnson says. "It represents symbolically the growth of technology in the northeast."

It was suggested to Johnson that "thousands of jobs" might be unrealistic, given that Athersys currently employs about 100 people.

"We need to focus on reputational change," he says. "That in and of itself draws other investments. If this company represents a growth in Ohio's biotechnology reputation, I would equate it to thousands of jobs."

But, he concedes, "It's an extrapolation some people don't choose to make."

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