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Life Science Discovery Fund, defunded by Legislature, will exit with last hurrah

 

The Life Science Discovery Fund (LSDF), created a decade ago from the state's share of tobacco-settlement millions to promote the growth and competitiveness of the life science industry in Washington but defunded by the 2015 Legislature, has found a way to go out in style after all.

In what amounts to an unusual but fitting last hurrah, LSDF announced today that it is launching a six-month competition for what might be described as a "legacy" or "ecosystem" grant of almost $2 million to one or more organizations that can stimulate momentum within the life sciences commercialization sector.

The LSDF was established by then-Gov. Christine Gregoire and the legislature with the vision of using Washington's multi-million-dollar share of the Tobacco funds from the 1998 settlement to promote life sciences competitiveness, improve health and healthcare and help shape that industry's future.

But perhaps proving that vision can't be passed on, the 2015 Legislature defunded LSDF, with Democrats in the House and the Statehouse eventually acquiescing to the demand of Senate Republicans that funding for LSDF end.

In writing about that final legislative action, I said that LSDF went out "not with a bang but a whimper," given that strong support for the organization from Gov. Jay Inslee and House Democrats evaporated in the final days of legislative give and take on what would be included in the budget.

Wrong about going out with a whimper! LSDF will be going out with a bang after all, but not one the Legislature intended, or knew was possible.

In defunding LSDF. the Legislature specified that the $11 million in the organization's treasury balance be shifted to the state general fund.  

Except that in Addition to the $11 million that was to be LSDF's operating funds for the next year, and the nearly $12 million in the LSDF treasury to manage the stable of 46 grants already awarded by the fund, there was almost $2 million left in the treasury. Unallocated and not ordered sent to the general fund.

So the LSDF board last week approved the idea of turning that nearly $2 million remainder into what Executive Director John DesRosier refers to as " a life science ecosystem grant" and LSDF took the first step today by announcing the request for proposals with a pre-proposal deadline of September 21.

Full proposals will be due by January 6 with awards (possibly more than one) to be announced February 8 as an appropriate denouement for LSDF, which since it first began making grants in 2007 has awarded nearly $106 million to non-profit and for-profit life science businesses.

DesRosier said the grant o grants could be awarded to either a non-profit or for-profit entity that might already exist or come into existence "to stimulate momentum within the life science commercialization sector."

DesRosier views LSDF's eight years of funding activity, largely to startups for whom the grants often served to allow entrepreneurs to bridge the early funding challenges referred to as "the valley of death" for startups, as "creating a momentum for the life science industry's emerging companies.

And for all the lamenting from those focused on how this state stacks up against competing states and the message they fear that LSDF's demise sends to entrepreneurs in other states, it needs to be remembered that LSDF's legacy is in the life science startups it funded and that are now growing and creating jobs.

"So now the question is how do we keep this momentum going," he asked. "We think one way is to create programs that support entrepreneurs in their endeavors, not with individual grants but in a less prescriptive way."

It's clear that the LSDF board wants to be flexible in determining what type of organization or groups might best contribute to the life sciences ecosystem they seek to foster. "We want to keep as much flexibility as possible, depending on the scope of the proposals we receive," DesRosier said.

LSDF will be downsizing its staff by the time the board awards the grant, or grants. But DesRosier avoids referring to the end of the organization, saying "we're not using words like dissolving."

It's worth remembering that the legislature only denied LSDF future funding, it didn't strike the organization from existence.

"We're actually downsizing the staff by the end of February and we may or may not be in or current physicial space (LADF has been housed in the headquarters of the Washington Biotech & Biomedical Association)," he said. "But whether or not the organization continues to exists still up in the air, as well as the question of whether we will continue to oversee the existing grants."

"We're still quite flexible if something interesting comes up between now and then," said DesRosier.

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Lawmakers bring Life Science Discovery Fund to an end, not with a bang but a whimper

The fund established a decade ago by then-Gov. Christine Gregoire and the legislature with the lofty goal of supporting innovative research in this state to promote life sciences competitiveness, enhance economic vitality and improve health and health care has been terminated by the Legislature. And an oft-quoted line of poetry may best sum up the outcome: "not with a bang but a whimper."

The Life Science Discovery Fund (LSDF) was defunded by the Legislature at the insistence of the Republican Senate and at the eventual acquiescence of both the Democratic House and Democratic governor who had touted its importance to the state's future. In the rush to final budget passage, the fate of LSDF drew little attention except from the disappointingly few who understood its to the future of the state's economy.

Those who recognize the quote in the lead paragraph above as from T.S. Eliot's "The Hollow Men" should be forgiven for a quick sense of how appropriate the description "Hollow men" might be for the members of the Legislature.

And how appropriate also for that body might be the poem's line, "headpiece filled with straw."

The "whimper" is in the still unexplained rollover by both Democrats in the House and the governor himself after they had fought fiercely for LSDF funding and owned the vision space as it related to the importance of biotech and biopharma start-ups to the state's future.

The final budget was passed by the Legislature and signed by Gov. Jay Inslee last week after a conference committee had hammered out the details of issues in conflict, including the future of LSDF.  

In the end, House Democrats gave in and allowed a GOP-demanded shift of LSDF's treasury balance of $11 million to the state general fund and the stripping it of any revenue from any source over the coming biennium.  

I confidently (and obviously misguidedly) told friends and business associates the governor would use his line-item veto power to eliminate those LSDF death-knell provisions and turn GOP opposition to state support of entrepreneurs and biotech startups into campaign issues for Democrats next year.

Didn't happen. For reasons yet unexplained, the governor failed last week to employ the veto power he used a year ago to save the fund and thus become the political darling of those who saw LSDF as this state's message to the life sciences world about Washington's commitment to its future role in economic development in this state.

But for all the lamenting from those focused on how this state stacks up against competing states and the message LSDF's demise sends to entrepreneurs in other states, it needs to be remembered that LSDF's legacy is in the life science startups it funded and that are now growing and creating jobs.

And appropriately, one of the grant recipients, Seattle-based Omeros Corp., could possibly become a springboard for biopharma startups in the future because of its unusual program funded with a $5 million LSDF grant and, in an leading-edge partnership, $20 million from Paul Allen's Vulcan Capital in 2010.

Those potential spinouts could come from Omeros' G-protein coupled receptor (GPCR) program, a potentially lucrative focus in what is viewed as one of the most valuable families of drug targets.

GPCR's relate to key physiological processes in the body in which molecules bind to the receptors. GPCR relates to drugs that act on brain-cell receptors, unlocking them to drug development with such drugs representing 30 to 40 percent of marketed pharmaceuticals. Examples of the wide range of GPCR-drugs are antihistamines, opioids, alpha and beta blockers, serotonergics and dopaminergics.

 

The Omeros focus is on what are known as orphan GPCRs, those whose brain-cell receptors lack a certain DNA factor. There is a broad range of indications linked to orphan GPCRs, including cardiovascular disease, asthma, diabetes, pain, obesity, Alzheimer's disease, Parkinson's disease, multiple sclerosis, schizophrenia, learning and cognitive disorders, autism, osteoporosis, osteoarthritis and several forms of cancer.

 

A key Vulcan executive said at the time of the partnership announcement that the Omeros GPCR focus could accelerate new pipeline development across a broad range of highly attractive drug targets and can make a significant impact on the pharmaceutical industry.

 

Dr. Greg Demopulos, CEO of publicly traded Omeros, says the GPCR focus of his company is designed to promote the life science industry in this state in a way that is provided by other states that are spending millions to move life science to the fore in their economic development focuses.

 

But if the Omeros effort is successful in turning out startups to focus on various diseases that could relate to and be impacted by the GPCR research, the result would be a private-sector successor to, or funder of life science discovery since Vulcan Capital and LSDF have a right to receive a percentage of net proceeds generated by the GPCR program.

 

Meanwhile, the legislature, in head scratching fashion, didn't strike the Life Science Discovery Fund from existence, merely left it without resources to survivc.

 

But as a friend who has surveyed the legislative process for decades, and been closely involved with the lawmakers, explained: "This is how the legislature operates. They don't outright kill things.  They just turn off the money spigot because that's the way it's handled in the secretive budget process, which is gutless."

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Could proposed capital-gains tax be vehicle for Supreme Court re-look at income tax?

The proposed capital gains tax that the Democratic controlled House of Representatives insists must be a part of the final legislative budget package likely stirs the inevitable liberal hopes and conservative fears about it being the vehicle to bring the issue of state income tax before the state Supreme Court.

Democrats are routinely hopeful of finding an opportunity to pass a tax measure that would cause the state's highest court to re-look at the constitutionality of a Washington income tax while Republicans are pretty much always on guard against that happening.

Thus the seemingly illogical positions of Democrats wanting a tax measure the Legislature passed over GOP opposition to be challenged to the Supreme Court and Republicans not wanting a measure they opposed to be appealed.  

Hugh Spitzer 

But the real logic is in understanding realities. Proponents of adding some sort of a tax on income to the tax structure in Washington have become convinced that the state Supreme Court, given the opportunity, would reverse the longstanding precedent that an income tax is unconstitutional in this state. And many opponents of an income tax apprehensively agree with that analysis.

  

It's been 82 years since Washington's Supreme Court, in a 5-to-4 decision, held that a graduated net income tax would violate the state constitution's uniformity provision because 'income' was 'property' and property was to be taxed uniformly.

Washington is one of only seven states with no income tax, but by almost any measure, it is the most progressive of the states with no tax on either personal or corporate income.  

The 1933 ruling on the unconstitutionality of an income tax has meant that it would require a two- thirds vote of the legislature and the voters to amend the constitution to impose an income tax. And despite repeated efforts to get the voters, since that supreme court ruling, to approve an income tax, no proposal has come close to approval.

But Seattle attorney Hugh Spitzer, an expert on the state constitution and long an advocate of a state income tax, agrees that the state high court, given the opportunity, would overturn the precedent case. But he says the proposed capital-gains tax, which Gov. Jay Inslee and Democrats pitch as targeting the investment income of the super wealthy, isn't likely to be the vehicle to get the issue before the court.

"Although I wish that this legislation, if enacted, would provide an opportunity to re-look at the constitutionality of a Washington income tax, I'm not sure that it would necessarily provide that opportunity," Spitzer emailed me when I posed the question to him this week.

"The state capital gains tax proposal has been carefully drafted to stay comfortably within the definitional parameters of an excise tax," Spitzer said, adding "I helped with the drafting of early versions of the proposed capital gains tax, and the language I worked with is still there."

"It's a one-time tax on a transaction rather than a periodic (i.e., yearly) tax on property.  The tax can be easily avoided by not selling the asset giving rise to the capital gains tax-this is an indicator of an excise tax rather than a property tax," he explained. "Property taxes can't be avoided by means of a voluntary action (like refraining from a purchase or a sale)." 

But likely stirring the emotions of liberal hope and conservative fear about a new supreme court decision, Spitzer, now acting professor at the University of Washington Law School, argues that the current State Supreme Court would accept an income tax as constitutional.  

"Fundamentally, the cases they relied on in 1933 all tied back to three United States Supreme Court cases which have been reversed or, in one case, wiped out by a U.S. Constitutional amendment. The background law no longer exists." Not to mention that this Supreme Court is dramatically more liberal in its makeup than the court in 1933.

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Legislative disinterest in funding assist for life science industry troubling to many

(Editor's noteThis is the first of a two-part series on the state's life science/biopharmaceutical industry with this first article dealing with the challenges of getting the state to provide the financial tools necessary to grow the industry. The second article will deal with a couple of newly emerging companies that will help carry the hopes for the future of the sector in Washington.)

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The apparent legislative disinterest in the state having a financial role in the future of Washington's life science industry isn't a fatal flaw for what has become the nation's sixth largest biopharma cluster. But it will send the wrong signal to biotech entrepreneurs and investors elsewhere in the country and will inevitably mean some startups won't make it across the early-funding challenge that's known as "the valley of death."

 

"Legislative disinterest" means the very real possibility that the 2015 Legislature may turn its back on key funding for startups, who represent the seeds that grow into players and job creators in the industry, by declining to keep the innovative Life Science Discovery Fund (LSDF) alive.

 

If LSDF, created to foster growth of the state's life science sector, went out of existence on its 10th anniversary because the Legislature decided not to fund it anymore, It would represent an ironic measure of the legislature's lack of commitment to the future of that industry in Washington.

 

Key states around the country are going to great financial lengths in their funding commitments to life science, both to foster growth of that industry within those states and also to send "come join us" messages to biotech innovators and investors elsewhere in the country.

 

LSDF was established in 2005 by then-Gov. Christine Gregoire and the state Legislature to guide investment dollars from the Master Tobacco Settlement Agreement into research and development grants to entities that demonstrate the strongest potential for delivering health and economic returns to the state.

 

It was only the intervention of Gov. Jay Inslee, a key proponent of a strong life-sciences sector, that saved LSDF at the end of the 2014 legislative session, but he couldn't prevent the demise of the research & development credit against the state sales and business & occupation taxes.

 

The R&D credit expired at the end of 2014. More than 2,000 companies had used the credit against the B&O tax since it was instituted in 1994, and about 400 have used the sales tax credit. The lost revenues through 2012 totaled about $950 million, but the investment the credits generated came to about $8 billion, and repaid the state several times over in overall tax collections, according to industry sources.

Chris Rivera
WBBA president.

Washington is now is on a short list of companies that don't offer R&D tax credits, and perhaps the only state on that short list that actually hopes to see its life sciences fortunes be an important component of economic success.

 

The budget Inslee has submitted to the Legislature would make a $20 million investment for LSDF and re-establish a $70 million Research and Development Tax Credit program with the governor telling the life sciences industry he is "a strong supporter of the R&D tax credit and sales tax deferral."

 

To be sure, the industry, guided by the Washington Biotech and Biomedical Association and its president, Chris Rivera, himself a former biotech CEO, have friends in Olympia in addition to the governor.

 

But the myopic among lawmakers will point to this region's sixth-largest life sciences ranking and say "well, things are obviously going pretty well for us."

 

The fact that the Seattle area ranks third among cluster-cities in the total of NIH dollars, at $142 million for the most recent year calculated, is viewed as reflecting the fact the region is anchored more by academic and independent research institutions than by local companies.

 

In fact, those academic-independent institutions, like the Gates Foundation, Fred Hutchinson Cancer Research Center, PATH, Institute for Systems Biology and the University of Washington may well be the most prestigious collection of industry research players in the country.

 

But the startups spun out of those institutions need conventional financial support to become full-blown businesses and that has been a challenge for companies in this state.

 

And from a competitive-clusters standpoint, the fact that two of the cluster cities above Seattle on the list are in California, with San Diego third and the Bay Area a far-ahead number one, is something that the lawmakers and policy makers need to be continually focused on.

 

Indeed nothing points up the importance of competitive awareness than the experience of Chris Rivera himself.

 

Rivera recalls that when he sought advice on launching a biotech firm in Seattle that would focus on orphan diseases "I told a key industry leader I needed space, talent and money. The response was 'you won't find those here.'

"

So having been involved with firms in Boston and the Bay Area before moving to Seattle in the mid-80s, he headed for California where, in 2005 in South San Francisco, he launched Hyperion Therapeutics, a specialty biopharmaceutical company focused on the development and commercialization of therapies for gastroenterology and hepatology diseases.  

 

Rivera guided his company through the usual ebbs and flows of early growth challenges, including downsizing when the IPO market dried up. He stepped down in 2008 as the company prepared for what turned out to be successful Phase II trials and a $69 million funding in June of 2009 in one of the largest VC raises that year. Hyperion went public in 2012. He remains an investor in the company, but it is a growing Bay Area firm, not the Seattle-area firm it might have been.

 

Thus it wasn't surprising that when the WBBA executive committee went looking for a new president in late 2008, they lured Rivera back to Seattle with one of his goals being to create a strategy to help keep companies in Washington.  

 

"I think we've done a pretty good job of achieving that," he says.

 

Success for Washington's life science industry often seems a matter of two steps forward and two steps back, despite the best efforts of WBBA, whose strategies include a successful mentor program for entrepreneurs.

 

There was some of both forward and back in 2014. The steps back were the departure Amgen, taking with it the jobs of more than 600 biotech employees, and the demise of once-high-flying Dendreon, which had more than 700 employees, leaving perhaps the largest number of jobless biotech employees ever in this area.

 

But the steps forward were the emergence of Juno Therapeutics, a company less than two years old that surged into an IPO in late 2014, and the surge in interest for Omeros Corp., whose CEO Greg Demopulos jokes that it has taken his company 20 years to become an overnight success.

 

Ironically, the hiring mode for Juno, which develops immunotherapy treatments for cancer and has had remarkable results in small clinical trials, has benefitted from the availability of former Amgen and Dendreon employees.

 

Omeros, a Seattle-based biopharmaceutical company focused on developing and commercializing small-molecule and protein therapeutics for large-market as well as a variety of orphan indications, has become the best biotech story of 2015 and we will take a look next week at the company that celebrated its 20th anniversary last June.

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Scott Jarvis merits retention in role as state's chief regulator of financial firms

As Governor-elect Jay Inslee puts his administration's leadership team in place over the coming weeks, the state's community bankers hope to persuade him to retain the man who oversaw the state's regulation of financial institutions during their unprecedented turmoil.

 

If Inslee asks outgoing Gov. Chris Gregoire about Scott Jarvis, whom she appointed director of the State Department of Financial Institutions (DFI) at the outset of her tenure in March of 1985, she'd undoubtedly give an unqualified endorsement.

 

Scott Jarvis
Scott Jarvis 

Brad Tower, president and executive director of the Community Bankers of Washington (CBW) will be suggesting to his members that they urge Jarvis' reappointment. The state-chartered community banks around the state may represent the most economically important sector of industries that fall under Jarvis' oversight.

 

Part of what Inslee must weigh is the fact that Jarvis, during an almost unprecedentedly challenging time for banks, credit unions and other financial companies, created a firm but caring state regulatory environment. What he created was important not just to the industry he oversaw but also to the economy of the state.

 

The state's banks and savings and loans were awash in profits when Gregoire plucked James (Scott) Jarvis from the office of the state insurance commissioner, where he was Deputy Commissioner for Consumer Protection, to head the agency that oversees all financial-transaction businesses.

 

It wasn't long into his tenure that Jarvis, an attorney, came to realize that what he recalls as "extremely high concentrations of lending in land acquisition and real estate development was going to be a problem for community banks if the economy took a turn for the worse."

 

But he was frustrated by the fact that, as he puts it, "there were no tools in the regulator's tool box to impose enforceable concentration limits nor to compel a profitable and healthy institution to reduce its exposure to a line of lending."

 

Thus as Jarvis came to know personally many of the bankers who ran institutions he regulated, "I knew who among them was struggling and whose banks, absent infusions of hard-to-come-by capital or an acquisition, would not survive."

 

"To watch these decent individuals keep a stiff upper lip and act as if all was well when they were among their peers and competitors was difficult," he said, in a comment bespeaking a regulator with a human side. "And it became all the more difficult as time for failure drew near." In the end, 17 state-chartered banks failed.

 

"I believe that over the last seven years, the environment he has created and people he has surrounded himself with has been one of the greatest assets for community banking in our state, and actually nationally," said CBW executive Tower in a telephone interview.

 

"While he has been a tough regulator, he's been fair and supportive and has been willing to push back on federal regulators when they were failing to be sensitive to local conditions," noted Tower, whose CBW is viewed as the pre-eminent voice of the state's 60 independent community banks. "Scott has been directly involved in slowing the knee-jerk reaction of the feds to close first and ask questions later."

 

That ability to work with federal regulators stems in part, likely, from Jarvis' role as legislative committee chair for the national organization of state regulators, where one of his duties is to coordinate the legislative positions of the organization at the federal level.

 

Pat Fahey, one of the state's most respected bank CEOs, recalls that as he sought to turn around failing Frontier Bank, "Scott was very supportive, even meeting with the governor to see how she might get involved, in seeking to convince the feds to accept a deal we had put together to save the bank."

 

In the end, fed ineptitude caused investors who sought to put together a deal with Fahey that would have saved Frontier Bank and its parent Frontier Financial Corp. to back away and the bank was shuttered and its assets sold to California's Union Bank.

 

Fahey is now at the helm of First Sound Bank as chairman, president and CEO seeking to turn it around. 

 

Patrick Patrick, like Fahey, a turnaround banker now involved in bringing back Seattle Bank, where he is CEO, says Jarvis "was the man the state needed in a very difficult time for Washington. He represented the interests of the regulatory system as well as the communities whose banks he oversaw."

 

Patrick credits Jarvis with "making certain, where possible, that people who had given back to their communities had a chance to continue to do so with their banks."

 

It's interesting, as well as telling, that Jarvis views his role as DFI director to be fostering policies that not only provide a healthy and predictable regulatory environment, but also promote economic vitality. It's clear he understands that what his agency website describes as "a fair and dynamic lending environment that results from viable state-chartered banks and credit unions" is important to capital formation for small business.

 

Jarvis' agency, in addition to regulating state chartered banks and credit unions, also regulates a variety of non-bank financial services providers, including mortgage lenders and payday lenders, as well as our state's securities industry.

 

Tellingly, CBW's Tower notes that "The FDIC has ramped up hiring and paid outrageous amounts to get good people. Scott can't pay market rates for his people so the only way he can keep good people is to create a good working, even a mentorship, environment."

 

Looking down the road for the industry he's come to understand as well as anyone, Jarvis thinks that as the economy improves "we can expect to see entrepreneurs looking to the state bank charter as the vehicle to create and grow new local community banks."

 

But he adds that for now, "and perhaps a bit beyond, consolidation remains the more likely path as the economic environment strives to sort itself out and attractive returns on investment remain challenging."

 

"Though not in the numbers seen in the past, well capitalized proposals, with strong management and sound business plans, will have a place in the Washington community banking environment in the years ahead and should receive federal approval," Jarvis said.

 

In addition, Jarvis notes, "a number of Washington institutions have recently switched from a federal to a state charter and several more are giving serious consideration to doing so."

 

"I would like to think that our efforts to be perceived as a fair, competent and knowledgeable regulator and our performance during these almost unprecedented times has something to do with that," he added.

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