AN UNLIKELY HOT SPOT Nearly six years after Pfizer closed down its site in Kalamazoo, the LIFE SCIENCES INDUSTRY there is growing steadily. 

BY THE END OF JANUARY, nearly 90  inches of snow had blanketed Kalamazoo,  Mich. Downtown buildings were frosted  with icicles, and awnings sagged under the  weight of the snow. Snowplows with nowhere  to turn created mountainous mazes  in parking lots and transformed the center  of neighborhood cul-de-sacs into mini-  North Poles.  Taking in the landscape, a visitor would  surely scoff at the notion that Kalamazoo is  a “hot spot.” But under the snow and ice, a  cluster of life sciences businesses is germinating.  By talking up local financial backing,  readily available facilities, a deep pool  of scientific talent, and affordable housing  and education, Kalamazoo is attempting  to make itself into a biotech hub. Given  the early success of life sciences service  companies and the city’s growing number  of drug discovery and medical device firms,  the proposition isn’t as crazy as it sounds.  To an outsider, particularly someone  from a coastal biotech center, Kalamazoo  probably seems like an unlikely competitor.  But southwest Michigan has a strong  foundation in the life sciences: Upjohn  Pharmaceutical opened its doors in Kalamazoo  more than a century ago, the medical  device firm Stryker has been in the area  for 60 years, and the contract research firm  MPI Research has been around for more  than a decade.  The life sciences scene in Kalamazoo—  particularly chemistry-driven drug discovery—  took a major hit when Pfizer closed  down the old Upjohn site in 2003. Leaving  about 1,000 scientists and related staffers  without jobs, the move had the potential to  create a devastating vacuum for intellectual  capital. To stem a mass exodus of scientific  expertise, the city and state provided  seed funding for potential entrepreneurs  to start businesses.  The first companies were primarily service  providers that emerged from the closure  of the Pfizer site. Having covered those  businesses in their nascent days (Nov. 3,  2003, page 17), C&EN returned recently to  explore whether local officials and entrepreneurs  succeeded in nurturing seedlings  planted far from the biotech industry’s  usual fields on the East and West Coasts.  Kalamazoo, it turns out, has done pretty  well for itself. The service companies started  almost six years ago have largely graduated  from the “incubator” stage to being  fully operational and, in many cases, profitable.  As Ron Kitchens, chief executive  officer of the local economic development  group SouthWest Michigan First (SWMF),  likes to say, “We’re one of five places in the  country where you can take a drug from  discovery to tableting.”  And importantly, local officials are cultivating  a second wave of entrepreneurs—  biotech firms attracted to Kalamazoo  because of ready capital, a strong scientific  workforce, and the infrastructure and services  needed to start or expand a business.  It made sense for the first group of  companies to be service oriented, Kitchens  says. Although the former Pfizer scientists  had discovered and developed many drugs,  the intellectual property stayed with Pfizer.  “There were great scientists who couldn’t  take any of their IP with them,” Kitchens  says. “But they had relationships with former  suppliers that allowed them to build  service organizations.”  There were also new facilities primed for  service companies. Anticipating upheaval  in the drug industry, SWMF began planning  an incubator space for entrepreneurs  as early as 1998. The Southwest Michigan  Innovation Center, a 58,000-sq-ft facility  with lab and office space for rent, conveniently  opened its doors just two months  after Pfizer closed in 2003.  Financially, it was also a safer bet to  invest in contract research organizations  (CROs) and other service companies. “It  is much less costly to invest in a CRO, and  once they are started they are self-sufficient,”  Kitchens notes. A drug company, on  the other hand, needs years and potentially  hundreds of millions of dollars to get a  product to patients.  SEVERAL FIRMS have been particularly  successful. Kalexsyn, a chemistry-driven  CRO, has built its own $5.5 million facility  in Kalamazoo. It is starting to augment its  staff, once dominated by older, ex-Pfizer  scientists, with younger chemists who can  benefit from the mentoring of their more  experienced peers. Proteos, a CRO focused  on peptides, has grown from seven ex-Pfizer  scientists to a staff of 17. It has become

the anchor company at the  Innovation Center, taking  up over 10,000 sq ft of lab  space.  But after that first crop  of companies, local officials  realized they would need  to look outside Kalamazoo’s  borders to continue  to build the city’s life sciences business.  Many scientists left the area after Pfizer  shut down, and most of those who remained  were gainfully employed. In order to keep up  the momentum, Kalamazoo would need to  scavenge the nation for entrepreneurs willing  to bring their businesses to Michigan.  In 2006, SWMF established a life sciences  venture capital fund with two goals:  to spur economic development and to  sustain the science base in Kalamazoo. The  fund was pumped with $50 million to help  companies get their start, but the money  had strings attached. Any company that  got investment had to be willing to relocate  some of its operations to Kalamazoo.  For many, the requirement to pick up and  move from a more cosmopolitan locale to  a sleepier, snowier town is a tough sell. In  the early days of the fund, it was often a deal  breaker. “Some companies just can’t do it,”  says Patrick G. Morand, the SWMF Life Science  Fund managing director. “I’ve learned  to get into that part of the conversation  within the first 10 minutes of a meeting.”  But Morand is not apologetic about the  requirement. A basic tenet of the fund is to  develop life sciences in the area, and most  of the entrepreneurs living and working in  Kalamazoo argue there is value in this scientific-  minded, results-driven community.  The fund is run on capital from the private  sector, so despite its location-driven mandate,  it is not dependent on state or federal  money—often slow to arrive and currently  hard to come by.

Focused on early-stage  investing, the fund looks for  several criteria in a potential  partner. Entrepreneurs obviously  need clear access to IP,  a handle on the market size  for their product, and a good  management team, Morand  says. More abstractly, the  entrepreneurs should have  “an appreciation of other  people’s money,” he notes.  So far, 10 companies have  matched those criteria, and  Morand expects to fund another  four or five this year.  An early addition to the  fund’s portfolio is Metabolic  Solutions Development,  a diabetes drug discovery firm that can  trace its roots to the Upjohn site. Cofounders  Rolf Kletzien and Jerry Colca had  both worked at Upjohn and survived as it  changed hands, first to Pharmacia and then  Pfizer. Both scientists moved to Pfizer’s St.  Louis site when research ended in Kalamazoo,  but they still had a lot of ideas about a  promising diabetes target they worked on  in their Upjohn days.  As they began to put together plans for  a company, they were drawn to Kalamazoo  not just by their history but by the financing  options and the wide range of local service  companies. Before receiving funds from  SWMF, Colca and Kletzien had put up their  own money to hire Ash Stevens, a Detroitbased  contract manufacturer, to make the  active pharmaceutical ingredient for their  lead drug candidate. Since setting up in Kalamazoo,  Metabolic Solutions has been able  to use local service providers for 95% of the  work needed to open an Investigational New  Drug Application for its lead diabetes drug.  “People think of San Diego or Boston  when they think of biotech,” says Colca,  Metabolic Solutions’ president and chief  scientific officer. “But none of those areas  have the concentration of pharmaceutical  development services that we have here.”  OTHERS HAVE also been drawn by the  combination of funding, lab space, and local  service providers. Executives at Emiliem,  a tiny biotech that takes a systems biology  approach to designing cancer-fighting  molecules, first heard about the resources  available in Kalamazoo when a Kalexsyn  manager visited their California offices.  Emiliem was already collaborating with Van  Andel Institute, a cancer research center in  Grand Rapids, about an  hour’s drive away. It had  decided to shift its chemistry  services to Kalexsyn  and was working with  Invitrogen, in Madison,  Wis., for screening. “All  of a sudden, it made  sense to come here and  set up an office,” Emiliem  President and CEO Dale Johnson says.  For others, the decision to come to Kalamazoo  came down to sheer economics.  James Duncan, CEO of Monteris Medical, a  medical device firm founded in Winnipeg,  Manitoba, is developing a minimally invasive  laser that heats and destroys brain tumors  with the help of magnetic resonance  imaging (MRI) and thermal data. Duncan  says he had always planned to establish  commercial operations in a U.S. city.  Chicago and Minneapolis were on the  short list because of their proximity to  Manitoba, but as executives were raising  capital, they learned about the SWMF fund.  Cash and facilities were available, not to  mention a legion of workers experienced in  making both drugs and devices. “We have  an enormous need for very skilled regulatory  and clinical people,” Duncan notes.  Suddenly, Kalamazoo was a contender.  The deal with SWMF was closed last  April, prior to the current credit crunch,  but money was clearly the driving force.  The entire executive team will move from  Winnipeg to Kalamazoo. For many, lifestyle  changes will come along with the  move, Duncan concedes. “While there is an  argument for why it makes sense, such as  the low cost of living, Kalamazoo is still not  Chicago,” he says.

Yet Duncan says he hasn’t had a hard time convincing employees  of the rationale behind the move. “Everybody who works for us  and those being recruited believe we are saving lives,” he says. “If  moving to Kalamazoo makes us more successful faster, then everybody  is for it.”  HEADING INTO 2009, the SWMF fund is starting to get more  queries from companies like Monteris that are driven by economics.  Although the financing crunch is hammering biotech firms  around the country, it could actually be a boon for Kalamazoo.  Many companies wouldn’t bother talking to the venture fund in  its early days; the hurdle of moving to Kalamazoo from balmy San  Diego or bustling Boston was too high.  Today, with so many companies struggling to put together the  capital to survive, Kalamazoo suddenly isn’t looking so bad. “Companies  that six months ago wouldn’t talk to us are calling us up,”  Kitchens says. “The volume of e-mail is daunting. Our opportunities  have grown exponentially.” So much, in fact, that SWMF recently  made a staff member “entrepreneur-in-residence,” with the  task of dealing with all the requests.  The successes in Kalamazoo tie into what appears to be wider  acceptance of the Midwest as a real choice for life sciences investment,  according to the Cleveland-based business development firm  BioEnterprise. “The venture investment numbers show that investors  have started to recognize the Midwest as a hotbed of biomedical  company development, and that is leading to companies themselves  becoming much more willing to consider a Midwest location  for their base of operations,” BioEnterprise CEO Baiju R. Shah says.  The perception has gone from “negative or neutral,” to a recognition  that many midwestern cities have skill sets that are worth a  second look, Shah says. He notes that Minneapolis has a hub of cardiovascular companies, Michigan is strong  in medical devices, and Wisconsin and  Ohio have medical imaging expertise.  “That helps small companies realize that  not only will both regional and national  investors be willing to invest in them, but  there’s a talent base that you can draw upon  for growing your company,” Shah adds.  Some in Kalamazoo attribute the city’s  success to a special brand of midwestern  fortitude. After all, they point out, by the  time Pfizer shut its doors, the community  had already survived exoduses of guitarmaker  Gibson, Checker Cab, and General  Motors. Local entrepreneurs and investors  note that while the rest of the country waits  for a bailout, their community is laying the  foundation for a sustainable future.  Whether the life sciences cluster can fulfill  its promise remains to be seen. One test  of SWMF’s model—and of the potential  of Kalamazoo’s discovery-based companies—  will be whether firms are successful  at attracting funding from national venture  capital firms.  Executives at NanoMed Pharmaceuticals,  which is using nanoparticle technology  to develop improved versions of  existing drugs, believe some of the bigger  venture capitalists are starting to come  around. CEO Stephen Benoit notes that  NanoMed was able to meet with four top  venture capital firms during the annual  JPMorgan HealthCare Conference, held  in San Francisco in January. Facilitated by  SWMF’s Morand, the meetings represented  for Benoit a major step forward for his  company, as well as the region.  According to Benoit, a successful life  sciences center is one where investors can  buy and sell companies in a short period of  time. For NanoMed and some of the other  companies in the SWMF fund, being able  to raise a next round of funding “that is  sizable and has a lead investor from a large  regional or national top-tier firm” will be a  crucial litmus, he says.  “We’re not exactly a day trip for the big  venture capital firms,” Benoit notes. Most  investors won’t bother making the effort  unless they can see many companies in one  day, he adds.  Kitchens, ever the Kalamazoo champion,  is confident the region will continue  to flourish. After all, when he and his colleagues  started the innovation center and  later established the fund, the naysayers  were plentiful. “They told us it wouldn’t  work, but we’ve proved them wrong,”  Kitchens says.

CEN, February 23, 2009