San Diego Call it the Florida flimflam. You would almost think that Richard Lerner, president of Scripps Research Institute, has taken lessons in snookering the public from his good friend, Padres majority owner John Moores.
Scripps plans to locate a biotech research facility in South Florida. To wangle $569 million in state and local government subsidies, the research institute, along with Governor Jeb Bush, has taken a page from pro-sports stadium scams. Bush is promising preposterous biotech job creation while Lerner, also promising a flow of jobs, rhapsodizes about a biotech Eden. Skeptical scholars and journalists have pointed out how bloated the claims are, but most state politicians have bought the hype...hook, line, and sucker.
However, even the skeptics have missed the major point. Government subsidy of bioscience (biotechnology and biomedical equipment) may be about future medical advances, but it is decidedly not about job creation. Unfortunately, to a very large degree, it is about fast bucks for fat cats, and that's why overhyped projects get support from politicians who are in the nabobs' pockets.
Corporate insiders, venture capitalists, and local moneybags rake in profits of one million percent or so in initial public offerings of biotech stocks. Most biotechs don't succeed in their scientific quests, but the insiders who get cheap shares (a penny, say, for founders shares and 50 cents to a dollar for second and third round pre-offering stock) have it made. Unlike companies in most other initial public offerings, biotechs are not on the cusp of success; they claim they will have a cure for a disease in perhaps ten years. With a window this wide, it's hardly surprising that biotechs get rushed to the initial public offering market, whether or not success is even on the distant horizon.
In a juiced-up market, Wall Street manipulators and corporate touts push up the stock on exaggerated expectations. Those who have received the extremely cheap shares can sell off some of their stock each year, with certain legal and underwriting restrictions, and get fabulously wealthy, whether or not the company succeeds, and even when the stock tanks, as almost all do. (If you got your shares for a penny each, you get plenty rich selling them for 50 cents, and filthy rich unloading them for $50.)
Florida and Palm Beach County have anted up the $569 million on Scripps' guarantee that its new Florida research center will hire 545 people in seven years. That's about one million dollars per job. Astounding. But, says Governor Jeb Bush, biotech companies springing up and relocating to the area will create 50,000 industry jobs in 15 years.
Oh? San Diego is the nation's third-largest biotech center. But in almost three decades of biotech activity, the county has 36,371 bioscience (both biotech and biomed) jobs, says Stephen Meyer, president of Alexander X, Inc., a San Diego technology and life science research company. Biotech jobs are a mere 2.5 percent of San Diego civilian jobs.
Biotech jobs are expensive to produce, slow to develop, and volatile, says Meyer. In the year 2000, San Diego had 30,000 biotech jobs. The next year it dropped to 27,000 before rising to the current level.
San Diego has 505 biotech companies. Very few are profitable. According to the accounting firm Ernst & Young, publicly held San Diego biotechs lost a collective $641 million in 2001, and the loss swelled to $748.4 million the following year.
In October, when Bush pitched the legislature for a fat Scripps subsidy, the governor's office sent out a news release saying that the projection of future jobs was based on the fact that 80 percent of San Diego biotechs "are within a three-mile radius of the Scripps facility in La Jolla." The news release didn't mention that the University of California at San Diego, Salk Institute, Burnham Institute, and other science centers are located in the same area. In fact, only 40 San Diego biotechs supposedly owe their existence to Scripps, and it isn't clear how many are still in operation.
In many ways, the biotech industry is like the lottery: a few companies make it big while the others sink. Biotech stocks have even more in common with the lottery -- except for insiders, who have a can't-lose ticket.
Nationally, only about 100 biotech-related drugs have made it to market in the past 30 years, according to a study by the Brookings Institution. There are fewer than 200,000 employees in 1500 companies.The U.S. industry lost $11 billion in 2002. Ernst & Young doesn't think it will be profitable until 2010 at the earliest. The years of bounteous money flowing from the federal government's National Institutes of Health are over, scholars agree.
Nonetheless, according to Brookings, biotech is either the first or second target for 83 percent of state and local economic agencies nationwide.
The Scripps/Florida projections are "unrealistic, and a long shot at best," according to Brookings economist Joseph Cortright.
Floridians have taken notice. When Governor Bush originally threw out the job estimates, Democratic leaders accused him of "wildly inflating" the numbers. Perhaps 16,000 jobs in 15 years -- not 50,000 -- would be reasonable, says the former head of the state's Office of Demographic Research.
According to the Ft. Lauderdale Sun-Sentinel, the Bush team's economic model foresees 173 new biotech companies arising or arriving in the 14th year. But in Massachusetts, one of three top biotech areas, only 5 to 20 companies are added each year. Hmmm.
Possibly because Bush and Scripps didn't want the public to wise up, the whole deal was wrapped up in a couple of months, at both state and local levels. Moreover, legislators hurriedly passed a measure that gives Scripps exemption from key parts of the state's public records laws. "We need to protect our intellectual property so that we can license it to private companies" and bring in royalties, says Scripps spokesman Keith McKeown. The deal might not have gone through without the exemptions.
But the state's open-government advocates, such as the First Amendment Foundation, point out that exempting Scripps from opening its books could permit it to conceal its dealings with state and Palm Beach County authorities. And because of the hurry-up, hush-hush nature of the deal, many Floridians are concerned about what happened behind closed doors.
Lerner has urged speeding up the deal with dubious statements such as, "Researchers by nature are not very patient." Oh? Patience is a bedrock virtue of scientific inquiry. Ask the Food and Drug Administration.
Lerner has made other statements that strain credulity. "Researchers remain isolated from the vagaries of the marketplace," he told the Miami Herald. "We don't have a bottom line. We don't have to worry if our stock goes up."
Balderdash. In 1992 and 1993, Craig Rose of the Union-Tribune did an excellent series on questionable Scripps activity, including a deal with Sandoz Pharmaceuticals that initially gave the company wide control over scientific activity at Scripps. Lerner became embroiled in controversy by serving as a paid consultant to Johnson & Johnson, which had an agreement to commercialize discoveries at Scripps.
Lerner may sniff that he doesn't worry about stocks going up, but he made a $900 investment in Cytel, a startup company he cofounded that had a joint venture with Scripps. Nine months later, Cytel bought those shares from Lerner for $71,000. There were other questions about shares in a Scripps/Cytel joint venture going to Scripps employees. Lerner said such fast-buck schemes were "incentivizing people."
Cytel has since morphed into a San Diego biotech named Epimmune, which to date has never made a profit or even any revenues from commercial products and has a huge cumulative deficit of $156.7 million.
It's little wonder that Lerner and Moores are so cozy. Moores, longtime Peregrine Systems chairman, sold more than $450 million of his stock during a period in which the books were cooked. During that time, he was a big donor and board member of Scripps.
"We gave him an honorary degree right in the middle of the problems with Peregrine because we wanted to weigh in and say, 'Everything you're hearing about John Moores is not the John we know,' " enthused Lerner to the Union-Tribune.
Lerner and Moores share mutual admiration -- and, apparently, strategy for extracting money from governments. Uh-oh. The next step might be for Scripps, having hornswaggled Florida, to threaten to leave San Diego unless taxpayers build a new facility here.