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Research Institute Struggles Raise Questions About Big Dollar Recruitment Approaches

June 23, 2016

Because a research base that generates new knowledge is a key pillar of a technology-based economy, an important strategy in technology-based economic development is the expansion of research capacity. While states may go about addressing this in a variety of ways (e.g., R&D tax-credits, university-industry partnerships, recruiting eminent scholars), Florida drew national attention when it took a different approach last decade, allocating more than $450 million to attract nine research institutes through its Innovation Incentive Program (IIP). Recently, one of those attracted institutes, the San Diego-based Sanford-Burnham Prebys Medical Discovery Institute – which received approximately $367 million in state and local incentives to open an Orlando location – announced that it was having discussions with the University of Florida to exit the state and turn the Florida operations over to the university.

Writing for Reuters in the early stages of former Florida Gov. Jeb Bush’s 2016 presidential campaign, journalist Jason Szep noted that, despite Bush-the-candidate’s suggestion that the government should not be in the business of picking winners or losers, Bush-the-governor’s economic development track record told another story. In 2003, Gov. Bush and the Florida state legislature decided to use $310 million in federal stimulus funds to attract the San Diego-based nonprofit Scripps Research Institute to establish a large biotech facility in the state in an early attempt to diversify the state’s economy, supplemented by a $200 million economic package from Palm Beach County.

Gov. Bush and the Florida legislature passed the Innovation Incentive Program (IIP) in 2006 with the objective of competing for and attracting high-value research and development, innovation business, and alternative and renewable energy projects related to the state’s pre-determined industry clusters.  Nine organizations were awarded a combined $455.7 million in funds from the IIP between 2006 and 2013, in addition to the $310 million state subsidy to Scripps Florida, according to the Florida Department of Economic Opportunity (DEO). DEO reported in its 2014 Annual Incentives Report that the nine organizations had created a combined total of 901 jobs.

A 2014 evaluation by the Florida legislature’s Office of Economic and Demographic Research (EDR) estimated that the return on investment for the Innovation Incentive Program was approximately 0.2 for the three-year period from 2009 to 2012, the lowest of the eight Florida incentives with appropriation-based state support (as opposed to tax incentives). The EDR measures ROI by calculating the direct, indirect, and induced gains in state revenues generated by a program as a percentage of the state’s investment. Potential explanations for the Innovation Incentive Program’s low ROI, as identified by the EDR, include: the very large award sizes; more than half of the capital investment associated with IIP projects was outside the period under review of the study; and, research and development has smaller multiplier effects than some other industries.

While the low return on investment suggests some of the challenges associated with an initiative like the Innovation Incentive Program, recent struggles at four of Florida’s research centers that received subsidies highlights additional underlying issues. For example, a decade after San Diego-based Sanford-Burnham was attracted to Florida to act as an anchor for Orlando’s fledgling “Medical City,” the institute has struggled financially, grappling with diminishing NIH research dollars and challenges in balancing its finances – including a $12 million loss in the most recent budget year.

As a way to address these financial struggles, the University of Florida (UF) and Sanford-Burnham have been discussing a proposal that would transfer the research institute’s facilities to the university. Under this proposed plan, the university would take over Sanford-Burnham’s building and research equipment, while researchers would become state employees working for UF. In a series of letters to Gov. Rick Scott’s office, both UF and Sanford-Burnham indicated that unless the state accepts a transfer of Sanford-Burnham’s biomedical research facilities to UF, the institute will exhaust its funds and eventually shut down its operations. The institute had received $137.8 million in state IIF funding through 2013 and created 234 jobs with a capital investment of $47.3 million, according to the DEO incentives report.

Similar circumstances have created challenges for IIP research institutes in Port St. Lucie, on the state’s eastern shore. In 2008, Oregon Health & Science University's Vaccine and Gene Therapy Institute (VGTI) announced it received $117.9 million from Florida to open a research center, and in 2010 the Port St. Lucie City Council authorized $65 million in bonds for development. After some early successes following its grand opening in 2012, including a partnership with Swedish Karolinska Institute, by 2015 it was determined in legal documents that VGTI was out of money. In August 2015, VGTI announced it was ceasing its operations after failing to secure a $5 million bailout from the city. 

The Torrey Pines Institute for Molecular Studies, also located in Port St. Lucie, has faced a constant struggle to comply with the employment requirements from its multi-million dollar investment deal with the state. The 85-person staff employed by the institute as of October 2015 is less than half of the 189 required by the end of its annual reporting period in June 2016, which may ultimately result in sanctions, according to TCPalm.

The Draper Lab in the Tampa region, which was attracted by a $30 million incentive package in 2009, announced in 2015 they were going to consolidate their Florida operations and instead focus on military contracting.

The challenges facing these research institutes lend insight into the difficulties in building a knowledge-economy focused primarily on recruiting large research institutes. The president of the Palm Beach County Business Development Board, as noted in Jason Szep’s March 2015 Reuters article, underscores what some skeptics had argued during the 2003 recruitment of Scripps, stating, “When the governor went after these institutes to come to Florida, we didn’t realize the amount of infrastructure that needed to be in place…. You don’t just go and pluck two institutes [Scripps and the Max Planck Florida Institute for Neuroscience] and put them in a county and expect the industry overall to thrive and for companies to flock here." 

Reliance on federal research funding and the flow of venture capital highlight challenges Florida has faced in building its life-sciences economy. One commonality among the struggling research institutes is that they have been negatively impacted by decreased funding from the National Institutes of Health (NIH). Although Florida researchers brought in a state-record $521 million in NIH grants in 2015, only a small share went to research institutes recruited as part of the IIP.

An SSTI analysis of venture capital data from the quarterly PriceWaterhouseCoopers Moneytree survey finds that despite an increase in the total venture capital investment in Florida’s biomedical industries (as defined by the sum of biotechnology, healthcare services, and medical devices and equipment industries in the Moneytree data), the state’s share of venture capital investment in these industries has declined since the IIP went into effect. From 2006, when Florida’s share of total biomedical venture capital investment was 1.7 percent, through 2015, the state’s share never reached more than 1.5 percent of the national total.

As noted in the 2014 evaluation by the legislature’s Office of Economic and Demographic Research (EDR), the long horizon of the IIP compared to other incentive programs makes measuring its short-term economic impact a challenge. Sean Snaith, the director of University of Central Florida’s Institute for Economic Competitiveness, argues that the funding to recruit Sanford-Burnham “has spurred billions of dollars of economic impact each year, including thousands of jobs in the Lake Nona area. And this investment continues to grow.” He also notes the impact of the research center on additional innovation efforts in the region, asking, “Would the Medical City ever have been possible if Sanford Burnham had not been a part of the original nucleus that it formed with the UCF Medical School? Would Nemours, the VA Hospital, M.D. Anderson Cancer Center, the University of Florida Academic and Research Center and Valencia College have been pulled into orbit around that nucleus without the institute?”

Despite Florida’s desires to enhance its research capacity in order to be more competitive in the 21st century knowledge economy, the attraction of large-scale research institutes may have been a problematic way to do so. As was written in a 2005 Digest article, “The true costs and benefits of these types of deals will not be known for years. SSTI hopes there are academic researchers and policy analysts already collecting the data in all effected regions to help determine the value of these investments.”

Floridabio, r&d