AZBio, OTEF, and the Healthcare Impact Foundation’s efforts to establish an endowment to support the commercialization of life science innovation in Arizona is featured in the May/June issue of AZ Business Magazine.
AZBio initiative aims to cure funding gap that ails Arizona
Trying to build on Arizona’s significant investments in the life science discovery and healthcare delivery infrastructure, the state’s leaders are focused on bridging the funding gap that slows the growth of Arizona-based life science companies. Leaders of Arizona’s life science sector share a drive to accomplish a common goal: accelerate the growth of local companies that are developing and delivering innovative treatments that truly change lives.
A coalition of nonprofit organizations has set an ambitious goal to raise a $200 million endowment to support the commercialization of life-changing and lifesaving healthcare innovations that are being developed by Arizona-based researchers and entrepreneurs.
The founding members of the coalition include the Arizona Bioindustry Association, Inc. (AZBio) and the Opportunity Through Entrepreneurship Foundation (OTEF), as well as the Healthcare Impact Foundation (HCIF), a 501(c)(3) charitable nonprofit organization based in New York.
AZ Business asked these leaders to share more about this exciting initiative:
• Joan Koerber-Walker, president and CEO of AZBio; chairman of the OTEF board of directors; and Global Trustee of the Healthcare Impact Foundation.
• Chuck Stetson, head of a third- and fourth-generation family office in New York, chairman of the Healthcare Impact Foundation, and worked with Koerber-Walker to develop the HCIF concept.
• Russ Yelton, CEO of Yelton & Associates, past chairman of AZBio, member of the board of directors at Pinnacle Transplant Technologies, chairman of the AZ-HCIF Board of Trustees.
• Kristen Swingle, chairwoman of AZBio, vice president of consumer sales and operations for Cord Blood Registry at AMAG Pharmaceuticals.
Az Business: Why this? Why now?
Joan Koerber-Walker: Arizona has made great progress since the formation of our Bioscience Cluster in 1997 and the launch of the Arizona Bioscience Roadmap in 2002. By conservative estimates, more than $18 billion has been invested in the bioscience and healthcare sector by public and private sources over the last two decades.
We have built up our research enterprise, are launching exciting companies and are educating the next generation of bioscience leaders. Yet, one major hurdle still must be crossed. Lack of access to early stage life science capital has plagued Arizona for two decades. It’s time to stop talking about the problem and solve it.
The Arizona component of the Healthcare Impact Foundation (AZ-HCIF) is designed to provide sustainable funding to support the progression of Arizona-based life science discoveries along a path from development to delivery.
AZ-HCIF is the first of a portfolio of endowments from across the U.S. and around the world that will be collectively grown and managed by the Healthcare Impact Foundation, a public charity that was established in 2017. Arizona-based local trustees will serve to distribute the annual proceeds, with a goal of supporting the growth of innovative early-stage healthcare companies in Arizona.
Chuck Stetson: The Stetson Family Office has spent the last 18 months meeting with emerging healthcare innovation ecosystems around the US and globally. We found that while great ideas with high impact potential were coming from emerging life science markets like Arizona, the capital streams and support ecosystems are insufficient to support efficient growth of the companies. Too much time is wasted chasing funding. This time needs to be focused on getting high quality healthcare innovations further along the path to commercialization so that traditional venture capital and public equity funding can take it the rest of the way. We were honored to work with our partners in Arizona to develop a new and sustainable funding model to address this critical need.
Following Arizona’s lead, additional communities have signed on to raise HCIF endowments in Ohio, Washington state and Switzerland ,with others expected to be announced soon.
Russ Yelton: Great ideas can grow into great companies. The State of Arizona did its part by raising the cap on its successful Angel Investor Tax Credit program by an additional $10 million and authorizing $2.5 million a year in tax credits for the next four years. But, angel investment alone will not get us where we need to go. Arizona needs a steady flow of early stage capital to support the life science companies being created by Arizona entrepreneurs and to honor our angel investors for the risks they take by investing alongside them. This plan is a way for us to make it happen.
That is why Arizona’s capital campaign for the AZ-HCIF has now launched with a goal of reaching $200 million in charitable donations by the end of 2018.
Kristen Swingle: Across our state, we are seeing new ideas generated at our universities and by Arizona entrepreneurs. This is our opportunity to leverage the investments the state and the federal government makes in these Arizona discoveries. Life science innovation has the potential to lower healthcare costs, improve the quality of life and create rewarding careers for our workforce today and in the future.
AB: Why pursue an endowment model? Don’t we already have other endowments in Arizona?
RY: Access to capital has been a key objective of Arizona’s Bioscience Roadmap since its creation in 2002 and is one of the few items that continues to be an ongoing growth challenge for the industry. While Arizona has explored various solutions over the years, including state funding, privately managed fund of fund structures and other solutions, none have yielded results. Arizona continued to lag its peer group in venture capital funding and Arizona’s life science employment growth percentage continues to lag its growth in the number of firms.
Unlike traditional models that raise funds, invest them and are then depleted, the HCIF model allows for a single capital campaign followed by ongoing investment for years to come. In addition, as the base endowment grows, it provides additional support for future growth so that we are not continually coming back and asking for more donations.
CS: HCIF was formed in 2017 as a 501(c)(3) public charity and is dedicated to building a better private equity ecosystem for healthcare innovations and supporting the commercialization of healthcare innovations as they progress from the research laboratory to the patient.
Structured as a portfolio of endowments, each HCIF separate account is dedicated to the community that creates it and is managed with a goal of growing the base endowment and distributing a steady and sustained stream of funding annually that can be distributed by the community’s trustees into the areas of its life science ecosystem in a way that will have the greatest potential impact.
KS: A key benefit of AZ-HCIF is the decision architecture. Decisions regarding the annual distributions will be rendered exclusively by the AZ-HCIF trustees – which are local community leaders. While the funding account is managed and grown as part of the global HCIF endowment, the decision architecture ensures support is allocated to local emerging growth companies only.
In addition, AZ-HCIF grants to local incubators and accelerators can help to provide access to experienced life science industry personnel and other business resources that may enable companies to mature faster — which further mitigates investment risk.
Early stage investors have many options for their investment dollars. Life science opportunities, especially those that are early in the development cycle, can appear daunting at best. Over time, as the degree of risk declines, the level of local and outside investment is likely to increase.
JKW: We do have other endowments here in Arizona. Each one serves a dedicated and important mission. Some examples include our university endowments, private endowments like the Flinn Foundation, Vitalyst Health Foundation, the Virginia G. Piper Charitable Trust, supporting foundations at TGen and many of our hospitals, as well as others. Many of these foundations have and continue to support vital efforts in education, research and public health.
AZ-HCIF provides the piece that is missing in the equation, specifically the resources to take the discoveries that are born from research and moving them forward along the commercialization path so that they get to our healthcare systems and patients faster.
With a $200 million endowment, we can reasonable expect distributions of $10 million each year. As the endowment grows over time, so will the distributions.
HCIF’s endowment model also provides a steady stream of investment capital inside the state so that the peaks and valleys of traditional venture fund structures can be avoided. In addition, through AZ-HCIF’s support of incubators and accelerators across Arizona’s life science innovation ecosystem, entrepreneurs are better supported and more likely to succeed.
HCIF’s investments into Arizona life science companies, at the direction of the AZ-HCIF trustees, can serve as a first institutional investor for local companies and provide syndication support to additional local and out of state investment partners.
Outside investors are more willing to invest alongside a local lead investor. When Arizona had institutional investors focused on the life science sector resident in the state, the levels of life science venture investment were significantly higher than where we are today.
AB: HCIF is the Healthcare IMPACT Foundation. What do you see as the major impacts the success of this initiative will bring to Arizona?
RY: At a $200 million endowment level, we expect to see $10 million or more annually beginning in 2020 for early stage funding and support across our Arizona life science ecosystem in perpetuity.
AZ-HCIF is also raising a $50 million direct impact fund for donors who would like to see immediate impact in 2018 and 2019.
The impact will be more life science companies being founded, attracted and grown in Arizona. This will result in faster job growth across our life science sector and our business community, as life science jobs have a average employment multiplier of five-fold.
There is always a risk that promising young firms will be drawn away or forced to move in their quest for investment dollars. Experience has shown that the best way to keep companies in place is to root them in the community. Companies are rooted by investments in facilities, strategic partnerships with universities or clinical partners, or by key local talent. Past examples of well rooted companies that stayed and continue to grow here after they were acquired include Ventana (Roche), Abraxis (Celgene), Ulthera (Merz), CBR (AMAG Pharmaceuticals) and MicroRel (Medtronic).
CS: AZ-HCIF is one of a portfolio of endowments that are being formed within the Healthcare Impact Foundation that are based in the U.S. and internationally. This creates the opportunity for collaborations across the HCIF communities, as well as access to networks of life science investors from outside of your community. These can lead to opportunities for future investments that may be needed as the companies continue to grow.
KS: Through the growth of Arizona’s life science sector, we create more employment opportunities for the talented students being trained at our universities. As an employer, my company has benefited tremendously from hiring local talent. But, unfortunately, we aren’t able to hire every talented student we interact with. I look forward to the day when more of our young people are able to access rewarding careers right here in our state and don’t have to relocate to find fulfilling career opportunities.
At AZBio, we are regularly contacted by talented senior executives too. Many of these individuals have more than a decade of experience in the life science sector. Some are looking to relocate here due to the amazing quality of life that we enjoy here in Arizona. Others are attracted by the incredible innovation happening across our life science sector. The volume of job seekers really heats up in the frigid winter months. People gravitate towards Arizona for its warm weather and business-friendly climate. More companies with funding will increase the sector’s ability to attract and retain extraordinary talent.
JKW: More companies and more jobs are great benefits, but the potential for more cures and life-changing innovations is where the impact will be greatest. Today, Arizona innovators are working to help people with cancers, diabetes, heart disease, respiratory diseases, brain and neurological disease and so much more. We are looking at ways to make life better for everyone, from our littlest people to our valued seniors.
If we all come together to achieve this goal, AZ-HCIF is a way for us to make better life for Arizonans today and for generations to come. That’s impact.