By David Wichner

Tucson, Arizona | Published: 01.13.2010

Arizona's biosciences sector made notable gains in 2008 and 2009 despite the recession and its lingering effects, according to a report issued Tuesday.

But the state saw its federal medical research grants fall 10 percent, and venture capital remained scarce, says an annual update on the state's 10-year biosciences development plan.

Jobs in Arizona's bioscience industry, including hospitals, grew by about 4,900, or 5.8 percent, to 89,674 in 2008, said the Battelle Technology Partnership Practice.

In the same year, Arizona's private sector lost 3.2 percent of its jobs as the recession took grip, noted Battelle, which was commissioned by the Phoenix-based Flinn Foundation to formulate the Arizona Bioscience Roadmap in late 2002.

"Overall, (2008 was) a very good year of progress on the Roadmap, despite the 'great recession' and the problems with the budget," Battelle senior adviser Walter Plosila said.

Since the Roadmap was laid out, Arizona's bioscience growth has outpaced the nation's, Battelle found.

From 2002 through 2008, Arizona bioscience jobs grew 31 percent, compared with 12 percent nationally. And though the bulk of the state's biosciences jobs are in hospitals — 84 percent in 2008 — non-hospital biosciences jobs grew 35 percent since 2002, compared with 31 percent for hospitals.

The state also saw a 32 percent increase in the number of bioscience firms from 2002 through 2008, compared with a 22 percent increase nationwide, Battelle said.

"We've put the biosciences on the map" in Arizona, said Marty Schultz, vice president of government affairs for Pinnacle West Capital Corp. and chairman of Arizona's Bioscience Roadmap Steering Committee.

But challenges lie ahead this year because of federal and state government budget problems that may limit research funding, Plosila said.

Arizona's overall bioscience-related academic research and development funding reached a new high in 2008, but the state hit a five-year low in funding from the National Institutes of Health. Reflecting a nationwide decline, NIH funding in Arizona fell 10.1 percent in 2008, to $157.6 million.

Plosila said Arizona's federal research funding for 2009 was buoyed by an estimated $33 million in stimulus money for research, based on preliminary figures from the NIH.

But the state budget is a major concern.

Plosila said bioscience leaders also must protect funding for Science Foundation Arizona, a nonprofit agency launched in 2006 to head a public-private effort to boost science and technology development.

Faced with a massive budget shortfall, the Legislature swept $35 million in funding for Science Foundation Arizona into the state general fund.

In the face of a legal judgment that $18.5 million in state money was already committed to grants for specific research projects, lawmakers voted to restore those funds in November, though the action still has to go through a legislative committee review, Schultz said.

"The economy in Arizona is in some sense dependent on the state budget, and that needs to be improved," Schultz said.

New startup companies were one strength of the report. The report cited the addition of 50 biosciences companies spun off from university research since 2002. The Tucson area alone added 38 bio firms since 2002, bringing the area's total to 82, Battelle found.

But the availability of working capital those need to survive and grow remains a problem, Plosila said.

Beyond the early-stage "seed" capital that Science Foundation Arizona is trying to provide, more mature companies need venture capital — private investments in developing companies, often in the millions of dollars.

Arizona's venture-capital investments in bioscience firms dropped to $16.5 million in 2009, down from $65 million in 2008.

Arizona is addressing that with the Arizona Fund of Funds, which aims to raise private venture-capital investments in early-stage tech firms in Arizona, Plosila said. The fund is managed by Santa Fe, N.M.-based Sun Mountain Capital, which has a goal of raising $200 million to be reinvested into several target venture funds and channeled into Arizona tech startups.

The state also has made progress in boosting education programs in science, technology, engineering and mathematics, and by expanding business "incubators," aimed at helping startups launch, Plosila said.

He cited new incubators in Chandler, Phoenix and Surprise; a plan for a new tech "accelerator" at the Biodesign Institute at Arizona State University; and the recent groundbreaking for a planned biosciences park at East 36th Street and Kino Parkway in Tucson.

Overall, of 19 actions Battelle recommended in the state Bioscience Roadmap, the research firm found that Arizona has made progress on 17, including "substantial progress" on 11.

Two action items — the creation of "technology zones" around concentrations of biosciences and other technology industries and a move to allow universities to take ownership stakes in private companies — are indefinitely on hold.

The Legislature generally has balked at creating such special zones, which typically involve tax incentives, Plosila said.

And the university equity ownership issue is dead for the foreseeable future, after voters defeated a ballot proposition in 2004 that would have amended the Arizona Constitution to allow the schools to take stakes in private ventures, he noted.