Incorporating Connecticut: Urbanizing Business in a Suburban State

Incorporating Connecticut:
Urbanizing Business in a Suburban State

Published on March 4, 2018

Alexion returned to New Haven with a pair of oversized scissors and a big blue ribbon. Dignitaries gathered to welcome the company. Yale University President Peter Salovey posed next to to Sens. Chris Murphy and Richard Blumenthal as local news channels filmed the celebration. New Haven Rep. Rosa DeLauro and Mayor Toni Harp beamed into the cameras. Alexion’s CEO and chair proudly shared the honor of the ribbon clipping with children who had benefited from the pharmaceutical company’s drugs.

In February 2016, after a 16-year absence, Alexion was coming home. And the reunion was even sweeter than anticipated. New Haven took pride in the pharmaceutical company’s choice to build a brand-new 10-story headquarters that, in its final form, exceeded expectations: 14 stories of shimmering glass with roughly 500,000 square feet of laboratory and office space occupied prime real estate at 100 College St. No one could miss the new headquarters when merging off of the interstate.

As hopeful as the reunion was, it would prove short lived. Two years later, the glass icon of Downtown stands as an uncomfortable reminder of what might have been. After all, Alexion, like so many Connecticut companies before it, was fleeing to Boston.

Alexion announced sweeping restructuring plans in September 2017: It would lay off 20 percent of its employees worldwide and close its facility in Rhode Island. Amid these changes, the company announced in a statement that a move to Boston in mid-2018 would provide a larger “talent pool and a variety of life-sciences partners to further support future growth initiatives.”

The promises of the ribbon-cutting were now broken, but, in hindsight, the move should not have been a shock: When management changed in early 2017, Alexion began to set its sights on more prominent cities. But it was a disappointment nonetheless. Local representatives were quick to share their negative feelings about the move and push back on the notion that the company only relocated to meet its financial and employee needs.

“Alexion’s decision to move their headquarters out of New Haven is shocking and shameful. New Haven is home to some of the most talented and brightest minds in the world, and Alexion will be worse off for leaving, both financially and intellectually,” DeLauro said.

In a press release issued shortly after the announcement, the Connecticut Department of Economic and Community Development said that, even though Alexion will maintain a significant number of employees in state, all of the $20 million loan and $6 million grant must be repaid — with interest and penalties — to the department in accordance with the terms of the agreement.

“There are a lot of startups, and some progress, and some don’t, but what you’re hoping for is a breakout company,” Executive Director of the Connecticut Bioscience Growth Council Paul Pescattlo said. “Alexion was our breakout company.”

BORN & RAISED

Yale professor Leonard Bell founded Alexion Pharmaceuticals Inc., a company that now concentrates on serving patients with rare diseases, as a tech startup in Science Park in 1992, but it has since transformed into a publicly traded giant.

Alexion grew up alongside a burgeoning biotechnology industry in New Haven, which was virtually nonexistent in the 1970s. At that time, only 21 percent of city jobs were in the fields of education and health care, a number that has since doubled. Science Park, too, is far ahead of where it was in the 1990s, when it was built on the site of the former Winchester Repeating Arms Company. At the time, parking lots weren’t paved, and a gate prohibited residents from entering the complex without permission.

No one expected the company to be so large, according to New Haven Economic Development Administrator Matthew Nemerson SOM ’81.

Jon Soderstrom, the managing director of the Office of Cooperative Research at Yale, is on a mission to help support startups. The office provides licensing to existing companies, encourages corporate sponsorships for research with faculty members and helps others launch new ventures based on the intellectual property available.

Eighty percent of Yale’s research budget is in the life sciences, Soderstrom said, so a lot of effort goes into the biotech industry. According to Soderstrom, Yale’s efforts to stimulate new ventures have paid off. Last year, Yale supported 11 venture-backed companies that raised $80 million, and over the last decade, 60 ventures have raised $700 million, Soderstrom said.

But even among the many other Yale-affiliated biotech projects, Alexion stood head and shoulders above the rest. As of 2016, it had 3,000 employees and served patients in 50 countries.  In 2011, Alexion was added to the Nasdaq-100, a stock market index of the 100 largest nonfinancial stocks traded on the Nasdaq composite. A year later, the company joined the Standard & Poor’s 500 Index.

Connecticut, for its part, has done a lot more than just praise Alexion. The state offered financial help in the form of tax breaks and incentives. In 2012, the company received $50 million from Connecticut taxpayers as part of a new economic development program. Throughout Gov. Dannel Malloy’s administration, Alexion continued to profit from tax breaks codified under state law.

Malloy, like many of the state’s residents, regarded Alexion’s transformation from a small startup to a global company as one of Connecticut’s success stories.

The First Five job creation initiative, which Connecticut rolled out in 2011, provides direct state aid and tax breaks to businesses that create a minimum of 200 full-time jobs in the state within two or five years, depending on the size of a given company’s investment, from the time their applications to the program are approved. Alexion, Cigna, ESPN and NBC Sports all signed up for the program.

According to the governor’s website, the program — which Malloy signed into law on July 8, 2011 — was designed to attract new companies from other states, retain companies already in Connecticut and encourage businesses to expand.

Connecticut did not stop there. Large investments in other projects have proved successful. Another biotechnology hub is growing in Storrs, just 60 miles away from New Haven.

In 2014, Jackson Laboratory opened a 4-story, 183,500-square-foot space on the campus of the University of Connecticut Health Center in Farmington. The lab focuses on discovering genomic causes for diseases. In 2011, a Democrat-controlled state legislature made a $291 million investment in Jackson Lab. The facility is projected create 300 jobs in research and technology by 2024.

Like Alexion, the Jackson Laboratory started small. The nonprofit was founded as a cancer research center in Bar Harbor, Maine, in 1929.

The emergence of industry centers in New Haven and Storrs is not a coincidence. The main driver of the biotech industry is the quantity and quality of academic, basic and life sciences research, according to Pescattlo. Storrs has the nearby University of Connecticut, and New Haven has Yale.

THE CONNECTICUT LAG

Connecticut has struggled more than other states to keep major employers and taxpayers, perhaps because it lacks a major city to attract companies amid the recent trend of urbanization. Recent high-profile departures from suburban areas and small cities fall in line with a national pattern of large companies moving to larger urban centers. It seems that the pendulum of investment and growth has swung away from the countryside to city centers. Companies no longer want to isolate themselves from the rest of the world on quiet campuses but instead seek the energy of urban networks.

Nemerson, New Haven’s economic development administrator, said that no one who was watching Alexion closely was surprised by the move. Once founder Leonard Bell left the position of CEO in 2015, the company’s personal ties to New Haven seemed less significant.

“I think a lot of people thought it was only a matter of time,” Nemerson said. “[The move] was disappointing, not surprising.”

In Rhode Island, Hasbro Inc., the third largest toy maker in the world, moved 350 jobs to Providence from smaller towns in the state. In Illinois, dozens of companies, including The Kraft Heinz Company, an American food company, moved from the suburbs closer to Chicago. Although the suburbs still hold the majority of the metropolitan workforce, downtown areas are closing in on that difference. Between 1996 and 2013, the proportion of metro area jobs within three miles of a city center grew 7 percentage points, according to the U.S. Census Bureau.

But Connecticut has no major city. Hartford and Bridgeport are not as large as Chicago or even Providence and have yet to solve major urban problems such as public transportation, poverty and crime within city limits. If a business cannot find what it needs from New Haven’s midsize population, its next step is generally to leave the state.

Alexion’s move is only one of several significant departures from the state in recent years. General Electric Co., a multinational conglomerate corporation, announced on Jan. 13, 2016, that it would leave Fairfield, where it had been headquartered since 1974. In 2017, GE ranked as the 13th-largest firm in the nation by gross revenue, according to Fortune magazine. In 2018, GE moved its global headquarters to Boston.

After the company announced it was considering a relocation, several states offered GE incentives to leave suburban Connecticut. With tax incentives from Massachusetts, the move would be cost-neutral. The company received over $150 billion in incentives and grants from Boston and the state of Massachusetts, which is one of the top investors in research and development. In addition, Boston will position the company in closer proximity to a variety of technology startups and global conglomerates in the seaside area.

Following GE’s departure, Malloy continued to praise the bioscience industry. In response to the news, Malloy still noted Connecticut’s draw to large companies on Channel 8 News.

“You can’t objectively look at Connecticut and not appreciate that we are making progress, whether that takes us to the level one company wants or sees in its future, I can’t tell you,” Malloy told the local news outlet.

But last summer Connecticut residents could not help but notice that, when Aetna Inc., a health care company and one of Hartford’s top employers and taxpayers, announced a $100 million relocation to New York City in June 2017, New York City Mayor Bill de Blasio approved a $9.6 million incentive plan for Aetna.

GE Chairman and CEO Jeffrey Immelt has said that the company’s relocation to the Seaport District of Boston would provide a more attractive, technologically savvy workforce, in line with the company’s push to develop a larger software scale. And if a technologically savvy workforce is what Immelt is looking for, Connecticut may not have been the right place to find it. Boston is home to over 50 colleges and universities, while Fairfield only hosts a few.

Millennials, for their own part, may play a significant role in the anti-suburban trend. New Haven demonstrates this phenomenon. Only 138 of the 1,399 Yale students in the class of 2016 stayed in New Haven after graduation, according to the Yale Office of Career Strategy. Nemerson noted that New Haven’s location, in between Boston and New York, is a challenge. He said that companies tend to move within a 100-mile radius. Boston is 130 miles from the Elm City, and New York is less than 70. Because these cities are so close, New Haven often loses out, but it also means that New Haven has the potential to gain.

“People often say how horrible it is that young people are leaving Connecticut. But they’re just actually moving to New York and Boston. And they can still be home, they can see their parents, they can see their friends, they’re an hour away. If you were in Los Angeles and you moved an hour away, you might still be in Los Angeles,” Nemerson said.

Yet some are still skeptical of the reasons behind large corporate moves. In March 2017, Ludwig Hantson, a resident of Boston, was named the CEO of Alexion, three months before the move was announced. Soderstrom described Alexion’s stated desire to gain access to a larger pool of highly skilled workers as “puffery.” Pescattlo noted that most members of Alexion’s new management team had no connection to Connecticut and New Haven but had built their careers in Boston.

And still, recent news has not all been sour. Last December, news broke that CVS Corporation would purchase Aetna for $69 billion, making the company’s planned move uncertain. And in early January, de Blasio withdrew the incentive proposal.

On Jan. 12, Hartford Eyewitness News Channel 3 reported that Carolyn Castel, the vice president for corporate communications for CVS Health, said in an email that CVS views Hartford as “the future location of our center of excellence for the insurance business.”

Soderstrom says that Connecticut is quick to highlight what it is doing wrong or what it could have done better but often doesn’t make note of its improvements.

But, though it may not be useful to harp on the past departures, they do point to larger questions facing Connecticut. The reality is that Connecticut has experienced a decadelong decline in the number of bioscience jobs. The reality is that Connecticut needs to take a critical look at its future in bioscience.

SO WHAT NOW?

Connecticut is lagging behind other states. Conglomeration of worldwide companies and the changing demographics of the workforce have fostered an environment of competition among states. It may be dangerous to chalk departures up to corporate management and the shifting desire to be near flashy cities. Changes can make Connecticut more of a competitor.

If Alexion’s move says anything, it is that providing large companies with major tax breaks will likely not be enough to incentivize them to stay in state. And even if Connecticut legislators wanted to do more, the state’s finances may be an insurmountable barrier. Last year, after the state added more than a billion to its debt, the Connecticut General Assembly passed a new, far more restrictive state budget. Pescattlo, the head of the Connecticut Bioscience Growth Council, says that the most signficant “macro” issue in the state is its budget.

“[Companies] do their research. And they find that Connecticut has really, really deep fiscal issues and deep budget problems. And they make a calculation [of] what’s going to happen in 15 years given this fiscal mess we’re in. And … unless things change in a fundamental way, it looks like higher taxes and fewer services, and that’s not a good profile to attract companies.”

But even if the state solves its budget crisis — something unlikely to happen without major changes — several issues make Connecticut particularly unfavorable relative to other states.

First, despite the small area of the state and constant praise for its ideal location between Boston and New York, transportation remains a problem throughout the state. Executive Director of DataHaven Mark Abraham said that, while New Haven and smaller cities and suburbs serve smaller companies and startups well, larger companies gravitate toward sites with commodities such as long, heavy railroads and subway systems. Connecticut is still fighting to fund infrastructure.

On Jan. 30, a debate arose between Malloy and the state’s top Republican lawmakers over transportation, a center point of the governor’s proposed budget. While Democrats expressed urgency to make strides on the issue, many Republicans want to wait on any major infrastructure spending. State Sen. Len Fasano, R-North Haven, thinks that Democrats are trying to do too much too soon.

“One of the biggest challenges facing our state is the decadeslong refusal to invest in our roads, bridges, tunnels and rail,” Malloy spokeswoman Kelly Donnelly said on Jan. 30, according to the Hartford Business Journal. “Yet, perplexingly, the Republican leaders’ solution is to further slash our transportation investment.”

2018 may not be the year for a major economic stimulus package, as elections across the state will likely be contested.

Connecticut may also not be able to offer the potential employee pool that other states can. In a statement issued after GE announced its departure, which was due in part to the availability of skilled workers, the governor’s office responded to the move: “Businesses care about talent, and we will continue our investments in our higher education system in order to connect them to the needs of high-tech employers.”

Even though Malloy has made a point of defending the public education system, Connecticut has recently had difficulty funding state colleges. In the state budget passed last year, the University of Connecticut’s state funding was cut by $139 million, enough for students to mount a #SaveUConn campaign to air their grievances.

Though New Haven has actively pursued large companies, major proposals have not proved fruitful, in part due to faults in state operation.

In October 2016, New Haven, in conjunction with Bridgeport, submitted a proposal to host the new Amazon.com Inc. headquarters. The New Haven–Bridgeport proposal would have provided the company with roughly 16 million square feet of office space. In addition, major statewide officials praised a Hartford–Stamford joint offer. But, on Jan. 18, Amazon released a list of 20 finalist cities out of the 238 that had submitted proposals. The list included New York and Boston but no Connecticut entree.

MORE THAN AN OUTPOST

In 2014, an article in FierceBiotech, an online publication, ranked New Haven as the 13th best biotech city that year, ahead of Los Angeles and Chicago.

“Connecticut may not be the first place that biotech entrepreneurs have in mind when they start a company, but when the circumstances are right it can make a lot of sense,” the article read.

Soderstrom, the managing director of the Office of Cooperative Research at Yale, said that Alexion represents the success of Yale’s Science Park, and the company’s departure will not put the brakes on any projects or Sciences Park’s future successes. He disagrees with any assessment that Alexion’s leave will cause long-term trouble for the city, instead arguing that Alexion was a symbol of a burgeoning critical mass of bioscience innovation in New Haven.

While Alexion’s move has shocked residents across the state, other biotech companies in New Haven are improving. The 2014 FierceBiotech article did not mention Alexion, but it did note that, in 2013, Canaan Partners’  Tim Shannon launched another Yale startup. Arvinas Inc. is a New Haven–based private biopharmaceutical company that aims to produce protein degradation therapeutics for cancers and other rare diseases.

Arvinas announced major partnerships at the end of last year and the start of this year, one with Genentech Inc. and one with Pfizer Inc. The company is poised to perform better this year, as they move forward with clinical development and filing new drug applications.

BioHaven Pharmaceutical, a clinical-stage pharmaceutical company that targets neurological disorders, was one of the strongest biotech initial public offerings on the New York Stock Exchange according to Soderstrom.

There is a new fashion in the life sciences industry. Companies want to be close to the academic research that spawned their company, as well as potential scientists and employees, Pescatllo said. In a sense, companies want to be near their competitors.

Soderstrom seemed tired of having to re-explain why it’s time to move past Alexion’s departure.

“The Alexion thing was a time to celebrate. It was a brand new building in the center of the city,” Soderstrom said. “But it is just one of those things that happens.”

Alexion’s presence in the city will not come to a complete halt. Research will continue in New Haven — Alexion CEO Ludwig Hantson said that 450 workers will stay Downtown, and the city will now be home to the company’s “Center of Excellence.”

Abraham stressed that, while moving headquarters can be symbolic, it does not always mean a large base of workers will move with it. For example, insurance company The Travelers Companies Inc. moved headquarters to New York, but its Hartford office is still its largest branch. Abraham said that the fact that Alexion has retained research and parts of its financial and administrative branch in New Haven indicates an ongoing relationship with the city.

The fashion in the life sciences industry may now be urban settings with a fluid workforce cross-pollination, Pescattlo said, but the trend may not be permanent. He pointed to high housing costs and congestion as incentives push employees and companies in the other direction.

“Fashions come and go. There is probably an overemphasis on that density, and I think we may have reached a peak,” Pescattlo said. “I could see a shift back to what Connecticut has.”

Now Connecticut has to adjust to the times or wait for another swing of the pendulum.

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