"So, have you packed yet?" Andrew Kress, CEO of health analytics firm SDI Health LLC, playfully queries two project directors as they pass outside a conference room. Kress' company has run out of room, the result of some spirited growth and an acquisition two years back. SDI is moving into a much larger complex down the road from its current headquarters in the Philadelphia suburb of Plymouth Meeting, combining 550 employees split between two buildings.
"I'm employing high-skill, high-wage people, and we're expanding," Kress says. Even in local discussions about job creation and economic growth, "that kind of situation gets overlooked."
Kress, a boyish-looking 43, explains this without obvious rancor. But his point is critical. It is hundreds of healthcare and technology companies like SDI, tucked into various suburban office parks and standalone buildings hugging perimeter freeways, that propel the Philadelphia region these days. And they rarely get their due.
Kress lists other success stories, "companies no one has ever heard of," he says. "That's what is really going on around here."
Philadelphia gets no respect, area residents grumble. "We've been branded as the city of angry sports teams and a lot of blue-collar workers, and that's about it," complains Greg McStravick, a senior vice president with the software giant SAP AG, which has its North American headquarters about 18 miles west of downtown. "Not too many people who aren't from this city know it."
Point taken. When it comes to the Philadelphia-area economy, some outsiders have vague notions that several major pharmaceutical companies dot the regional landscape. Shopping cognoscenti might cite the suburban King of Prussia Mall as second only to Mall of America in the annals of biggest-ever indoor retail centers. In-the-know foodies may have read that Tasty Baking Co. now bakes its distinctive cakes from a new complex in the old Naval Yard, just south of the stadium complex, home of the beloved Eagles, Phillies, '76ers and Flyers.
While Philadelphians remain a proud lot, their economic identity suffers from being overshadowed by the vast New York metropolis to the northeast. And to make matters worse, that profile is harder to define because it is rapidly shape-shifting and evolving, both in terms of business activities and in terms of geography. "We're still not the most vibrant economy in the world," admits David Elesh, a sociologist at Temple University and an authority on area industry. "It's percolating along, but it's very difficult to see where we're going."
Look a little closer and two solid pillars emerge. One important support: the area's many colleges and universities, second in number and student population only to greater Boston. These institutions provide the human capital necessary for the second, the expansive arena of life sciences and healthcare. This encompasses everything from hospitals to medical claims software developers to some of the biggest pharmaceutical companies in the world to a growing list of biotechnology startups. By some estimates, life sciences account directly and indirectly for one in every six jobs. If anything, they are growing in importance.
"Philadelphia has a fairly diverse economy," says Ryan Sweet, a senior economist with Moody's Analytics Inc., whose offices are just outside Philadelphia. "It really lives and dies by eds and meds."
Higher education and life sciences are hardly anything new in Philadelphia. After all, Benjamin Franklin founded the University of Pennsylvania in 1740. Pharmaceuticals have been brewing for the better part of a century in the area.
What has changed is the nature, the breadth and the extent of healthcare and life sciences in the area. Far more recent is the development of an infrastructure that adequately facilitates, fortifies and underpins life sciences and their economic growth. Infrastructure includes companies such as SDI that support the industry. It includes professional financial advisers. And it includes some new sources of capital. "There's a vibrant ecosystem here," says Josh Kopelman, managing director of early-stage venture firm First Round Capital, who keeps offices in both the Philadelphia suburb of West Conshohocken and San Francisco.
Quaker BioVentures is just nine years old and started to invest only in 2003, but the firm is considered a pioneer in Philadelphia-area life sciences venture. The firm is now investing a second, $420 million fund, and while portfolio companies stretch into North Carolina's Research Triangle, the vast bulk of its portfolio is centered squarely in the region around Philadelphia, an area that encompasses five counties and some 4 million inhabitants.
"We knew venture capital could catalyze the area because all the raw ingredients were there," says founding partner Sherrill Neff, whose own managerial background included life sciences, a health maintenance organization and the Baltimore-based tech-centric investment bank Alex. Brown & Son., which was sold in 1997 to Bankers Trust. "The feeling was, we could get there as a region."
It would also be a mistake, however, to limit any conversation about the Philadelphia area economy to eds and meds. Comb the suburbs and you find all sorts of surprises: SAP houses more than 2,000 employees in its North American headquarters in Newton Square, Pa. Mutual fund giant Vanguard Group Inc. employs more than 8,000 in the area from its suburban Malvern,
Philadelphia "is very well located. There's a ton of talent here," says Walter Buckley, CEO of Internet Capital Group Inc. based in Wayne, Pa. Publicly traded ICG invests in companies on the business side of Internet marketing and services. As an example of opportunities, Buckley cites an investment ICG made in a Philadelphia company called StarCite Inc., a Web-based corporate events and meetings platform. "In the early 1990s, it was hard to build a good software business because not all the ingredients were there, especially in sales and marketing. That's changed. We're seeing entrepreneurs on their second and third company."
How this shapes the economic landscape isn't entirely clear. The traditional business and professional elite, who increasingly lived in the suburbs, kept the city under its thumb for many decades. This was the source of the view -- and the old jokes -- of Philadelphia as a dull, hidebound city (a view that clashes with the other myth of Philly folks as rowdy, loud and aggressive, particularly about sports). Some argue that feeling of exclusivity hasn't disappeared entirely and still impedes growth. "Philadelphia is a huge market. In some ways, it behaves like a smaller market," says John Salveson, who heads the executive search firm Salveson Stetson Group. "It can be a little closed, as in exclusive, a bit parochial."
America's fifth-largest city combines aspects of a gritty survivor and a youthful exuberance. Sections of Philadelphia continue to suffer from serious urban blight, with crumbling schools, boarded-up shops and a disaffected population. The city is still losing population and has some of the worst segregation of any American city, according to Drexel University political scientist Richardson Dilworth.
This is an aspect of Philadelphia that business boosters sidestep. "The city still struggles to talk about race. It still needs to have a dialogue," says Sylvia Watts McKinney, executive director at the Philadelphia office of the Network for Teaching Entrepreneurship, a nonprofit organization that mentors promising high-school students. Funding for the Philadelphia program came from ICG and fellow Wayne-based technology holding company Safeguard Scientifics Inc.
McKinney glances out her office window, just off the Temple University campus on the fringe of grim North Philadelphia. She cites sobering statistics, the city's 45% high-school dropout rate and an alarmingly high percentage of African-American males who wind up in prison. "We are fighting to counter the daily experience of being surrounded by violence and the naysayers who say that young people can't succeed."
Other parts of the city bask, however, in revival, creating a mix of stately row-house residences, cultural institutions and nightlife. Tens of thousands of students mix with young professionals and a growing number of empty nesters. Despite decades of W.C. Fields jokes, Philadelphia has emerged as one of the great after-hours cities in America.
But the contrasts are jarring. After years in Washington, including stints as legal counsel to Sens. Ted Kennedy and Patrick Leahy, Richard Phillips Jr. came back to Philadelphia five years ago to help his father run the family business, a successful national freight forwarding company called Pilot Freight Services. Phillips basks in his rediscovery of the city where he grew up. "I love it. It has a Brooklyn feel, with great little restaurants, great little neighborhoods," he says, reveling in a house he bought in the city for less than he paid for a small condo in Washington. "Center City is gentrifying and expanding. [In some now-trendy neighborhoods] you wouldn't have lived or worked there 10 to 15 years ago."
Not everyone agrees on just how much the city has recovered. "I do see the glass as half full," says an optimistic William Marrazzo, the CEO of legendary public broadcaster WHYY and a former engineering company executive.
John Milligan, managing principal of the Philadelphia-based accountancy practice Milligan & Co. LLC. isn't as upbeat. "I have a concern that if the city doesn't get healthy, a smaller base has to assume a larger share of the burden. That's going to drive even more people out," he says.
Like so many Northeastern and Midwestern cities, Philadelphia has long since lost its traditional economic touchstones. Gone are the textile, chemicals, armaments and steel plants that once defined the city's manufacturing base. The port along the Delaware River is almost moribund.
Temple's Elesh says manufacturing in Philadelphia has been declining since the 1950s and supports a lower percentage of the Philadelphia region populace than the country as a whole. Adds Milligan, "I can't tell you the last time I've been on an inventory count. It seems like manufacturing is completely gone. Everything we have [in the city] is service industry."
No major banks of any size now call Philadelphia home, the result of takeovers in the 1980s and early 1990s. Ditto retail. The Widener Building, which once housed Philadelphia National Bank, now sports a sign for Wachovia Bank, itself a subsidiary of Wells Fargo Bank NA. Next door, Macy's occupies the stately building that still carries the name of its Philadelphia department store builder, Wanamaker.
Few corporate headquarters call Philadelphia proper home these days. In part, that's because a municipal tax structure penalizes most businesses, especially compared to towns in the suburbs. "This city is bad for taxes," says Milligan, who then proceeds to launch into a five-minute lecture on various levies Philadelphia assesses.
In the mid-1980s, says Salveson, "there was a sense of decline, a sense Philly was dying. Look at the banks: PSFS, PNB, First Pennsylvania Bank. They started to evaporate. They were gobbled up."
Does a lack of homegrown capital hurt the city? "I don't think that any companies have found the need to get out of Philadelphia because of a lack of [funding] resources," says Jeffrey Libson, who heads law firm Pepper Hamilton LLP's life sciences practice from an office in Berwyn, Pa.
Buckley counters that funding gaps do remain, although not necessarily as the result of a bank exodus. "We could double the early-stage capital and not have enough," he says.
That sense of decline ended a decade ago. With it came a physical transformation of downtown Philadelphia. The headquarters of cable giant Comcast Corp. and several other magisterial buildings now dominate the skyline. (Until 1987, a gentleman's agreement limited the height of any new construction to the cap on William Penn's statue that tops City Hall.) Occupants of those new skyscrapers, however, still tend to be professional firms and service providers, many of whom live in the suburbs.
Philadelphia has long had a complex relationship with its suburbs. Many of the elite long ago decamped for large homes along the Main Line, which still exhibits an old-money smugness. But beyond the Main Line, named for the train linking city to suburb, a new-money impatience marks the towns and villages farther west, many of them nodes along a dense belt of highways. Post-industrial business parks and condo complexes vie with desirable near-to-city suburbs sporting affordable housing, leafy, tree-lined winding roads and campus-like schools.
Those suburbs attract and hold many professionals. "It's an ideal place for us to be. It's a great place to raise a family," says Stephen Wray, president and CEO of digital healthcare marketing firm Cadient Group Inc., based in King of Prussia.
Some of that desirability comes down to cost. Dilworth, who was named after his grandfather, legendary Philadelphia Mayor Richardson Dilworth, figures "most major lifestyle issues," from housing to the arts, involve "half the cost of New York."
An ability to retain employees is critical. "Those moving to Philadelphia generally don't know a lot about Philadelphia. After they've moved here, good luck getting them out," says Salveson, who sits on the boards of both WHYY and the Philadelphia Orchestra. "Philadelphia has so many benefits of a big city, and far fewer of the liabilities."
Gregory Segall, managing partner of local distressed buyout shop Versa Capital Management Inc., reflects that sentiment. He came to Philadelphia from Los Angeles 13 years ago on short notice to manage a company his firm acquired. He stayed on, even though Versa does deals nationally. "Philadelphia is vastly underrated. The quality of life, the schools, it's a great, great place to raise a family."
For many, the "city versus suburban hostility" lingers, and state government "has long viewed Philadelphia as not something they want to associate themselves with," says David Bartelt, a Temple sociologist. Even within the city there "are real cultural divides."
According to SDI Health's Kress and others, it's only in the past five years that the business elite has gotten serious about the notion of unified regional development. "A lot of the conversation used to be urban versus suburban, Philadelphia versus Pennsylvania, Pennsylvania versus New Jersey or Delaware," says Marrazzo. "Today the conversation and the efforts are more regional." He continues: "There's a real, sincere and conscientious attempt to build civic and economic endeavors around that approach."
An inchoate sense of regional economy is understandable. The so-called Highway 202 pharmaceutical corridor actually stretches more than 100 miles across three states. GlaxoSmithKline plc has major operations in two Philadelphia suburbs, but AstraZeneca US is based in Wilmington, Del., Merck & Co. is in Whitehouse Station, N.J., and Johnson & Johnson is further north in New Brunswick, N.J. And there's a lively biotech sector around Philadelphia and Princeton, N.J.
The Cira Centre rises like a massive rock across the Schuylkill River from Center City and next to the majestic railway station, 30th Street Station. Its stunning, irregular shape became an instant landmark when the building opened five years ago. It also became a magnet for local money managers. "There's $12 billion in committed capital in this single building," says Versa Capital's Segall, who occupies an office on the top floor.
To get an idea of just how recent the transformation is in terms of investment capital, check out Segall's neighbors, venture firm Quaker BioVentures and private equity shop LLR Partners Inc. (The three are linked by shareholdings and exist under the umbrella of the Independence Capital Partners Inc. group.)
Seth Lehr is a partner at LLR Partners, whose office is just down the hall from Versa. He talks of the pioneering days of PE in Philadelphia a mere 12 years ago. "When we started here [in 1998], the idea was there's nothing here," he says. "We're just too proximate to other markets." But he says that has given his firm a leg up. "We were able to develop many relationships. We were the resident good guys."
Like many in the Philadelphia-area business community, Lehr traces his own roots to the University of Pennsylvania and, in his case, the Wharton School, where he did both undergraduate and graduate work. He stayed on, in part, he says, because his wife is from the area, another common story.
From his 29th-story vantage point, Lehr points west to vacant land near Children's Hospital of Philadelphia and his alma mater at Penn. Both have ambitious expansion plans.
Children's Hospital alone has "had $1 billion in new building," says Milligan, who sits on the hospital board. "Construction has blown up."
The University Science Center, just up Market Street from the Cira Centre, is one of the most potent symbols of the new Philadelphia, although it's actually been around since 1963. It's the oldest and largest urban research park in the country, a creation of various local educational and nonprofit institutes. "We became the cradle for eds and meds," says the center's president and CEO, Stephen Tang. "We're 47 years old and an overnight sensation."
The campus now sprawls over 17 acres. Fifteen buildings line Market Street sandwiched between Drexel University and Penn, which remain the center's two largest shareholders. Some 8,500 employees work in about 100 companies, according to Tang. Professors at local universities are often founders. Some one-third of the companies are incubators, while the rest are in various stage of maturity. Activities include nanotechnology, cleantech and information technology. However, life sciences stand at the core.
According to a 2009 study by the Milken Institute, the life sciences sector has more impact on Philadelphia's economy than on any other region in the country and, directly and indirectly, "was responsible for generating 380,000 jobs, $20.2 billion in earnings and $39.7 billion in output in 2007."
All of which brings us to the town of Conshohocken, which rises further northwest on the Schuylkill River, a tributary of the Delaware that slices Philadelphia roughly in half. An old mill town once known for its iron, steel and tire manufacturing, Conshohocken now stands as one of the growing agglomerations of suburban residences and tech-oriented offices. It's become a favorite of the healthcare industry. "It's exploding," says Sean Fahey, a Philadelphia-based partner with Pepper Hamilton.
NuPathe Inc. occupies one of these buildings in Conshohocken. NuPathe is developing a patch to treat migraines. After raising $50 million in private capital from Safeguard Scientifics, Quaker BioVentures and others, it went public in August, the second startup of co-founders Jane Hollingsworth and Terri Sebree to successfully do so. (The first was Malvern-based Auxilium Pharmaceuticals Inc., which was founded in 1999 and listed five years later.) According to Hollingsworth, both women suffer from migraines and cast about for a way to more effectively deliver the drugs to treat their headaches. Their company is part medical device, part pharma.
"This area is great," Hollingsworth says. "We're right in the middle of things." One big advantage a company like NuPathe has, she says, is access to "the talent, the expertise" of the established pharma industry. She rattles off names of big, specialized pharma companies with nearby operations: Shire plc in Wayne, Cephalon Inc. in Frazer, Pa., Endo Pharmaceuticals Holdings Inc. in Newark, Del. "We get help from all of them."
Safeguard Scientifics in many ways mirrors the area's economic evolution. "We moved as the economy moved," says Peter Boni, the company's president and CEO. Founded in 1953, it began by investing in industrial products. Safeguard Scientifics first invested in technology hardware, followed by software, the Internet and life sciences, all the while keeping a focus on the mid-Atlantic region for dealflow. "There are some world-class companies located outside Silicon Valley and Route 128," says Boni, a mantra he repeats often during the conversation.
While life sciences and healthcare constitute the core of the new Philadelphia economy, they're by no means the only endeavor. Qlik Technologies Inc. is a business intelligence software provider that calls Radnor, Pa., home. It was founded in Sweden. As it picked up venture funding in 2004, financiers and management alike agreed that its headquarters should move to the U.S. However, company founder and CEO Lars Björk rejected the orthodox view that he should base the company in California or Massachusetts. "This is a very disruptive company. If everyone else is in the Silicon Valley, we're not," he says.
But Björk adds that his headquarters, which now house 75 of QlikTech's 700 employees, fit the bill from both business and personnel concerns. "We wanted to be close to the center," he says, extolling, like others, Philadelphia's location midway between New York and Washington and within striking distance of most of the Eastern Seaboard and some of the Midwest. Björk adds that it's easy to recruit, the talent pool is plentiful, and logistics are superb.
QlikTech occupies part of the Radnor Financial Center. The buildings began life as a Sears, then served as headquarters for Wyeth, which vacated after it built a mammoth complex in the distant suburb of Collegeville, Pa. Last year, Pfizer Inc. acquired Wyeth in a $68 billion megadeal, and there's fear a combined operation will translate into job losses.
That reflects a major concern in a pharma-intensive local economy: pharmaceutical consolidation and downsizing driven by flagging R&D productivity. SDI Health's Kress takes the upbeat view. "Pharma will struggle for a couple years until it realizes it must reinvent itself," he says.
Quaker BioVentures' Neff agrees. Consolidation, he says, could have at first a "depressing effect on the regional economy," but maintains that the industry will rejuvenate and replenish itself.
Neff believes any downsizing will translate into experienced managers and executives migrating to smaller companies and startups. "The talent pool will become available and repopulate small companies."
With its stable real estate market and a diverse economic base, the Philadelphia area economy missed some of the worst ravages of the recession, but it didn't escape completely. According to economist Sweet, the area tends to lag behind the rest of the country in terms of a recovery timetable. The Philadelphia region "is out of recession, but the economy isn't booming and won't begin to get better until some time next year," says Sweet.
"It's an incredibly passionate city, and people are intensely loyal to the city," says Kress, who believes Philadelphia will come out OK. "People are tough."