Jerry Colca, now 61, reminisces about his decision to move to the small southwestern Michigan city of Kalamazoo to take a job in pharmaceutical research. It was the summer of 1984, and he had recently moved from St. Louis after completing his postdoctorate in biochemistry at Washington University. The U.S. economy was just reviving from recession. Biochemists are often in demand, but Colca entered the workforce at a particularly opportune time, with biotechnology just emerging and Big Pharma booming.
Colca, then 33, had thought he might want to teach. But there was another position that promised him the freedom to set his own research path, aided by ample assistants and resources, and where he would never have to beg for grants: Upjohn Co., headquartered in Kalamazoo, wanted Colca's expertise in diabetes, and as a major drug company, it had plenty of money to throw around.
There was also the appeal of Kalamazoo, which sits on the banks of the winding Kalamazoo River. The city, population 75,000, is quaintly American: single-family homes intermingled with small businesses and a handful of department stores. This is not the Rust Belt. The city has two colleges -- Western Michigan University and Kalamazoo College, as well as a branch of Michigan State's medical school -- and is Midwestern to its core, where Saturday often means a trip to a nearby lake and Sunday usually means church. Colca had recently married. The security of a position at Upjohn won out over the career in academia.
"Also, I was interviewing at Upjohn during the summer and not the winter," he laughs.
Colca wasn't alone. Upjohn, founded in 1886, had been aggressively recruiting talent and building a trove of scientific prowess in Kalamazoo. Colca quickly learned that Upjohn was a pillar of the community. When a new neighbor asked him where he would be working, "I said, 'Upjohn,' and he said, 'Ah, you'll have a job for life there,' " Colca recalls.
The neighbor turned out to be wrong -- though it took two decades to find out. Change was coming for both Upjohn and Kalamazoo. In 2002, with Big Pharma consolidating, New York-based Pfizer Inc. swept in to acquire Pharmacia AB, which had merged with Upjohn in 1995, for $58 billion. After the deal closed in 2003, Pfizer laid off with buyouts some 1,200 of the 6,000 workers in Kalamazoo. More buyouts came in 2005. That second round got Colca.
Colca could have taken his buyout and retired. Likewise, Kalamazoo could have moved on from its past as a drug development center and endeavored to shift, like many other American cities, to services, marketing its pastoral landscape and hearty restaurants, or simply done nothing.
Instead, Kalamazoo has tried to revitalize itself as a burgeoning Midwestern center for life sciences. Officials from the area, and throughout the state, have helped build support programs, early-stage angel and venture investment funds, and marketing outlets. The goal: grow and nurture life sciences companies in Kalamazoo and attract them to the city.
Colca is at the forefront of that effort with Metabolic Solutions Development Co., a startup he co-founded in 2006 with Rolf Kletzien, another former Upjohn scientist. Metabolic Solutions has two ongoing clinical trials for drugs focused on controlling glucose related to Type 2 diabetes and plans to eventually shift one of those to focus on treatments for neurodegenerative diseases such as Alzheimer's.
Metabolic Solutions isn't alone. A bevy of other biotech, medical-device and related life sciences companies has risen from the ashes of Upjohn. While the acquisition and subsequent layoffs initially stunned Kalamazoo, it now seems to bring the community a sense of pride for having survived a near-death experience and constructed something for the future.
It's easy to bypass Kalamazoo without stopping. Two freeways, with their hotels and fast food, wrap around the metropolitan area, masking the small city within. A freeway billboard visible on the drive between the nearby towns of Paw Paw and Mattawan, which invites drivers to "Discover Kalamazoo," does little to help: It looks more like a ransom note than marketing material. With larger, more active Grand Rapids only 45 minutes to the north, why bother with Kalamazoo unless you're a big fan of Glenn Miller's "(I've Got a Gal in) Kalamazoo"?
Industrial centers such as Detroit and Flint don't fully reflect Michigan, which contains great swaths of fields and forests between moderately sized cities. Kalamazooians talk about Lake Michigan, an hour's drive west, as if they were Californians crowing about the Pacific Ocean; the 178-mile Kalamazoo River empties into the lake. Kalamazoo's downtown retains its business center, with clothing stores, restaurants, office buildings and breweries -- the city is famous for 30-year-old Bell's Brewery Inc.
The city has its problems. While many areas are safe -- Western Michigan, with its more than 25,000 students, looms over the city on one of its few hills -- crime is an issue in some neighborhoods.
One of the prominent fixtures of downtown Kalamazoo is the Pfizer complex. The pharma owns several office towers on both sides of Portage Street, just off East Michigan, linked by a skywalk. The complex is modern, contrasting with the surrounding architecture, much of which dates to the early 20th century.
Still, Pfizer's presence in Kalamazoo is a shadow of the business it acquired, originally known as the Upjohn Pill and Granule Co., founded by William and Henry Upjohn more than a century ago. Upjohn grew into a sizable global pharma company but maintained a family feel, Colca says. It was the type of place where retired scientists came in mornings to chat over coffee and where employees could get a quality 50-cent steak on Thursdays in the cafeteria.
Upjohn was best known for products such as anxiety medication Xanax, anti-inflammatory drug Motrin and baldness therapy Rogaine, and remained intact even after merging with Stockholm-based Pharmacia in a $13 billion deal. Despite its size, Upjohn had felt the need to generate larger revenue, which it sought through M&A. The merged company renamed itself Pharmacia & Upjohn and moved its headquarters to London. Yet life in Kalamazoo remained pretty much the same.
Things began to change after Pharmacia & Upjohn agreed to merge with St. Louis bioagricultural company Monsanto Co. in a $26.5 billion deal in late 1999. The combined entity took the Pharmacia name. As years passed, it became clear that managers had further plans, Colca says. Job cutbacks occurred, first at Pharmacia's Swedish operations. In late 2001 and early 2002, Pharmacia spun Monsanto back out, leaving everything but the agricultural business with Pharmacia. "Unbeknownst to us, I think what they were doing is that they were packaging this for the Pfizer takeover," he says.
Soon after, Pfizer bagged Pharmacia.
Upjohn may be gone, but the Upjohn family remains, as do the Parfets, who, through marriage, also have prominent roles in the area. Then there's the Stryker family, the power behind Kalamazoo's Stryker Corp., a multibillion-dollar maker of medical devices that operates in dozens of countries, employing thousands of people. In Kalamazoo, Stryker is to medical devices what Upjohn was to drugs. Between them, the two companies generated billions of dollars in family wealth.
Stryker was founded by a Michigan-born surgeon, Homer Stryker, who invented products, such as oscillating saws and rubber heels for walking, in the basement of Kalamazoo's Burgess Hospital until he began selling them in 1941. The company hit $1 million in sales by 1958, $280 million by 1990 and $7.3 billion by 2010.
That growth was driven by M&A. In 1998, it paid $1.65 billion for Howmedica, a Pfizer company. Many more acquisitions followed, including Orthovita Inc. for $316 million and Concentric Medical Inc. for $135 million, both in 2011. In recent years, Stryker has been one of the most acquisitive medical-device companies worldwide.
While growth at Stryker has made it one of the city's largest employers, it alone couldn't replace the job losses that occurred after Pfizer acquired Pharmacia. By the time of the sale, Pharmacia had some 6,000 employees. As of 2010, that number had dropped to around 2,800, a decline of more than 50%.
Business leaders in Michigan could see what was coming as the layoffs began. They had already begun making preliminary moves they thought would help nurture a nascent life sciences industry. Now came the test.
Two groups began coalescing in the years before the Pfizer layoffs. First, Don Parfet, an executive at Pharmacia, formed a $15 million life sciences fund, run by venture investors known as the Apjohn Group LLC. Then, Kalamazoo's local economic-development agency, Southwest Michigan First, launched a life sciences fund, which was seeded with $50 million and has now grown to some $65 million.
Others followed. Mike Jandernoa, a Grand Rapids businessman from who had helped run over-the-counter-drug maker Perrigo Co. since 1979, started a private equity fund, another angel investment fund and a life sciences-specific fund. Jandernoa's life sciences fund, dubbed Hopen Life Science Ventures, was formed in 2006 to invest in startups such as Metabolic Solutions.
Jandernoa saw opportunity in Pfizer's departure. "We were blessed with so many scientists when Pfizer left the area," he says. "They stayed around. A lot of those people wanted to stay in West Michigan. We were lucky at Perrigo to pick up some executives. Some of these people have been really key components."
Other strategies to support startups in Kalamazoo also emerged. Southwest Michigan First helped the Michigan Medical Device Accelerator get off the ground. Kevin McLeod, a former Stryker executive, advises medical-device companies on fundraising and how to turn concepts into products. As a former Stryker marketing and product development director, McLeod attempts to use his knowledge of the inner workings of the company, as well as of the kind of targets Stryker may be interested in, to help companies develop new products. McLeod tries to connect his clients to financing such as Southwest Michigan First's life sciences fund and Jandernoa's Grand Angels.
The fact that Kalamazoo built programs to support its startups shouldn't be a surprise. The city became known in 2005 for its "Kalamazoo Promise," a program founded after Pfizer slashed more jobs that year, which offers college tuition payments at Michigan universities to students who attend Kalamazoo schools. A child who starts in kindergarten and graduates high school gets 100% of tuition paid; attend all four years of high school and you get 65%. The program, funded by anonymous donors, was intended, in part, to retain people in the community.
Similarly, a stipulation of receiving money from the Southwest Michigan First fund is that the company must already be in Kalamazoo or agree to relocate there. McLeod, for instance, is working to persuade a California inventor with a device that treats pressure ulcers caused by long stretches of bed care to incorporate in Michigan.
Other companies have paved the way. Tolera Therapeutics Inc. was a 2007 spinout from the Cleveland Clinic and moved to Kalamazoo when it received around $8 million to work on a monoclonal antibody for Type 1 diabetes and a drug that could prevent organ rejection in transplantation.
Other companies came straight out of Pfizer. James McKim was a toxicologist at Pfizer and Pharmacia who left in 2003 and founded CeeTox Inc., a contract research organization focused on toxicology screenings. CeeTox launched from the Southwest Michigan Innovation Center, which was built to house life sciences startups. Toledo, Ohio, drug screener North American Science Associates Inc. acquired the company in 2008, but CeeTox remains in Kalamazoo, where it continues to sell drug, chemical and cosmetics screenings.
Afmedica Inc., a company backed by the Apjohn Group, developed a technology to use drugs to treat vascular, coronary artery and kidney disease. Only two years after it was formed, Vancouver, British Columbia-based Angiotech Pharmaceuticals Inc. agreed to buy it in 2005.
Of course, there are inevitably failures. NanoMed Pharmaceuticals Inc. was founded in 2000, received an investment in 2006 from the economic development agency's life sciences fund and then disbanded a few years later after an anti-cancer therapy failed. Its executives moved on to new projects in Kalamazoo. Former NanoMed CEO Stephen Benoit returned as CEO of Metabolic Solutions in 2010. NanoMed chief science officer Harry Ledebur founded Axonia Medical Inc., which has a technology it hopes to use to repair damaged human nervous system tissue. The company received $2 million in seed financing May 10 from the life sciences fund.
These days, everyone in Kalamazoo seems to have dealmaking on their minds.
The same day Axonia Medical reeled in its $2 million in seed funding, Vestaron Corp., a pesticide developer, landed a $10.2 million Series B round. Existing investors Open Prairie Ventures and Southwest Michigan First contributed, and Vestaron also gained new investors in Vancouver-based Pangaea Ventures Ltd., the Michigan Accelerator Fund and two private investment organizations. The money will be used to continue field trials of the pesticide and to explore its use in plants, potentially for genetically modified crops.
In an interview in Vestaron's offices at the Southwest Michigan Innovation Center, CEO Steven Hartmeier, says he sees three different directions the company can take: It can try to commercialize the product; it can license the product out to another company; or it can put itself on the block.
Even Vestaron has benefited from the Pfizer layoffs. Hartmeier estimates that half his employees once worked for Pfizer, Pharmacia or Upjohn at one time or another.
He appreciates the foresight of local economic leaders to set up the means for companies to start in Kalamazoo. "It gives people who were displaced the opportunity to use their brainpower and talent," he says.
The effort is bigger than just Kalamazoo. The Michigan Legislature in 2003 established the Biosciences Research and Commercialization Center at Western Michigan, helping almost a dozen companies launch in a seven- to eight-month period, says Jandernoa. Today it lists 22 startups, including CeeTox and Axenic Dental Inc., another Apjohn-backed medical-device business. Other companies have arrived since then. ProNai Therapeutics Inc., another Apjohn investment, has multiple cancer drug candidates including a Phase 1 drug. David Zimmermann and Robert Gadwood, veterans of Pharmacia-Upjohn, brought attention to Kalamazoo when they were named entrepreneurs of the year for the region in 2010 by Ernst & Young LLP for Kalexsyn Inc., a post-Pfizer contract research organization focused on medicinal chemistry they founded in 2003.
Similarly, PharmOptima Inc. operates out of Portage, a "suburb" of Kalamazoo near Stryker's headquarters. PharmOptima was also founded in 2003, and it offers customer consulting and lab services for drug development. NephRx Corp. was one of the first companies to relocate to Kalamazoo's innovation center in 2001. Founded by a University of Chicago scientist, it moved to the city when former Upjohn executive Peter Croden, took over as CEO. NephRx has two drugs in clinical development focused on kidney disease and the gastrointestinal tract.
Even more should come. Western Michigan announced in 2011 the formation of a new medical school that is scheduled to open in the fall of 2014. The school is partnering with the two local hospitals, Borgess and Bronson Healthcare Group Inc. Research is certain to be a focus.
Foremost among Kalamazoo's current companies is Metabolic Solutions. The diabetes drug developer may be the most advanced among the cluster in Kalamazoo, possibly because its underlying science has been around for decades. When Colca and Kletzien were Upjohn researchers in the '80s, the company signed a research agreement with Japan's Takeda Pharmaceutical Co. Ltd. on pioglitazone, a drug class that specifically is used to target diabetes because scientists believe it can activate a type of receptor molecule in a cell's nucleus that affects glucose levels. Both scientists worked on it until Upjohn dropped the collaboration agreement in 1993. By 1999, Takeda received approval for the drug as Actos. Other drugs in the class include GlaxoSmithKline plc's Avandia, which had more than $2 billion in sales before also dropping off after side effects, and Daiichi Sankyo Co. Ltd.'s Rezulin. Actos has performed the best, achieving nearly $4 billion in sales by 2011.
Who knows what would have happened if Upjohn had retained rights to the drug, which is one of the top 10-selling pharmaceuticals?
Metabolic Solutions is hoping to draft off Actos' success, developing its own version of what are known as insulin sensitizers. These drugs helps the body more effectively use insulin to control excessive glucose, a cause of diabetes. While Actos is popular, like any drug it has side effects, including fluid retention, weight gain and the possibility of congestive heart failure, not to say smaller problems such as headaches, sinus pressure and tooth problems.
Colca and Kletzien believe they've found a way to lower glucose levels by focusing on what they call an "unappreciated mitochondrial target." (They believe the drug will have the benefits of insulin sensitizers such as Actos while also aiding in the prevention of diabetes without causing the unruly side effects.)
The company's first product would in essence be a generic of Actos. Called MSDC-160, it's in Phase 2b trials. If successful, its returns could be sizable. Actos goes off-patent in 2012. The fate of 160 will determine if Metabolic Solutions can proceed with its second candidate, a Phase 2a drug called MSDC-602.
To develop these drug candidates, the company is looking to raise an additional $40 million on top of the $55 million in venture funding it's brought in so far.
Metabolic Solutions would like to have a product on the market by 2014 or 2015. "From the venture perspective, this is pretty interesting," says CEO Benoit, making his sales pitch. "Within three years, I'll argue that this is going to be a binary outcome. You're going to spend $40 million. We hope to have the whole package ready to go by 2014. They have the opportunity to make a pretty serious return -- yeah, on a serious dollar amount, no question. But three years to a 3 times return is pretty good."
Of course, this is life sciences, where much can always go wrong.
Still, Benoit credits Kalamazoo's community development with allowing life sciences to remain viable in the area. With companies launched, and a handful sold, Kalamazoo needs a big hit.
"The story needs a success. We can be a very large success," says Benoit. "If you look at all the thriving biopharma clusters around the country, they have turnover. You've got to have wins -- significant wins. They plow money back into the community. Investors go on to start new companies, and the virtuous cycle grows. We've been at this nine years or so, starting from zero. We've got several opportunities for companies to break out over the next couple of years, and that will be important."