Speeches & Presentations

Regional Innovation Clusters: Advancing the Next Economy

Encouraging Regional Innovation, Driving Economic Growth

John C. Lechleiter, Ph.D.

Chairman, President and Chief Executive Officer — Eli Lilly and Company

September 23, 2010

Washington, DC

Thank you, Deborah [Wince-Smith]. And thanks to the Brookings Institution, the Center for American Progress, the Council on Competitiveness, and the National Association of Development Organizations for inviting me to be a part of this conference on regional innovation clusters.

Indeed, the sponsors of this conference themselves represent quite an impressive innovation cluster. It’s an honor to be in such distinguished company and to be involved in this discussion, at a time when we need powerful new ideas like this to create jobs and drive economic growth.

What I have to say may surprise you. I hope it does. My story takes place in a state that has lost more than 200,000 jobs in manufacturing since the peak in the late 1970s. Yet, what I will describe is a remarkable success story of economic vitality and job creation.

And if all you ever hear about Indiana is the Indy 500 … or basketball … or Peyton Manning … you may be surprised to learn that this is the story of a life sciences hub, far from the coasts, deep in what is affectionately known as the Heartland.

What’s happening today in Indiana and in other places around the country demonstrates the power of regional innovation clusters. When you see what’s possible, it’s clear that we must pursue every opportunity … including regional clusters … to develop the full potential of American innovation … to create the new jobs we so urgently need, and seize the opportunity inherent in the 21st Century economy.

Let me open my story with a bold statement: “Though every state wants to be a hub for life sciences, Indiana really is one.” These aren’t my words; this is the assessment of The Economist in June 2009. And it reflects strong growth in Indiana’s life sciences sector over the past decade … confirmed by the Kelley School of Business at Indiana University, in research published last year.

Between 2001 and 2007, payroll employment in Indiana life sciences industries grew by nearly 3 percent a year – more than twice the national rate of life science job growth. During that same period, total Indiana employment was growing at an annual rate of just 0.2 percent, and employment across all Indiana manufacturing was contracting by about 2 percent each year. So the life sciences were absolutely critical to replacing jobs we lost in autos and other manufacturing. Life sciences represented nearly a quarter of all job growth in Indiana during this period. This is a clear case of creating 21st Century jobs to position our state for the future, and it’s a trend we’d like to continue.

As a result, today Indiana is home to more than 1,600 businesses in the medical device, pharmaceutical, drug development, diagnostic, and ag-biotech sectors. The annual wage of a typical life sciences job in Indiana is $82,000, which is more than double the average wage in our state.

Today I want to draw your attention to those human dimensions of innovation. I’ll focus on bioscience innovation … speaking from the perspective of a research-based pharmaceutical company … but I believe my remarks will also apply more broadly to innovation of all kinds.

Furthermore, the total value of Indiana life sciences exports more than doubled between 2002 and 2007, from $2.5 billion in 2002 to $5.1 billion in 2007. That figure is 7 percent of the U.S. total and 3rd-highest among all states, behind only California and Massachusetts.

This growth did not happen by accident. The exciting plot of this success story begins with Indiana’s surprising strengths in life sciences and follows a clear strategy that might have predated the term “regional innovation cluster” – but in fact that’s what it was.

In 2002, Lilly and a number of others helped to launch BioCrossroads … a public/private initiative to develop the life sciences in Indiana. We began with a strong base of global life sciences corporations – not only Lilly, but also Roche Diagnostics, Dow AgroSciences, Guidant, Zimmer, Biomet, DePuy [di-PEW], Cook, and others – and our state’s major research universities – including Indiana University with its School of Medicine, along with Purdue and Notre Dame. And we’ve benefited from a supportive state government and positive business climate.

BioCrossroads plays such an important role in our story that I’d like to give you some details. BioCrossroads is designed to form connections among Indiana’s life sciences research institutions, corporations, philanthropies and state government to create new opportunities and prepare for a future that will increasingly be global, networked, and entrepreneurial.

David Johnson, the president of BioCrossroads, is here today, and I’m pleased to have this opportunity to acknowledge and thank David for his great leadership.

Since its inception,

  • BioCrossroads has directly raised over $245 million of market capital and philanthropic funding to identify and pursue promising new Indiana life sciences opportunities.
  • It has organized four venture capital funds that have invested in 24 start-up Indiana life sciences companies and has attracted over $160 million of additional outside venture capital.
  • For example, since 2003, 14 Indiana-based companies – including five university-related firms – have received investments from the Indiana Future Fund. And the Indiana Seed Fund has invested in 10 university-based enterprises that are advancing important discoveries in the diagnosis and treatment of lung disease, chronic pain, kidney disease, memory loss, coronary artery disease, epidemic infections, and cancer.
  • BioCrossroads has also formed eight sustainable enterprises to capitalize on our strengths in life sciences, such as the Indiana Health Information Exchange … of which I’ll say a bit more later … and OrthoWorx, which supports growth and innovation in the orthopedics hub in Warsaw, Indiana – home to nearly one third of the world’s orthopedic device industry.
  • BioCrossroads has directly helped draw more than 3,000 new life sciences jobs to Indiana and has elevated Indiana’s visibility on the national map of biotech, medical device, and health care IT centers – no easy feat when we’re competing against hot spots such as San Diego and Boston.
  • BioCrossroads has also worked to expand and enhance science and math education in grades K-12 and institutions of higher learning, to develop the home-grown talent necessary to support a strong life sciences sector … and to prepare young Hoosiers to take advantage of the opportunities it creates.

Lilly’s involvement in BioCrossroads is much more than a story of good corporate citizenship. Oh, we’re rooting for our home state – big time – but the life sciences cluster strategy dovetails perfectly with our own strategy as an innovation-based pharmaceutical company – particularly a key element of the strategy that we call “FIPNet.”

Let me explain. The Lilly I joined as a scientist over 30 years ago was a “fully integrated pharmaceutical company” – or “FIPCo” – that owned the entire value chain from an idea in a researcher’s lab to a pill in a patient’s medicine chest. As we entered the 21st Century, Lilly adopted a new model – a “fully integrated pharmaceutical network.” This “FIPNet” still stresses the integration aspect … with Lilly assembling and orchestrating the network … but more and more of the pieces are linked through partnerships, alliances, and other relationships and transactions … rather than always through outright ownership.

A well-developed FIPNet allows us to cast a wider net – for ideas, for molecules, for talent, and for resources. In the process, we can greatly expand the pool of opportunity. We can leverage our financial resources by sharing investment, risk and reward. This wider net is global; so, not surprisingly, we’re doing more work in China and India, tapping into the vast intellectual capital in those countries.

“Through easier access to shared ideas, skills, and transactions, clusters exhibit external benefits that
no one company can expect to capture, making the social benefit larger than the private costs.”

Here’s an example of how it all works. In 2008, we sold Lilly’s large research site in Greenfield, Indiana … along with Lilly operations there … to Covance – a contract research organization with which we already had a FIPNet-style connection. As part of the transaction, we established a long-term relationship with Covance for work they perform for us at the Greenfield labs. We followed a similar strategy a late last year in the sale of our large Tippecanoe Laboratories manufacturing site in Lafayette, Indiana, to Evonik Industries.

As a result, Lilly is a more flexible company, able to tap the capabilities of partners who specialize in the services they provide us. Further, by “unlocking” what had been internal Lilly assets and allowing them to serve additional clients, the Covance and Evonik transactions open the door to additional growth at these sites … leading to increased employment and broader life sciences capabilities in the region.

As a company that thrives on innovation, we draw strength from a strong life sciences community. Certainly, with the Internet and the airline industry, it’s possible for scientists to collaborate with their colleagues around the world … as Lilly scientists do every day. But, you know, those researchers don’t actually live in cyberspace … or on planes (though it may feel like it sometimes). They live in real communities, get involved in their neighborhoods, schools, and places of worship. They benefit from having a wide range of career opportunities in their field, right where they live. They still value opportunities for face-to-face interaction with others who do the same kind of work they do. So we believe strongly that it’s important to have a vibrant life sciences community in our state if we’re to continue to recruit and retain the best talent.

In many cases, Lilly “alumni” remain active in both the academic and commercial branches of the life sciences around the state. At least six new Indiana-based life sciences businesses have been spun-off or started from Lilly support. To take just one example, former Lilly employees started CoLucid … which received venture capital funding from the Indiana Future Fund … by in-licensing a Lilly pipeline compound for migraine.

In fact, when we launched BioCrossroads, I described my vision of when we’d know that the initiative was a success … and that would be the day that Lilly has to compete for talent with all the new start-up and spin-off companies on our landscape. Day by day, we’re getting closer to that chapter in the story of Indiana’s life sciences hub.

So, what’s the moral of our story? With the right strategy – based on a clear-headed assessment of regional economic strengths … and the engagement of a broad coalition from industry, academia, philanthropy and government – all with a solid stake in the success of the mission … a regional economic cluster can be a powerful engine for jobs and income. We’ve proven it.

The life sciences cluster I’ve described is certainly not the only success story … it’s not even the only one in Indiana! A second initiative … patterned after BioCrossroads … is building on Indiana’s traditional strengths to create a cluster in advanced manufacturing and logistics, and other initiatives are applying what we’ve learned to develop new capabilities in technology and clean energy. Earlier today, of course, you heard from representatives of successful regional clusters across the country. Lilly, in fact, is engaged in other life sciences hubs … including the one in San Diego that Duane Roth spoke about this morning, where we opened a new biotechnology center last year … as well as in New York City, where we will open a new research center next week.

The key question is: are these regional clusters encouraging but isolated developments, or can they be part of a comprehensive national strategy to strengthen the economy and create good jobs for Americans? And what is the role of federal policy in such a strategy?

I believe that regional economic clusters are a vital element in renewing our nation’s economy – in fact, today’s event could not be more timely. And I believe that federal policy plays a key role in the success of regional economic clusters – in both a “micro” and “macro” sense.

The “micro” role for federal policy is essentially the two pronged approach outlined in the President’s 2011 budget: first, identifying and sharing information on successful clusters and their characteristics; and, second, providing grants to support and strengthen clusters “to promote economic development and job creation.”

This conference is an excellent example of the first element – building on the work of Brookings, CAP, the Council on Competitiveness and others to identify and promote successful clusters – and I certainly appreciate the involvement of the Secretary Locke, Secretary Vilsack, and other members of the Administration here today.

For an example of the second element – grants to support and strengthen clusters –let me again cite our experience in Indiana.

From the beginning of our regional efforts in the life sciences, we’ve recognized that one of our most valuable assets is clinical data. In 2004, BioCrossroads drove the formation of IHIE – the Indiana Health Information Exchange – to connect, exchange, collect and analyze patient information from major Central Indiana health systems. By 2008, the Indiana Health Information Exchange was identified by Health Affairs as the “most advanced” health information network system in the United States.

In the past year, Indiana’s leadership in health information technology attracted nearly $50 million in total federal funding under the American Recovery and Reinvestment Act. This included a highly competitive Beacon Communities grant to build and strengthen the health IT infrastructure … and achieve measurable improvements in health.

Such a grant is just one ingredient in the complex chemistry of a successful regional cluster … and clearly no region can expect to be successful by depending primarily on federal funding … but it can be an important catalyst in creating essential capabilities.

Even more important, I would argue, is the “macro” role of federal policy in creating an environment where innovation can thrive. Our focus on regional innovation hubs reflects the insight that innovation is not a top-down process, but one that springs from human minds and human interaction. Without the right environment, no regional innovation cluster – no American enterprise – can fully compete in the global marketplace.

Unfortunately, America's economy is in danger of losing what has always been our greatest competitive advantage: our genius for innovation.

A recent study ranked the U.S. sixth among the top 40 industrialized nations in innovative competitiveness, but 40th out of 40 in “the rate of change in innovation capacity” over the past decade. The ranking, published last year by the Information Technology and Innovation Foundation, measured what countries are doing – in higher education, investment in research and development, corporate tax rates, and more – to become more innovative in the future. The U.S. ranked dead last.

Let me be clear: When it comes to sustaining innovation, the burden remains on enterprising businesses like Lilly – and businesses that doggedly pursue innovation, that address challenges, that overcome obstacles, are the essential element in any regional cluster.

The one thing that industry has a right to ask of public policy is to help preserve the environment in which innovation is possible. We take seriously our role in advocating policies that support medical innovation. By the way, just last week Lilly bravely leaped into the 21st Century with a social media platform we call “LillyPad” – with blogs and a Twitter feed that focus on public policy and corporate responsibility. Through these channels, we hope to engage you in the conversation on innovation and other important issues.

The fact is, the pursuit of innovation in any field is a difficult, high-risk venture. If innovation is to take root and grow, it requires a combination of elements I describe as an “ecosystem.”

The first element of this ecosystem is an atmosphere in which innovation can thrive, a society that understands and appreciates scientific inquiry, and free markets where innovators can expect to be rewarded for the risks they take and the value they create. This has always been an American strength. Yet today you'll hear some people say that we have all the innovation we need — or that, in this difficult economic climate, we just can't afford any more of it! But if you’re here in this room today, you know that innovation is not the problem. It's the solution!!!

The second element of the ecosystem — nutrients — come in the form of monetary investments. For investors to take the risks associated with innovation, they must have a fair chance at earning a return when they succeed. That requires solid protection of intellectual property; a fair, rigorous and transparent system of regulation; and a tax structure that provides companies the ability and incentives to invest in innovation.

Let me emphasize that last point. We need a system of taxation that provides incentives – rather than undermines – innovation.

Though the U.S. was one of the first countries to offer an R&D tax credit, we have not kept pace with other nations. Other countries – and many U.S. states – are making public investments to attract private capital and using tax policies to encourage local investment in R&D and related job growth. We need to make the federal R&D tax credit permanent – as President Obama recently proposed – and raise it to levels that make it globally competitive.

Importantly, in advancing a permanent R&D credit, we oppose international tax revenue raisers that will hurt the U.S. economy and deplete U.S. jobs. And I would caution against characterizing long-standing provisions in the tax code as loopholes, as some have called them, in an effort to raise revenue; instead I’d encourage addressing any issues associated with international taxation only in the context of broad, comprehensive tax reform. Recent international tax revenue raisers further exacerbate the problems of a U.S. corporate tax system that is out of step with the rest of the world.

In fact, we need a business tax system that levels the playing field for America’s worldwide companies, which currently face a higher corporate tax rate than their global competitors, and, unlike those competitors, must also pay taxes on their foreign earnings. We need a corporate tax system like the rest of the world – one that encourages, rather than discourages, investment in the United States.

The final and most important elements of the ecosystem are the seeds of innovation, which equate to talented people and their ideas. Human talent — with its energy, passion, creativity and insights — is our most precious resource, but one that remains woefully underdeveloped in this country.

This is a story for another day, but let me just mention two essential tasks:

  • First, with our kids falling further behind on international comparisons in education, we've got to get serious about broad improvement in science and math instruction in our grade schools and high schools. In a recent speech, the President of the Federal Reserve Bank of Minneapolis suggested that, if all current American job openings were filled, the unemployment rate would drop from 9.6 percent to 6.5 percent. The problem is a growing mismatch between available jobs and potential workers … and one reason is that American workers often lack the necessary skills.
  • Second, we need immigration laws that allow and encourage top scientists from other countries to choose to work and to remain in the United States. This does not entail drastic changes, but a sensible increase in visas for highly skilled immigrants and a shorter, simpler green-card application process.

Together, such policies can unleash America's true capacity for innovation. With the right choices, we can preserve and enhance America's priceless legacy of creativity in the life sciences and throughout our economy. This is the fundamental role that federal policy can play in unleashing the power of regional innovation clusters across this country – to sustain an environment where innovation can thrive.

Before I conclude, let me add a point specific to innovation in the life sciences. Today I’ve focused on the benefits of our life sciences hub in Indiana in terms of jobs and economic growth. Indeed, the economic contribution of biopharmaceuticals and other life sciences is vitally important to states and communities across this country.

But innovation in the life sciences also contributes to longer, healthier lives. Medical innovation is the key to meeting the health care needs of a rapidly aging population, improving quality and lowering costs, and making progress against scourges such as Alzheimer’s disease, diabetes, and cancer. Our life sciences hub in Indiana is not simply about creating jobs for their own sake. The folks in those jobs are literally making life better for people around the world.

I began by saying I hoped my story would surprise you. I also hope it has been encouraging.

The successful effort to build a thriving life sciences hub in Indiana – in the face of some pretty strong headwinds in the state’s economy – is reason to believe that our country can overcome the economic headwinds we confront today.

What’s more, as our experience shows, those of you here in Washington don’t bear the burden of rebuilding the economy all by yourselves. Regional innovation clusters are taking root across the country, sharing many common elements but building on the unique strengths and resources of their communities. Driven by a combination of civic engagement and enlightened self-interest, leaders from industry, academia, philanthropy, and state and local government are collaborating to create new enterprises, jobs, and economic growth.

The story I’ve shared with you today … the story of our life sciences hub in Indiana … is really the ongoing story of American innovation. With sound policy and true collaboration, regional innovation clusters will play an important role in the next chapter of that story. The heroes, as always, will be inventive and entrepreneurial Americans … in every state … enjoying the benefits of freedom and a society that values and supports innovation. In that next chapter, our nation – as we have throughout our history – will once again apply initiative and ingenuity to overcome our challenges and create economic opportunity and growth.