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The Honolulu Advertiser
Posted on: Sunday, February 11, 2007

Examining the future of a high-tech industry here

Advertiser Staff

David Watumull

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Have you checked out The Hot Seat? It's our opinion-page blog that brings in your elected leaders and people in the news and lets you ask the questions during a live online chat.

On The Hot Seat last week was David Watumull, chief executive officer of Cardax Pharmaceuticals, an 'Aiea-based startup company that targets inflammatory diseases. Watumull is also the former CEO of Hawai'i Biotech.

Below is an excerpt from that Hot Seat session. To see the full conversation, go to The Hot Seat blog at www.honoluluadvertiser.com/opinion and click on "On the Hot Seat: Biotech CEO David Watumull." (Names of questioners are screen names given during the online chat.)

Peter Kay: HB1900 in the Legislature right now is reportedly proposing to repeal all tax incentives including Act 221/215. To the best of your knowledge, how many other biotech companies offering similar opportunities to its employees (in terms of salary and stock incentives) exist in Hawai'i? What percentage of those companies are 221/215 qualified? How many of them do you think we would have if 221/215 did not exist? Finally, can you speak to the critics of 215/221 as to what would happen to our nascent biotech industry if the tax incentives are repealed?

David Watumull: I believe there are about a half-dozen similar life-science companies in Hawai'i, and I believe all are Act 221/215 qualified. In my opinion, Act 221/215 financing was crucial to all of us and, frankly, I don't believe any of us would be around if not for that financing.

David L. Moore: The economy is chugging along fine. Why on earth should the government be involved in the free market? What environmental impact will these biotech industries have on our state?

Watumull: It is unlikely that Hawai'i can develop a biotech or life-science industry without a partnership between industry, academia and government. In most communities where the industry is developing, government/industry partnerships are crucial. I am a strong believer in the free market, but this is one of those cases where a different model is required.

In answer to your second question, the life science industry is an exceptionally clean one and as someone who grew up in Hawai'i, that's important to me.

Coffee: Do you think that you will be able to hire locally? Or do you think you will have to hire from the Mainland?

I know lots of our kids want to get into the high-tech field but there has just been very little opportunity.

Watumull: We believe in hiring locally, and we have spent considerable time and effort on this endeavor. Bringing kama'aina back home is especially attractive to us, and the real key to making this happen is to make sure that we have companies in Hawai'i ready to hire. That being said, we also need to expand our work force efforts to make sure we have properly trained personnel.

John: How can Hawai'i attract the type of high-tech businesses that we need to truly have a strong diversified economy?

Watumull: Hawai'i has a lot of positive attributes that make it an attractive place for the high-tech/life-science industry, including our multicultural environment and great quality of life. But we do need to significantly expand our access to capital, in particular.

Steve Doyle: Congratulations on the Cardax Pharmaceuticals startup, however, I have a question about staffing.

Are you encountering a lack of skilled applicants for jobs that require a higher level of education, experience and/or job specific skills here in Hawai'i?

Also, are those who are qualified for your company's needs graduates of Hawai'i's community colleges and university system, or do you find it necessary to recruit out of state?

Watumull: We are able to attract the quality of applicant that we need. In fact, we have far more interest from qualified applicants than we have jobs. We hire from local colleges and out of state. But often we are looking for people with significant experience, ideally someone from Hawai'i who wants to return.

Tina: I realize that Hawai'i's main industry is tourism. However, I think the high-tech industry is a great way for Hawai'i to have a "stable" economy. What other incentives do you think would help to get more businesses to come here?

Watumull: I believe that the most productive way to grow the life-science and high-tech industries here is to grow these companies from the ground up (as most other communities have). To make that happen here, the most important incentives are related to capital and in our particular case, Act 221/215 and the Hawai'i Innovation Fund as proposed by the governor and the Legislature.

David K.: Do you foresee private business/university partnerships being established here at the University of Hawai'i similar to what's done at Stanford or MIT?

Watumull: Yes, clearly partnerships with the University of Hawai'i are an important part of growing this industry here. Both Cardax Pharmaceuticals and Hawai'i Biotech have these partnerships, and I know other companies do as well.

D. E. Minatodani: How do I know that my hard-earned tax dollars will be used effectively? What is to prevent a company that is receiving these investments from leaving the state?

Watumull: The industry has worked hard with the Legislature and the administration to make this program accomplish this goal. The best thing we can do to ensure that these companies stay in Hawai'i is to make sufficient capital available and to improve our work force, particularly in the high-tech arena.

Laurie Foster: When 221/215 was first introduced, I observed two market behaviors that caused concern: investors that had no interest in the investment but just were in it for the credits; companies that tried to "force fit" their qualification for a 221. What is your perspective on whether these behaviors exist and whether they positively or negatively impact the intent of the legislation?

Watumull: In my opinion, the changes we made to Act 221 (which became Act 215) addressed these issues in a productive manner. I believe it is very difficult now for investors to invest without taking a serious look at the company, and I also think it is very difficult for companies to "force fit," as you describe it, their companies into Act 215 qualification.

Jo: Thanks for taking the time to answer questions. With that said, do you think that some bio-tech jobs shouldn't be done in Hawai'i? I'm specifically talking about importing the bird flu here. One mistake could be catastrophic for Hawai'i. We are an Island community with not much place to go.

Watumull: You raised an important question. The two largest risks for importation of bird flu into the state come from migratory birds and visitors, neither of which we can or are prepared to control. The perceived risk to the state of virus importation for research purposes is not only very, very, very small, but this research will afford us the ability to protect ourselves better than if we did not do it.

Meheroo: Do you envisage competition from low-cost research labs in China and if collaboration with any of them will be an advantage to his company. What is the impact of pharmaceuticals that do not respect intellectual property rights?

Watumull: Meheroo, that's a really important and complex question. But, to give a short answer, we do anticipate that working with low-cost labs in China could be fruitful for us, but intellectual property issues must be addressed to make this approach work.

Brendan Fritzsche: How do you foresee the biotech industry in Hawai'i performing over the next several years and will it continue to need generous tax credits after it has established a foothold in the state?

Watumull: Our goal over the next five years is to move our compounds into human clinical trials and, possibly, receive FDA approval for our first products. A successful cardiovascular product in today's pharmaceutical marketplace has sales well in excess of several billion dollars. Compare that to all of tourism, with approximately $12 billion, and you begin to understand what impact this industry could have on Hawai'i.

Paul Arinaga: What will it take to get the high-tech industry in Hawai'i to critical mass (however you define that)? If you had $100 to spend, how would you allocate your funds and why (e.g., the different levels/types of education, research funding, availability of seed or later stage capital, etc.)?

Are there any high-tech sectors for which Hawai'i offers truly unique advantages?

It seems that once high-tech companies reach a certain size, they move their operations /headquarters to the Mainland because it's simply easier to access customers, capital and talent there (a bigger market). Is there a way to prevent this? Or should we resign ourselves to being a state of startup and early stage companies only, and hope that we can incubate enough of them?

Do you think Hawai'i is simply too remote geographically to ever become a "Silicon Paradise"? Realistically, how high can we aim?

Watumull: By far, the most critical issue for the success of high-tech and life-sciences industries in Hawai'i is availability of capital. Even with Act 221/215, most high-tech companies are substantially undercapitalized. Act 221/215 has done a reasonably good job of providing early stage capital, but the large amounts of later-stage capital necessary to foster a successful life-science industry's almost nonexistent. As a result, I would allocate a significant majority of your fictional $100 to late-stage capital, provided, of course, that Act 221/215 is in place. The remainder I would focus on science and math in our schools all the way from kindergarten through UH. Also, development of facilities, including the regional biosafety lab in Kaka'ako biotech park is crucial, and a portion of the money should be allocated there as well.

Trying to pick a "unique advantage" is not really necessary. There are areas that are particularly well-developed high-tech/life science centers — Silicon Valley, San Diego and Boston—that have no "unique advantages." But, one might counter, what about their academic institutions, don't they provide a unique advantage? My answer: Many other areas, such as Baltimore and Chicago, have outstanding academic institutions but have not enjoyed a robust high-tech/life-sciences economy. Why not? No capital. Capital is key. Companies that need capital move to where the capital is.

Because of Act 221/215, Hawai'i has been probably the best place in the country for availability of early-stage life science capital. But the larger amounts of capital required for later stage life-science companies is not available. We need to address this impediment; both the governor's and House Speaker Say's innovation funds begin to do so.

I don't believe our geographical location prevents us from being successful at all. Both Singapore and Switzerland, for example, are small and isolated and yet have become strong players in the pharmaceutical and/or biotech industries.