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Jim Rutherford

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Personnel file – March 2008: sports

Jim Rutherford, General Manager
Carolina Hurricanes, Raleigh

Professional athletes don’t work all that hard. So says Jim Rutherford, and he would know. He played 13 seasons as an NHL goalie and is wrapping up his 14th year as general manager of the Carolina Hurricanes and its predecessor. “As a professional athlete, you work about seven to eight months a year and a couple of hours a day,” he says.

The business world came as a shock when Rutherford, who turns 59 this month, moved from tending goal to managing the Detroit youth hockey program started by computer entrepreneur Pete Karmanos. When Karmanos bought the Hartford Whalers NHL franchise in 1994, he made Rutherford its general manager. “In business, you’re working all the time, sometimes 12 to 15 hours a day on certain projects.”

The effort paid off. It not only kept him employed in pro hockey but also helped the Hurricanes win the Stanley Cup in 2006. He and Karmanos thus proved that their wintry sport could thrive in a place where college basketball remains the secular religion. That outcome wasn’t assured when they moved the then-ailing team from Connecticut to North Carolina in 1997. Skeptics doubted that Tar Heels would warm up to a game played on ice. “I thought it was the opposite,” Rutherford, Canadian by birth, recalls. “We have such great universities here. In basketball, you’d always be competing with that. With hockey, you don’t make those comparisons. We felt that we had a niche.”

Fans have turned out, but gushers of money haven’t followed. The privately held team claims — as pro franchises tend to — that it has trouble breaking even. It didn’t turn a profit until that championship season. “You see us drawing big crowds, and you see the advertising. But it’s a very expensive business to run a professional team.”

Economic outlook

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Economic Outlook – March 2008

Despite some winter rain, North Carolina is still mighty dry. In mid-January, more than half the population was subject to mandatory water restrictions. An additional 25% was under voluntary restrictions. How has the drought affected the state economy? We asked Stephanie McGarrah, assistant secretary for policy, research and strategic planning at the North Carolina Department of Commerce, and Gene Byrd, the department’s director of business retention and development.

BNC: What sectors of the economy have been hurt so far?

McGarrah: Farmers have already seen some of the impacts. The Green Industry Council, which represents landscapers, Christmas-tree growers, sod growers, those kinds of folks, put out an estimate of $1.5 billion.

What about construction?

McGarrah: We’ve heard the drought is not as bad for some parts of the construction sector because fewer workdays are rained out.

Byrd: It may have a negative effect on residential construction because some cities and towns are not going to make the water and sewer connections to these developments. There is a certain amount of backflushing and cleaning out of lines that has to occur, and there are cities and towns around the state that are saying, ‘We’re not going to do that until we get some more rain.’

How has it affected manufacturing and other heavy water users?

Byrd: We are hearing from large water users, such as poultry processors, large pharmaceutical companies and electronics manufacturers that use lots of processed water. They are very interested in doing everything they can to curtail their water use. They’ve got to have a certain amount of very high-quality processed water to stay open so they don’t have to lay off people. They are very receptive to the idea of saving water. They are very open to the idea of recycling water within their own operations. They are interested in using gray water — treated water that isn’t drinkable — in their processes.

In December and again in January, Gov. Easley called for conservation pricing — rates that penalize excessive water use.

Byrd: There’s been a lot of discussion about that, but I’m not aware of any water systems that have actually done it. Most of them are run by local municipalities, and it would involve their public staffs coming up with recommendations, taking it to council and going through the process.

McGarrah: This is our worst drought on record. This is the first time some of these water systems have faced these kinds of conditions.

Are businesses planning for the possibility of higher water costs?

Byrd: I think they are. The governor has challenged everybody to take this opportunity to take a hard look at how we use a precious resource and to make sure we are using it as carefully as possible. In many cases, we are not because it has been readily available. We are coming into a time, it appears, when that resource is not so readily available. Companies are profit-driven. If they can invest in a machine that has a reasonable payback, they’re going to be all for it. It’s enlightened self-interest.

Has the drought affected recruiting?

Byrd: No.

Do you anticipate any adverse impact if the drought continues?

Byrd: That’s impossible to know. Some of our competitors may be attempting to use some of this stuff against us. But we are seeing no lessened activity nor any loss of projects due to lack of water.

Will the state have to fight a perception that it is water-poor or that water supplies are unreliable?

McGarrah: I think the entire southeastern United States is in this situation. I don’t think it’s just a North Carolina thing.

Aside from construction workers having more sunny days to work, what sectors have been helped by the drought?

Byrd: Maybe manufacturers of water-recycling equipment.

How do you expect the drought to affect the state economy in 2008?

McGarrah: I can’t model that. Our climatologists expect us to have less-than-average rainfall between now and the summer. But that model is 50% accurate. I can’t do much with data that could go either way. And that’s 50% accurate for the state as a whole, not for each of the counties or public water systems. Each of those water systems has to determine, if they get into an emergency situation, to whom are they going to cut water off first?

Byrd: One of the things we want heavy water users to do is take a serious look at how they use water. Are there alternatives? Can they use a lower grade of water somewhere in their process? Do they have pipes that are leaking? Do they have low-flush toilets in their bathrooms? But more than 60% of water users around the state are residential. So even if businesses save significant amounts of water, we’ve still got to continue to push to make sure that the general public is aware of the severity of what we’re facing.

 

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Changing prescriptions

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Changing prescriptions

Pharmacists compound a new formula to keep fit a business that’s
been in the family four generations.
By Edward Martin

The past seems to cling to Mount Pleasant, change treading lightly on this 160-year-old town of about 1,400, with its quiet, shady streets and antebellum homes. The most prominent structure is still Mount Pleasant Collegiate Institute’s main building, erected in 1855-56 and now a museum, its 30 rooms and three floors crammed with Cabarrus County history. Down East Franklin Street, the mill built in 1899 of brick made at the site is still spinning yarn. On a corner under the town’s only stoplight stands an exception.

Not that the drugstore Archibald Walter Moose founded in 1882 looks much different than when it reopened after a fire in 1927. Like the Tuscarora Yarns mill, the building is brick. Inside, along a wall above shelves of remedies and sundries, sit red, blue and green apothecary jugs labeled vinum portense, pulvis scilla, acidum citricum. The ingredients once treated rheumatism, finicky digestion and various other miseries.

It’s the way Moose Drug Co. does business that has changed, radically in some ways. “When Mrs. Jones comes to us today, she’s not just getting a bottle of pills,” says Joe Moose, 43, who with his older brother owns the company. “She’s getting time with Whit and time with me. She’s getting help in order to get the most from her prescriptions. We’re selling health care.”

It’s a formula that’s working. The Moose brothers and their father have opened two more drugstores in nearby communities and keep adding lines of business, such as Moose Pharmacy-branded dietary supplements. Their pharmacists — eight among 28 employees — train for niches in what’s called disease-state management. Whit Jr., 46, is an expert in osteoporosis and fibromyalgia. Whit Sr., 69, focuses on diabetes. Joe concentrates on pharmacoeconomics — cost-benefit analyses of drugs or drug therapies — for customers and compounding — making — many of the remedies himself. “I came in early today,” he says. “I had to start mixing one that included 13 ingredients.”

The bottom line: “We’re solidly in the black.” Getting there isn’t easy, and many community pharmacies find it hard to stay in what health-care experts describe as the most competitive segment of modern med­icine. Pummeled by giant drugstore, supermarket and discount chains, parsimonious managed-care plans, shrinking government reimbursements and rising wholesale drug costs, independent pharmacies face a choice: change or die. Nationwide, about 1,300 went out of business last year; it’s unclear how many did in North Carolina. In 2000, the N.C. Board of Pharmacy tallied 942 chain pharmacies and 539 independents operating in the state. Last September, there were 1,131 chain stores and 593 independents.

Nationwide, according to IMS Health, a Norwalk, Conn.-based pharmaceutical and health-care research company, independent pharmacies accounted for about $35.5 billion of the nearly $275 billion of prescription drugs sold in 2006. Chain stores, including drugstores and such mass-market retailers as Wal-Mart and Target, sold $96.1 billion, while mail-order companies sold about $42.2 billion. The independents sold $34.4 billion in 2005.

But sales aren’t the only thing rising. Take cost of dispensing, a standard industry calculation of everthing from labor to the light bill. It was $10.69 per prescription in North Carolina last year. Medicare Part D, which pays for drugs for government-insured patients, is pushing it higher. It takes 8.7 minutes to fill a typical cash order, compared with 12.5 minutes for Part D patients, mostly the elderly.

“Not all of them but a lot of community pharmacies are having a tough time,” says Rebecca Slifkin, director of the federally funded North Carolina Rural Health Research and Policy Analysis Center in Chapel Hill. “That’s important because there are things that really matter in the life of a small town. There are things that make it desirable to live there and less desirable if you don’t have them. Things like a doctor or a small hospital. Or a drugstore.”

Like the Scotch-Irish, Germans started drifting down the Great Wagon Road from Philadelphia through the Shenandoah Valley of Virginia into the Carolina Piedmont in the 1700s. In the 1800s, Mount Pleasant was a stop on the road from Salisbury to Charlotte, and John Moose — by then the German surname had been anglicized — was its doctor. “His practice became so successful, he didn’t have time to compound prescriptions,” Whit Sr. says. ”He encouraged my grandfather — his brother — to go to pharmacy school. He was in his 20s then. He came back and opened here in 1882.”

Archibald Moose probably didn’t know it, but he was at the dawning of modern pharmacy. A new breed was being born: trained health professionals who also were retailers. By the early 1900s, the wooden drawers of A.W. Moose’s drugstore — later, son Hoy’s — bulged with prescription files and formulas. Bottles and bins held chemicals and herbs. Lore has it that rowdies gambling next door started the 1927 fire. Fire trucks from Concord, 10 miles away, raced into town, but their hoses didn’t fit the hydrants. “The whole downtown burned,” Whit Sr. says. “The building next door was two stories, and it fell over on top of this pharmacy. The next day, my father opened up across the street in a borrowed location.” A new drugstore would rise on the foundation of the one that burned.

A generation later, Big Pharma was stirring. “In the early to middle 1950s, commercial manufacturers began making drugs, as opposed to chemicals,” Joe says. “Since the Civil War, druggists had operated basically with recipes to formulate prescriptions.” Whit Sr. joined his father as a pharmacist soon thereafter. “We still formulated a few prescriptions,” he recalls. “Each ingredient was weighed and measured, but there was a certain level of skill required, too.” When Whit and Joe were growing up in what was still their grandfather’s store, the business was a blend of the old apothecary and newer drugstore. “We read comic books and magazines and would creep around the store to find all the hiding places,” Whit Jr. says. “We had work to do, and we’d get paid in merchandise. When we got older, we got paid in money, but my dad couldn’t stand to see you spend it, even in the store, so he’d drive you down to the bank and wait for you to deposit it.”

Prescriptions and sundries created a comfortable business. “My father told me at least 20 times, ‘You’ll never get rich in a drugstore,’” Whit Sr. says. “‘You might make a living, but you’ll never get rich.’ When I started in the business in about 1960, our sales were about $200,000 a year. I thought that was awfully low, but it was about average for independent pharmacies at the time.” The Community Pharmacists Association estimates independent drugstores now average $3.6 million a year.

Whit Jr. graduated from UNC School of Pharmacy in 1987 and started work the next week. “The day I came, Dad took off for the beach,” his first vacation in seven years. Three years later, Joe received a doctor of pharmacy from Campbell University and went to work the day he was licensed. “When I came was about the time the third parties were coming in,” Whit Jr. says. “I was on autopilot, doing it the way Dad did it. But we could see things headed in a downward trend. Joe and I were trained as pharmacists, not business people. We’d done things by the seat of the pants, but we realized we had to have professionals to help us. We hired some accountants, who could tell us what the numbers meant, and that helped us turn things around.”

The family opened Moose Pharmacy in Concord in 1989 and Moose Midland Pharmacy in 1997. In 2006, the bro­thers bought out their father, becoming the fourth generation of Mooses to own the business.

Joe Moose was on a Christmas Eve mission, heading to the home of a woman who had been a Moose Drug customer for 69 years. One of her children had bought a lift chair to help her stand — medical equipment such as wheelchairs, shoes for diabetics and other health-related gear is sold at all three Moose stores — but wanted it to be a surprise. Joe personally delivered it. A few weeks earlier, the Mount Pleasant store had celebrated its 125th anniversary downtown with bluegrass music, barbecue, flounder and hush puppies — and health-care pep talks. One guest was a woman who had been a customer for 74 years.

Such tactics win skirmishes in the conflict over how prescription drugs will be sold — the personal service offered by the independent pharmacies versus the mass marketing of drugstore chains. A Consumer Reports survey of 32,000 customers nationwide found that most thought independent drugstores were cheaper and better. But the independents also face some long odds.

For one thing, they are more dependent on filling prescriptions, says Fred Eckel, executive director of the North Carolina Association of Pharmacists in Chapel Hill. “To a big-box store, pharmacy sales might be 5% or less of revenue. Prescriptions are a loss leader to get people into the store.” In 2006, Wal-Mart, now the nation’s third-largest drug retailer, began selling about 150 generic drugs for $4 a prescription. Target and some other retailers have followed its lead.

From what once was essentially a cash business, 91% of prescription sales are now through Medicare, Medicaid or managed-care plans. Pharmacy benefit managers, companies that contract with government and private insurers to administer prescription benefits, sometimes force stores to sell drugs at less than cost and swaddle them in red tape. “It used to be, people on Medicare or Medicaid had one payer and one set of rules,” says Slifkin, the rural-health researcher. “Now, they have to deal with as many as 60 different plans, each with its own formulary. Administrative time goes way up, while reimbursement is going down.” Under Medicare Part D, bureaucracy has slowed reimbursement. Previously, most claims got paid in 15 days. Now they typically stretch 45 to 60 days. Moose Drug has weathered the change. Others haven’t. “If you were marginally capitalized, it catches up to you,” Whit Sr. says. “That’s a great reason 1,300 independent pharmacies went out of business last year.”

Mail-order prescription plans, increasingly pushed by managed-care insurers, captured more than 15% of the market in 2006, up from practically zero 15 years earlier. Though co-pays are the same, allowing community pharmacies to compete on price with chains, insurers let patients buy a three-month supply through the mail while requiring them to refill prescriptions monthly at local pharmacies. “Our competition is more the insurance companies than the other pharmacies,” Whit Sr. says.

However, he says, the mail-order companies, working on behalf of insurers rather than customers, don’t necessarily offer bargains because they often strike deals for discounts from manufacturers. “On diabetic strips, for one thing, you might have a $5 co-pay for a generic, but the mail-order company will give you a strip they’re getting a discount on and charge you a $20 co-pay.”

To survive in the face of these trends community drugstores have to exploit niches that chain pharmacies and managed-care companies haven’t tapped. “The bottom line is, profit for these guys is so thin, they have to find ways to supplement their prescription income,” says J. Andrew Bowman, director of continuing education at Campbell’s pharmacy school. In this dog-eat-dog world, the Mooses have turned to dogs — and other pets — to broaden sales. They formulate veterinary prescriptions — many have the same ingredients as human medicines, except in different dosages — and can flavor them to appeal to finicky animals. They sell consultations. A 30-minute session in which one of the pharmacists goes over a patient’s record, making suggestions for more effective drugs, typically costs about $60. “Pills don’t do a patient any good sitting behind a counter,” Joe Moose says. “In North Carolina, over a third of prescriptions are never filled” — usually because patients can’t afford them. “Of those filled, a third are never taken or never taken correctly.” About a dozen insurers, his father estimates, cover such consultations.

“Selling pills is just one piece of the pie now,” Joe says. ”Compounding is another piece. Selling consultations is another. Where the Walgreens and Wal-Marts have diversified into potato chips and beach balls, we’ve come full circle. Manufacturers make a tablet that works for the majority of people but not everybody. We can make things for patients that might have trouble swallowing or are allergic to certain ingredients.” The Mooses’ stores have focused on new medications formulated as lollipops or syrups for those customers.

That kind of customized service forces community druggists to sacrifice volume in hopes of bringing in business chain drugstores can’t get. The average price of a prescription was $58.58 in 2006. “It takes more time at a compounding pharmacy, and you need special equipment,” Eckel says. A typical community pharmacy compounds six to 10 prescriptions a day. “If they do 100 prescriptions a day total, they’re really busy, where a Wal-Mart or CVS might do 600 without compounding.”

Bowman and other experts say the Mooses are on a track other community pharmacists will have to follow. They will become more-integral parts of the health-care system, working more closely with physicians and expanding patient-care skills. It won’t be easy, Slifkin says. “What we’ve heard from a lot of pharmacists who’ve been in business in their communities for a long time is that ‘we can stay in business, but when we retire, we’ll never be able to sell it,’” she says. “A new person having to take over the mortgage couldn’t handle it. There’s not enough return. In the next five to 10 years, I think a real crisis is coming.” Bowman notes that the state is already experiencing a shortage of druggists, and the N.C. Board of Pharmacy says more than 58% of the 8,967 practicing pharmacists are older than 40.

All three Mooses live in Mount Pleasant — Joe in a restored house that his grandfather built — within walking distance of the drugstore. They want to add stores, one at a time, controlling their growth. “We expect to move forward with what we have,” Whit Jr. says. “We want to continue and expand our branding and encouraging our staff to continue advanced educations” for disease-state management. They will adapt to the times. But one thing won’t change. “When a customer goes to CVS, they see the way a corporation thinks a pharmacy should be,” Joe says. “When they come in here, they see a pharmacy the way we think it should be.”

Biotechnology wants a lead role

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Biotechnology wants a lead role

After years of preparing a work force and other infrastructure, the industry
is ready to take a star turn in the state’s economy.

Every state covets biotechnology, but industry leaders in North Carolina believe the state is especially well-positioned for growth. Business North Carolina recently asked some of those leaders to address industry issues during a round-table discussion sponsored by the North Carolina Biotechnology Center in Research Triangle Park. Participating were Norris Tolson, president and CEO of the biotech center; Sam Taylor, president of the Raleigh-based North Carolina Biosciences Organization, an industry trade group; Chris Kroeger, a partner at Durham-based venture-capital firm Aurora Funds; and two Tar Heel biotech CEOs, Vipin Garg of Durham-based Tranzyme Pharma, which is developing drugs to treat gastrointestinal and metabolic diseases, and Sarah Yocum of Winston-Salem-based Aqualutions, which is developing diagnostic tests to benefit aquaculture. The round table, moderated by Arthur O. Murray, BNC’s managing editor for special projects, was held at the biotech center.

What is the state of biotechnology here?

Tolson: We’re going to create 75,000 jobs in the next 15 years or less. We already have 50,000. We believe they will come from homegrown companies plus others that we’ll be able to recruit, some already in the mix.

Taylor: We’ve been around for 20 years, but the technologies that really have an application in health care are just beginning to open up. You’re going to see this industry continue to grow steeply, not only in the number of jobs it creates but also in the amount of wealth it generates and the economic contribution it makes across the board.

Yocum: I’m coming in on the tail end of that 20 years, and I wouldn’t have chosen any other place to be.

Kroeger: From the venture-capital perspective, we look at a couple of key metrics. Deal flow in primarily very early-stage entrepreneurial companies has been strong for years, in particular on the therapeutic side. The flip side is exits: Are biotechnology companies going public or being sold? We’ve had a few significant IPOs over the past five years or so, and there are a number of companies that are in registration or about to get registered. The question is, will the IPO window remain open? But it’s a promising sign that we’ve got companies that have matured to that stage.

Garg: The challenge is, how do we take products that are coming out of our companies to the next level of success, both in terms of the product itself and financially? That’s really what’s going to take us to the next level as a state and an industry.

So how do you get to the next level?

Taylor: First, we have to understand that what we see today in this industry — the drugs, the devices, the diagnostics — are not going to be the technologies of tomorrow. The contours of the science are going to continue to change. We’ve laid a great groundwork for producing the labor force that we need to deal with that kind of evolving product line. Our next steps really need to be in fostering innovation at the small-company level.

What kinds of steps?

Taylor: We have an R&D tax credit, we have a qualified-business-venture tax credit. But we need more types of tax incentives and maybe even some direct appropriations to entities like the biotech center to fill that gap between the angel-funded stage of companies and the venture-funded stage. A capital-gains tax exclusion, which we’ve advocated for years, would be a perfect tool. Getting companies in a position where they can get access to cash and where their burn rate is reduced are strategies that will succeed.

Tolson: We spend a lot of money in this state to encourage companies to come here, but we need to invest money to help businesses that are here to grow. That’s the thing that we here in the Biotechnology Center are interested in talking to our colleagues about in the General Assembly because we believe that the best growth — in most cases — is internal growth. Most new jobs in North Carolina come from businesses with less than 100 employees. We need to find ways to encourage small businesses to start here and to stay here.

Kroeger: Two things would help. One is funding the gap between great science and a venture-backable company. There’s a significant void there where it’s something that can no longer be adequately developed within an academic setting, but it really isn’t mature enough to be backed by a venture fund.

Taylor: The capital-gains tax exclusion is something that really helps finance and keep our entrepreneurs. Sometimes you get a twofer on these policy changes. If somebody cashes out of a big successful company in North Carolina, they’re tempted to go to Florida, where they don’t pay income tax. We ought to encourage them to stay here and redeploy that money.

Kroeger: The second thing is to find management talent. We as venture capitalists see countless very good, very interesting technologies and business plans for early-stage com­panies. What there is a dearth of in the region is good entrepreneurs to take these companies to the next level.

How do you find those people?

Kroeger: What really needs to happen is for the region to develop its own Biogen, Genentech, Genzyme — a big, successful biotech that remains independent and becomes a billion-dollar company and begins to spin out management talent to start other companies in the region. You really need that foundation company or two. Unfortunately, there’s not a lot we can do to make that happen. It’s going to take some time.

Yocum: You do need a blockbuster company. If I know that Genzyme started in Raleigh, I want to go there because something worked there for them.

Garg: There’s even a lower tier than that, which we need to get to first. Developing pharmaceutical products is a numbers game. It’s really shots on goal. You need to have a lot of drugs moving through clinical trials before you can have a success. We only have a handful of companies that have taken a drug into late clinical development. This is just a function of being a younger industry. So it’s critical that we create more companies because a business can only take about three drugs forward at a time.

Yocum: The biotech center has done a great job of initiating plans to help entrepreneurs. I’m a recent recipient of one. But a lot of professors don’t want to spin out their ideas because they know they can’t get to the next level. So they may as well keep it in the academic setting and publish, publish, publish and get the recognition. These are great ideas, and there’s a lot of money to be made.

Tolson: Like every other business, what we’re in here is a game of wealth generation. And when you look at it that way, instead of just looking at it as jobs or companies, you tend to look at it somewhat differently. When we generate wealth, we’ll generate jobs and a lot of new products.

Taylor: [The North Carolina Biosciences Organization] keeps a running list of publicly announced equity rounds, grants, licensing agreements, building investments. Just the announced transactions are running at about $1 billion a year. And when a company like TranS1 in Wilmington does an $80 million IPO, that money doesn’t just sit in the bank. It goes into the economy just like the sales that a manufacturer might make. Sometimes we forget that.

How significant was TranS1’s IPO?

Taylor: As a device company, TranS1 is a little outside the biotech space. But we feel strongly that North Carolina can leverage its biotech capability to bring in device companies because the line between biotech and devices is going to become so blurred. We can’t compete with Minneapolis on the electromechanical devices. But if you start putting biotech, infotech and nanotech in it, then we can really do it. Those are the kinds of opportunities that TranS1 is exploiting.

Garg: We have to not just think about biotech as a pharmaceutical industry. Biofuels is a major area, even marine biotech. Nanotechnology is clearly going to be big. California is investing a ton of money in stem-cell research and cell therapies. All that talent exists here. But we need to make more money available for those other technologies.

Kroeger: A number of efforts have really just sprung up in the last year or two to try to nurture a device industry here. It’s going to be important as those two things converge. Boston, San Francisco and San Diego all have both a biotech and a device industry. You can’t really have one be incredibly successful and have absolutely nothing in the other.

Garg: We also cannot forget about diagnostics. The whole practice of medicine is going to change, and diag­nostics is going to become a critical sort of companion to pharmaceuticals. Devices, therapeutics and diagnostics — they’ll all go hand in hand ultimately.

How can the state make sure that biotechnology companies don’t just spring up around the universities, or is that not a bad thing?

Tolson: It’s not a bad thing because we’ve got a big university system. What we need to do is make sure we don’t have the haves and the have-nots any longer. We’re looking at programs right now in the biotech center where we can re-engage the universities that are not in the Research Triangle or in Charlotte.

Kroeger: You just need to match the amount of time, effort and capital that we invest in trying to mature those discoveries with the depth and breadth of science at the universities. One proxy for that is National Institutes of Health grants. The schools that get the most NIH grants are the schools we should spend most of our resources on.

Taylor: If you look at where the biotech manufacturing jobs are now, sure, we have Biogen Idec and Diosynth in Research Triangle Park. But we have Wyeth in Sanford, Talecris in Clayton and Novozymes in Franklin County. We have a very strong labor force, great natural-resource space in our rural areas, and we can build on that synergy.

Garg: We have to create centers of excellence and focus on different types of technologies in different parts of the state. If you focus on marine biotechnology, you can draw upon resources from one part of the state. Nanotechnology or biofuels can be in many different parts of the state. Everybody doesn’t have to build a pharmaceutical company in their backyard.

Tolson: The exciting thing about this whole business is getting people who’ve been working in parallel paths starting to say, well, maybe we ought to cooperate. We’ve got a program here at the center that encourages this. What it’s going to do is say let’s get this act together and create a product stream and companies and wealth out of that. We’re going to help fund you as long as you work together. We’ve said this to universities that haven’t talked to each other in 100 years.

Yocum: People have asked why I would choose North Carolina to start a company. It’s because of this collaborative effort across the state. I attended a conference with some people in Wilmington and utilized their strategies for growing bigger fish and genetically engineering them or breeding them. That’s why I’m staying, not just because of the intellectual-property exchange, but also the other resources, the venture capital and angel networks. Everybody is working together.

Doesn’t that happen in other places?

Yocum: No. We were recruited to Maryland. And while we looked at the cost of the space there and what kinds of resources were immediately available, there really was no competition with North Carolina. All the resources are here, and everybody works together.

Is there any concern that the state will train more workers than there are jobs?

Tolson: No. All forecasts that we’ve seen say that North Carolina will grow at 14 to 15% a year in employment in the biotech industry. If we train them, we’ll find the companies that will employ them. There will be occasions where somebody might not be able to find a job, but that’s pretty rare.

Garg: We frequently have to go outside the state to bring people here. In many cases, we are looking for highly qualified, highly trained people who’ve got big-pharmaceutical-company experience. But the fact remains that every day there are jobs being created at every company that I know of. I don’t see any danger of creating too many people with qualifications and not having enough jobs for them, at least not in the short term.

Yocum: You have to start somewhere. If you started the companies first and there was no work force, those companies wouldn’t stay here. I would welcome the problem of too many people to choose from.

Kroeger: Again, the place where there is a bit of a shortage of talent is really at the senior-management level. If you’re creating lots of junior-level folks, manufacturing, technician folks coming out of the universities, you need to have senior management leading the companies to hire those folks.

Is there a danger that lower-cost countries might start attracting Tar Heel biotech businesses?

Taylor: We’ve got serious competition. Maybe in 20 years Amevive will be made in China because it’s so well-characterized and understood that they can make it anywhere. But 20 years from now, we’re going to be making the next great thing.

Tolson: I grew up in the agricultural-chemical industry. We saw it grow and mature, and we saw cost of goods sold become the main factor everybody looked at. And what happened? They went to cheap-labor countries. But the inventions continue to happen in America. As long as that’s the case and we can manipulate it to grow companies with it, we’ll do OK.

Then you don’t see a threat?

Tolson: I don’t think we ought to sit around and wring our hands about the fact that tableting will go offshore or packaging will go offshore. That’s just the inevitable nature of low-cost countries. But after a while low-cost countries figure out they want a higher standard of living, too, and the price goes back up and a lot of that stuff comes home.

Kroeger: The commodity aspects of the industry will eventually move offshore. It’s not going to be next year or the next five years. But I bet in 10 years, certainly a lot of the chemical manufacturing will be offshore and likely a lot of biologics manufacturing will be. So we as a state need to make sure we’re not too married to any one aspect of the biotech industry, and we move as the industry matures.

Garg: I’m CEO of a company, and I’m sitting next to a venture capitalist. They give us money. Our job is to be as efficient with that capital as possible. So even as a very small company, we’ve gone to India to do process-development work. We’ve gone to China to do our pre-clinical animal work. We’ve gone to both China and India to do some of our manufacturing. And we’re now doing clinical trials in Romania and Lithuania and Ukraine; and we just started recruiting patients in India. That’s in addition to work we’re doing in the U.S.

Can that movement be stopped?

Garg: That’s the economics of the process. The key is, what we’re good at is innovation and in building intell­ectual property. We’re also good at supporting entrepreneurs — much better than many of these countries — and let’s not forget that.

Ben Sutton

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Personnel File – March 2008: Sports

Ben Sutton Jr., CEO
ISP Sports, Winston-Salem

Sports is a conservative industry run by cartels that call themselves leagues. That conservatism crimps innovation. So give a double shot of credit to Ben Sutton Jr., founder of International Sports Porperties Inc. in Winston-Salem, for coming up with one. The company, which does business as ISP Sports, lets college teams sand leagues outsource marketing, handling everything from negotiating TV contracts to selling space on stadium signs. It has 250 employees in 31 states. Sutton, 50 this month, talks about how he dreamed up the company and his unorthodox management ideas.

“After law school at Wake Forest, I worked in the [Wake Forest] athletic director’s office. We had a company that sold our TV rights, one that sold our radio rights and another that sold our stadium scoreboard. One of them didn’t pay us, and another just stopped producing the coaches’ shows that it was supposed to produce. So I got the idea that we should bring all the rights in house and sell them ourselves.”

“It’s challenging to be in a business in a not-for-profit environment, so I went to the university in 1992 and said, ‘Why don’t you outsource this all to one company, and I’d like to be that company.’ We started with just Wake Forest and today have 58 projects — schools, conferences and bowl games.”

“Every Wednesday morning, from 8:30 to 9, we ask our people to turn off their computers and phones and read. We want them to drink deeply of good books. We want to stimulate thought. We have a list, but they can read what they want. On Friday mornings, we take 30 minutes and ask them to write seven or 10 thank-you notes to people who touched their lives, personally or professionally, that week.”

A moderating influence

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Capital Goods – march 2008

A moderating influence

By Scott Mooneyham

Every four years, North Carolina Republicans talk about ending the Democrats’ stranglehold on political power in the state. And every four years, Democrats usually beat them back. The Democrats’ success, at least since the 1970s, hascome in part by their embracing the role of pro-business moderates. Doing so, Democrats running for governor and other statewide offices have been able to harvest the state’s most fertile source of campaign money — wealthy business executives and business-related political-action committees — leaving the Republican candidates digging for scraps.

Will 2008 be any different? Gary Pearce doesn’t think so. He might be a little biased. He’s a Democratic political consultant whose clients included former Gov. Jim Hunt and then-U.S. Senate candidate John Edwards. Pearce calls it “cracking the code,” and he doesn’t see even hairline fractures right now. “I think the Democrats’ hold is getting stronger and stronger.”

His reasoning might surprise you. Pearce believes the influx of highly educated, moderate Republican voters is helping moderate Democratic candidates, not hurting them. Transplants moving to Charlotte, the Triad and Triangle to work in banking, communications and high-tech industries care about pocketbook issues and public education. In addition to wrapping themselves in the pro-business blanket, Democrats running for statewide office have made these issues their own. At the same time, the Republicans’ anti-tax, anti-regulation message — successful in presidential and congressional races — hasn’t had the same resonance on the state level.

Of course, Pearce is painting with some broad strokes. The details are a bit more complicated. For one thing, Democratic success hasn’t been complete. Republicans Jim Holshouser and Jim Martin won terms as governor (two for Martin) in the 1970s and 1980s. The GOP also gained a majority in the state House for four years beginning in 1994. Today, Republicans hold three of the 10 elected executive-branch offices — agriculture secretary, labor secretary and state auditor. Also, more often than not, campaign money from business interests flows to those in power. If business is good, why wouldn’t it? Big business, in particular, craves stability and frets about the unknown. It becomes a supporter of the status quo. In North Carolina, status quo means Democrat.

Still, Republicans cracked the code elsewhere in the South, taking up residence in governors mansions while gaining and holding statehouse majorities. Why there and not here? Republican politicians’ lukewarm support for public schools, in a state whose electorate has a long history of supporting public education, may be part of the answer. GOP activists who have tended to pull their candidates away from the center — while Democrats like Hunt, current Gov. Mike Easley and legislative leaders stayed anchored in the middle — may be another explanation.

With another election looming, Republican candidates will again try to solve the riddle. Charlotte Mayor Pat McCrory may be best positioned to do so. Coming to the governor’s race from the hive of business activity that is the Queen City, he ought to be able to tap a deep reservoir of business money. The seven-term mayor enjoys a characteristic important to big business donors — he’s a known, steady commodity. With his moderate record, McCrory should have appeal among Piedmont suburbanites as well as retirees living along the coast.

Then again, Richard Vinroot, a former Charlotte mayor, had much the same going for him when he took on Easley in the 2000 governor’s race. He lost by 6 percentage points. McCrory also could struggle to get out of a crowded GOP primary in which many voters stand ideologically to his right. Polls indicate that state Sen. Fred Smith, a Johnston County developer, is likely to be his toughest competitor. Salisbury lawyer Bill Graham and former state Supreme Court Justice Bob Orr also are fighting for the nomination. Both Smith and Graham have poured more than $1 million of their own wealth into their campaigns and probably will put in even more.

You’d think that a homebuilder like Smith might attract money and support from the business crowd. He has pulled in donations from fellow homebuilders and the like, but his fundraising through December shows him woefully behind the two main Democratic candidates — Lt. Gov. Beverly Perdue and State Treasurer Richard Moore.

Perdue had taken in nearly 10 times more than Smith from political-action committees, most of them business-related. Moore continues to tap financial-services execs for campaign cash. Both Democrats had around $4.6 million to spend at the beginning of January, better than four times Smith’s available money, despite a $1.5 million loan to his campaign.

Forget about the polls. Given those early returns — the kind that can be counted in dollars and cents — that’s reason enough to think that Republicans are still a long way from cracking the code.

Scott Mooneyham is the editor of The Insider, www.ncinsider.com.

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When profit is not the incentive

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When profit is not the incentive

For many reasons, nonprofit companies have become major players
and employers in the Tar Heel economy.
By Amamda Parry

It’s not yet 3, but the late-December day is fading as men and women climb out of cars onto the sloped concrete of a parking deck near downtown Charlotte. The Presbyterian Hospital lot becomes a sea of jewel-colored scrubs as nurses, doctors, technicians and assistants in rose, teal and navy blue drift toward the walkway that will take them through patient parking to work. Many call out to workers who have just finished a shift, some stopping to chat before they head in opposite directions. A similar ritual is being played out some 80 miles north at Forsyth Medical Center in Winston-Salem. Ditto at hospitals in Salisbury and Thomasville.

Fifteen years ago, the only thing all these people would have had in common would be job titles. These days, they share the same boss. With 22,000 on its payrolls, Novant Health is the state’s fifth-largest private-sector employer and one of its biggest nonprofit companies. More than 237,000 Tar Heels work for a nonprofit — more than do in construction, finance or transportation. Employment figures for the largest rival those of for-profit businesses. Novant has more employees in the state than IBM. Duke University employs more North Carolinians than Bank of America.

This year, Business North Carolina includes nonprofits in its ranking of the state’s largest employers for the first time since 1992. Back then, only six made the cut. This year, 15 were on the list, including Duke University, with 30,550 employees; Wake Forest University Baptist Medical Center, 11,400; and University Health Systems of Eastern Carolina, 8,195. Seven more appear on a list from the Employment Security Commission of companies with 1,000 or more employees.

“We have had this ideology that these are basically volunteer-run agencies helping poor people,” says Lester Salamon, a founding director of the Johns Hopkins Center for Civil Society Studies in Baltimore. “But not all the services they provide are for the poor. What I think is becoming increasingly clear to people is that nonprofits have developed into enormous employers and very complex organizations.”

Straddling the divide between public and private sectors, nonprofits — or not-for-profits, as they sometimes are called, because many run solidly in the black — are strange and resilient beasts. They function in many ways like their for-profit counterparts, charging fees for services and often competing for the same customers. They can make a profit — an operating surplus — but must pour it back into the business. Yet their ties to the public sector are strong: Exempt from federal income taxes, many receive government funding, either through grants or reimbursements. Some, such as nonpublic schools and universities, provide services also offered by government. It’s this duality that makes them so strong. Like weeds, they often can grow under conditions others can’t.

A recently released study found that employment at North Carolina’s nonprofits grew 35% from 1995 to 2003, six times the rate of for-profit businesses. The study, co-authored by Salamon with help from the North Carolina Center for Nonprofits advocacy group, showed growth in nonprofit employment was strong even during the last recession. During 2001-03, when for-profit jobs decreased, nonprofit employment grew an average of 4.4% per year. Because nonprofits tend to be service-oriented, they grow in step with population: The more people, the more services needed — and not just of the assistance variety. Some recreation centers, day-care centers and community theaters fall under the nonprofit umbrella. In the last 27 years, North Carolina’s population has increased by 52%. Its nonprofits have been swelling to meet the demand.

In fast-growing Mecklenburg County, the YMCA of Greater Charlotte has grown at a faster pace than the population. While the number of residents has more than doubled since 1980 to 842,622, Y membership has increased six times, reaching 166,000. The two largest branches in North America are here: the Harris YMCA, with 27,000 members, and the Siskey YMCA, with 26,000. “We’re sought out by a lot of developers and corporate entities to see if we can enhance the quality of life in specific areas or subdivisions,” says Robbie Armstrong, executive vice president and chief operating officer of the YMCA of Greater Charlotte. Its headquarters and 22 branches employ 3,560, making it the state’s 61st-largest private employer.

Though they operate in many ways like for-profit businesses, growth of nonprofits is not always tied to the same economic forces. For example, a downturn can increase demand for social-assistance services, which can create political pressure to increase government funding for the nonprofit groups providing them. At the same time, another major source of revenue — fees for services — remains relatively stable, according to Salamon. “If you’re sick, you go to the doctor. If you have kids and need to work, you use day care.”

However, nonprofits are vulnerable to recession through their third source of funding — donations. “There are decreases in contributions,” says George Bryan, president and CEO of The Children’s Home. “People don’t want to spend money on going to events and galas.” But most nonprofits overcome this loss of individual donations by seeking more government funding or private grants. The Winston-Salem nonprofit, which provides services that include residential care of orphans, foster-care placement, family counseling and mental-health treatment, weathered the last recession by adding programs, which brought in more funding. It now works with autistic children and recently opened a home for teenage mothers. It employs 160, slightly more than it had before the downturn.

Competition also spurs growth. Nonprofit health organizations need to deliver the same services and accommodate the same numbers as the for-profits. A growing and aging population means more people seek health care, and new technology tends to increase the number of workers needed, according to Don Dalton, a spokesman for the North Carolina Hospital Association. “In diagnostic technology, you have additions, not replacements. First, X-rays were state-of-the-art. Then you had the CT scan, but you still had the X-ray. Then you had the MRI, which didn’t replace either the CT scan or the X-ray. It creates these layers of growth.”

Industry trends have changed the way health-care organizations are structured. Of the nonprofits on our list of the largest private-sector employers in North Carolina, nine are or include health systems, an industry term for groupings of hospitals, clinics, doctor offices and nursing homes. Health systems took off in the ’90s when hospitals became concerned over the expansion of managed care. “There were predictions of tremendous cuts in payments, both from HMOs and the government,” says Jim Tobalski, Novant Health’s senior vice president of marketing, communications and government relations. “A lot of organizations thought the best strategy would be to form alliances or to form new organizations.”

(Charlotte-based Carolinas HealthCare System, with 33,000 employees and 22 hospitals in North and South Carolina, is the largest such entity in the two states. But because it is owned by the Charlotte-Mecklenburg Hospital Authority, it is considered a public agency, a designation that keeps it off the Employment Security Commission’s list and ours.)

Novant got its start in July 1997 with the merger of Winston-Salem-based Carolina Medicorp and Charlotte-based Presbyterian Health Services. Thomasville Medical Center merged with it later that year. The system now has nine hospitals, two nursing homes and 137 clinics, outpatient surgery and diagnostic centers. Other hospitals have also found success in joining forces, sometimes motivated by even more basic factors than fears of declining government and insurance reimbursements. Asheville-based Memorial Mission Medical Center and St. Joseph Hospital began a working relationship over linens in 1996. Both wanted to stop using laundry services to save money and decided to pool resources to create their own. The hospitals ended up merging in 1998. Mission Health has since been joined by Spruce Pine Community Hospital in Mitchell County and The McDowell Hospital in Marion.

Consolidation often results in growth. Most health systems want to increase access to care, so they tend not to close the smaller hospitals they acquire and often open treatment centers to meet local demand. Greenville-based University Health Systems of Eastern Carolina and East Carolina University have become partners to build a cardiovascular-care center scheduled to open this year and create 500 jobs. Novant is building two hospitals — in Mint Hill and Kernersville — to meet growing patient demand. Each is expected to employ 300 to 400 people.

Expansion is such a given for health-care organizations that labor shortages are a concern. With the state’s population 65 and older expected to double by 2020, demand for all sorts of positions will increase. Hospitals are already feeling the crunch when it comes to nurses and respiratory, occupational and physical therapists. Schools can’t keep up with demand, though some are trying to expand programs to accommodate extra students. For example, last year, UNC Chapel Hill expanded its nursing program to double the number graduating each year with a bachelor’s of science in nursing to 220.

Even if enough workers can be trained to fill these jobs, there’s no guarantee they’ll want to go the nonprofit route. The traditional assumption has been that nonprofits pay less, Salamon says. That can be misleading, as studies haven’t compared wages by position but as overall industry averages. As such, averages for nonprofits are skewed by the high number of college-educated professionals they employ, as are the for-profit figures by all the highly compensated executives — and what some would call obscenely paid top executives — plus the multitude of low-paid, low-skilled employees on their payrolls. When industry-to-industry wages are compared, nonprofits sometimes come out on top.

Salamon’s study showed that for-profit workers made 4% more than nonprofit employees in North Carolina in 2003. But it found the average wage for hospital workers — everyone from the janitorial staff and orderlies to chief surgeons and top administrators — was $710 a week at nonprofits, compared with $597 at for-profits. At nursing homes, it was $402 to $362. For home health-care workers, $493 to $276. Nonprofits are able to pour more money back into the business, Salamon theorizes, because they don’t pay profits to owners and investors.

Salamon points to his study as an academic awakening. He took his data on North Carolina from quarterly surveys distributed by the state’s Department of Labor to companies employing four or more people. In other words, he relied on information that has been available for 40 years; it just hadn’t been analyzed. “The statistical community conceptualizes the economy as two-sector — market and government,” he says. “But anyone who thinks about it for five minutes, or three minutes, will see there’s really three.”


For a complete look at our Top Private-Sector Employers chart, visit your local bookstore, or purchase a copy online here.

What’s working now

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What’s working now

In providing jobs for North Carolinians, it’s not what uesd to.
And what works today might not tomorrow.
By Edward Martin and Frank Maley

Up the hill from God’s Acre, biotechnology could be Jim Crawford’s salvation. In a laboratory a few blocks from Old Salem’s cemetery, where Moravians sleep — some since the 1700s — beneath rows of marble slabs, he works in the sterile air of biological safety cabinets, extracting cells from the amniotic fluid of pregnant women. The nonembryonic stem cells can morph into different types of body tissue.

“Some of these, we want to remain like stem cells,” Crawford says from inside his white coat and safety glasses. ”But others, we want to change into muscle and nerve.” This is not science fiction. This is the Wake Forest Institute for Regenerative Medicine in downtown Winston-Salem. They grow human organs here.

At 57, Crawford is cultivating something else — another career. Since the 1980s, layoffs have cost him jobs in textiles, electronics and the furniture industry. After the 2005 shutdown of PMI Industries Inc., which made furniture hardware and other products in Welcome, just south of the Twin City, he earned a two-year biotechnology degree from Forsyth Technical Community College. That helped him land a job here. “In the future, you’re going to have to be willing to retrain and relocate to survive,” he says. But such job security can come at a cost. “I’m making about half of what I was when I left PMI, and that was in the $60,000s.”

Crawford’s career path has followed changes in an economy once dependent on manufacturing textiles, furniture and tobacco products and now leaning more heavily on life sciences, finance and other emerging sectors. “We’re the poster child for a region in transition,” says Don Kirkman, CEO of the Greensboro-based Piedmont Triad Partnership. The 12 counties that make up the economic-development organization had a net loss of nearly 30,000 insured-employment jobs from 2000 to 2006. Vanished — or shadows of their former selves — are the headquarters and plants that once made the region the center of the state’s manufacturing might. Statewide, net job creation has varied, with counties that make up the Research Triangle Partnership gaining sharply but some other regions stagnant or losing ground. Figures show state-insured employment in the North Carolina portion of the Charlotte Regional Partnership increased 2% in the period.

The economic shifts have instilled fear and confusion in workers. North Carolina has shed 300,000 old-line manufacturing jobs over the last three decades. Per capita personal income, after peaking in 1997 at 93% of the U.S. figure, has slipped eight of the last nine years, the first sustained decline since the Great Depression. In 2006, it stood at 88% — about where it did in 1987. Household incomes, adjusted for inflation, fell 8% between 2000 and 2005, N.C. State University economist Michael Walden notes. But even those figures are open to interpretation. “We’re a fast-growing state, and young people starting in their careers make less,” says Mark Vitner, regional and national economist at Wachovia Corp. in Charlotte. North Carolina also has the nation’s second-highest rate of legal and illegal immigration. The newcomers, primarily from Latin America, are young and have a birth rate double that of non-Hispanics. Babies, Vitner points out, earn nothing.

To get a picture of what’s happening, focus on the Triad. Probe its technology enclaves, gritty mill towns and back roads, and you’ll find a landscape dotted with prosperity but also littered with the dead-end, dead-wrong assumptions of the past: Automation would save textiles; tobacco would reign forever; foreign furniture could never compete with North Carolina’s. It’s a glimpse into the future, too, with great promise but many potential pitfalls. Jim Crawford is a case study.

Across the street from where he works in Piedmont Triad Research Park, along silent hallways in aseptic glass cubicles lined with beakers and test tubes, Targacept Inc. researchers and technicians target the brain’s nicotinic receptors in a search for drugs to treat Alzheimer’s and other diseases. In the next building, two new companies delve into nanotechnology. Working within billionths of a meter — 100,000th the width of a human hair, explains physicist Daryl Boudreaux, the president of both — PlexiLight Inc. searches for commercially viable ways to generate light while FiberCell Inc. seeks technology to capture electricity from the sun. Then drive 30 minutes to the south side of the city where you’ll find more than 40 technicians at Tengion Inc., which licenses technology from Crawford’s employer, cultivating neo-bladders for patients in medical trials. Commercial production could begin within three years.

In the Triad, the potential for research, logistics and advanced-manufacturing jobs seems boundless. Texas-based computer maker Dell, which employs 1,100 in Winston-Salem, is just settling in. Tennessee-based air courier FedEx will employ 500 in Greensboro when its sorting hub opens in 2009. Honda Aircraft, part of the Japanese car maker, plans to spend $100 million and employ 300 at the headquarters of its budding aviation business in Greensboro. It also plans to open a $28 million, 70-employee plant to make jet engines in Burlington. In that former mill town, Laboratory Corporation of America Holdings performs medical tests. About 3,000 work in some 40 buildings downtown and elsewhere in Alamance County.

Manufacturing is still key. “It has shrunk as a percentage of the work force, but it hasn’t shrunk in importance to the economy,” says Mac Williams, president of the Alamance County Area Chamber of Commerce. About 3,600 work for Reynolds American Inc. in North Carolina, most in and around Winston-Salem. But that number is down from about 14,000 in the 1980s. Many of the losses were what a 2007 study by the N.C. Commission on Workforce Development calls “middle jobs” — the ones that let a worker with minimal education support a family.

While other nations have taken many jobs, so has automation, weapon of choice against cheap foreign labor. Go 25 miles west of Winston-Salem to the foothills town of Yadkinville, where Greensboro-based Unifi Inc.’s million-square-foot, six-story polyester-fiber plant is an example. On vast floors, each as big as a typical Wal-Mart, giant machines whine while robotic AGVs — automated guided vehicles — doff millions of cones of yarn a year. Human hands never touch the material.

At work here and elsewhere, Walden says, is a seismic upheaval of the state’s economic bedrock. “It’s flip-flopped,” the economist says, with the homegrown manufacturers that once ensured a measure of stability statewide, and to the Triad in particular, muscled aside by new ones with shallow roots. Tobacco, textiles (including apparel) and furniture (including forest products) made up 22% of the gross state product in the late 1970s. That has slipped to about 7%, Walden says. Meanwhile, the combined share for banking, technology, pharmaceuticals, food processing and vehicle parts has nearly doubled, from about 10% to more than 17%.

Economists, wary employees like Crawford and corporate executives say something else has vanished — the days when the presence of the big three traditional industries assured a community could rest easy about the future, unfounded as that faith proved to be. What assumptions, they ask, will the next 10 years disprove? The next 30? Is China, now wooing such hot Tar Heel industries as pharmaceuticals, the enemy? Or the Indian Ocean nation of Mauritius, where industrial output — some textile workers wear roller skates to tend machines quicker — is rising at twice the rate of China’s? Or India, which has snatched thousands of jobs from North Carolina’s vaunted banking industry?

Or with footloose companies that invest in brains rather than bricks — enabling them to relocate at the drop of an incentives check — is the greatest threat to a community’s economy really the town, county or state next door? A recent legislative study found the state had promised $3.7 billion in the last three years to get businesses to move or expand here. That figure doesn’t include local incentives. What happens if the money dries up? Welcome to the new age of uncertainty.

Have doubts about globalism’s impact on the state economy? Visit High Point. Here its invisible hand has picked up the center city and moved it eight miles away. In October, streets of the old downtown are packed, the conversations on them taking the tone of an international bazaar. Foreign flags flutter on every corner. Russian accents mingle with those from Sri Lanka, Japan, France — 100 nations in all. This is the High Point Market.

Loren Hill, 53, president of the High Point Economic Development Corp., watches the scene from his office window. “Over there is where the Federal Building and old U.S. Post Office were when I went to register for the draft in 1972.” It’s now a market showroom. Nearby is Showplace, a convention center. Fronting it is the 13-story International Home Furnishings Center, 80 acres of floor space for exhibitors. “My mom used to work at the Sears retail store where Showplace is now.”

More than 180 buildings — 90% of the city’s core — are devoted to the furniture market, attended by 80,000 buyers twice each year. The market thrives here, despite a billion-dollar effort by Las Vegas to lure it there, but High Point’s traditional manufacturers have taken a beating. “When I look at the list of top employers from 20 years ago, we had 17 hosiery mills in town. Today, there are two,” Hill says. The new downtown? “It has shifted out to the Piedmont Centre,” says Tom Dayvault, president of the High Point Chamber of Commerce. The 1,100-acre business park is on the city’s northeast fringes, five minutes from Piedmont Triad International Airport. Many of High Point’s 70 foreign-based companies have Piedmont Centre addresses. More than 11,000 people work in office complexes along its manicured hollows and hilltops. Thousands of them perform back-office jobs for global corporations such as Charlotte-based Bank of America Corp.

Dayvault, Hill, Walden and others stress that manufacturing isn’t dying. Nationwide — and economists say the trend holds true for North Carolina — the value of manufactured goods in 2005 was a record $4.5 billion. But dig deeper. The smallest work force since 1950 produced those goods. Consider High Point and furniture. The industry employs 65,000 and has an annual economic impact of $8 billion in Guilford, Randolph, Davidson and Forsyth, the four counties that touch the city. The market, a year-round industry in itself — it has, for instance, spawned dozens of furniture-catalog photography studios — has an impact of $1.2 billion. “If High Point hosted the Super Bowl,” Dayvault says, “it wouldn’t have that kind of impact.”

But globalization has shriveled furniture employment in North Carolina. Peaking at nearly 100,000 in the 1980s, when 60% of America’s furniture was made within 200 miles of High Point, manufacturing has declined to fewer than 50,000 jobs. Nearly half of the furniture sold in the U.S. arrives from overseas. Most of the jobs remaining are concentrated in design — Winston-Salem is attempting to brand itself as a design center, Chamber of Commerce President Gayle Anderson says — headquarters, distribution, marketing and niche manufacturing. Marquis Seating Co., which makes upholstered hotel furniture, recently moved into a 160,000-square-foot building in High Point vacated by another manufacturer. But it brought its 100 employees from nearby Lexington.

“That’s the wave of the future,” Walden says. “The legacy industries have been protected, in many cases operating just in the U.S. economy where trade rules, restrictions and laws protected their markets. There’s a different world now, a closer world. There’s international competition, cheaper foreign labor, lower trade barriers.” It’s a tough world. A stalwart of the High Point market, Henredon Furniture Industries, founded in Morganton in 1945 and now a subsidiary of St. Louis-based Furniture Brands International, sold high-end, hand-carved beds for $5,000 in the 1990s. Today, similar beds made in China retail for about $700.

To replace lost jobs, industry hunters have set their sights on new targets. Jeffrey Garstka, vice president of Winston-Salem Business Inc., says his organization aims at five: advanced manufacturing, distribution, logistics, financial services and life sciences. The last includes research centers such as Crawford’s employer and businesses that support the region’s major medical centers and Wake Forest University’s medical school. Not only are the Triad’s hospitals and health systems major employers, they have something few of the emerging industries do: ties to a place. Anderson, the chamber president, notes that — with the exceptions of reading X-rays and interpreting MRIs, some of which is being outsourced overseas — health care always will be delivered locally.

“The time,” Walden says, “is past when, as we did in the 20th century, we could have two or three industrial sectors that were solid, purely North Carolina-based.” Furniture makers clustered here because of the hardwood forests and craftsmanship of the settlers who made this their home. Tobacco factories sprang up because the crop flourished in the state’s rich soil and temperate climate. New England textile barons, as well as native entrepreneurs, exploited the rivers and streams to power their mills and, as subsistence farms were clapped out, cheap labor to tend their looms.

Compare that with, say, nanotechnology. Boudreaux, the president of FiberCell and PlexiLight, is also a partner in NanoHoldings, the Rowayton, Conn.-based venture-capital firm that launched them and 12 other nanotech companies elsewhere. It was attracted to the Triad by work being done at Wake Forest’s Center for Nanotechnology and Molecular Materials. The university’s research and aggressive efforts to commercialize it with startups like Boudreaux’s are a draw, but will they have the hold that North Carolina’s natural and labor resources had for so long on its traditional industries? What is there that distinguishes this place from countless others nationwide?

“Virtually every state in the union has people trying to get funding from legislators, economic incentives or whatever to start a Nanotech Valley this or a Nanotech Center that or whatever,” Boudreaux says. “All of them hope to create the next Silicon Valley. But with technology, that’s just not going to happen. There’s also a lot of global activity in this field as the world becomes a smaller place. Scientists all over are looking at nanotechnology. We have some overseas operations because all the good ideas aren’t going to happen in the U.S.A.”

In this respect, some of the state’s new economic engines might prove as vulnerable as textiles, tobacco and furniture finally turned out to be. Banking, which dominates the skyline in Winston-Salem and Charlotte, is a prime example. Moravians, members of a German-speaking religious sect whose roots go back to the 15th century, came from Pennsylvania to settle a 100,000-acre tract that came to be known as Wachau after the estate of their patron in Saxony. They founded Salem, their third settlement in what would become Forsyth County, in 1766.

When William Lemly decided to move his bank from Salem to the county seat of Winston in 1879 — only a few years after Richard Joshua Reynolds opened his tobacco factory there — he needed a new charter and new name. He chose Wachovia. It would grow into the largest bank in the South and, for more than 120 years, Winston-Salem would remain its home. The 34-story, Cesar Pelli-designed tower that housed its headquarters is the city’s tallest building; its old building, the second-tallest. Both dwarf the iconic Reynolds Building. But Wachovia fell behind the big Charlotte banks and, in 2001, merged with First Union Corp. — which also took its name. Headquarters, and hundreds of jobs, departed the Twin City for the Queen City.

Winston-Salem is still the home of a major financial holding company. BB&T Corp., the state’s third-largest bank, operates in 11 states and the District of Columbia. It employs about 1,400 in Forsyth County and nearly 11,000 in North Carolina. But in its rapidly consolidating industry, the lesson of Wachovia is not forgotten. BB&T has long been rumored a takeover target of larger banks such as San Francisco-based Wells Fargo. If that were to happen, some in Eastern North Carolina would call it just. The company, founded in Wilson in 1872, moved to Winston-Salem in 1995 after its merger with Southern National, another émigré from that part of the state.

Even the mammoth Charlotte banks might not be immune to such forces, which causes sleepless nights for some boosters of what has become the nation’s second-largest financial center. Wachovia and Bank of America are now global companies, tied to North Carolina by history, personalities and the fortune they’ve invested in real estate and infrastructure. All that could be trumped by the right deal or a decision from the top that living costs make North Carolina a fine place for operations but headquarters need to be somewhere else.

Another of Walden’s emerging big five — pharmaceuticals — could be imperiled by a different threat, the same that old-line manufacturers faced. At the end of a giant conference table in Targacept’s boardroom, Alan Musso, the company’s vice president and chief financial officer, and Linda Gretton, director of investor and public relations, outline the company’s rise. Until 1997 a subsidiary of Reynolds Tobacco, it earned headlines by demonstrating how receptors in the brain that respond to nicotine might be targeted with drugs to treat a litany of illnesses, including schizophrenia, attention-deficit disorder and depression. It holds 95 patents.

Targacept’s small size and high-caliber work force — more than 40% of its 102 employees have Ph.D.s or medical degrees — are its assets. “It’s no secret that the pressure on Big Pharma to produce is enormous,” Gretton says. Here decisions can be made down the hall, not halfway around the globe. A new drug typically takes about 10 years to bring to market. “Hence their decision to go outside with young pharmaceutical companies like ours.”

Two companies that have cast part of their lot with Targacept are London-based AstraZeneca International Corp. and GlaxoSmithKline PLC, also based in London but with U.S. headquarters in Research Triangle Park and Philadelphia. They have poured $55 million into the company. At the same time, both are investing heavily in a pharmaceutical frontier — China. GlaxoSmithKline conducted more than 30 drug trials there in 2007; AstraZeneca is building a research-and-development plant in Shanghai. American-trained Chinese scientists will work for less than half the salaries paid their Tar Heel counterparts. Technicians at some Winston-Salem biotech companies labor side-by-side with Chinese who expect to return home after their training.

The stakes could be enormous. For example, the state recently awarded an incentives grant valued at more than $6.5 million to High Point-based TransTech Pharma Co., which does research on treatments for cancer and other illnesses, and PharmaCore Inc., which manufactures drugs. The new jobs, company officials say, will pay an average of about $97,000 a year.

Sometimes they rise like a phoenix, if not from the ashes then the rubble of the old. A warehouse for Kayser-Roth, a hosiery and apparel maker caught in the textile industry’s downdraft, used to be on this corner in downtown Burlington. It was demolished to make way for the red-brick and glass, four-story, 114,000-square-foot headquarters of Laboratory Corporation of America, the medical-testing company that started here in 1969. Now Alamance County’s largest employer, it employs 25,000 worldwide and grossed $3.6 billion in 2006.

Communities that thrive in the future will be those that constantly remake themselves, adapt, diversify and invest in human and intellectual capital. It won’t be painless. Many places might find it impossible. “The big challenge is, the new industries are not necessarily located where the old industries have been,“ Walden says. “You’ve got geographic winners and losers. If you go to the Rocky Mount-Wilson area, you find they’ve lost out on the phase.” Among his winners: “The Triangle is one, Charlotte is one. I’m not sure about the Triad yet.”

Educational attainment, though more amorphous than hardwood forests for furniture, rich soil for tobacco or rivers for mills, will be communities’ best bets for the future. “East of Interstate 95 but inland off the coast, that whole area has some work to do. If average educational attainment is under 12 years, you’ve got a serious problem. The south-central area is another region that’s going to struggle, along with the foothills west of the Triad.”

Walden’s assessment amounts to more than paying lip service to the premise that it pays to stay in school. In the last 10 years, he says, not only those workers who didn’t finish high school but anyone without a college degree suffered inflation-adjusted cuts in earnings. “It’s not a pretty picture for those households,” he says. “In the old days, when a person came out of high school or maybe if they didn’t even finish high school, they could go to a textile mill or furniture factory and find a job. You can’t do that anymore.”

Other forces, though they may turn out to be transient, will guide the Tar Heel economy of the future. Visit the laboratory where Jim Crawford works. Its director can usually be found in a white coat, a man with a pinched face and almost timid manner. He’s Anthony Atala, recruited to Wake Forest University Baptist Medical Center in 2004 from a post as director of tissue engineering and cellular therapeutics at Children’s Hospital Boston and Harvard Medical School. A team of more than 20 physicians, scientists and engineers accompanied him to Winston-Salem. Atala became director of Baptist’s tissue institute and chairman of the department of urology.

His is the face of intellectual capital, the seed that will grow into success, but for only a handful of North Carolina’s most fortunate communities. Across town at the labs of Tengion, the King of Prussia, Pa.-based company’s vice president of finance and administration explains the technology being used, all developed by Atala. It begins, Gary Sender says, with a biopsy of a patient’s bladder, which is sent to a lab where its cells are placed on a scaffold shaped like the organ.

Once the cells are implanted and have grown for six to eight weeks, the scaffold is sent to the patient’s surgeon, who implants it. “The body takes over from there, and at the end of the day — about two months — the patient is left with a new bladder.” Tengion estimates there’s a demand for about 10,000 to 15,000 such procedures a year, a market potentially worth hundreds of millions of dollars. And the technology, developed by Atala, might work for other organs.

Tengion, Wake Forest officials report, is only one of a half-dozen or more small companies that already have been spun off by Atala’s work. More are coming. Some have the potential to become giants among their peers, as Burlington Industries and Reynolds Tobacco were among theirs. But they’ll be spawned by education and intellect, not soil, water or wood.

Tipping point – Tobacco

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Tipping Point: Tobacco

 Phil Carlton grew up the son of a tobacco-warehouse owner in Pinetops. After a long legal career that included a stint as a state Supreme Court justice, he was hired in the mid-‘90s by the Big Four tobacco companies — R.J. Reynolds, Philip Morris, Brown & Williamson and Lorillard — to help negotiate a settlement with 46 states and anti-smoking forces. The agreement they signed in 1998 limited tobacco advertising and forced tobacco companies to pay billions of dollars to the states each year.

Big Tobacco’s willingness to consider a settlement was the most dramatic change in attitude in history. I kid you not. Nobody believed it. I had represented tobacco companies before, and they would fight you over nothing. They were just paranoid. They didn’t want to lose anything. They were afraid of setting a precedent. But in the early ’90s, they saw a powerful army forming against them, including the plaintiff’s bar, public-interest groups, the Clinton White House and a number of young Democrat attorneys general. Tobacco companies may look stupid, but they ain’t totally stupid. The word was getting back to them that this crowd was meeting every week, plotting and planning legislation that would control the industry. My first assignment was: Get us invited to the meetings. I spent from Thanksgiving in ’96 till April in ’97 just getting tobacco to the table. The health people didn’t trust them. They wouldn’t let me bring anybody from tobacco for a long time. Finally, I was instructed to go before the AGs and say that the tobacco companies were willing to drop Joe Camel from the advertising. Joe Camel was an icon. Joe Camel was regarded in the advertising industry as the most brilliant piece of work ever done. It sold a lot of cigarettes, including some to children, which was a problem. I went in and said, ”Gentleman, I have something to tell you — just to give you an idea of our sincerity. I’m prepared to give you Joe Camel. No more Joe Camel ads.” You could have heard a pin drop. You really could. Then the AGs were leaning over, talking to the person next to them. And I had my invitation the next day.

 

Tipping point – Textiles

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Tipping Point: Textiles

In 2004, New York financier Wilbur Ross combined two North Carolina stalwarts, Burlington Industries — once the world’s largest textile maker — and Cone Mills, to form Greensboro-based International Textile Group. He had purchased both companies from bankruptcy the year before. ITG had sales of $769.1 million through the first three quarters of 2007.

The World Trade Organization’s multifiber agreement in 1994 said that at the end of 2005, all the quotas, tariffs and other textile protections would come off. The textile industry had 10 years to prepare for it. Most textile companies, unfortunately, did very little — under the theory that, despite the agreement, government would protect them on an ongoing basis. ITG wanted to operate with a conservative balance sheet, and we wanted to complement our domestic factories with offshore ones. We have built state-of-the-art dyeing-and-finishing and denim operations in China. We also made a joint venture in Vietnam. We are opening a wholly owned venture in Nicaragua. If we hadn’t made those international investments, we would have had to shut down many more domestic facilities than we did. The foreign expansion, in our case, was not at the expense of the domestic plants. It kept them going. We view globalization not as a negative but as a positive. We have opposed some of the initiatives that have been taken in the political sector against China and Vietnam. The jobs that have left are never going to come back anyway. If action is taken to restrict China and Vietnam, those jobs will go to the next-lowest-cost countries — Pakistan, India or wherever. The way the South got the textile business in the first place is that it was the low-cost market, relative to New England. The answer is not restricting things. The answer is trying to right-size your business and balance it enough to retain a domestic presence.