TIGM a bust in meeting job goals

When Gov. Rick Perry in 2005 used one of Texas' largest-ever job creation grants to create a biomedical research center in Brazos County, he promised the $50 million would save lives and bring thousands of high-paying jobs to the state.

But more than six years later, those jobs have not materialized. A biotech firm based in The Woodlands that received 70 percent of the money, Lexicon, has laid off more than half its staff, shed its role in the project and transferred most of its early job creation obligations to its public partner, the Texas A&M University System. And the institute Lexicon and the A&M System teamed up to create, the Texas Institute for Genomic Medicine, or TIGM, employs just nine people.

By accepting the 2005 grant, the public-private partnership promised to create 5,000 jobs by 2016. The deal required Lexicon to hire 513 new employees by today, the last day of 2011. If it didn't, the governor's office could demand $2,415 back for each job it failed to create. With no new aggregate jobs created, that would mean Lexicon could have been on the hook for more than $1.2 million

Lexicon, which has ties to some of Perry's major campaign contributors, has actually reduced its staff from 704 in 2005 to 290. Meanwhile, Perry's office, which is responsible for tracking the grant's compliance, has imposed only one small fine on the company, for $16,905, and allowed the A&M System to take up the slack for job creation through 2012.

TIGM now operates on University Drive in College Station. Workers there use frozen stem cells to provide outside researchers with custom-cloned mice. Its administrators say they haven't dealt with Lexicon in years.

Perry's office has defended the grant, saying it still expects the facility's scientific and economic benefits to go far beyond the initial costs. And A&M officials credit TIGM with kickstarting its biotechnology corridor along Bryan and College Station's shared border.

"TIGM has significant implications for biotechnology, biodefense and other industries supported by this technology in Texas," said Lucy Nashed, a Perry spokeswoman. "Having this capability in Texas helps promote the culture of innovation and entrepreneurship Gov. Perry has worked hard to strengthen."
But as Perry runs for president, the project has attracted new scrutiny. It was created by one of 89 grants that Perry has doled out from the Texas Enterprise Fund, a taxpayer-furnished resource designed to spur new job growth in the state. Perry has touted the fund as a key reason for Texas’ economic success, saying the recipients of the $440 million spent have promised more than 50,000 new jobs. His opponents say those numbers are overblown and that the fund is a tool of “crony capitalism.”

TIGM has been controversial at A&M for years. Critics, including many faculty members, believe the institute was thrust upon the school to buoy a struggling biotechnology company with close ties to Perry donors.

"I think it is arguably one of the greatest frauds ever perpetrated by the Texas Enterprise Fund, which is saying a lot," said Andrew Wheat, research director for Texans for Public Justice, a liberal think tank that has extensively studied the Enterprise Fund.

An Eagle investigation of the grant based on hundreds pages of public documents, internal system audits, emails and reports, plus interviews with people involved, indicates top A&M administrators worried that the deal was doomed from the start. But the A&M System Board of Regents, which is appointed by Perry, and System officials with close ties to Perry, pushed it forward anyway.

And when the institute encountered financial difficulty, Lexicon was allowed to sever its ties, leaving TIGM's debt and initial job-creating responsibilities with A&M. The university has worked to turn the project around, and its leaders are optimistic about the future -- one that doesn't include Lexicon.

A struggling company

Perry's relationship with three key Lexicon investors was widely publicized when the Enterprise Fund grant was announced in 2005.

William A. McMinn, who was chairman of Lexicon's board when it went public in 2000, helped guarantee a $1.1 million loan to Perry's 1998 campaign for lieutenant governor. He also contributed $152,000 to Texans for Rick Perry in the five years before the grant was awarded.

Houston Texans owner Robert McNair donated $185,000 to Texans for Rick Perry. And venture capitalist Gordon Cain donated $60,500 from 2000 until he died in 2002.

McNair, McMinn and Cain's survivors' trust combined to own more than 15 percent of Lexicon the year the grant was awarded. And McMinn and McNair each donated $50,000 to Perry less than a month before the deal was announced.

Perry's office and Lexicon both said the donors played no major role in the grant.

"As far as we are aware, they had no knowledge of those discussions until the agreement was announced," said Lexicon spokesman Wade Walke.

The exact origin of TIGM is murky. Nashed, the governor's spokeswoman, said the idea came to Perry in a letter from a group of business leaders in The Woodlands who were worried that Lexicon might locate the facility in New Jersey. A&M System officials have said the idea sprang from inside the university. Lexicon said it developed the technology specifically for TIGM.

Either way, Lexicon was struggling when it received the money. According to its federal Securities and Exchange Commission filings, it hasn't turned a profit since it went public. In the three years before it received the grant, it sustained losses of $57.9 million in 2002, $64.2 million in 2003 and $47.2 million in 2004.

The company was worth $22 per share during its initial public offering. That value reached almost $35 per share that year, but has consistently dropped since. On the day the Enterprise Fund contract was signed, the price had plummeted to around $5. This week the stock closed at $1.29 a share.

But Lexicon had high hopes for its OmniBank II Library of mouse genes in 2005. Mice share about 99 percent of the genetic structure of humans, making them useful for medical research. Lexicon's library allowed it to clone mice with certain traits or genetic defects and sell them to researchers.

The Enterprise Fund grant was designed to set up an institute that could market those mice. It paid Lexicon $35 million for its library and related technology and the A&M System $15 million to build TIGM's headquarters. The partnership never planned for TIGM to generate world-changing research on its own. Instead, the Enterprise Fund dollars were spent with the hope that biomedical companies would move to Texas to be near the institute and the resources it provided.

A big surprise

Rick Floyd was shocked when he learned about the deal. As associate vice president of finance at A&M, reviewing the financial risks of the university's major contracts was one of his jobs.

But Floyd, who retired in 2006, learned about the deal in mid-2005 when it was included in an upcoming A&M System Board of Regents agenda. Finding out about it so late in the process made him wonder whether he was intentionally left in the dark. He requested a copy of the contract and took it home to review overnight.

He was furious with what he read. A&M was committing to build a 34,000-square-foot facility with the state money. But if the building didn't create jobs, the university would be required to pay the money back.

"Very, very quickly, the alarms went off," Floyd said in a November interview.

A deal like that would require months, if not years, of analysis, he said. But Floyd had never been consulted, he said.

So the next morning, Floyd rode the Rudder Tower elevator past his eighth-floor office to the ninth floor, where he waited outside the door of Dan Parker, associate executive vice president at the time.

When Parker arrived, Floyd slammed the contract on a table and demanded to know why he hadn't been consulted, Floyd said. But Parker hadn't heard of it either, Parker told The Eagle.

Parker said he carried the contract into the office of then-executive vice president and provost David Prior, who had never seen it either. Next, Parker called vice president of research Richard Ewing, who died of a heart attack in 2007. Ewing, who was in China at the time, said he knew talks had occurred between A&M, the state and Lexicon, but didn't know that a contract had been prepared, Parker said.

"From 8 in the morning until 10 a.m., every senior administrator at A&M all of the sudden realized that we had a contract here that was a ticking bomb and we didn't know anything about it," Parker said.

Parker said he and Prior then visited the 10th floor to ask then-A&M president Robert Gates. Gates had never heard of it either, Parker said.

After hearing the details, Gates assured Prior and Parker that he wouldn't sign the deal, Parker said. A&M administrators assumed that that would delay the contract and give them time to review it, Parker said.

"This is the kind of stuff that you look at for two years," Parker said.

Instead, the contract was rewritten. A&M was removed from the deal and replaced by the A&M System, which meant that Gates had no authority to stop it, Parker said. On July 14, 2005, the Board of Regents, all of whom were appointed by Perry, unanimously approved it. The contract was signed by Perry, A&M System Chancellor Robert McTeer and Lexicon president Arthur Sands the next day.

It's unclear how much the System reviewed the contract. McTeer, who retired in 2006, didn't respond to requests for comment. Guy Diedrich, who handled technology commercialization at the time and brokered the contract, declined interview requests, saying in a short phone conversation that he hasn't worked on TIGM in years and that the institute's employees would better be able to answer questions.

A rough start

Each mouse TIGM clones sells for thousands of dollars, meaning a limited number of researchers can afford them. So the institute staked its success on winning a major grant from a U.S. National Institutes of Health program designed to map as many mouse genes as possible.

A 2008 audit of TIGM concluded that the grant "was essentially the business plan for the TIGM partnership and no contingency plans were considered."

But in June 2006, TIGM leaders were shocked to learn that the NIH rejected their application. No specific reason was made public, but speculation was rampant. In a 2006 article reporting the rejection, Science Magazine cited anonymous researchers who believed past restrictions Lexicon had imposed on customers were "problematic." Other researchers, the article said, believed that Lexicon's technology wasn't as "cutting-edge" as NIH sought.

And in an internal email obtained in an open records request, A&M's then-Vice President and Chief Financial Officer Sue Redman said TIGM missed out on the funding "because we apparently had the wrong kind of mice -- white versus brown or black."

Either way, missing out on the funding was disastrous.

"The lack of business and contingency plans resulted in an inability to respond to the declining financial condition of TIGM," the audit said.

A&M officials began searching for a new direction for the project.

In December 2006, Gates resigned as A&M president to serve as U.S. Secretary of Defense. His interim replacement, Eddie Davis, immediately requested a briefing on the future of the institute.

Davis said recently that he was concerned at the time that A&M wouldn't live up to its job-creating requirements and sought to make TIGM sustainable.

"We did have some meetings with some representatives from Lexicon, but I never did get a business plan," he said.

He said he also spoke with A&M researchers and was told that Lexicon's technology was outdated and not very attractive to clientele. Researchers could get similar services for cheaper elsewhere, he said he learned.

But, before he could make a decision on TIGM's future, A&M System regents hired Gates' permanent replacement.

That hire was Elsa Murano, who took the helm in January 2008. She said that she also heard from researchers that Lexicon's technology was out of date. She said one compared the technology to Betamax video tapes -- it worked, but it wasn't marketable.

"There was nothing wrong with them, it was just that everyone else was using another technology," Murano said.

By that time, TIGM was losing money and had required $3.2 million in additional financial support from the A&M System.

In February 2008, Mike McKinney, a former Perry chief of staff who replaced McTeer as chancellor, asked Murano to consider allowing A&M to take over sole responsibility for TIGM.

A month later, TIGM's governing board voted to dissolve and transfer all its assets and obligations to the A&M System, a transition that cost the system $1.2 million.

Murano said she hurried to decide whether to bring TIGM back under A&M's control. She said she determined that the mouse technology had little value, but the $10 million headquarters could be used for small animal research. She leaned toward selling Lexicon's stem cell library and keeping the building for other uses, she said.

But even that posed a problem. The building's construction had never been approved by the Board of Regents, a violation of system policy, and it failed to meet the extensive code requirements for a research building on the A&M campus, a fact that is confirmed in the 2008 audit. The university would have had to spend money retrofitting it before it could be used, she said.

Murano resigned before a decision could be made. And in July 2009, TIGM was absorbed into the Institute for Innovative Therapeutics, a new umbrella agency that oversaw other A&M System biomedical initiatives.

Working to improve science

Since 2009, A&M researchers have worked to improve TIGM financially and scientifically. Its original executive director left the A&M System that year and was replaced by two people, one who is focused on the business side and one who leads its scientific ventures.

James Sacchettini, an infectious disease researcher, now handles the scientific side. He insists that TIGM's detractors are wrong when they say its technology is out of date -- it's just different.

The mouse clones that TIGM provides are considered "stable," while other organizations, such as the NIH and the University of California at Davis, offer "conditional" mice, Sacchettini said. Both types of technology can provide researchers with mice that have certain genetic traits, but there are differences.

For example, TIGM and its competitors can both provide mice that are genetically predisposed to rabies. But only conditional mice -- not TIGM's stable mice -- can have that gene turned on or off during the process of research. That flexibility is attractive to researchers in some cases, but not in others, Sacchettini said.

A&M System Vice Chancellor Brett Giroir agreed, saying he expects TIGM's technology to be viable until at least 2020.

In a lab at A&M's Interdisciplinary Life Sciences Building, Sacchettini, along with researcher Deeann Wallis, is using TIGM's technology to try to find cures for botulism and rabies. They aren't using mice, but are using TIGM's stem cell library to generate heart, lung and other tissue and test treatments directly on that.

Sacchettini and Wallis say they are the only researchers using TIGM's technology in that way, but they expect others to follow suit once their findings become public.

"When we publish, that is when people will go, 'Wow!'" Wallis said.

Meanwhile, TIGM turned a $118,161 profit in the most recent fiscal year.

The institute has brought other benefits, too, Giroir said, most notably in that it was the first step in a continued investment in biotechnology at A&M. Since then, the system has founded the Texas A&M Institute for Preclinical Studies and the National Center for Therapeutics Manufacturing, which Perry funded with a $50 million grant from the state's Emerging Technology Fund.

Now, Giroir is leading an effort to bring a major biodefense facility to Bryan-College Station, which he says could transform the local economy. He acknowledged that TIGM has little to no role in that project, but the effort to win it never would have happened without that initial investment, he said.

Claiming success

While A&M is claiming progress on the scientific front, it has already claimed victory in its job-creation goals.

Texas Enterprise Fund recipients are required to submit annual reports to the governor's office detailing how they have created jobs. The governor's office is expected to review them and administer any penalties.

A&M has claimed more than 12,000 jobs directly created by TIGM.

But A&M's reports, obtained by The Eagle in an open records request, appear to take great leaps in their accounting. The system takes credit for every job created in the state since 2005 that is classified by the U.S. Census Bureau as biotech-related. That includes industries where cloned mice would have seemingly no use, such as ophthalmic manufacturing, fertilizer manufacturing and surgical instrument manufacturing.

In other words, the A&M System takes credit for jobs created by an eyeglasses manufacturer in El Paso, an organic fertilizer company in Hamilton and a surgical instrument company in Dallas.

Giroir admitted that A&M likely isn't responsible for many of those jobs. But he said anyone who criticizes the grant for that is missing the point and ignoring all the other biotechnology progress that the state has made since TIGM was founded.

"Anyone who looks at the success of TIGM by only the job numbers of A&M and Lexicon is narrow-minded and intellectually dishonest," Giroir said.

Lexicon's requirements are more strict. In order to claim credit, its employees must work for Lexicon, or an affiliate in which Lexicon owns at least 50 percent.

According to the 2005 contract, Lexicon should have created 513 jobs by Dec. 31, 2011. In its 2006 report, the company took credit for creating 30 new jobs. In 2007, it claimed 12 more. In 2008, the company began to lay off workers, and the contract was amended so that A&M took over Lexicon's job-creation requirements until 2012. Even though Lexicon has reduced its staff by more than half, it hasn't been held responsible under the contract.

Perry's office says that Lexicon will be required to pay more "clawback" penalties if it fails to meet future requirements. That could be a difficult task. According to the amended contract, Lexicon must create 125 jobs in 2012. By 2016, it will be responsible for all 1,616.

"Lexicon's future employment base, and, therefore, our ability to create the jobs contemplated by the [Enterprise Fund] agreement, will be driven by the success of our drug discovery and development pipeline as it progresses through the later stages of development and into commercialization," said Walke, the Lexicon spokesman.

But some of Perry's critics and former A&M administrators have wondered why Lexicon has been left mostly off the hook so far -- and why A&M, a state agency that had no role in creating the technology TIGM uses, has been allowed to pick up the slack.

"We partner with a private company that is not on solid footing and the risk always seems to be assumed by us," said Murano, the former A&M president. "If things fail, the company goes. And who is left to pay the bill? Us."