When state officials pledged $7.4 million to Organogenesis in 2009, they heralded the grant as a way to reward a promising biotech firm that sought to more than double its local workforce.
But the Canton firm’s growth trajectory was cut in late 2013, when the federal government sliced reimbursement rates for its main skin-graft product. Instead of reaching its target of 500 employees in Massachusetts by the end of 2014 as promised, the company ended up with fewer local workers — about 200 — than it had when it received the grant.
Organogenesis has no plans to return any of the $7.4 million from the Massachusetts Life Sciences Center, saying it did what it could to create jobs. Part of the problem is that the original contract was loosely worded, without specific penalties for falling short of the jobs target.
The company is, however, giving back much of the $1.5 million in tax incentives it was also awarded over several years from the life sciences center.
The Organogenesis case underscores the risks when state leaders place big bets with public money on private companies. The grant came in the early days of the Massachusetts Life Sciences Center, the quasipublic agency created out of a 2008 law to help the industry by distributing up to $1 billion in state funds over 10 years.
Because the agency had not yet fully developed its financial assistance programs in early 2009, Organogenesis over two years received 15 times more money than the next biggest grant given by the center to a for-profit company.
The case is sure to remind some people of Evergreen Solar, another growing tech company that benefited financially under Governor Deval Patrick’s administration. One key difference: After millions of dollars in state and local funds were awarded to Evergreen, the solar company essentially closed up shop in Massachusetts.
Organogenesis, meanwhile, continues to plug along, a survivor with proven regenerative technology that heals diabetic foot ulcers and venous leg ulcers.
Massachusetts Life Sciences Center officials defended the unusual grant, which was dangled in front of Organogenesis at a time when the company was considering moving out of state. Instead, the firm stayed put in Canton, eventually growing to a four-building campus within an industrial park in the town.
“The primary goal of the grant that was provided to Organogenesis in 2009 was retaining the company in Massachusetts, with a secondary goal of incentivizing future growth,” Susan Windham-Bannister, the life sciences center’s chief executive, said in an e-mailed statement. “We are pleased that the company has chosen to remain here and appreciate that changes in reimbursement policy at the federal level have impacted the company’s timeline for growth.”
Organogenesis spokeswoman Angelyn Lowe said that since 2009, the firm has remitted $9 million in direct tax revenue to the state and has been responsible for $150 million in taxable wages.
But its financial picture has darkened in the past year or so. Figures provided by the life sciences center show Organogenesis’ local workforce consisted of about 240 people at the end of 2009. By 2011, that number had risen above 300, peaking at around 350 at the end of 2012 and through most of 2013. But layoffs last year shrank that number back to 205 by the start of this year.
Why wasn’t the company required to return the grant money at that point? The language in the 2009 contract was such that only a major event — not just the loss of a handful of jobs — could allow the state to recoup some of the grant money.
When Organogenesis bought its fourth building in Canton in 2011, then-chief executive Geoff MacKay said the firm was growing faster than expected
“It really feels as though we’re firing on all cylinders,” MacKay said at the time.
The good times didn’t last.
The company encountered its first big government-imposed setback at the start of 2013, when the new 2.3 percent federal tax on medical device firms’ revenue took effect. This Affordable Care Act tax, Lowe said, cost the company more than $2.5 million a year, eliminating funds that could have supported at least 40 jobs.
But the real blow came later that same year. That is when the federal Centers for Medicare & Medicaid Services significantly cut reimbursement rates for Organogenesis’ Apligraf and Shire’s Dermagraft products.
As a result, Shire sold its Dermagraft business and its related California plant to Organogenesis, and hundreds of people were laid off at both businesses last year. Organogenesis now employs about 500 people, including its 200 or so in Massachusetts. Gary Gillheeney recently replaced Mac-Kay in the CEO’s office.
“They did everything they were supposed to,” said Peter Abair, director of economic affairs at the Massachusetts Biotechnology Council. “Then they were hit with a double whammy by the federal government.”
Abair said the life sciences center created the Organogenesis grant before it had a fully vetted program to support the company. But he said the center’s tax incentive program that subsequently benefited Organogenesis has proved to be a crucial resource in persuading big employers such as GE Healthcare and Baxter International to move jobs here.
The tax incentive program does have safeguards that require repayment if job growth falls short of stated goals. That is why Organogenesis has agreed to return much of the $1.5 million in tax incentives it was awarded over a three-year period.
The company received about $1.4 million of that amount, Lowe said, and is in the process of returning about $826,000 under the “clawback” provisions attached to those awards.
There is no plan, she said, to return any of the $7.4 million.
Greg Sullivan, research director at the Pioneer Institute in Boston, said he believes the life sciences center board erred by not putting in place proper clawback provisions for the original $7.4 million grant.
The grant contract includes language for the state to recapture some of that money, but certain major events such as a building demolition or a liquidation would have to happen first before a missed employment goal could be considered.
“The Massachusetts Life Sciences Center had the legal authority and, in my view, the responsibility to build in a clawback if the companies they granted money to did not produce the jobs,” said Sullivan, a former state inspector general. “I think they really dropped the ball. I don’t think they have much of a leg to stand on to get any of that [grant] money back from Organogenesis.”
Sullivan said the grant is the latest example of why a state agency should not be making big bets on private companies.
“State employees don’t make good venture capitalists,” he said.
The extent of the Organogenesis cuts is coming to light as Jay Ash, Governor Charlie Baker’s economic development secretary, undertakes a broad review of the life sciences center and other quasipublic agencies.
Paul McMorrow, Ash’s policy director, said there is no timetable for any decisions on what will happen to the agencies, if anything.
In general, McMorrow said, the administration supports company-specific tax awards that have safeguards to ensure the beneficiaries live up to their stated goals.
But, he said, “We have got to recognize that those types of deals can only get you so far.”