Could Austin — the ‘Silicon Hills’ of Texas — become the next biotech hub?

AUSTIN, Texas — The Texas capital is best known for its music, barbecue, “keep it weird” mentality, and — kicking off this weekend for the 30th time — the annual South by Southwest festival. But there’s another player in the local economy: biotechnology.

Within a 25-mile radius of the State Capitol building here, close to 200 life science companies have sprung up, many of them small startups that have put down roots within the past few years, hoping to get a foothold in the industry while the city is still affordable.

The University of Texas at Austin already brings in around $60 million annually in grants from the National Institutes of Health. And this summer, it will open the doors to the new Dell Medical School, which promises to bring even more intellectual property, brain power, lab space, and grant money to Austin.

All of this momentum has led many Austinites to wonder: Can Silicon Hills, as the local tech scene is called, become the country’s next big biotech hub?

“We seem to have all the right components in play,” said Tom Kowalski, president and CEO of the Texas Healthcare and Bioscience Institute, a state advocacy group for the industry. “It all seems to be a wonderful harmonic convergence.”

But skeptics caution that the hype might be outrunning reality.

“Most of the companies here are really very small,” said John Burns, president and general counsel of BioAustin, the local trade group.

And the Austin metro area itself, with a population of just over 1 million, is tiny compared to the nearby metro areas of Houston and Dallas, each boasting around 6 million people. That may limit the size of the local biotech industry, pointed out Bernard Weinstein, an economist at Southern Methodist University in Dallas.

“If you count the number of people working in the biotech sector, and evaluate the types of research being conducted by universities and medical schools, Austin pales by comparison to both Dallas and Houston,” Weinstein said.

Indeed, while Austin consistently ranks high as a booming city — earning the number one spot on the Forbes’ 2015 list of fastest growing cities for tech jobs, for instance — some of that growth is possible because the tech scene is so new and young. The city, for instance, has only about a third as many tech jobs as San Jose, Calif., a quarter as many as San Francisco, and less than half as many as Seattle or Houston.

Fixin’ to launch an industry

In the 1990s, Austin was virtually void of a life sciences industry. “I think there may have been three companies here when I moved here 20 years ago,” said Cindy WalkerPeach of the Austin Technology Incubator.

WalkerPeach has helped local drug, medical device, and diagnostics startups raise some $300 million in seed and growth capital over just the past five years.

About a quarter of that money, she said, has come from the state government. (The Cancer Prevention and Research Institute of Texas, for instance, is in the midst of a 10-year push to funnel $3 billion in taxpayer money to researchers and fledgling companies.) Another quarter comes from private investors within Texas, who are starting to branch out beyond the energy sector. The remaining half flows in from outside the state.

Thanks to those initial investments, some local companies are already making it big.

Last year was a banner one, with Austin’s Mirna Therapeutics and XBiotech both going public with initial public offerings that raised $44 million and $76 million, respectively. Aeglea BioTherapeutics also filed for an IPO after netting more than $80 million in grants and private funding in less than two years.

For companies looking for a cheaper home base than San Francisco, San Diego, or Boston, Austin can make economic sense. There’s no state income tax, and Texas offers sales tax credits for some research and development expenses. Boosters also tout the good weather and youthful energy of Austin.

“Without question, the city has done a great job marketing itself as a less hectic, more laid-back version of Silicon Valley,” said Weinstein.

But “there’s a wide gap between myth and reality,” he said, citing a higher cost of living in Austin than in other Texas cities, and some of the worst traffic congestion in the state.

And, until now, Austin was lacking another major element: a medical school. It was the largest city in the country without a place to train physicians and clinical scientists, many of whom often go on to form biotech startups.

That’s all about to change with the opening of the Dell Medical School. The school, which will have more than 300 faculty, welcomes its inaugural class of 50 medical students in June, and then will cut the ribbon on a $295 million, 211-bed teaching hospital next year.

“The medical school is kind of the third rung of the stool,” said Mary Costello, a BioAustin board member who heads global marketing for eClinical Solutions, a data management company. “I think it’s going to become a big draw for thought leadership.”

Weird no more

The influx of new clinicians, WalkerPeach argued, will give local startups a resource to help make their products relevant to health care. “I think what’s been missing is that unique insight into what patients need and what clinicians need,” she said.

It’s a need that school leaders know they’ll be filling. “We’re trying to bring new capital and new expertise to Austin,” said Dr. Clay Johnston, the inaugural dean of the school, who came to Austin from the University of California, San Francisco, where he was associate vice chancellor of research.

To live up to its Silicon Hills name, though, the city still needs some big ticket items, including wet lab space and more mature companies.

Local schools, including UT Austin and Austin Community College, with their massive student bodies, are producing hundreds of graduates each year qualified to staff biotech companies, but there aren’t always jobs to keep them around. Moreover, it’s tough, Burns said, to recruit upper level management to Austin.

“If they stay in Boston, they have some local job mobility,” he said. “They don’t yet see those opportunities here.”

If just one major pharmaceutical or device company lands in Austin — either by sprouting up from within the community, or by relocating — that could change rapidly. “I think we’re right on the cusp of tipping,” said WalkerPeach.

Pharmacyclics, she pointed out — which was founded 25 years ago by a UT Austin chemist but relocated to California — was recently purchased by AbbVie for $21 billion. If the company had stayed in Austin, that acquisition could have put Austin’s biotech community on the map.

The city is still waiting.