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State revokes credits for delayed biotech start-up

By Todd Wallack
Globe Staff / December 25, 2010

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The state has rescinded $360,000 in tax credits to a fledgling Boston biotechnology company that misled officials about the size of its workforce, the first time such an award has been revoked.

The tax credits were part of more than $10 million in state, federal, and local aid offered to PharmaSphere LLC. Nearly three years ago, the company unveiled an ambitious plan — still unrealized — to build a 50,000-square-foot, high-tech greenhouse in Worcester to grow and refine plants for the pharmaceutical and herbal industries, creating about 60 jobs.

Five separate agencies arranged for government bonds, tax breaks, and other aid to cover most of the anticipated $16.5 million cost to build and operate the plant. The city of Worcester alone promised PharmaSphere $2.6 million in loans and offered the company land in an urban industrial park — a site that remains vacant.

PharmaSphere, which has been struggling to raise the $6.5 million in private financing it needs for the project, has yet to receive any of the promised public money. But Jim Stergios, president of the nonprofit research organization Pioneer Institute in Boston, questioned why government agencies promised so much help to an unproven start-up founded by executives with no biotechnology experience, who run a company without any full-time employees or enough money to build the plant.

“Think of all the energy that has gone into trying to lure an unfunded, untested entity to the city [of Worcester],’’ Stergios said. “Think of how that energy could have been better used.’’

The Massachusetts Life Sciences Center, a quasipublic agency charged with supporting the state’s life sciences industry, said it revoked the tax credits after finding a discrepancy on the company’s grant application. PharmaSphere claimed on the application that it had 11 to 50 employees. The company later acknowledged it never had those workers.

The center had awarded $25 million in state tax credits to 28 companies, including PharmaSphere, a year ago. Officials said they discovered the problem in the final review of PharmaSphere’s application before the tax credits would have been issued.

Angus G. McQuilken, a spokesman for the center, said the agency normally completes the fact-checking process before its board ratifies the awards. But he said the agency occasionally runs into questions that it has to resolve afterward, as in the case of PharmaSphere.

PharmaSphere’s chief executive, David Darlington, acknowledged the discrepancy, saying the company listed the number of workers it thought it would have by the time it received the tax credits and didn’t realize the project would be delayed so long.

Meanwhile, PharmaSphere is also in danger of losing loans promised by the city of Worcester, where officials have given the company a Jan. 31 deadline to pull together all of its financing for the project.

“If at some point, [the project] is not going to materialize, we need to make that decision and move forward,’’ said assistant city manager Julie Jacobson.

Darlington said the company ran into trouble raising the remaining $6.5 million it needs to build the Worcester plant because of the financial crisis and sluggish economy. He said two deals collapsed, and a third has taken longer than expected.

“We are as frustrated as anyone,’’ said Darlington, an experienced lobbyist and public relations executive from North Kingston, R.I., who is currently chairman of the Rhode Island Turnpike and Bridge Authority. He said he and company cofounder William Gildea, who has a background in environmental insurance and banking, have poured more than $1 million of their own money into the project.

PharmaSphere had previously told Worcester officials it arranged for $6.5 million from a private equity company called Quarry Hill Partners LLC. But Quarry Hill managing partner Patrick Flanagan explained in a recent e-mail that the firm is still trying to raise money for its first investment fund.

Darlington said he is now pessimistic that Quarry Hill can deliver the funding in time to meet Worcester’s deadline. But he said he’s lined up two other unnamed private equity firms to provide funding.

“We are not relying on Quarry Hill partners at this point,’’ Darlington said. “We are working through our issues and are confident we are going to close on time.’’

Adding to the complication: PharmaSphere recently became a subsidiary of a related company called Converted Organics Inc., a struggling Boston firm that is trying to build a business converting food waste into organic fertilizer.

PharmaSphere has already licensed its plant cultivation technology to a Rhode Island nonprofit to grow medical marijuana. It plans to grow other plants in Worcester, including Madagascar Rosy Periwinkle, an herb the company says could be used to produce treatments for such illnesses as cancer and diabetes.

Although it has not been able to lock down private financing, PharmaSphere was able to garner support from an assortment of public agencies trying to spur economic development.

In addition to the $2.6 million from the city of Worcester, the company lined up commitments for $4.9 million in federal tax credits from two community development agencies. And the Massachusetts Development Finance Agency, another quasipublic state agency, agreed to issue $2.5 million in tax-exempt bonds slated to be sold to Boston Private Bank & Trust Co., which would ultimately bear the risk.

Other than the life sciences center, no other agency has canceled commitments to the project, although “every single one of them has been sharing their urgency about getting this thing closed,’’ Darlington said. And none of them have released the funding yet.

Worcester officials said there’s always some risk when betting on a start-up like PharmaSphere, which has tied up the city’s property and time for the past three years.

“The bottom line with any of these projects is nothing ventured, nothing gained,’’ Jacobson said.

Todd Wallack can be reached at twallack@globe.com.