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Putting a price on employment

Some question if Vertex needs tax breaks

By Casey Ross
Globe Staff / February 23, 2011

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The Patrick administration’s newest effort to create jobs at a private company comes at a steep cost: $60 million to help a Cambridge drug maker move to a luxurious new neighborhood on the South Boston Waterfront.

The money will help Vertex Pharmaceuticals add 500 employees and build new headquarters at Fan Pier, a partially built development that advertises sweeping views, a marina, and a shuttle service for executives.

While Vertex’s planned move has boosted the fortunes of the $2.5 billion project, critics argue the Patrick administration should not be using scarce taxpayer funds to subsidize individual companies, especially when the state’s own data show the policy is not working as intended.

Yesterday, the Massachusetts Life Sciences Center reported that more than half of the 26 companies that received tax incentives in late 2009 failed to create the jobs they promised.

The data were released just weeks after Evergreen Solar Inc. announced it was closing its Massachusetts plant, despite having received $58 million in state subsidies.

“When you start getting into the mode of picking winners and losers like this, it usually ends up being a no-win situation,’’ said David Terkla, an economics professor at the University of Massachusetts Boston. “It’s very unusual to find one firm that’s so key you’ve got to give them this kind of stuff.’’

In the case of Vertex, some economists question whether it even needs subsidies to continue growing.

The 1,350-employee company has added hundreds of employees since 2008 in anticipation of receiving federal approval to sell telaprevir, its treatment for hepatitis C. The drug’s approval is widely expected this spring, and analysts predict it will turn Vertex into an immensely profitable company, practically overnight.

Vertex’s chief executive, Matthew W. Emmens, received a $19 million compensation package in 2009 that included incentives for advancing telaprevir.

Patrick’s economic development aides vehemently defended use of subsidies for Vertex and other firms. Far from being chastened by the Evergreen Solar debacle, administration officials said they are as committed as ever to tapping taxpayer funds to help build and retain promising companies. In their view, for every Evergreen there is a Facebook or other start-up that had origins in Massachusetts, but moved elsewhere to grow into a colossus.

“We’re good at starting small companies, but they grow big in other places,’’ said Gregory Bialecki, Patrick’s economic development chief. “The number one thing we’ve got to do better in Massachusetts is make this a place where great small companies want to stay and become great big companies.’’

Patrick’s aides said the assistance for Vertex will mean the creation of hundreds of jobs at a time of persistently high unemployment. And while some life sciences companies fell short of their hiring goals last year, others far exceeded it, adding more than 600 new employees, the aides said.

However, several economists said that such incentives often result only in companies hiring employees away from competitors or other nearby businesses, undermining the employment benefit the state is trying to achieve.

“What states end up doing with these incentives is moving a lot of people from one company to another company,’’ said Robert Chirinko, a University of Illinois Chicago professor whose research has questioned the efficacy of state tax breaks for individual companies. “It ends up being a break-even proposition.’’

To help Vertex move to Fan Pier, the state is borrowing $50 million to pay for new roads and other improvements. The state will give Vertex up to $10 million in tax credits for hiring the additional employees, and the City of Boston is adding another $11.8 million in property tax breaks.

Vertex will spend $800 million building the headquarters, and the 500 new employees will earn about $100,000 a year, Patrick’s aides said. They said the income taxes from those employees will yield more than enough to cover the annual debt payments on the $50 million in infrastructure improvements.

And, Boston officials said that even with the city’s property tax break, Vertex will pay a net of $58 million in property taxes during the term of its agreement with the city.

It looks on paper like a low-risk investment — if all goes according to plan.

The market for hepatitis C treatments is huge, and telaprevir has cleared all major regulatory hurdles, so its approval by the Food and Drug Administration in May is widely expected within the industry.

In 2009, Vertex posted a net loss of $642 million. Analysts who follow the company estimate that in its first full year, 2012, telaprevir will reap $2.35 billion in sales, netting Vertex a profit of $1.2 billion.

And if something goes awry, state officials said, Vertex could be forced to surrender some or all of the $10 million in tax credits. The state’s regulations require a company to hire at least 70 percent of the promised employees for a given year, otherwise it is subject to clawbacks.

In addition, Fan Pier’s developer, Joseph Fallon, would be responsible for making up any shortfall in tax revenues to pay off the $50 million in infrastructure assistance.

Still, critics say those protections do not account for the fact that other public needs would go unmet.

“At a time when we’re cutting local aid and health care, is it wise to throw a lot of taxpayer money at one big company?’’ asked state Senator James Eldridge, a Democrat from Acton who has studied the use of state tax incentives. “I’m generally skeptical of a lot of these subsidies for large projects.’’

But with a prize as big as Vertex, Patrick administration officials and supporters of their policies argue that Massachusetts almost has no choice but to subsidize private development.

If it didn’t, it would lose companies — and the revenues they generate — to other states.

“The reality is these companies do have a chance to expand elsewhere,’’ said David Begelfer, chief executive of NAIOP Massachusetts, a commercial real estate association that helped craft the program being used to pay for Vertex’s infrastructure.

“This is a conservative way to encourage economic growth without the downside,’’ he added.

In Vertex’s case, company executives made clear to Patrick administration officials that they could move. The State of Rhode Island in 2008 offered Vertex $78 million to move into a new complex in Providence, people familiar with the talks said. Rhode Island officials confirmed they tried to lure Vertex, but would not disclose details.

It is unclear whether Vertex was seriously considering a move. But the Patrick administration was not willing to take that chance. After private meetings over two years, officials made their $60 million offer late last year. At that point, Vertex had not submitted a formal application for aid. Instead, much of the information passed between the two sides informally.

In a Dec. 10 letter to the company, Bialecki made clear that Vertex would eventually be required to submit a formal application and win approvals from a variety of agencies. He also seemed confident the company would clear the hurdles.

“Based on the information provided to us to date,’’ Bialecki concluded in his letter, “we do not anticipate any difficulties in meeting these qualifications.’’

Casey Ross can be reached at cross@globe.com.