Scientists at a small pharmaceutical lab in a Greenwood office park labored for years on a generic version of insulin and came up with a product they hoped would change the world.
Elona Biotechnologies developed a new way to make insulin that they said was faster and less expensive. The company hoped to undercut big pharmaceutical companies such as Eli Lilly and Co. on price and to make the drug that diabetics need to regulate their blood sugar more accessible worldwide.
Elona’s owners eyed a multibillion-dollar global market and talked of making diabetes care affordable in Mexico and developing countries. The family-run business had big plans: $25.7 million in investment in a new production facility, 70 jobs, and an anchor that would attract other pharmaceutical firms to Greenwood and make it a small hub in the biotechnology industry.
A consultant estimated the company could have a $516 million economic impact on Johnson County.
The city of Greenwood bought in. It backed the company in a big way, offering far more than the 10-year tax breaks that growing businesses usually get.
Three years ago, Greenwood agreed to invest in a product that still needed U.S. Food and Drug Administration approval and gave the company $8.4 million in incentives, including a $6.4 million loan for the new plant, a $1.5 million zero-interest loan to help with the costs of the FDA approval process and $500,000 in cash to buy manufacturing equipment.
Now, a forensic accountant is trying to figure out where the money went, Mayor Mark Myers said.
Greenwood declared Elona in default of repaying the incentives after the company came to city officials and told them about serious financial difficulties. The city is looking at whether it will have to sell the new building, manufacturing equipment and patents Elona filed for. Greenwood could foreclose on the building and lay claim to the equipment and patents under an agreement it made with the company when the incentives were approved.
“The accountant’s trying to identify where the money went, if it went where it was supposed to go, and any possible assets we can reclaim,” Myers said.
The plant is mostly built. But Elona has no FDA approval and no product on pharmacy shelves. Elona filed preliminary paperwork with the FDA in 2010 and had planned to start clinical trials in San Francisco.
But the company no longer is actively pursuing approval because it doesn’t have the money for costs such as paying patients for their participation and making large batches of the drug for testing, Myers said.
“They have the patents but can’t get on with the process to do the FDA approval,” he said. “They’re out of money and can’t afford it.”
The company is running low on money and having a hard time finding private investors, Myers said.
One potential backer promised to invest, but only on the condition that the city lifted jobs and salary requirements, but Greenwood refused to agree to those terms.
Elona’s owners did not return several messages this week.
‘Totally out of the blue’
The company had to make reports every year to the redevelopment commission and filed all its reports on time but hadn’t indicated the depths of its financial troubles, Myers said.
“It was totally out of the blue,” he said.
The city does not suspect any wrongdoing or fraud and just wants to recoup whatever it can, Myers said.
Since last week, city and company officials have been having daily discussions about how Greenwood can recoup its $8.4 million investment back, said Wendy Brewer, an attorney Greenwood hired to handle the default.
City officials won’t say exactly what’s being discussed, but Greenwood has asked the company for financial records, such as balance sheets and tax returns, to determine what can be recovered and how.
Under its agreement with the company, Greenwood can lay claim to the manufacturing equipment, patents, trademarks and even fixtures and furnishings, according to the project agreement. The city could end up having to sell those items and is trying to figure out what assets Elona has and what they’re worth, Brewer said.
After that’s resolved, Greenwood plans to take a look at how it reviews incentives and determines whether businesses will make good on their promises of jobs and investment.
Redevelopment commission president Mike Tapp said the board will consider whether it should do more scrutiny or put more protections in place when giving businesses incentives such as cash or loans.
“We’ll do a complete review and see what should be added to our due diligence list,” he said. “When this situation is over, whatever that means, we’ll talk about what we learned from this experience.”
‘Make the best out of this’
Myers said he doesn’t know if he would have done anything differently if he had been mayor when Greenwood offered Elona the deal in 2010.
Greenwood shouldn’t shy away from offering incentives to attract job growth and new development but should consider requiring companies to report more information, especially about any financial troubles they might face, Myers said.
Greenwood has asked Elona to provide two years’ worth of general ledgers, income statements, tax returns and other financial documents that Indianapolis-based Somerset CPAs will review. They’ll try to find what money is left and if there’s cash anywhere, Brewer said.
The city is still figuring out what it will do to get back taxpayer money but could foreclose on the new plant and claim assets such as manufacturing equipment and patents that were pledged as collateral on the loan, Myers said. The city then would sell them, but it hasn’t looked into any potential buyers because officials haven’t decided on that course of action.
“We’re still working to find a solution to this problem,” he said. “It’s not over. We’re trying to figure something out. They’ve cooperated and want to make the best out of this, too.”
Elona officials have told the city they hope to stay in business, and the city is reviewing all possible options, Brewer said.
She said that the company and the city have been presenting potential options during a series of phone calls, but that she couldn’t go into details of what has been discussed.
“We’re trying to figure it all out,” she said. “We have to know if they can stay in business as a going concern, what liquidation would look like, all the different options.”
The city has safeguards in place, including a mortgage on the 50,000-square-foot production facility that Elona built in the Precedent South Business Center, Brewer said. Construction of the building is mostly complete, though the interior is not finished.
‘Have to be realistic’
Under a loan agreement, if the city finds Elona in default, Greenwood could foreclose on the building off Commerce Parkway.
Myers said that, if foreclosure turns out to be necessary, the goal would be to sell the building to another pharmaceutical company in the hope of bringing a cluster of such businesses to Greenwood.
“We’d like to see that building used for its intended use, but at the same time we have to be realistic,” he said. “It could have to be demoed on the inside and sold to any business that would be interested. We need to recoup any costs that we’re incurring.”
Elona has purchased manufacturing equipment it would have used to make a generic low-cost insulin that it planned to sell first in the United States and then worldwide.
Last year, for instance, the company used the city’s loan money to buy more than $244,000 in equipment, according to paperwork filed with the city.
As a result of the default, Greenwood could lay claim to that equipment as well as patents the company filed for before it got the incentives, Brewer said.
Elona pledged the company’s patents, including on new production methods for insulin and human growth hormone, as collateral for the construction loan. That means Greenwood potentially could claim them, sell them and use the proceeds to settle the debt, Brewer said.
Greenwood is working with the company to recover the funds however it can, Brewer said.
The best-case scenario would be if Elona could find an investor or investors to keep going and continue its quest for FDA approval, she said.
No new investors have come forward since the default last week, Brewer said.
What Elona promised
Here’s a look at what Elona Biotechnologies originally promised Greenwood:
- Investment of $28 million over 10 years
- 70 full-time jobs and the possibility of expansion and 70 additional jobs
- Average salaries of $55,000
- Estimated economic impact of $516 million over 10 years, according to consulting firm Applied Economics
- Projected creation of 132 jobs at other Johnson County businesses, because of supply orders and the goods and services Elona’s employees would buy
What Elona got
Here’s a look at the incentives that Elona Biotechnologies received from the city of Greenwood:
- $6.4 million construction loan to buy land and build a production facility
- Credits of property taxes on the real estate toward the loan payments, which would cover about 20 percent of the payments
- $500,000 grant to use for equipment purchases and construction expenses
- $1.5 million zero-interest loan to cover the cost of getting the new insulin product approved by the U.S. Food and Drug Administration.
What Greenwood can claim
Here’s a look at how Greenwood can try to reclaim up to $8.4 million in incentives.
- The city has a mortgage on the $6.4 million production facility Elona has mostly built. The city could foreclose on the property and sell it.
- Greenwood has liens on manufacturing equipment that could be liquidated.
- Elona pledged patents, trademarks, furnishings and furniture as collateral on the loans. The city could claim them, sell them and use the proceeds to repay the incentives.