Established in 2005, the Life Sciences Discovery Fund awards grants to biotech or biomed startups to help them navigate early stages of product development.

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In signing the state operating budget Tuesday night, Gov. Jay Inslee eliminated funding for the Life Sciences Discovery Fund (LSDF), a key source of money for early-stage biotechnology and biomedical companies in Washington.

The budget removed the organization’s final two years of revenue, which came from the 1998 settlement agreement between the state and tobacco companies concerning the advertising, marketing and promotion of tobacco products.

“We’ve been deprioritized,” LSDF Executive Director John DesRosier said Tuesday. “If there is no new funding, we will gradually decrease staffing and close the doors.”

The two-year state budget will also take $11 million from the LSDF’s treasury account and direct it to the state’s general fund.

Tuesday night, Inslee vetoed a portion of the budget that would have blocked the life sciences fund from awarding new grants after Wednesday. Blocking new awards would have shut down the grant cycle for the 2015-2016 year.

In his veto letter to the Senate, Inslee said he is disappointed the Legislature could not come to an agreement on funding for the LSDF, which provides “valuable innovative research that improves the health of all Washingtonians.”

Vetoing that section allows the LSDF to use revenue provided by marijuana research licenses. But DesRosier said that revenue is not expected to be substantial and no grants will be awarded for the 2015-2016 year because Inslee did not veto the section transferring $11 million of the LSDF funds into the general fund.

“Without an infusion of new money, LSDF will be on a pathway to managing current grants till their termination,” DesRosier said Wednesday.

At a time when federal funding from the National Institutes of Health is declining and other states are boosting investments in life sciences, leaders in Washington’s biotechnology industry say they can’t understand why the state would cut funding for what the Washington Biotechnology and Biomedical Association calls the fifth-largest employment sector in the state.

“There are companies here today who have received venture capital or brought technology to the market that would not have been able to do that with out the LSDF,” said Chris Rivera, president of the association.

“ We’ve got significant momentum, and you typically invest more into your growth products, not less,” he said.

Former Gov. Chris Gregoire established the LSDF in 2005 with a goal to finance health-related research programs and stimulate economic activity.

The fund started awarding grants in 2007 and since then has provided 112 grants worth $106 million. Recipients have been startups and research institutions, including the University of Washington and Fred Hutchinson Cancer Research Center, DesRosier said.

More specifically, the LSDF has helped approximately 40 startups take shape or expand, supporting more than 3,500 jobs in the state and bringing in an additional $550 million in private funding.

DesRosier cited Adaptive Biotechnologies, a Seattle company that focuses on deciphering the building blocks of the body’s response to cancer and other illnesses.

When LSDF funded the company in its earliest stages, it had fewer than half a dozen employees, DesRosier said.

Now the company has about 170 employees and in the past 15 months has received $400 million in funding, including $195 million in May.

“There are new discoveries and new companies waiting to emerge that are the next Adaptives and the next Junos of the world that could benefit from this niche funding mechanism,” Adaptive CEO Chad Robins said. “In my opinion, it is a travesty for the area. I think we are going to miss out on the next potential Adaptive of the world.”

DesRosier said he looks at the LSDF as an opportunity to help companies raise the early capital necessary to provide a “proof of concept” before securing private funding.

He said the gap between federal funding for basic research and the private funding for more applied work is known as the “valley of death.”

The LSDF helped early companies make it through that valley, he said.

“It is not like the (life science) industry is going to fall off the cliff, but with time new ideas won’t be explored because there won’t be funding,” DesRosier said Tuesday. “New ideas will leave the state because there won’t be funding.”

That was almost the case for Seattle-based M3 Biotechnologies, which develops treatments for neurodegenerative diseases, including Parkinson’s and Alzheimer’s.

The company received an initial $250,000 from the LSDF last year.

At the time, CEO Leen Kawas said, M3 was being lured to San Diego.

“We are 12 to 18 months away from our clinical trial,” Kawas said. “If it wasn’t for the LSDF, M3 might not have made it, or if it did, it wouldn’t have been in Seattle.”

Last year, Inslee saved the LSDF by vetoing a budget bill that would have eliminated the fund. But this year’s budget proved to be more challenging.

The one partial win LSDF’s DesRosier sees is that active grants will not be terminated in the new budget.

Information in this article, originally published June 30, 2015, was corrected July 1, 2015. A previous version of this story incorrectly spelled Leen Kawas’ name.