How has San Diego’s biomedical industry, arguably the region’s key economic sector, been weathering the downturn, and what’s its outlook for the future?

According to a recent report by PricewaterhouseCoopers (PWC) and the California Healthcare Institute (CHI), the industry has suffered along with the rest of the economy, but remains resilient.  Nevertheless, storm clouds loom on the horizon, especially in the form of regulatory and reimbursement issues.

For several years, PWC has partnered with CHI, which advocates on behalf of the Golden State’s biomed industry, to produce the annual study.  It reveals that, in San Diego, venture capital has fallen from a recent high of $1.9 billion in 2007 to $900 million in 2009—a 50 percent decrease that’s slightly worse than the national and statewide fall in seed money.  A similar drop-off occurred in investments directed specifically at life science ventures.

Unsurprisingly, though, San Diego far outpaces the rest of the state in investments in biomedical companies as a percentage of total venture funding.  Unlike in Silicon Valley, where only a quarter of every seed dollar goes to life sciences, the proportion here is more than two-thirds.  Statewide, the computer (hardware, software, and services) industry employs about as many people as the life sciences sector, both of which dwarf any other industry in California.

But perhaps most encouraging is that nearly two-thirds of all venture investments in San Diego are in startup or early stages, far exceeding the national average and auguring positive future developments here.

On Friday, PWC and CHI hosted a panel in La Jolla to discuss the report’s findings and the general outlook for the life sciences here.  The panel comprised three local high-ranking executives at pharma and med device companies, as well as David Gollaher, CHI’s president and CEO.

The panelists began by articulating a common view of why San Diego has become a hub for the biomed sector.  Besides the weather, scientists and entrepreneurs alike flock to the region because of the strong life sciences nucleus originally sparked by the academic institutions (UCSD, SDSU, the Salk, Scripps, and Sanford-Burnham Institutes) and early biotech startups here.  Once a core formed, other companies and potential employees glommed onto it, creating a snowball effect.  As one panelist put it, he finds it easy to recruit R&D folks to join his company because they know that if things don’t work out there, they can easily find another equally acceptable place to work within a few miles.

But while San Diego, in the view of these industry insiders, continues to be an attractive place for life science practitioners, state and federal regulatory regimes pose a serious, if somewhat inchoate, threat.

At the state level, California’s inability to get its fiscal house in order means that companies live every day with the threat of a sudden, sharp increase in taxation.  At any point, Sacramento could decide to raise corporate or income taxes, an uncertainty that breeds conservatism among companies that should instead be embracing a bold, innovative approach to discovering new drugs and life-saving devices.

And at the federal level, the twin regulatory and reimbursement burdens compound the taxation threat.  First, all of the panelists agreed that doing business with the Food and Drug Administration has become nearly unbearable.  Now an extremely risk-averse agency, according to the industry folks, the FDA ends up stifling the innovation it is supposed to foster, due to its interminable review processes and CYA attitude.  Several panelists observed that many American biomed companies now find it more expeditious to clear their new drugs or devices through the FDA’s European or South American counterparts, which means that non-Americans are becoming the first to benefit from American innovation.

Second, the uncertainties in the reimbursement regime are staggering.  Various congressional health care reform proposals would impose taxes and fees directly on medical device makers and drug companies.  And regardless of the outcome of the current reform debate, some of the panelists said, health insurance companies are already hedging their bets and curbing reimbursement, using congressional reform proposals as an excuse.  In addition, the “comparative effectiveness research” grants provided in the stimulus package have the biomed sector concerned about developing a new life-saving or -enhancing solution that the government deems insufficiently cost-effective to warrant reimbursement.

On the other hand, government, especially local officials, can also have a positive impact on the industry.  Gollaher notes that the Northern California city of Vacaville has enjoyed great success in attracting biotech companies.  According to Gollaher, when Genentech, the South San Francisco-based pharma giant that’s now part of Roche, sought to expand its manufacturing capacity years ago, it was eyeing Ireland, whose low-tax, smart-regulation policies rendered the Emerald Isle a highly attractive business environment.

But Vacaville officials rejiggered their own zoning, regulatory, and tax schemes in an effort to lure Genentech, which ultimately agreed to open a 250,000-square-foot manufacturing facility there.  Before long, Chiron (now part of Novartis) and other pharma companies built their own plants there, and they were followed soon thereafter by other ancillary biotech businesses that service the pharma sector.  Vacaville, Gollaher said, is now a virtual “Disneyland for biotech.”

Gollaher argued this example proves that creating a climate friendly to biomed business, even here in California, is well within the capabilities of local government.  He pointed to Temecula, where a mini-Vacaville for medical device-makers has begun to spring up.  If only we could get municipalities within San Diego County to engage in such forward-looking reflection.

So as the recover (hopefully) picks up steam, there’s reason for a healthy mix of optimism and pessimism for the biotech sector in San Diego, California, and beyond.

Michael M. Rosen, a News Room contributor, is an attorney in Carmel Valley and the secretary of the San Diego County Republican Party.  The views expressed are his own.  Reach him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

                                        

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