SOUTH SAN FRANCISCO, Calif. — If the San Francisco Bay Area wants to retain its top-tier life-sciences cluster, it must retain the major presence of its anchor biotechnology company, Genentech, and build ties with Asian biopharma companies and their executives and investors, according to a key observer of the US life-sciences market.
"Keeping Genentech here, and keeping Genentech growing and warmly embraced in this community, is really a critical success factor because of the new companies [and] the partnerships that will be spawned" across the region, Scott Morrison, national leader for Ernst & Young's life-sciences practice, told attendees of BayBio's GeneAcres 17, held here at the South San Francisco Conference Center on Wednesday.
Morrison said Genentech, acquired in March by Roche for $46.8 billion, is a pivotal player in the Bay Area because of its regional workforce, which numbered about 8,250 people as of the summer, and its potential to generate additional economic activity through new drug-discovery and -development activity.
That workforce stretches from Genentech’s South San Francisco headquarters to Roche Molecular Diagnostics’ base across San Francisco Bay in Pleasanton.
"It is a real critical player, so I think creating an environment where [Genentech] can thrive and grow will be greatly beneficial to our entire cluster going forward," Morrison told BioRegion News after his keynote address.
The newly combined company, which uses the Genentech name for its US operations, has taken steps to expand in the region, including inking a lease near its headquarters for 156,000 square feet at 500 Forbes Blvd., a property owned by publicly traded Alexandria Real Estate Equities of Pasadena.
The space was formerly occupied by Cell Genesys, which terminated its lease as part of a restructuring that followed the failure of its GVAX immunotherapy for prostate cancer [BRN, July 6].
Genentech has applied for a permit with South San Francisco’s building department to renovate 75,000 square feet of the space, according to the San Francisco Business Times. The company has not said which of its units would occupy the site.
To be sure, Genentech has not been immune to the economic downturn that has slowed the broader life-sci industry. Reflecting in part the tough economic climate, Roche, as part of the acquisition, plans next year to shut down and vacate its R&D campus in Palo Alto and to lay off 302 employees based there by the end of 2009.
Likewise, Genentech plans to lay off 109 employees based at its South San Francisco campus.
Genentech has also cited the recession in explaining why it has delayed the start of construction on the five-story, 168,500-square-foot 680 Forbes Blvd. that was supposed to have broken ground within the past year. That space, which is to be part of a larger campus expansion planned over the next decade, will contain space for R&D, manufacturing, labs, and offices.
Genentech in August received from the South San Francisco Planning Board a year's extension of its approval granted in 2007 for the building, known as Building 50.
The building is part of a master plan by the biopharma giant, approved by the planning board, to build more than 3 million additional square feet of laboratories, offices, and amenities space in 16 new buildings on 39 acres, more than doubling the 2.8 million square feet on 129 acres it had developed until then [BRN, April 30, 2007].
[ pagebreak ]
At GeneAcres, Morrison, who serves as treasurer of BayBio's board, likened today's concerns by industry leaders and others about the future of Genentech in the Bay Area to what turned out to be unfounded concerns a decade ago. At the time, the region's biotech industry was crippled when drug maker Alza, based in Mountain View, failed to be acquired by Abbott and was instead bought by Johnson & Johnson, which eventually dismantled the company.
"Those that lived through that [period] thought that that was the end of biotech in the Bay Area. It was not. It was really a new beginning, and I think the Roche acquisition of Genentech will also be a new beginning," said Morrison, who is also a board member of the Biotechnology Industry Organization.
He then paraphrased Mark Twain: "I think the rumors of biotech's death – and they are never as loud as they are here with the acquisition of Genentech – have been greatly exaggerated."
Building Bridges to Asia
Morrison said at GeneAcres that another key success factor for the Bay Area will be the ability of its life-sci companies and professionals to cultivate ties with their counterparts in Asia, especially Japanese pharmas that have a presence in the Bay Area such as Takeda, and emerging Chinese drug developers.
Some companies Morrison is working with have embraced a model of establishing a beachhead in the Bay Area for raising capital, but carrying out R&D and manufacturing in China and other lower-wage Asian nations. He said R&D costs in China are around 25 percent of those in the US, and when companies there reach milestones they have the option of going public on NASDAQ or in Hong Kong or pursuing additional capital from Asian investors.
"You will see immense amounts of capital moving from East to West, and a lot of outsourcing into to China and India," where a growing middle class is fueling "immense" opportunities for biopharma companies seeking to lower their development costs and find new capital sources, Morrison said, echoing a familiar life-sci refrain. "That is likely to have a profound impact on the industry and the models that are being formed today.
"I can envision a day where a partnering discussion, instead of being a discussion about the US market, the European market, and the rest of the world, is a discussion about the Chinese market, the Indian market, and the rest of the world," he added.
Speaking with BRN, Morrison said the growth of Asia as a biotech mecca is less a threat to the San Francisco region's life-sci cluster than an opportunity that warrants more exploiting by scientists and entrepreneurs on both sides of the Pacific. For Asian researchers, he said, it means training at Stanford University or the University of California, San Francisco, for careers with Asian biotechs.
"I think we'll be nurturing that and making sure there's a commonality and encouragement for foreign science students and entrepreneurs and to form companies in Asia with strong ties to the Bay Area. I think that's going to be critical, as well as making sure that our government officials are aware of this important bridge and the potential it has on the growth of the cluster here in the Bay Area," Morrison said.
He said that effort would not necessarily undermine the Bay Area cluster, contending that the short-term job and economic losses wrought by outsourcing can lessen long term as Asian countries raise wages to retain talent: "Those strong ties actually create a situation where as costs rise in China, and you have a presence here, that [the potential for Bay Area job losses] may actually flip, and superior access to the US market and the critical mass here could actually cause a lot of those companies to potentially relocate out here.
"I think it's actually very positive if you look at the long-term impact, and not just the short-term impact," Morrison added.
At least some players in the Bay Area's life-sci industry appear to be getting the message. Venture capital firms based in Silicon Valley, especially in Menlo Park's Sand Hill Road corridor, have opened sister offices in China, Hong Kong, Singapore, and Malaysia, as part of efforts with those governments to assist in forming new companies there, Morrison noted.
[ pagebreak ]
"I think some of the keys are the big Japanese pharmaceutical companies, and making sure they have a very strong and growing presence here; as well as capital formation,” said Morrison. “There's transfer of scientific talent between the two geographic areas."
Morrison said the Bay Area will need to do more than cultivate Asian ties and retain Genentech. If the region is to stay a vibrant life-sci cluster, he said, then the Bay Area must also:
• Keep happy and growing the already sizeable regional presence of life sciences giants, from pharma concerns such as Merck, and Pfizer, to biotech anchors like Amgen and Exelixis.
• Expand the life-sci "infrastructure," such as the supply of laboratory space and other industry facilities.
• Retain its top-flight base of researchers and other professionals, which Morrison said "so far has happened."
• Retain its community of private equity investors and especially venture capitalists: "Keeping that here really leads to more innovative companies, really founded in this region. I think promoting those is really going to be critical to the continued growth in the San Francisco Bay Area."
Projecting a $21B Year
Morrison commented on the Bay Area's life-sci cluster during a morning address that also delved into key factors shaping the nation's biotech industry – many of them discussed in E&Y's annual Beyond Borders report chronicling the state of the biotech industry worldwide.
He said he expects the industry to finish 2009 with $21 billion raised in total financing, based on a first half of this year that saw about $10 billion raised, of which $2 billion came from traditional venture capital. That would be down one-third from the roughly $30 billion raised in 2007, as life-sci companies scrambled to complete mergers and acquisitions on the eve of the economic downturn – but above the $16 billion raised in 2008, when the economy skidded into the current severe recession.
Another reason for hope: The number of companies obtaining financing has grown quarter by quarter this year. While Amgen's $2 billion in convertible notes tied to its repurchase of 38 million shares accounted for half of all funds raised during the first quarter of 2009, more than 25 companies raised over $50 million in each of the following two quarters, Morrison noted.
A $21 billion year in life-sci financing, he added, brings the US biotech industry back to levels it enjoyed in 2004 and 2005.
Morrison also said he expects the IPO market to continue bouncing back as it has in recent months, when two biotech companies carried out the first sales of their stock in the public financial markets.
The Wall Street meltdown and subsequent recession, he said, capped a five-year period that saw the Bay Area lose 10 more public biotech companies than it gained. The 23 acquisitions and two liquidations recorded for the period outpaced the 15 successful initial public offerings, one relocation to the region, and one successful spin-out that took place during the five-year period, Morrison said.
The San Francisco region accounts for 600 of the roughly 7,000 public biotech companies nationwide – a number Morrison predicted will shrink in the near future.
"I think contraction is going to happen in terms of sheer numbers of companies as we move forward, and the Bay Area has not been insulated from that," Morrison said. "I think there are some real opportunities here in the Bay Area that will continue to make it a very, very positive cluster for biotech innovation."